**USAID** **Policy Paper**

**Approaches to the Policy Dialogue**

## Bureau for Program and Policy Coordination

**U.S. Agency for International Development**

**Washington, D.C. 20523**

**December 1982**

Page

I. INTRODUCTION 1

A. Purpose and Structure of the Papers 1

B. The Concept of Conditionality 2

C. Scope of Economic Policy Dialogue 3

D. Approaches to the Use of Aid to

Foster a Policy Dialogue 3

II\. THE EFFECTIVENESS OF THE POLICY DIALOGUE THROUGH

BILATERAL ECONOMIC ASSISTANCE 4

A. Assessing the Potential of Aid as a Vehicle for the

Policy Dialogue 4

B. The Nature of the U.S. Aid Program 5

1\. Economic Support Fund (ESF) 6

2\. Development Assistance (DA) 6

3\. PL480 Food Aid 7

C. Project and Program Assistance 8

D. The Formulation of Conditionally 8

1\. Positive and negative conditions 8

2\. Explicit and implicit conditions 8

E. The Implementation of Conditionally 9

1\. The \"quality\" of conditionally 9

2\. The number of conditions 9

3\. The phasing of assistance 9

F. Limits to Effectiveness of the Policy Dialogue 10

III\. THE CONDUCT OF THE POLICY DIALOGUE THROUGH

BILATERAL ECONOMIC ASSISTANCE 12

A. The General Tone and the \"Emily Post Factor\" 12

B. Major Stages of the Dialogue and Some Administrative Issues 13

C. Sensitivity, Selectivity, Stamina, Staff: Four

Essential Ingredients 14

1\. Selectivity 14

2\. Stamina 14

3\. Staff 15

D. The Host Country Participants 16

IV\. BILATERAL-MULTILATERAL COOPERATION IN THE POLICY DIALOGUE 16

A. The Role of the IMF and the IBRD in the Policy Dialogue 16

B. Coordination Between the IMF and the IBRD 16

C. Coordination Between USAID and Multilateral Institutions 18

D. Coordination Between USAID and Other Bilateral Donors 20

**Annex**

USAID EXPERIENCE AND CURRENT MISSION VIEWS 22

**Bibliography** 25

\"We should be careful to get out of an experience only the wisdom that
is in it, and stop there, lest we be like the cat that sits down an a
hot stove lid. She will never sit down on a hot stove lid again-and that
is well; but also she will never sit will never sit down on a cold one
any more. \" Mark Twain, Following the Equator.

The U.S. interest in the soundness of the economic policy of developing
countries stems largely from the concern with promoting long-term,
broad-based economic growth in these countries. The policy dialogue that
flows from this, concern is in large measure a process of sharing
information and ideas regarding economic policy actions and options,
which impact on the development performance and prospects of the
developing country. It is important to state at the outset of this paper
that donor suggestions concerning the economic policy of recipient
countries must rest on familiarity with the recipient country situation,
sympathy for its objectives and problems, and a valid economic
development case for the policy suggestion being advanced. Only on such
a basis can a policy dialogue bear fruit in terms of the recipient
countries own development and the effectiveness of utilization of
external economic assistance.

**I.** **Introduction**

**A. Purpose and Structure of the Paper**

Individual aid projects can sometimes reach their intended goals and
accomplish some good even if the overall economic policy environment is
less than optimal. As a general proposition, however, the United States
has emphasized over the last year that even an integrated set of well
planned and well executed economic assistance projects may fail to have
a significant developmental impact in the absence of a favorable
economic policy environment, for:

The soundness of domestic economic and social policies is in general the
dominant long term in­fluence on development \... economic assistance in
support of ill-conceived policies would be a poor investment indeed.[^1]

This common sense principle bears constant repetition and frequent
re-statement, for it has been periodically forgotten in the practice of
aid and development. It is not the purpose of this paper to discuss the
types of policies considered desirable for economic stability, growth
and development. These are discussed ably and articulately
elsewhere.[^2] Nor can this paper articulate adequately the variety of
important connections between country policies and USAID\'s major
cross-sectoral emphases on the private sector, the building of
institutions and the transfer of technology. The express purpose of this
paper is instead limited to comprehensive interaction with d with
developing countries\' governments, addressed to support their economic
policies when they are deemed effective, and to promote their
improvement when they are deemed defective. It is this interaction which
forms the core of the \"policy dialogue\".

This paper is a review and synthesis of the USAID experience and of the
principal points of consensus and of disagreement in the impor­tant
subject of how best to manage this in­teraction from the viewpoint of the
U.S. bilateral assistance program. It is organized along the following
lines. The remainder of this introductory section clarifies some
important terms, sets the limits to the subsequent discussion, and
outlines the general characteristics of the approach to the policy
dialogue. Section II discusses the principal determinants of the
effectiveness of the policy dialogue through bilateral economic
assistance, and Section III pulls together the major considerations on
the conduct of the dialogue in practice. Section IV deals with the issue
of coordination between USAID and the other ma­jor participants to the
dialogue to promote sound economic policies by-the developing
countries - and hence the effectiveness of economic assistance to those
countries. An annex discussing USAID experience concludes the paper.

The current stress on the importance for long run development of the
economic policy of the developing countries themselves - and thus on the
need for a dialogue with aid recipients concerning the soundness of
their policies - represents a significant shift in emphasis relative to
U.S. aid thinking through much of the 1970s.[^3] It also constitutes,
however, a renewal of an interest that had been strongly felt and
articulately expressed in USAID for the first ten or so years of the
Agency\'s existence.[^4] The activities of the 1960s generated a
substantial written record, which was useful in preparing this paper.
This record, and much of the literature on efforts to foster
improvements in economic policies through foreign aid, frequently
suffers from a lack of dear definition of the basic terms at issue -
from a kind of semantic fog so pervasive that it is essential, at the
risk of being pedantic, to begin with the clearest possible definition
of the principal terms. This need for clarification also derives from
the negative connotations and confusion Which have been associated with
such terms as influence, leverage, dialogue and self-help, each of which
have been used to refer to widely differing relationships and processes
and sometimes have been used interchangeably. The lack of clarity,
coupled with inappropriate usage of these terms, has led to unintended
and undesirable interpretations of the objectives and nature of the
donors\' concern with the economic policies of developing countries.

A discussion of the use of aid to foster improvements in the recipient
country\'s economic policy logically presumes some initial disagreement
between donor and recipient on the direction, the scope, the degree, or
the timing of policy change. The ability to affect views and policies is
best understood as a continuum, from the logical extreme of total
control over the resolution of the difference, to the opposite extreme
of utter inability to affect the outcome in any way.

The process of seeking to foster improvements in host country policies
within this continuum can encompass, among other things, two different
concepts: leverage and dialogue. Given that the parties\' viewpoints
differ, \"leverage\" refers to the capacity to have one viewpoint
predominate over the other. \"Dialogue\" on the other hand is better
understood as a mechanism incorporating the interchange of ideas and
information whereby either viewpoint or both can change to bridge the
initial difference between the two. Through a \"dialogue\", then, the
aid recipient comes to view the policy advice as genuinely in the
interest of its own economic progress. In contrast, through the
application of \"leverage\", the aid recipient agrees to enact a certain
policy in response to positive or negative incentives by the donor, and
not because it concurs with the other party\'s views of the policy\'s
desirable effects. In actual practice, leverage and dialogue need not be
mutually exclusive since the use of leverage does not usually entirely
rule out the possibility of a dialogue - that is, of a change in either
party\'s viewpoint, and a policy dialogue almost always entails the
possibility that donors might alter their assistance or take other
action in the future in light of the policies and actions taken by the
recipient.

However, focusing attention on the availability of potential leverage as
a means of fostering improved economic policies can be badly misleading.
Potential leverage is at best only a possible facilitator of the policy
dialogue, and is neither a sufficient nor a necessary condition for the
success of a policy dialogue. On the contrary, if exercised clumsily, it
may in the longer term be counterproductive.

Indeed, experience has shown that constructive results are more likely
to occur where the recipient countries are aware of the existing
potential of such action but the potential is not actually used.
Reflecting this fact, this paper and USAID policy focus on the
establishment of an ongoing policy dialogue with the host country.

Another term often used without clear definition is \"self-help\".
Self-help can be defined, as in the USAID program lending practice of
the 1960s, to encompass a recipient government\'s policies to affect
positively those development variables over which it has some control.
Since self-help effort is difficult to prove or disprove, much less to
measure, the \"effort\" dimension of self-help should where possible be
complemented with some assessment of its \"results\". At least,
self-help must mean that the recipient country\'s policies have not
allowed, as a result-\'of aid, a reduction in the amount of financial
resources mobilized domestically for development purposes. (The question
of what constitutes development expenditures is itself a fit subject for
the policy dialogue.) At best, self-help entails recipient country
policies that yield - as a result of, or at least concomitant to, the
provision of aid greater mobilization of domestic resources for
development and/or improvements in the efficiency of their allocation
and utilization. In current parlance, aid then acts as a \"catalyst\".

**B. The Concept of Conditionality**

The discussion throughout this paper is grounded on two basic
principles, to which reference shall be made again and again. The first
principle, discussed above, is that the donors\' aridity to affect host
country policy is a continuum. The second, discussed here, is what we
may call the principle of appropriate conditionality, i.e., that the
formulation and implementation of any conditions to be at­tached to aid,
in any form, depends on the objectives of the aid.

Clearly, there can be no \"conditionality\" that does not imply the
provision of incentives whether of the positive or the negative kind. It
is not sensible to ask \"whether\" economic assistance does or should
carry conditions. The sensible questions are instead \"which\"
conditions, \"how and by whom defined\", and - the most important
question of all "why".

The term \"conditionality\" refers to policies which a lender/donor
expects or requests the recipient to follow (or to avoid), in order to
use the former\'s resources. The use of such resources, in turn, must be
in furtherance of, or at least in keeping with, the lender/donor
objective(s) in providing the resources.[^5] Thus, conditionality is a
device to promote use of the resources in conformity with the purpose of
providing them. The concept of conditionality of assistance is utterly
meaningless if divorced from the objectives the assistance is meant to
achieve. If follows that a change in the goals of assistance will
normally require a change in conditions as well. Further, to the extent
that one of the several objectives of a bilateral assistance program may
be inconsistent with another, this will necessarily be reflected in a
conflict between specific conditions.

Whether in the specific case conditionality is in keeping with the
objectives of the assistance is partly a matter of interpretation. Just
as commercial bank and business borrower may be in perfect agreement on
the objective - safe and profitable use of the loan - but differ in
their assessment of such safety and profitability, so aid donor and
recipient may hold identical views on the economic objectives to be
pursued but disagree sharply on whether a particular condition is in
keeping with those objectives. The likelihood of such a disagreement,
other things being equal, increases with:

\- the ambiguity of the objective;

\- the time span over which the objective is to be achieved;

\- the number of different objectives.

**C. Scope of the Economic Policy Dialogue**

Of the myriad possible conditions on the provision of economic
assistance, the discussion of the policy dialogue entails an examination
only of those related to the twin objectives of fostering the economic
stability and improving the prospects for sustained long-term economic
development of the recipient country (primarily the latter). The
remainder of this paper shall not, therefore, concern itself with the
conditionality needed to prevent fraud, theft, abuse of misuse of aid
funds,[^6] nor with the use of aid for short-term foreign policy
objectives, for purely commercial goals (such as the tying of aid to
purchases from the U.S.), or for long-term political development (except
insofar as economic development may itself be conducive to political
liberalization and institutional growth).

Finally, the notion of the policy dialogue is centered on the sphere of
discretionary conditionality, and not on statutory prescriptions or
prohibitions. Every donor\'s assistance program is subject to a set of
statutory conditions.[^7] These are usually taken as a given in the
policy dialogue, but it should be noted that in the long run statutory
conditionality is not a given, and all prescriptions are variable,
including charter provisions.

**D. Approaches to the Use of Aid to Foster a Policy Dialogue**

The use of aid to foster improved economic policies may be approached in
two general ways: in an \"ex post\" approach, good economic performance
by the aid recipient justifies financial support; in an \"ex ante\"
approach, the provision of aid is linked to a future policy change.
These approaches are not mutually exclusive, and may even be
complementary in certain circumstances.

The principal advantages of the ex post approach are alleged to be that
it does not generate accusations of interventionism - and that it does
not run the risk of causing damage to the aid recipient if the policy
advice happens to be wrong.[^8] These advantages are illusory, however.
For, offsetting the absence of the \"interventionism\" charge, there is
the inevitable charge of \"paternalism\" in the judging of economic
performance; and, the damage caused a country by wrong policy advice may
be no greater than the consequences to that country of an incorrect
assessment of past events. The advantages of the ex ante approach
include the possibility of having some beneficial effect through
specific macroeconomic policy decisions (while the ex post approach is
in practice more applicable to macroeconomic performance). Equally
important is the capacity to support desirable policy changes as they
are occurring; many such changes do need external support in order to
become feasible. (The classic example is the need for assisting with the
financing of a surge in imports caused by a liberalization of import
restrictions urged by the donor as a desirable policy measure.)

The policy dialogue usually involves an element of negotiation.
Generally, the outcome of a negotiating process may involve: (i) a loss
to both parties; (ii) a zero-sum game whereby one party\'s loss
corresponds to the other party\'s gain; and (iii) a gain to both
parties. An example of the first negotiating situation would be demands
by labor, which lead to bankrupting the company and thus also to
eliminating the union members\' jobs. An example of the second situation
might be negotiations on royalties to be paid to the owner of mineral
deposits. An example of the third situation - where both sides can gain
is the dialogue between aid donor and recipient concerning the latter\'s
economic policies. An adversarial approach is characteristic of the
first two types of negotiating situations; this approach rests on a
narrow linear perspective, by which it becomes a truism that, the closer
the outcome is to the position of one party, the farther away it must be
from the position of the other party.

The alternative is a cooperative approach to negotiations, which rests
on a more realistic view of the complexity of the parties\' different
sets of objectives, leading each party to define its subjective gains in
a significantly different way from the other. The cooperative approach
has the potential of yielding a perceived gain to both parties. It is
especially well suited to a negotiating situation in which the
fundamental objective is shared by both sides - as in the case of the
policy dialogue between aid donor and recipient to improve the prospects
for the economic development of the latter.[^9]

The key to a successful policy dialogue is mutual respect and
familiarity with (and sympathy for) the other party\'s objectives,
possibilities, and constraints. In particular, unless the donor
understands the country situation well enough to identify the important
policy measures at issue, it is impossible to provide valuable and
relevant advice. And if the donor does not have such advice to offer,
the recipient obviously will have no interest in listening to the
donor\'s viewpoint.

**II. The Effectiveness of the Policy Dialogue Through Bilateral
Economic Assistance**

In macroeconomic policy issues, the lead in engaging developing
countries in a dialogue is usually taken by the International Monetary
Fund (IMF) or the World Bank (IBRD). These issues are also discussed in
the context of IBRD-led consultative groups and in the Board meetings of
-the Multilateral Development Banks (MDBs) and the IMF. U.S. views are
articulated both through its Executive Directors to the MDBs and the W,
and in the context of its own bilateral programs. These policy issues,
however, also affect every part of the U.S. bilateral economic
assistance program.[^10]

As noted earlier, little attention was paid during much of the 1970s to
the overall economic policy context in developing countries, and the
explicit stress of the 1960s on using economic assistance as a vehicle
for the long-term improvement of the overall macro-economic policy
landscape has only recently reappeared. This should not be interpreted
to mean that no interaction on policy issues was taking place in the
1970s between USAID officials and the host governments. On the contrary,
many specific USAID programs have continued to have a significant policy
dialogue component, and notable successes have been achieved in a number
of instances. While the policy issues that are addressed in project
preparation are rarely macroeconomic in scope, they often do go beyond
the -narrow scope of the project, and have country-wide implications.

Experienced aid practitioners agree that the \"receptivity\" of the host
country government is an essential ingredient of the success of the use
of a aid to foster improvements in economic policies. But what does such
receptivity depend on? For starters, there naturally needs to be
valuable economic advice for the host government to be receptive to; in
the absence of a constructive contribution by the donor the dialogue
cannot have substance. Beyond that, the effectiveness of the dialogue
depends to a large extent on the practical conduct of it an on the tome
and history of U.S.-recipient country relations. The conduct of the
dialogue, the administrative implications and the personal elements are
discussed in section III. This section examines the more concrete
determinants of the dialogue\'s effectiveness.

**A. Assessing the Potential of Aid as a Vehi­cle for the Policy
Dialogue**

The potential of aid as a vehicle for the policy dialogue depends on
several interrelated elements - many of them factual, including:

> \- the size of the U.S. aid program relative to the magnitude of the
> recipient country\'s financial needs, to the inflows of assistance on
> comparable terms from other sources, and to the country\'s access to
> private lenders;
>
> \- the specific country circumstances, e.g., the urgency of its needs
> for additional exter­nal financial resources;
>
> \- the existence and importance of U.S. foreign policy goals other
> than the recipient country\'s own economic stability and development,
> e.g., strategic, human rights, etc.

With reference to the first point, there is no doubt that the
quantitative weight of U.S. bilateral economic assistance has declined
in relative terms from the peaks of the late 1960s.[^11] It is thus
probable that, in the aggregate, the potential of U.S. aid to promote
sound LDC economic policies is not as high today as it was in the 1960s.
However, the actual effectiveness of U.S. aid in this direction can be
preserved, or even increased, with respect to the specific (fewer)
countries to which it applies, by greater selectivity in the issues to
be discussed and greater persuasiveness of the case being advanced.

What if it is concluded that U.S. aid has very low scarcity value to the
specific recipient country? Recalling the earlier definition of a
\"dialogue\" as leading to an acceptance of the policy advice on being
in the recipient\'s own economic development interest, the vast
potential of a genuine policy dialogue is not necessarily compromised by
the lower relative volume of aid.

In the final analysis, economic policy improvements will be implemented
on a lasting basis (however they may have been initially induced) only
by successfully demonstrating to the host government the validity of the
economic development case for policy reform. Hence, a relatively small
size of the U.S. assistance program in a particular country does not by
itself rule out all possibilities of a constructive impact on the
country\'s policies. The very presence of a resident USAID staff is
evidence of U.S. interest in the country\'s economic progress. The aid
program, even if fairly small, is a useful entree, a sort of calling
card, a \"proper introduction\" without which discussion would be
difficult to initiate and maintain. Beyond this, as noted, the success
or failure of the dialogue rests on the persuasiveness (and, ultimately,
the real economic validity) of the arguments. But, as argued earlier,
this is true even if the aid program is very large.

**B. The Nature of the U.S. Aid Program**

U.S. bilateral economic assistance is com­posed mainly of three distinct
though inter­related programs, each with its own characteristics and a
different mix of objectives: Economic Support Fund (ESF), Development
Assistance (DA), and P.L. 480 food aid. (Other small programs include
the Housing Guarantee Program and the Trade and Development Program.)
While the constituency, characteristics, motives, and mix of objectives
differ in the three major components of the U.S. economic assistance
program, the uses of the assistance are in all cases expected to be
consistent with long-term economic development goals. These goals may
occasionally be overridden by other considerations, but should never be
disregarded. Consequently, there is almost always a point in discussing
possibilities for a constructive dialogue on the recipient country\'s
economic policy, regardless of the specific aid program in question.
Naturally, the limits and shape of the policy dialogue do, among other
things, depend on the specifics of the aid program.

In a sense, the aggregate USAID program in a particular country can be
used as the vehicle

to discuss policy issues. However, the difference in emphasis and scope
among ESF, DA, and PL 480 means that each offers different opportunities
and constraints in serving as a vehicle for the policy dialogue and is
worth discussing separately.

**1. Economic Support Fund (ESF)**

While foreign policy motivations are clearly dominant in the provision
of ESF, the functions of the assistance may include short-term
stabilization as well as longer-term developmental results. The kinds of
activities financed through ESF also vary, from those with a heavy
project orientation (e.g., Jordan and Pakistan) to straight balance of
payments support (e.g., Israel). The strength of ESF as a vehicle for a
dialogue on a wide range of macroeconomic policies thus depends on the
specific program under consideration. Generally, though, ESF is provided
in more quick-­disbursing and flexible form.

Since ESF assistance is usually provided for the economic stability and
development of the economy as a whole, its effectiveness naturally
depends mainly on the soundness of the country\'s overall macroeconomic
policies, i.e., those concerning aggregate production, employment,
taxation and public spending. interest rates, foreign trade, and
exchange rate policies. This, too, is likely to be viewed as a
reasonable connection by the recipient government, which is therefore
much more likely to be receptive to such a dialogue. This does not rule
out, of course, the possibility of using an ESF program to affect
positively some economic policy affecting a specific major sector,
especially where the ESF program is heavily project- or sector-oriented.

The main constraint on use of ESF for the policy dialogue is the U.S.
basic political commitment of support to the country, of which the host
government is obviously very much aware. This was thought by many to
virtually rule out an effective impact on the recipient\'s economic
policies.[^12] The U.S. economic assistance experience of the 1950s and
1960s shows that the emphasis on economic self-help has tended to
increase whenever the program motivation shifted from security or
short-term political objectives to longer-term development goals. This
tendency may not be irresistible, however. Some current programs show
promise - notwithstanding the security and foreign policy importance of
the assistance - to continue to develop a substantial and useful
interaction with the government concerning economic policy in several
major sectors and in certain macroeconomic areas as well.

**2. Development Assistance (DA)**

In DA, the sectoral emphases of USAID on agriculture and human resource
development carry an inevitable policy component. DA is mainly
project-oriented, but with somewhat more flexibility than in the recent
past, and with a new accent on improved economic analysis in support of
programs and policies. One limit to the policy dialogue through
development assistance can be that in some countries the amount of aid
is very small. However, as argued earlier, a constructive dialogue can
still take place based on the en­tree provided by even a small (but not
in­significant) aid program. Also, as the following table shows, the
number of countries where U.S. bilateral economic assistance is
significant is rather large. In FY 1981, 32 developing countries
received over \$20 million each in total U.S. bilateral economic
assistance. Of these, U.S. assistance accounted for over 5 percent of
imports in 10 cases.

In DA, the formulation of a specific aid-assisted project is incomplete
if it does not include explicit consideration of the economic policy
environment within which it is expected to function, and which has an
inevitably large effect - positive or negative on the developmental
impact of the assistance. It follows that negotiations with the host
government concerning the project can and should serve as an opening for
at least an exchange of views on how the economic policy environment
directly affects the efficiency of the project, and consequently the
effectiveness of U.S. assistance in help with the country\'s economic
development. MG Project assistance can be a good vehicle for the
dialogue on the country\'s microeconomic policies - i.e., those
affecting the demand, availabilities, and prices of the products in the
specific sector under consideration, and of the resources needed to
produce them, as well as policies affecting the competitiveness of the
product and resource markets in question.

The dialogue through project assistance need not be limited to a
discussion of the policies that directly influence the efficiency of the
particular project. It occasionally may even serve as an entree for the
discussion of broader policy issues. Such discussion will be facilitated
to the extent that the project assistance is substantial, and/or that
the U.S. aid program in the aggregate is large. Equally, if not more
important, the connection between the efficiency of the project itself
and the macroeconomic policy being discussed cannot be too indirect - if
the host government is to be at all receptive to a discussion of the
policy. In any event, discussions with the host government concerning
the overall U.S. bilateral assistance program also provide the
opportunity to address important macro as well as micro policy issues,
even if the various components of the assistance program are in the form
of project assistance.

**3. P.L. 480 Food Aid**

Since 1967, P.L. 480 food aid has been explicitly linked to
developmental objectives, and greater emphasis has been placed recently
on the use of P.L. 480 assistance to promote more effective agricultural
and rural development policies in the recipient countries. P.L. 480
assistance can potentially serve as a vehicle for a discussion of either
or both macroeconomic policies and specific rural development policies
(including therein measures in the areas of nutrition, population
planning and education, in addition to policies affecting pricing,
production and marketing of agricultural products). This is, of course,
because P.L. 480 carries general balance-of-payments implications at the
same time as it affects food availabilities and rural development in the
recipient country.

The U.S. emphasis on the developmental impact of food aid is evident in
the relevant legislation. Titles I and III of P.L. 480 are obviously
much more suitable vehicles for the policy dialogue than is Title II,
although a policy dialogue on the effectiveness of non-emergency Title H
programs (e.g., maternal-child health, food-for-work, and school
feeding) deserves more emphasis than it is usually given. Title I loans
are made on condition that the recipient countries undertake self-help
measures to improve the efficiency of agricultural production and
marketing. And Title III, too, provides for multi-year food aid
commitments and forgiveness of dollar repayment obligations, as
incentives to low-income developing countries to mobilize resources for
development and to undertake development-oriented economic policy
reforms.[^13] The main constraint on the use of food aid as a vehicle
for promoting sound recipient country policies appears to be assurance
of sufficient availability of commodities to permit program continuity.

**C. Project and Program Assistance**[^14]

Few topics raise the temperature of a discussion on economic assistance
as quickly as the project/program controversy does. It may be useful to
begin, therefore, with a reminder that this section does not touch on
any aspect of the relative effectiveness of project or program aid other
than their potential as a vehicle for the improvement of economic
policies in the recipient country. Secondly, it is well to underline
that project and program assistance are not mutually exclusive. On the
contrary, they are complementary tools, in the context of the policy
dialogue as much as in the broader context of the contribution of
economic assistance to international development and other U.S. foreign
policy goals. Thirdly, it is always salutary to keep in mind the
familiar distinction between the ostensible linking of aid to specific
projects and effective project-tying.[^15] Nevertheless, there are three
major categories of advantages of program aid.

\- Program aid has a higher scarcity value, both because the amounts
provided are typically larger and because few donors are willing to
provide it.

\- Program aid is a flexible instrument. It is quick disbursing, it can
be increased or decreased at the margin or delayed in timing, and can be
released in tranches. One can therefore support economic policy changes
as they occur, as well as monitor their implementation. Project
assistance, by contrast, cannot be turned on and off easily, and its
potential leverage on economic policies is correspondingly weaker.

\- Program aid is more directly relevant to a discussion of
macroeconomic policies; to link program aid to broad policy changes is
more likely to appear reasonable to the host government, and thus
increases its receptivity to the dialogue.

A review both of the USAID experience of the 1960s (see the Annex), and
of the World Bank\'s influence on LDC policies in its three decades of
project-oriented assistance might lead to the conclusion that program
assistance is the most effective form of aid for influencing
macroeconomic policies. Two important qualifiers, however, take some of
the wind out of this conclusion:

\- To identify a form of aid as the most effective for a particular
purpose is not equivalent to ruling out the usefulness of other forms of
aid for that purpose, nor to assuming that the most effective form will
actually be available under the specific circumstances.

\- The first two of the three categories of advantages of program aid
(higher scarcity value, and flexibility) belong more in the realm of
strict conditionality than of dialogue. Thus, if a decision is made in
the particular case to formulate and implement precise performance
criteria, then program aid is unquestionably the superior
instrument.[^16] If the dialogue aspect is instead stressed, the choice
is far more equivocal.

**D.** **The Formulation of Conditionality**

Conditionality is the most controversial aspect of the effort to promote
improved economic policies through a bilateral assistance program,
perhaps because it is in this area that the need for painful policy
choices or a disagreement between the parties usually comes to the
surface. It helps to frame the following discussion if we refer back to
the principle of appropriate conditionality, i.e., that conditionality
is meaningless without consideration of the objectives of the assistance
and of the country situation. The first proposition is thus that the
formulation of conditions must always be consistent with the purposes of
the assistance. **A** second general proposition is **the** obvious one
that it is important to acquire familiarity with the recipient
country\'s political, economic, social, and ideological landscape prior
to deciding whether to set conditions concerning economic policy, and if
so, which specific conditions to ask for.

**1. Positive and Negative Conditions**

In purely economic terms, the distinction between positive and negative
conditions is hollow. In principle, there is no difference between
causing a loss and causing the cessation of a gain.[^17] It is a matter
of esthetics, not of economics. Causing a country to become less rich is
the same as causing it to become poor; the only relevant question
concerns the quantitative impact of the intervention. However, the major
political and diplomatic dimension of the policy dialogue calls for
**a** very delicate handling of the positive versus negative formulation
of conditions.

**2.** **Explicit and Implicit Conditions**

There appears to be a consensus and a wealth of precedent within USAID
that explicit and formal understandings openly incorporated into aid
agreements are preferable to informal agreements, unless there **are**
very good reasons for not insisting on doing so in an individual
case.[^18] The same is true of the choice between specific or general
conditions, with specific and measurable conditions generally preferred
to vague and generic criteria, both from the U.S. viewpoint and in order
to provide a clear benchmark to the recipient country. It should be
noted, however, that specific and precise conditions can be either
quantitative or qualitative. This is important to stress, for - when
shifting to new and different objectives of assistance that are less
capable of quantification - there is often the temptation to accept
vagueness or even to forego the elaboration of performance criteria
concerning the new objectives. Again, it is perfectly possible to spell
out precisely certain conditions even though they may be expressed
qualitatively rather than quantitatively. Qualitative conditioning may
include dated commitments to undertake actions defined in generic terms,
or undated commitments to undertake specific actions. In more recent
practice, U.S. bilateral aid has included precise but qualitative
conditions (such as \"strong and concrete measures to curtail the
tendency to capital flight\" by a specified date) but has generally
tended to rely on the ME for a specification of quantitative conditions.

**E. The Implementation of Conditionality**

Implementation can be exercised through performance reviews, loan
negotiations, and tranche releases. The twin objectives should be to:
(i) establish credible consequences flowing from non-performance, and
(ii) decide on the type of implementation best suited to the specific
country situation. Credibility can be established through a combination
of tact with firmness, along with refraining from threats or promises
unless it is certain that, if needed, they can be made good. A decision
on the type of implementation naturally depends on the particular
circumstances. The effectiveness of implementation is a function of
three important elements:

\- the quality of conditions,

\- the number of conditions, and

\- the phasing of the assistance.

**1. The \"quality\" of conditionality**

Performance criteria should, ideally, be both necessary and sufficient
for the achievement of the policy and economic objectives of the
assistance. As a rule, this is extremely difficult to achieve,
frequently owing to unforeseen external economic changes. The
international financial landscape is littered with the remains of
bilateral and multilateral loan agreements that were formally abided to
without any amelioration of the economic problems their conditionality
was meant to address. It is, of course, important to be confident at the
negotiation stage that conditions will prove to be at least necessary,
if not sufficient. The establishment of conditions, which turn out to be
basically irrelevant to the purposes of the assistance and to economic
policy improvements only, discredits the policy dialogue. It is also
important, as discussed later, to build in a mechanism for frequent
review of conditions and of country performance.

**2. The number of conditions**

Common sense as well as the practice of multilateral and bilateral
institutions indicate clearly that more conditions do not necessarily
mean greater impact on policy improvement. On the contrary, there is -
beyond a certain small number - an inverse relationship between the
number of conditions and the effectiveness of their implementation. The
consensus is that it is far better to insist on a few key points, and
make sure that it is known to -ill concerned that the U.S. will follow
through. Often, the most practical course may be to explicitly state one
major criterion (as, for example, food price changes in a specified
degree and on a clear timetable) and incorporate a discussion of other
self-help conditions related to the major criterion.

**3. The phasing of the assistance**

Whenever applicable and practically feasible, the assistance should be
disbursed in installments - \"tranches\" - taking care that sufficient
time elapses between tranche disbursements to allow for at least minimal
assessment of country performance. \"Back-loading\" (later installments
larger than earlier ones) increases the credibility of conditionality,
though obviously it also delays the economic impact of the assistance.
This, and the various other practical aspects of the phasing of
assistance, can be determined only in light of the circumstances of the
specific case. Generally, however, tranching has a number of advantages.
It allows a flexible adaptation of the agreement to possible major
changes in economic circumstances - tightening, slackening, or changing
performance criteria in pursuit of effective implementation of the
purposes of the initial conditionality. Also, it builds in a mechanism
for periodic review of country policies, that is, for the policy
dialogue itself. This is such an important feature that it may be by
itself suffice to justify the tranching of assistance.

It is recognized that regular tranching may not be feasible in some
instances, especially for some kinds of project assistance, such as
establishing an agricultural-research system or other forms of
institutional development. Even in these cases, however, a tranche might
be linked to the beginning of a new phase of a project or to an in-depth
mid-term evaluation. Where a pre-determined tranche is not feasible, the
mid-term evaluation Or some other natural phase in project life should
be a time for review of performance, including relevant country
policies, with a mutual understanding that depending on the outcome of
the review, the project might be modified and scaled upward or downward.

The nature and number of conditions, the tranching, the formulation of
performance criteria - all facets of the conditionality addressed at
promoting sound LDC economic policies - are a means to stimulate the
host government in that direction and to arrive at the best informed
possible assessment of its efforts and successes. In the final analysis,
however, an inherently qualitative judgment, by the donor is inevitably
called for - a judgment of the seriousness, good faith, and competence
of the host government in pursuit of the agreed economic goals
identified through the policy dialogue.

**F. Limits to the Effectiveness of the Policy Dialogue**

Several important limitations are implicit in the previous remarks.
Indeed, virtually any statement of \"desirable\" features of the policy
dialogue contains within it a corresponding expression of a limit to its
effectiveness. It may be useful, however, to recapitulate here the
principal limits, keeping in mind that they do not necessarily rule out
the possibility of a useful policy dialogue but only imply the need for
realistic expectations and for carrying out the dialogue in specially
careful ways.

The presence of overriding U.S. foreign policy objectives other than the
economic stability and development of the recipient country has already
been noted as a constraint on the economic policy dialogue. Even then, a
constructive exchange with the recipient country can take place
regarding the maximum developmental impact of the resources provided -
and hence regarding the overall policy context. The same is true of the
possible limit posed by project-orientation of the assistance.

The existence of large programs of other bilateral donors and of
multilateral institutions, as well as the activities of the Mg and the
potential availability of funds from private international lenders -
naturally also affect the capacity of the U.S. bilateral economic
assistance program to promote improvements in a recipient country\'s
economic policies. The important coordination issues involved are
examined in the next section.

A third limit is set by internal political and social conditions in this
recipient country. Insecurity, instability, administrative incapacity -
all serve to lessen the chance of successfully inducing policy
improvements. Paradoxically, external efforts to encourage improved
policy may be least effective just when the need for improved economic
policies and administration is most urgent. A variation on this theme is
the possible extreme sensitivity of a recipient country to the slightest
suspicion of interference with its sovereignty sensitivity, which is
sometimes alleged to rule out a policy dialogue. But, that a host
government may be particularly sensitive implies that the dialogue on
its economic policies should be conducted in a particularly carefully
fashion - not that it should not be attempted in the first place.

One approach would be to ask as a condition of assistance that the
recipient government formulate and present its own specific program of
measures to deal with current economic problems. While much more
palatable to the host government than U.S. insistence on certain
policies, this approach still has the merit of leading the host
government to recognize economic realities, and in all probability
leading it to identify a set of measures similar to those which the U.S.
would have specified in the first place. Even if this does not happen,
discussion of the recipient government\'s own program would constitute a
useful entry for a dialogue on concrete policy measures.

Finally, one often hears that the fundamental limit on the ability of
donors to foster improved LDC economic policies is the incompleteness of
our understanding of the economic development process. The
incompleteness is real, but the limit is imaginary. It is, of course,
salutary to keep in mind that the market for truth is a competitive
one - where no monopoly survives for long - and that arrogance should be
avoided.[^19] The benefits expected from proposed major policy reforms
should be substantial enough to allow for the inevitable large margin of
error.[^20] But to stretch this point too far leads to paralysis. It
leads to the unscientific dead end of not ever counseling anybody about
anything, for fear of not being entirely correct.

The fact is that if a donor government possesses a great deal of
accumulated experience in economic development problems, information and
insights, about a particular developing country\'s economic difficulties
and possibilities, and is in sympathy with the country\'s aspirations
and long-term goals - it has a responsibility to its own people and to
the recipient country to offer the best policy advice it can formulate,
to urge effective economic policies, and to use its bilateral assistance
program as a vehicle for promoting them. In addition, it is frequently a
case of supporting LDC governments in doing what they recognize is
needed and often want to do, and not at all a case of forcing them along
a policy path which they do not find desirable for their country\'s
economic development. Similarly, participation by donors in policy
dialogue adds weight to economic development considerations in the
recipient country policy formulation process, a process, which - as in
most countries involves various, and sometimes conflicting objectives.

That said, there appears to be no disagreement among aid practitioners,
development scholars, and policymakers, of the importance of **a**
careful handling of the policy dialogue process:

External donors . . . assume a heavy burden of responsibility when they
intervene vigorously and on **a** continuing basis in a developing
country\'s policy formulation. This is not to argue against such
intervention . . . external influence may be extremely useful as a
counterweight to internal resistance to needed change, as a supplement
to analytic capacity in countries lacking their own trained analysts,
and as a stimulant to fresh perspectives in more sophisticated
countries. But effective use of influence also demands recognition of
the limits of our understanding of development problems, the patience to
work toward a consensus on goals and means, and the willingness to stand
by the implicit obligations of the game.[^21]

**COUNTRIES WITH A 1981 CAPITA INCOME LOWER THAN \$2,000 RECEIVING
MORE**

**THAN \$20 MILLION IN TOTAL U.S. BILATERAL ECONOMIC ASSISTANCE^a^**

**(1) (2) (3)**

###  **Country FY 81 Actual Programs FY 81 Imports** **1 \-- 2**

(million of dollars) (millions of dollars) (percent)

AFRICA: Ghana 12.2^b^ 1,010.1 1.20

Kenya 49.9^b^ 1,990.8 2.50

Lesotho 10.4 224.1 4.26

Liberia 57.8 471.8 12.25b

Senegal 35.6 754.8 .13

Somalia 57.0 177.9 32.04

Sudan 109.4 1,640.9 6.66

Tanzania 36.3 1,199.7 3.02

Upper Volta 30.7 329.9 9.30

Zaire 29.6 676.4 4.37

Zambia 38.5^b^ 727.2 5.29

Zimbabwe 22.9^c^ 1,198.0 1.91

ASIA: Bangladesh 151.6 2,475.2 6.12

India 275.1 13,675.6 2.01

Indonesia 135.0 14,747.O^c^ .91^c^

Korea 29.0 25,300.0 .11

Pakistan 79.3 5,407.3 1.46

Philippines 97.5 8,464.4 1.15

Sri Lanka 71.7 1,921.7 3.73

Thailand 30.8 9,950.1 .31

LAC: Dominican Republic 38.6 1,627.1 2.37

El Salvador 104.0^b^ 931.9 11.16

Haiti 27.5 218.6 12.60

Honduras 38.5 965.6 4.00

Jamaica 70.8 1,334.1 5.30

Nicaragua 18.5 1,008.1^c^ 1.84^c^

Peru 81.0 3,293.4 2.46

NEAR EAST: Egypt 1,133.0 7,748.2 14.62

Morocco 55.7 4,336.3 1.28

Tunisia 40.6 3,752.0 1.08

Turkey 201.0 8,859.4 2.26

Yemen Arab Republic 71^b^ 1,283.8 .60

^a^In addition to these, Israel received \$764 million in FY 81, and
Poland \$47.6 million.

^b^FY 78 data. For Ghana, Lesotho and Yemen, the FY 1981 actuals were
higher than \$20 million.

^c^Estimate.

**Ill. The Conduct of the Policy Dialogue Through Bilateral Economic
Assistance**

As mentioned at the beginning of the previous section, the conduct of
the dialogue cannot be divorced from its effectiveness, of which it is a
major determinants It is discussed separately here because it is much
more eclectic than the other determinants of the dialogue\'s
effectiveness - as it includes practical (though important)
considerations as well as systemic and organizational issues.

**A. The General Tone and the \"Emily Post Factor\"**

The introductory section outlined a \"cooperative approach\" as an
alternative to the adversarial, confrontational, approach to
negotiations, and -concluded it to be particularly appropriate to
negotiations where - at least in principle - donor and recipient share
the common objective of the economic stability and progress of the
latter.[^22]

A correct tone of the dialogue with the host government officials is
uniformly agreed to be essential to the chances of its success. Among
other things, the tone of the approach ought to be generally consistent
with the prior realistic assessment of the potential for U.S. influence
in the concrete situation and avoid conveying an adversarial and
confrontational flavor y for, once again, there need be no conflict of
goals between donor and recipient in a genuine dialogue on the latter\'s
economic policies.

A number of common sense maxims emerge from an examination of the
practice of the policy dialogue. The following may be listed:

\- as already mentioned, the obvious precondition to the dialogue is
that the donor must understand the country situation well enough to
identify the key policy measures at issue. This is much easier said than
done. An essential prerequisite is an overall economic analysis of the
country\'s major development problems and prospects. (Such analysis need
not necessarily be carried out by the donor agency from scratch or
independently of the analyses by other institutions. The assessment, as
opposed to the research, must be independent, however.) This assessment
needs to be based, moreover, on a thorough, balanced and sensitive
understanding not only of the economic situation, but also of the
political and cultural setting, including the historical evolution. This
argues for country expertise by donors; ideally, in-country resident
expertise.

\- The donor and its representatives must pay attention not only to the
clarity of the message as it is \"broadcasted\", but also policy, to the
clarity of it as it is \"received\", keeping in mind that governments do
not discuss issues; people discuss issues. Needless disputes may result
from a simple understanding of each other\'s actual position. It is, for
example, perfectly clear to say \"private sector promotion\".
Nevertheless, if there is any chance that this might be misunderstood by
the interlocutor to be limited to \"private foreign sector promotion\",
it is far better to spell out \"local and foreign private sector
promotion\", however repetitious it might become. This point leads,
among other things, to the desirability of asking the host country
representatives to articulate their understanding of the policy
\"message\" being delivered.

\- The dialogue must be conducted on a basis of mutual respect. For
example, any chance of a successful dialogue on economic policies is -
in most countries - badly compromised if the host government gets the
impression that its sovereignty is considered to be \"for sale\". On the
other hand, naturally, a recipient country must accept the donor\'s
right to advance and promote its own position on the country\'s economic
policies.

\- Open mindedness is quite important too. It makes for better
listening. Better listening makes for better quality advice, and advice
that is more legitimate - hence more acceptable - from the recipient\'s
viewpoint. It consequently allows the possibility of a stronger and more
robust insistence on following the policy course and performance
according to the agreement. That is, open mindedness in the formulation
of policy advice leads to more forceful implementation of the outcome of
the policy dialogue. And, since the parties\' open mindedness is likely
to improve the quality of the initial advice in the first place, the
result is better policy, more forcefully implemented.

\- A variant of the above maxim is that it is important that the
recipient government reach its own conclusions, and not feel that it is
being manipulated.

\- Policy concerns should be introduced early in the aid negotiating
process. Sometimes the policy concerns are not broached with the
recipient government until the process is well underway. Occasionally,
these concerns are allowed to remain dormant until just before the
agreement is to be concluded. Clearly, this results either in not having
them taken seriously or in generating justifiable resentment by the host
government. In addition, it is probable that the very design of the
project is improved by early consideration of the policy issues relevant
to the purposes of the assistance.

\- The dialogue must be mindful of the \"Emily Post Factor\", that is -
as mundane as it sounds - the need for behaving in manners that do not
clash with common politeness or with the host country\'s social
conventions.

**B. Major Stages of the Dialogue and Some Administrative Issues**

A fundamental administrative problem is the assignment of appropriate
weights to the necessarily partial views of the different components of
an institution in such a way as to lead to an outcome, which conforms,
to the objectives of the institution. The dialogue with a recipient
country cannot be productive unless the prior dialogue within the U.S.
Government successfully takes place.

The economic policy dialogue must be consistent, of course, with U.S.
foreign policy overall and with respect to specific countries. Thus, the
interaction between USAID, State, Treasury, USDA, USTR and other U.S.
agencies is a very important component of the eventual effectiveness of
the policy dialogue with the recipient country, both in Washington and
in the field. In Washington, a formal interagency coordination mechanism
is provided by the Development Coordination Committee (DCC), which is
chaired by the USAID administrator, and its subcommittees on
multilateral assistance, food aid, and so on. This formal mechanism
needs to be supplemented by informal contacts between appropriate USAID
staff and that of other agencies. Such informal contacts, which already
do take place frequently and constructively, should be extended to the
area of the policy dialogue, its effectiveness and conduct. Coordination
in Washington, whether formal or informal, is of course incomplete
without parallel efforts in the field, to assure that all components of
the U.S. presence in a country - including the Embassy, the USIA
mission, and others - are at least aware and at best strongly supportive
of the objectives of the economic policy dialogue being conducted by
USAID.

In the specific USAID context, one must first of all acknowledge that
Mission perspectives differ - and properly so - from the USAID/W
perspective, and hence assign a significant weight to both sets of
views, in order that the Policies decided by USAID/W be vigorously
implemented. Many of the principles outlined for a successful policy
dialogue with recipient countries apply also to the successful exercise
of USAID/W influence and guidance for USAID mission activities and the
vigor with which they are carried out. While the \"leverage\" possessed
by USAID/W vis-a-vis USAID Missions is clear to all participants, it is
nevertheless true that willing cooperation by the Missions is
indispensable for the achievement of a successful policy dialogue.

A meaningful and lasting response by Missions requires, among other
things, clear and manageable instructions. So far, the Missions\'
response to USAID/W emphasis on the policy dialogue have been
supportive. The requirements for a further strengthening of Missions\'
interest and capability to engage in a robust policy dialogue with their
counterparts in the recipient country are discussed in the next section.
Here it is sufficient to note that one of the findings of a review of
the USAID experience of the 1960s in this area is \"a strong tendency to
\'package\' existing activities in a particular field \... in order to
comply with Washington\'s directive \... superficial packaging adds
nothing to their effectiveness.\"[^23] Thus, asking for policy changes
should never be allowed to become just another item an a statutory
checklist. To do so would tend to create the tendency to repackage
exactly the same activities with a new cover fulfilling the formal
conditions, but with no effective change.

The nature of the interaction with the recipient government will depend
among other things on the country\'s level of development, its
analytical capabilities, and its relationship with the United States.
Except for the very few instances where strict and formal conditionality
of assistance is a realistic option, such interaction may encompass one
or another of the following approaches, or a suitable combination of all
three. A low-profile informal approach entails discussions over an
extended period of time, with an array of host government
representatives, academics, etc. in whatever form and occasions may be
suited for raising policy issue. A long-term planning relationship
entails the provision of a contract team to work for an extended period
with the host country Ministry of Finance, Planning Office, etc., with
the delicate dual responsibility of helping to implement host country
policies at the same time as it attempts to promote their improvement.

Finally, we may concentrate aid resources in those countries (or
sectors) where the probability of successful policy improvement is
greatest. AU of these approaches lead to the same set of practical
implications, discussed below.

**C. Sensitivity, Selectivity, Stamina, Staff: Four Essential
Ingredients**

There is an unbroken consensus of experienced opinion that sensitivity,
selectivity, stamina, and staff are essential to a successful policy
dialogue in the circumstances of the 1980s. \"Sensitivity\" has already
been discussed earlier under the heading of the tone of the dialogue. As
for the latter three elements, while many aid practitioners and
policy-makers might differ on other aspects of the strategy of the
Policy dialogue, or on the desirable policies themselves, there is no
disagreement that the dialogue must:

-build on the Agency\'s strengths and concentrate on a few key policy
changes; -be conceived and carried out on a sustained, long term basis;
-be implemented by a knowledgeable and competent staff, on both sides.

**1. Selectivity**

The policy dialogue needs to be concentrated in areas where it can make
a difference, rather than scattered across the entire economic policy
landscape. The important question is the identification of the specific
policy areas selected as fit subjects for the dialogue. Officials in the
recipient countries inevitably help define the policy issues that are
discussed. But it is also necessary that USAID choose to discuss those
key issues and policies about which we are best informed and which we
feel are most important. These would normally lie in the areas of
special USAID expertise and/or interest, such as agricultural policy,
parastatal enterprises, health and population, taxation and government
expenditures, and trade and tariff policy.

The enormous economic, social, and political diversity among developing
countries points to the need for defining those key issues and policies
on a country-specific basis - albeit, of course, from among a \"basket\"
of policy areas on which constructive discussions might be possible.
Agency precedent as well as common sense thus combine to suggest that
there is no substitute for allowing - indeed, requiring - the
USAID/Missions to determine their own key area priorities for policy
intervention or dialogue, on the basis of their familiarity with the
country situation and with the strengths of the USAID program in that
country. (This is in fact the approach that has been followed so far.)

There is, of course, a need for stimulation\" by USAID/W and for
follow-up of Mission responses. The key policy areas to be identified
ought to meet the following three criteria:

\- They must be areas of importance to the economic development of the
country. If they are unimportant, efforts at a policy dialogue are not a
cost-effective use of mission staff. For example, the economic
efficiency costs of subsidizing consumers by means of controls on
agricultural producer's prices are a topic of great general importance.
It would be, however, wasteful for a Mission to discuss this point in a
country where such intervention on prices is minimal and thus not an
important issue.

\- They must evidence a significant and identifiable difference between
the U.S. views of desirable economic policy and the host country
practice. If there isn\'t a significant difference, the dialogue is
moot.

\- They must belong in the host government\'s discretionary sphere. If
the economic policy measure is dictated by an overriding national
imperative - domestic or external the host government cannot be at all
receptive to the dialogue. Thus, it would not be reasonable to harp on
the economic inefficiency of a certain regional allocation of public
spending when the expenditure \"quotas\" as in several African
countries - are dictated by the need for preserving minimal national
cohesion in a multi-ethnic plural society.

**2. Stamina**

Any attempt at promoting policy changes must recognize the axiom that
any economic policy measure, no matter how desirable or sensible, by
itself always harms somebody somewhere.[^24] Under special country
circumstances, a sudden and large policy reform might be the only way to
overcome-successfully the predictable opposition by the vested interests
of prospective losers. When a government, however, does. not possess the
requisite strength and authority for such a quick, broad stroke, its
implementation of economic reforms requires gradual overcoming,
pacifying, or compensating the groups that stand to lose from the
reform - and this is delicate and time-consuming political business.
Correspondingly lengthy and gradual is an aid donor\'s build up of its
capability to demonstrate to the recipient government how the latter can
lessen, escape, or weather the political opposition to economic policy
changes.

A policy dialogue will need to be considered as a long term investment
of talent and resources, When progress is achieved, it will most likely
occur in small increments and when we are most successful, it will be
from gradual progress over an extended period. We should not delude
ourselves that we will be able to catalyze large or dramatic changes in
the macroeconomic policy arena for a small investment of time and
resources.

If the policy dialogue is properly viewed as continuing involvement on a
long-term basis, one may add to the direct policy dialogue (such as may
be exercised during program loan negotiations, for example) all the
various indirect ways through which the U.S. viewpoint on desirable
economic development policies is advanced - including help to build up
the host government\'s policy analysis capacity, support for applied
research in certain policy areas, professional exchanges among
government agencies, seminars and conferences, and the provision of
short-term technical assistance for the analysis of the political and
economic implications of certain policy measures. Indeed, it can be
argued in that the bulk of the policy dialogue in many countries is and
has been effected through these techniques rather than through U.S.
officials\' conversations with host government officials. However, it
was not possible in this paper to do justice to the elusive topic of the
possible long-term policy impact of these indirect measures.

The long-term. nature of the policy dialogue leads to one final point.
Experience suggests that one should \"never give up on countries\":
today\'s basket case may be tomorrow\'s growth model. A case in point is
Korea, which in the late 1950s was considered to have extremely poor
economic prospects.

**3. Staff**

The USAID staffing implications of three other ingredients of a
successful policy dialogue sensitivity, selectivity, and stamina - are
predictable, yet valid. It is unrealistic, and ultimately
counterproductive, to try and carry out a dialogue on economic policies
of great import to the recipient country without knowledgeable,
competent, and sympathetic people to conduct it. This is not the place
for a discussion of numbers and credentials of USAID staff that may be
required.[^25] One may, however, note that much can be accom­plished by
optimal use of a relatively small number of high-quality staff.

There are a number of ways in which the staffing requirements of the
emphasis on the policy dialogue can be kept down to manageable
proportions. First, adhering strictly to the criterion of selectivity of
intervention entails a significant potential for targeting efforts on a
few key policy areas even with a relatively small staff. Second, as
noted earlier, independent USAID assessment of the host country\'s
economic policy context does not necessarily require original research.
A lot can be done by intelligent critical scrutiny and synthesis of
other institutions\' analyses - notably those by the World Bank and by
the IMF, along with relevant documents by regional MDBs and other
sources - and by frequent exchanges of views with staff of these
institutions and of other U.S. agencies. Superimposing the U.S.
priorities and perspective onto another institution\'s work will
normally result in certain significant differences in conclusions, or at
least changes in emphasis, from the original assessment. An independent
economic policy assessment need not, therefore, require a great deal of
in-house analytical capacity. (Whether the conclusions of such an
assessment should be pressed independently of other donor institutions
is a separate major issue, taken up in the next section.)[^26]

Even after all possibilities for limiting new staff are utilized, there
remains the hard core reality that a constructive policy dialogue,
however selective, mandates a minimum in-house analytical capability -
consisting of a sufficient number of U.S. direct-hire economists on the
staff of USAID Missions along with supporting local staff and analytical
backup in the form of TDY assistance from USAID/W or on contract. At
present, in a large number of Missions such analytical capability is
notable for its absence.[^27]

These considerations do not mean that the policy dialogue can be carried
out by staff. Subject to the authority of the Ambassador, the USAID
Mission Director has the major role (though not an exclusive one) to
play in the interaction with host government officials of the requisite
level. However, it should be dear to both sides that there are limits on
a Mission Director\'s autonomy. It is good for the effectiveness of
negotiations to be able to disclaim authority and to have to refer major
issues to USAID/W. (The \"policy staff\" should, of course, enjoy easy
access to the Mission Director - or, at USAID/W, to policymakers; in the
regional bureaus.) A management/ organizational corollary is that
Mission Directors ought to be chosen partly on the basis of their
ability to engage in substantive economic policy discussions, and of
their understanding of the importance of sound domestic policies in the
economic development process. Also, it is necessary that the
policymakers in the regional bureaus at USAID/W appreciate the
im­portance of the policy dialogue, and evaluate Mission Directors in
part on the basis of their performance on this score.

**D. The Host Country Participants**

The quality and attitude of the host country interlocutors is also very
important. All too frequently outside experts quickly interpret
non-optimal economic policies undertaken by LDCs as indication of
ignorance rather than political constraints or contradictory objectives.
Few mistakes can be more damaging to the chance of a constructive
dialogue than to underestimate the technical competence and savvy of the
host country counterparts. The story is told of the aid organization
representative who gave a paternal lecture to a host government economic
official concerning a particular conclusion of economic development
research - only to find out after the interview that the official had
co-authored the original research. Especially in countries with a large
economic assistance program, USAID will often be negotiating with the
host country\'s most competent professionals, and must be represented by
individuals capable of commanding respect and thus attention from their
counterparts.

By contrast, in countries with a limited economic and administrative
capability, the dialogue may be constrained by inability of the host
country interlocutor to understand what the issue is about and why a
certain policy course may be desirable. When this is the case, USAID
assistance to build up the host country capacity for policy analysis
would be in line both with the requirements for a successful policy
dialogue and with the institutional strengthening which is of general
importance for the development.

**IV. Bilateral-Multilateral Cooperation in the Policy Dialogue**

The etymology of \"dialogue\" does not reflect the complexity of the
problem of assuring the developmental effectiveness of external
assistance. More than \"two voices\" are involved and \"the\" policy
dialogue in practice comprises a number of formal or informal exchanges,
whether joint or several. The contact between a U.S. USAID Mission
Director and the host country counterpart is only the intersect of two
complex decision-making planes. In turn, the U.S. economic assistance
program is, in most countries, only one among a constellation of sources
of external finance, including the MDBs, the RAF, other bilateral
donors, and private international lenders. The need for coordination
among these is an age-old issue, with the objective to assure - at
best - maximum stimulation of economic policy improvements, and - at
least - that one program or one donor not undercut valuable efforts
through another program or by another donor.

**A. The Role of the IMF and of the IBRD in the Policy Dialogue**

The IMF and the World Bank are always potential actors in the dialogue,
and very often play the leading role - in large measure owing to their
substantial resources. The interaction between USAID and these
multilateral institutions thus ranks as the first item in any discussion
of coordination by USAID in the area of the policy dialogue. The
burgeoning literature on 11@9 conditionality and on the World Bank\'s
approach to influencing economic policy in developing countries is too
vast to be examined here in detail.[^28]

Even though the IMF practices have to an extent changed in response to
international economic developments in the 1970s, and not withstanding
the views of some that IMF conditionality has \"slipped\", it remains
true today that the IMF policy conditionality is still by far the
strongest and dearest of any international institution, albeit, of
course, limited to measures consistent with the Fund\'s purpose of
helping the member country achieve a sustainable balance of payments
position in a reasonable period of time. Three interrelated factors are
probably responsible for this. First, the theory underlying
international financial adjustment is reasonably complete, and better
established than the theory of economic development, so that IMF
conditions can be formulated with more assurance and thus implemented
more vigorously. Second, the IMF can marshal significant amounts of
quick-disbursing financial resources to back its economic policy advice.
Third, member countries in balance of payments trouble usually yield to
the natural temptation to postpone the recourse to unpleasant adjustment
measures as long as possible - with the result that when they do go to
the MU for financial assistance their needs are acute, and lend a
certain special weight to IMF adjustment policy conditions. It should be
stressed that the Fund has often urged member countries to anticipate a
need for drawing from the Fund, and not wait until their financial
problems become severe. The \"lender of last resort\" terminology is not
the Fund\'s own.

The World Bank\'s influence on macroeconomic policies of developing
countries has generally been more diffuse. Historically, the Bank has
been primarily a project lender, and within that vehicle there has
always been a concern with the economic policy environment. The recent
introduction of program lending with an explicit policy dialogue
component (Structural Adjustment Lending - SAL), may, however, have
given added robustness to the Bank\'s economic policy dialogue with
recipient countries and increased their success in fostering
improvements in host country policy.

**B. Coordination Between the IMF and the IBRD**

The introduction of SAL has been a major factor in the establishment of
closer Bank/ Fund links than had been the case previously - although the
Bank and the Fund have cooperated with each other throughout their
history.

The division of labor - and therefore the nature of cooperation -
between the IMF and the. IBRD is not as easily defined as it was in
earlier days, when the distinction between \"stabilization\" and
\"development\" was clearer - largely because the duration of
\"temporary\" balance-of-payments disturbances was shorter. It was more
acceptable then to think of the Fund as dealing with \"short term\"
difficulties, and of the Bank\'s function as applicable to the \"long
run\". The onset of oil crises, and the progressively longer duration of
temporary balance of payments problems has changed all that. To neglect
external financial problems can be fatal to long term development and,
conversely, the lack of needed structural changes is eventually paid for
in the form of financial crises.

The Fund has correspondingly lengthened the time horizon of some of its
activity (with the introduction of the Extended Fund Facility EFF), and
broadened its institutional concern to include production issues; and
the Bank has foreshortened its own time perspective to a degree and -
within that - begun paying serious attention to requiring certain policy
adjustments. Neither Fund nor Bank representatives find it fully
acceptable any longer to define their boundary as short-term versus
long-term, or stabilization versus development, or macroeconomic versus
microeconomic - although it remains beyond argument that the Fund is in
all three cases closer to the former of these two terms of comparison,
and the Bank to the latter.

What is left as a fairly clearcut dividing line (in addition to the very
different \"personality\" of the two institutions) is the respective
institutional policy competence and experience. The Fund possesses
primary competence/responsibility in the analysis of balance of payments
adjustment problems and has therefore a comparative advantage in the
dialogue on exchange rate, monetary, and incomes policies. The Bank
possesses primary competence/responsibility concerning development
programs and priorities and project evaluation, and has thus a
comparative advantage in the dialogue on the size and composition of the
investment program, on the efficiency of the use of resources, and on
individual pricing policies.

Coordination and cooperation between the Bank and Fund has naturally
been easier in regard to the areas of clearcut primary responsibility of
one or the other institution, than in the remaining policy areas \"in
between\" (especially fiscal matters and external debt problems). Still,
with some limitations and difficulties arising partly from the different
pace of activity in the two institutions and their different operational
time horizon, cooperation has evolved in keeping with the substantive
changes made by both Fund and Bank in response to the changed
international economic environment. Outside observers are understandably
skeptical that Bank-Fund cooperation has been characterized by as much
unbroken smoothness and amity as the representatives of both
institutions are typically careful to project. However, it is very
probably true that, at least, coordination has not proven to pose any
constraint to the operations and overall effectiveness of either the
Bank or the Fund.

**C. Coordination Between USAID and Multilateral Institutions**

The dialogue on macroeconomic policies to a large extent does need to be
carried out by multilateral institutions, not only for the standard
reasons of their greater volume of assistance and their non-political
nature, but also because - to be plain - from the U.S. viewpoint it is
obviously much better that the ME or the World Bank-bear the onus for
insisting on inconvenient or unpopular policy reforms. But U.S.
bilateral economic assistance programs must themselves have the ca
ability to p serve as an independent vehicle for the dialogue on LDC
economic policies. This capability is useful to support and reinforce PO
the dialogue when it is fed by the Mg or the Bank; and it is an
indispensable check on the policy advice rendered through those sources.
Lacking such capability, U.S. support for the policy dialogue conducted
by the multilateral institutions would suffer form a knee-jerk
automaticity which would be very hard to justify - from the U.S.
standpoint, from that of the recipient country, or from that of the
multilateral institutions themselves.

An opposing argument is often heard, however, to the effect that the
dialogue on macroeconomic policy should be left to the multilateral
financial institutions, or - which amounts to almost the same thing -
that the U.S. effort to foster improved economic policy should
\"Piggyback\" entirely onto the IMF or IBRD conditionality. Supposedly,
policy changes urged by multilateral institutions are more acceptable to
the recipient countries because they are advanced on \"technical\" and
not on \"political\" grounds.

As Edward Mason put it fourteen years ago:

\[The stigma of aid\] becomes less embarrassing and loses much of its
sting, we are told, if aid comes from a multilateral agency in which a
recipient country and countries in a similar position of dependence have
a voice.\"[^29]

It is not sensible, however, to regard economic policy issues as merely
\"technical\"; indeed, it is not good economics to do so. The historical
pattern of reaction to the IMF\'s own conditionality makes this quite
clear. Related to the \"technical\" character of multilateral policy
advice is the alleged greater capability of multilateral institutions to
undertake a more vigorous policy dialogue. The record of the IMF is
invariably cited in this regard, and the argument indeed carries weight
in this specific case.

A second argument put forward to support a policy of -100%
piggybacking\" by the U.S. on the conditionality of the Fund or the Bank
is the greater analytical capability underpinning these institutions\'
assessments and policy dialogue. This is a valid, but not determining,
argument. There are still three specific reasons why 100% piggybacking
would be an undesirable policy. First, as competent and thorough as the
staffs of the IMF and the IBRD are, there is always the possibility that
their analysis may be faulty in some respect in any particular case.
Second, while the analysis may be on mark, they may have a different
perspective on the kinds of economic policies that would lead to
broad-based economic development. Third, and most important, the
principle of appropriate conditionality should be recalled once again:
it is to be expected that the policy dialogue will be carried out by
different institutions in pursuit of the achievement of their own
statutory objectives and functions. Since these are significantly
different, the shape and direction of the policy dialogue carried out
through one institution cannot be identical to that which another
institution should in principle adopt, and the possibility of an
independent stance must not automatically be ruled out.

This problem is especially relevant to the next section\'s discussion of
the difficulties of coordinating the policy dialogue through U.S.
bilateral economic assistance with other bilateral donors - whose
objectives, and the time phasing of those objectives, have the greatest
overall divergence from one another. This problem is, instead, least
troublesome as regards coordination with the MDBs, with which the U.S.
economic assistance program shares the major objective of promotion of
long-term economic development.

Interaction with the IMF is somewhere in between, and requires separate
consideration. There has been generally strong Agency support for IMF
programs from the early days of USAID and even before. The U.S. has
occasionally conducted parallel (and sometimes even joint) negotiations
with those of the Fund and of the Bank with recipient countries.
Recently, the connection between U.S. assistance and the IMF imprimatur
on recipient country policies has been underlined - consistently so at
the level of public support, and often including clear linkages to the
probability and amount of bilateral economic assistance.

To a large extent, such strengthening of support for IMF conditionality
is grounded on the recognition that the danger to long-term development
posed by short-term financial crises is greater than ever. However, lest
this posture become purely automatic and hence, by definition, no longer
defensible from the viewpoint of the U.S. interests and those of the
international economy, it is well to be reminded of the difference
between the objective of financial and economic stabilization and the
objective of long-term broad-based economic growth. This difference,
although blurred by recent events, is still very much an economic
reality. While, in most cases, well conceived adjustment programs and
sound long-term development plans are mutually reinforcing, the
possibility that stagnation and stability might occasionally go
hand-in-hand obviously exists.

Bilateral economic assistance, naturally, cannot afford to disregard
considerations of economic stability in developing countries both
because stability is linked to longer term development and because it is
an important component of U.S. foreign policy objectives in its own
right. But neither should one forget that the weight assigned to various
economic objectives will in most cases be quite different for U.S.
bilateral economic assistance than it is for the IMF. Although the
strong presumption should continue that the policies counselled by the
IMF (or the Bank) are conducive to economic stability and to broad-based
development, in light of these institutions substantial analytical
capacity and integrity of purpose - such presumption must not be
absolute, and needs to allow the possibility of proving otherwise in any
given specific case. Furthermore, the need for consistency of the
bilateral economic policy dialogue with overall foreign policy goals
also requires leaving open the possibility of an independent U.S.
stance - in general, or with reference to specific countries.

This principle has an important implication for internal policymaking
processes within the U.S. If indeed the policy dialogue to be carried
out through U.S. bilateral economic assistance is to reflect largely
(though never unquestioningly) the conditionality of IMF programs, it is
plain that USAID, which has a major role in formulating policy in regard
to bilateral economic assistance:

\- should participate in the making of U.S. policies vis-a-vis the IMF
to a much greater extent than is currently the case; and

\- should interact with the IMF in such a way as to allow for the
possibility of changes in views or modification of policy prescriptions
by either side. At a minimum, any unquestioning presumption that IMF
prescriptions are invariably correct or complete should be avoided by
the U.S. participants to that aspect of the dialogue.

This is not intended to suggest a need for significant variance from the
present practice of Treasury-led coordination -of the U.S. dialogue with
the IMF. Nor should the arguments of this paper be read as counseling
that USAID should \"duplicate\" the multilateral policy dialogue, but,
more modestly, that it is important that the bilateral economic
assistance program in a specific developing country support and
reinforce the multilateral policy dialogue, in an informed and
knowledgeable fashion and in keeping with the U.S. own foreign Policy
objectives \_ including the sustained economic development of the
country in question. Informed and knowledgeable support by USAID
naturally must be grounded on a capability for independent assessment,
which can be accomplished by optimal use of a relatively small number of
high\--quality staff. At the same time, country-specific U.S. support
for the IMF or MDB-led multilateral dialogue could be much stronger if
the bases of such dialogue incorporated more fully the USAID perspective
on the importance of development considerations and sound macroeconomic
policies to begin with.

**D. Coordination Between USAID and Other Bilateral Donors**

The need for policy reform is not limited to countries receiving aid. It
extends to the aid practices of the different bilateral donors. There
are severe limits, however, to the feasi­ble extent of bilateral donors\'
coordination for the purpose of fostering sound macroeconomic policies
in the recipient countries. As often noted earlier, the greater the
difference in objectives, experience and outlook, the more difficult is
the task of coordination; that bilateral donors differ greatly from each
other in both general aims and economic perspective is a point that
requires no elaboration. It is clear that, at this time, some other
donors do not attach as much importance to LDC economic policies as the
U.S. does; even when they do, some appear generally wary of bilateral
involvement in sensitive macroeconomic policy issues. Greater bilateral
coordination for a more effective policy dialogue should, of course, be
attempted and is achievable. The reasons behind the initial reluctance
of some other donors do, however, need to be considered in any concrete
effort at achieving greater coordination.

The great diversity among bilateral aid pro­grams is well known. There is
no clear donor consensus on providing a major portion of bilateral aid
for specific purposes or objectives (with the possible exception of aid
for stimulating food production). There appears to be only partial donor
agreement on aid priorities and development strategies in particular
LDCs. In several development areas, e.g., basic human needs, physical
infrastructure, industrialization, etc., donor involvement also varies a
great deal. In actual historical practice, therefore, major donors have
not sought actively or consistently to coordinate their positions on
economic policy questions. Some donors have traditionally strongly
disapproved of any attempt to link bilateral aid to policy changes, and
prefer looking to the multilateral institutions to raise LDC policy
issues. However, it would appear, based on U.S. experience in the
OECD\'s Development Assistance Committee (DAC), that over the last year
the interest of other bilateral donors in policy dialogue has increased.

For the most part inadvertently, donors at times work at cross purposes.
One example of this is the uncoordinated provision of assistance from
several sources for overambitious development efforts, beyond the means
of the host country and with a plethora of recurrent cost problems.
Another example is one donor\'s provision of general unconditional aid
support which as a byproduct relieves the incentive of the host
government to take needed policy measures urged by another donor.

One difficulty with formal inter-donor coordinating mechanisms is that
most policy questions are politically and economically sensitive, and
thus not a good subject for productive and frank discussions in open
settings. Confidential, one-to-one relationships in all probability must
complement - and preferably precede - whatever formal coordinating
mechanisms exist. The pre-requisite for a better coordinated approach,
naturally, is a greater degree of agreement by other bilateral donors
concerning (a) the importance of LDC policies, and (b) the desirable
policy direction toward which a recipient country ought to be urged.
Once again, one is confronted with the necessity of a prior dialogue -
this time, between donors - if the dialogue with the recipient country
is to be successful. The U.S. must, therefore, persist in its efforts to
present others with an ever more persuasive case in support of its
development perspective. This is much more important than elaborating
additional mechanisms of coordination which may or may not be necessary
or even desirable, in view of the probability of suspicion by aid
recipients.

This policy dialogue among donors can be pursued in a number of
already-existing ways including discussions:

\- among donor representatives in the field,

\- between senior aid officials in donor capitals,

\- in MDBs and international organizations,

\- in regional donor/LDC groups, e.g. Club du Sahel, the CBI.

Two fora in particular should be mentioned: the Development Assistance
Committee (DAC) and the Consultative Groups (CGs).

DAC: As a central coordinating forum, DAC is most suited for broad scale
discussions of the need for appropriate LDC policies, the relationship
between aid and LDC policies, and the desirability for coherent
collective donor positions. Individual LDC situations are not considered
in DAC. It would be useful to aim for discussion in DAC on how
development critically depends on appropriate LDC policies; on the
desirability to provide aid in support of such policies; on tire
definition of policy areas within which some agreement is possible; on
the desirability of coordinated donor positions on policies in
respective LDCs; and on the ways and means for reaching agreed donor
positions.

Consultative Groups: While there are limits to the utility of CGs for
pursuing the policy dialogue, certainly this is a useful mechanism for
reinforcing donor views on the importance of policies. As most CGs are
managed by the IBRD it is necessary that bilateral donors and the Bank
work closely together to ensure that the issues selected are
appropriately highlighted, discussed in country economic reports, and
prominently considered in CG meetings. Donors, individually and
collectively, should be urged to be less hesitant to raise
country-specific policy questions in the CGs. However, the positions of
major donors must be similar or at least compatible.

When consortia or consultative groups do not exist for a particular
developing country, it is in the interest of a constructive discussion
of economic policies of developing countries for the U.S. to support
formation of a consultative group - if circumstances permit. In
addition, the possibility of country-specific mechanisms along the lines
of the Club du Sahel may be worth exploring: a systematic mechanism of
consultation, convened at intervals, and led on a rotating basis by that
bilateral or multilateral donor institution that has special experience
and/or interest in the particular issue to be discussed. It would be
desirable, also, to examine the possibility of arrangements through
which host government officials could participate in such consultations
as well. Possible for such joint discussions include the UNDP in certain
countries and the Development Center of the OECD.[^30] The UNDP through
its round tables represents another mechanism for coordination and
dialogue which has been useful, particularly in the case of very small
developing countries, where consultative groups do not currently exist
and may not be practical.[^31]

**Annex**

**USAID EXPERIENCE AND**

**CURRENT MISSION VIEWS**

Several of the principal conclusions from and examples of the USAID
experience with the use of program lending to influence LDC economic
policies have already been noted in the body of this paper. In most
cases, contemporary comments and opinions echo those conclusions,
although without the \"can do\" tone and the presumption of omnipotence
of public policy pervading some of the 1960s attempts at shaping the
course of economic change in the developing world. The main results of a
comprehensive survey of USAID experience with program lending in the
1960s are summarized here.

An important generalization emerges from this material, as well as from
comments by individuals. By and large, the greater the distance from the
recipient country, the less appears to be the concern with special local
sensitivity - since the knowledge of those sensitivities is less keen
and the perceived cost of adversely affecting them are much smaller.
Thus, at Mission level, concern with host government sensitivity is
greater and - other things being equal - willingness to urge policy
changes is generally less. At central USAID levels, the recognition of
the delicate nature of the dialogue and of its practical limits may be
less clear, but the perspective on the policy problem is also keener.
The crucial administrative question is to assure that the
decision-making process embodies that particular pair of weights
assigned to Mission versus USAID/W views on the policy dialogue that
will lead to a realistic but not paralyzing strategy on the dialogue.

**USAID Experience with Program Lending in the 1960s**

Some of the earlier experiences with the use of aid to promote sound
economic policies were not good, and well publicized blow-ups occurred.
These were partly caused by style differences but partly also by
substance. Less known are the quietly successful efforts to encourage
improvements in economic policies the U.S. aid program undertook in
other countries during that period. Nevertheless, one important lesson
of those earlier experiences is that a bilateral aid program however
large - cannot be effective as the sole vehicle for a macroeconomic
policy dialogue, nor even perhaps perform the leading role in this
respect.

A comprehensive review of program lending in the 1960s found that
program lending did indeed affect the economic policies pursued by
recipient countries, more so than project loans, which were narrower in
their scope and exerted only occasional and localized policy, influence,
or sector loans, which were relatively new during the 1960s and offered
no substantiated results. (Me conclusions concerning individual country
cases were, however, sometimes rosier than the evidence available at the
time - let alone the aftermath - indicates.)

Through observation and documentation of program loans as a means of
promoting economic policy improvements, two characteristic methods were
found to be typically used in their implementation. The first was the
\"Latin American Strategy\", characterized by \"tough\" and \"formal\"
conditioning and performance evaluation. The second was the \"Near
East-South Asia Strategy\", which exemplified \"informal\" conditioning
with an emphasis on a continuing dialogue. Although no conscious effort
was made to formulate two such divergent methods of promoting economic
policy improvements, the USAID experience generally proved that the
approaches taken in countries in each of the respective regions tended
to pattern themselves along the lines of their regional approach. The
following table provides a visual summary of the pattern and modality of
the AM approach to promoting improved economic policy.

The Brazilian country experience provides a good example of the Latin
American or for­mal conditioning system. Brazilian economic performance
was judged on the basis of its fulfillment of both quantitative and
qualitative performance targets, which were previously agreed to in
formalized, written agreements. In turn, tranche releases of program
loan funds were contingent on a judgment of whether these specific and
explicit loan conditions were met. The Agency concluded that this
approach did encourage host governments to pursue policies that would
not have otherwise been followed in the areas of monetary and fiscal
stability.

India is illustrative of the Near East-South Asia or informal approach
to the dialogue. In this case, more emphasis was placed on maintaining a
continuing dialogue through gradual persuasion in verbal program loan
agreements. Often, agreement on a loan was finalized after the
prescribed policies had already been adopted, such as India\'s
devaluation of the rupee.

More generally, the USAID experience during the 1960s leads to several
useful recommendations and conclusions, many of which (but not all) are
still applicable to the policy dialogue today. Regardless of which type
of approach is used, a recipient country needs to understand that its
cooperation and performance in self-help efforts are critical to its
economic development. Therefore, the host government needs to cooperate
with the USAID Mission, by providing the Mission with an influential
contact point in its government and encouraging relations with the
Mission Director and his staff in order to establish a firm foundation
for the dialogue.

USAID should also concern itself with the human element in promoting
development and foster diplomatic relations between the Mission
Director, his staff and other local counterparts. The USAID Mission
should be cognizant of potential political, military and commercial
considerations that could possibly reinforce or undermine the success of
policy discussions.

Certain conclusions pertaining to the use of the program loan itself as
a means of promoting policy improvements, and to the time factor, merit
additional attention. Although a dialogue can take place in almost any
policy area, with the exception of an area of ideological importance to
a country, a time allowance should be made for the adjustment needed to
accompany and accommodate changes in fiscal and monetary policies.
Another important point is that a host government\'s receptivity to
policy suggestions does not usually remain constant over time. The
characteristics of the policy dialogue need therefore to be periodically
reviewed.

Multilateralism, whether in conjunction with the IMF or the IBRD,
including consortia and consultative groups, is useful in promoting
improvements in economic policy. The Chilean country experience during
the 1960s is indicative of how Mg fiscal and monetary stabilization
policies were incorporated into USAID program loan conditions. The 1970
PPC study also concluded that donor consortia can be useful in promoting
sound economic policies consistent with the views of the United States,
yet at a lesser political and diplomatic cost.

Environmental Factors

Areas in Which Unforeseen Multilevel

Nature Implementation Conditions Diplomatic Domestic Economic Presence
Mission-Host

Country of Conditions of Conditions Were Specified Relations Politics
Developments Relations

X = Strict^(a)^ Consortium IBRD IMF

Brazil Specific X Stabilization Policy Good Unstable Inflation X X Good

Federal Budget

Coffee & Wage Policy

Fiscal and Monetary Policy

Inflation

Chile Specific X Stabilization Policy Good Obstacle to Favorable X X
Conducive to

But Implicit Balance of Payments Aid Relations Copper Diplomatic

Inflation military press. Prices Relations

pol. System

Colombia Specific X Stabilization Policy Fair Political System Exchange
Rate X X Strained Staff

and Explicit Exchange Devaluation Provided a more Crises Capabilities

Coffee Policy Secure Yet Less

Agriculture, Education Powerful Excessive Staff

Export Promotion Government Demands

India General Development Policy Indian Political System Indo. X X X
Continuing Dialogue

and Implicit Agriculture Neutrality Sensitive to Pakistani Emphasized

Family Planning Emphasized Outside War 1965

Import Liberalization Influence

Export Promotion

Exchange Rate Devalua-

tion

Increased Foreign Private

Investment.

Pakistan General Import Liberalization Good Good Indo- X X Continuing
Dialogue

But Explicit Population, Agriculture Stable Pakistani Emphasized

Fiscal Policy War 1965 Persuasion

Turkey Implicit Balance of Payments Politico- Sensitive to Perennial X X
X Continuing Dialogue

Stabilization Policy Military Outside Balance Of Emphasized

Foreign Exchange Relations Influence Payments

Import Liberalization Interfered Difficulties

Tunisia Export X Stabilization Policy Good Good X X X U.S. Attempt to

Credit, Public Expendi- Find Another

ture, Tax, and Private Principal

Investment Policies Donor

Agriculture

Fiscal Policy

Current Account Liability

Korea Specific Stabilization Policy Good Good X X X Good Working

Credit, Fiscal, and Relations

Foreign Exchange

Policies

^a^\"Strict program low condition implementation may be Characterized as
having more than 15 loan conditions in a given year accompanied by 2 or
more tranche releases and/or penalties in the form of delays and
deobligations of loan funds.

SOURCE: The Use of Program Loans to Influence Policy, USAID Evaluation
paper, March 1970.

**Bibliography**

**Agency for International Development Documents**

These are especially relevant to the Policy Dialogue through bilateral
assistance. USAID and State Department cables are not included.

\"Comparative Studies of Resource Allocation Development Policy,\"
Harvard University Contract Report, January 1973.

Ingle, Marcus D., Implementing Development Programs: A State of the Art
Review, Washington, D.C.: USAID, January 1979.

Mason, Edward, \"Notes on Bilateral and Multilateral Aid,\" Internal
USAID Memoran­dum, 8 April 1%8.

Office of Program Coordination, \"Develop­ment Policies and Assistance
Re­quirements,\" USAID Staff Paper, December 1964.

, \"Policy Guidance for Foreign Assistance,\" USAID Staff Paper, 14 May
1963.

Program and Policy Coordination Evaluation Staff, \"The Use of Program
Loans to In­fluence Policy,\" USAID Staff Paper, March 1970.

Strout, Alan M., \"Factors Affecting the Allocation of Foreign Economic
Aid,\" USAID Staff Paper, July 1969.

**International Monetary Fund Documents**

These are especially relevant to conditionality in IMF programs.

Ankara, Fulya, Aid and Donor-Recipient Rela­tionship, International
Monetary Fund, 1975.

Gold, Joseph, Conditionality, IMF Pamphlet Series No. 31, Washington,
D.C.

Guitian, Manuel, \"Fund Conditionality and the International Adjustment
Process: the Early Period, 1950-1970,\" Finance and Development, March
1981.

, \"Fund Conditionality and the International Adjustment Process: A Look
into the 1980s,\" Finance and Development, June 1981.

International Monetary Fund, \"Review of Up­per Credit Tranche Stand-by
Arrangements Approved in 1978-79 and Some Issues Related to
Conditionality,\" 14 July 1981, EBS/81/152.

, \"Review of Upper Credit Tranche Stand-by Arrangements Approved in
1978-79 and Some Issues Related to Condi­tionality - Supplementary
Observations,\" September 1981, EBS/81/152.

, \"The Size of the Fund in the 1980s,\" 2 December 1981.
EB/CQuota/81/3.

Johnson, Omotunde and Joanne Salop. \"Stabilization Programs and Income
Distribution,\" Finance and Development, December 1980.

**World Bank Documents**

These are especially relevant to the discussion of the policy dialogue
through World Bank lending.

Ezckiel, Nission, et at, \"Indonesia: Develop­ment Prospects and Policy
Options,\" World Bank, 1981.

Stern, Ernest, \"Structural Adjustment Len­ding,\" World Bank, 9 May
1980, R80-122.

Stewart, Frances, \"International Technology Transfer: Issues and Policy
Options,\"

World Bank Staff Working Paper No. 344, 1979.

World Bank, Accelerated Development in Sub-­Saharan Africa: An Agenda For
Action,

Washington, D.C.: IBRD, 1981.

, \"Arab Republic of Egypt: Domestic Resource Mobilization and Growth
Pro­spects for the 1980s,\" World Bank, December 1980.

, \"Lending for Structural Adjustment,\" 5 February 1980, IDA/R80-22.

, \"Lending for Structural Adjustment,\" World Bank, 31 March 1980.

, Mission to Korea - Policy Issues for Long-term Development,
Washington, D.C.: Johns Hopkins University Press.

**Other Sources and References**

Balassa, Bela A., The Policy Experience of 12 Less Developed Countries,
1973-1978, the World Bank.

, Policy Reform in Developing Countries, New York: Pergamon Press, 1977.

Cline, William R. and Sidney Weintraub, eds., Economic Stabilization in
Developing Countries, Washington, D.C.: Brookings, 1981.

Cohen, Benjamin J., \"Balancing the System in the 1980s: Private Banks
and the Paper prepared for the International Law Institute Conference on
\"The International Framework for Money and Banking in the 1980s,\"
Fletcher School of Law and Diplomacy: Tufts University, May 1981.

Connors, Thomas A., \"Evaluation of Changes in IMF Conditional Lending
Criteria,\" Federal Reserve Board, 27 March 1981.

Cox, Robert W., The Anatomy of Influence: Decision-Making in
International Organizations, New Haven: Yale University Press, 1973.

Dasgupta, Ajit Kumar, The Objectives of Macro­economic Policy, London:
Macmillan Press, 1971.

de Vries, Egbert, Administration of Development Programs and Projects:
Some Major Issues, New York: United Nations, 1971.

Eckaus, R.S., \"The Conditionality of Interna­tional Financial
Institutions and U.S. Policy,\" M.I.T. Conference on U.S. Inter­national
Financial Policy, 24 February 1982.

Faaland, Just, Aid and Influence: The Cam of Bangladesh, New York: St.
Martin\'s Press, 1980.

Gulick, Clarence S. and Joan M. Nelson, Pro­moting Effective Development
Policies: USAID Experience in Developing Countries, September 1965.

Jacoby, Neil H., U.S. Aid to Taiwan: A Study of Foreign Aid, Self-Help
and Development, New York: Frederick A. Praeger, Publishers, 1966.

John, Walter Adolf and H.W. Singer, The Role of the Economist as
Official Advisor, London: George Allen & Unwin Ltd, 1955.

Krassowski, Andrzei, The Aid Relationship, London: Overseas Development
Institute, 1968.

Landell-Mills, Pierre M., \"Structural Adjust­ment Lending: Early
Experience,\" Finance and Development, December 1981.

Nelson, Joan M., Aid, Influence and Foreign Policy, Harvard University:
Center for Inter­national Affairs, 1969.

O\'Kelly, Elizabeth, Aid and Self-Help, London: C. Knight, 1973.

Schiavo-Campo, Salvatore, International Economics, Cambridge, Mass.:
Winthrop, 1978.

, and Hans W. Singer, Perspectives Of Economic Development, Boston:
Houghton-­Mifflin, 1970.

Selwyn, Percy, ed., Development Policy in Small Countries, London: Croom
Helm in Associa­tion with the Institute of Development Studies, 1975.

Streeten, Paul Patrick, Aid to Africa: A Policy Outline for the 1970s,
New York: Praeger Publishers, 1972.

Treasury Department, U.S. Participation in the Multilateral Development
Banks in the 1980s, Washington, D.C.: February 1982.

[^1]: ^?^Development Issues 1982, p. 43. (Footnote references are shown
    in abbreviated form in the text. Full references are given in the
    Bibliography.)

[^2]: ^?^Development Issues 1982, Chapter II.E.; T. Morrison and L.
    Arreaga-Rodas, Economic Liberalization in Developing Countries; Some
    Lessons From Three Case Studies - Sri Lanka, Egypt, and Sudan, USAID
    Discussion Paper No. 40, October 1981.

[^3]: ^?^This does not imply that our assistance programs in the 1970s
    did not encourage or promote specific LDC policy actions and
    approaches. However, it is generally recognized that less explicit
    emphasis was given during this period to economic policy
    considerations than is given currently or was given during the
    1960s.

[^4]: ^?^Edward Mason, a principal academic advisor to USAID in the
    1960s, had occasion to state, in an internal memorandum of April 8,
    1968, that \"Current USAID doctrine holds that the inducement effect
    of aid on development can be more important than the effect of
    resource transfers.\"

[^5]: ^?^See Joseph Gold\'s Conditionality.

[^6]: ^?^Chapters 2 and 3 of USAID\'s Handbook 3 contain a detailed
    listing and discussion - running to well over 100 pages - of the
    criteria and procedures to optimize the administration of aid funds
    in practice.

[^7]: ^?^The State Department\'s Legal Adviser lists about 120 specific
    prohibitions concerning the use of U.S. economic assistance, mainly
    on grounds of security, and other foreign policy considerations -
    such as human rights, combating terrorism and nuclear proliferation,
    and other non-economic grounds.

[^8]: ^?^For an elaboration, see the USAID discussion Papers by C.
    Gulick and J. Nelson, and by

    J. Nelson and G. Ranis. See also Nelson\'s Aid, Influence and
    Foreign Policy. (The Bibliography contains the full references.)

[^9]: ^?^As only on illustration among many, the USAID Policy Paper on
    Recurrent Costs (May 1982) concluded that inefficient or
    shortsighted macroeconomic policies by the aid recipient or the
    donor can given rise to a recurrent-cost problem. When this is
    inadvertent, an ongoing dialogue on a cooperative basis can do much
    to improve the situation in a manner conducive to the achievement of
    both parties\' objectives.

[^10]: ^?^The USAID experience of the 1960s is discussed in the Annex.

[^11]: ^?^In FY 81, U.S. bilateral economic assistance to countries with
    a 1981 per capita income lower than \$2,000 amounted to about \$4.5
    billion, of which about \$1.7 billion was for Development
    Assistance; in CY 1981, by comparison, the combined current account
    deficit of these countries was 22 times as large, \$99 billion. For
    a specific illustration, the large U.S. economic assistance program
    in Pakistan will over the next few years account probably for less
    than 5% of that country\'s import bill, compared to an FY 1962-68
    average of over 11% from U.S. program lending alone.

[^12]: ^?^Indeed, the argument is often heard that the magnitude and
    strength of commitment of U.S. support may enable a recipient to
    avoid the need for painful needed policy adjustment, which would
    otherwise be insisted upon by the international financial
    institutions.

[^13]: *^?^*On this and related points see the USAID Policy Paper on
    Food and Agricultural Development, May 1982.

[^14]: *^?^*This section draws heavily from Schiavo-Campo and Singer\'s
    Perspectives of Economic Development.

[^15]: *^?^*If the recipient country\'s own resources are not entirely
    absorbed by the aid-financed project \"A\", and project \"A\" is of
    sufficiently high priority for the recipient country to be otherwise
    undertaken with the country\'s own resources, then clearly the aid
    enables the release of the country\'s resources to finance some
    other project \"X\". In such a case, notwithstanding the various
    possible good reasons for still going ahead with the nominal linking
    of aid to project \"A\", the fungibility of financial assistance
    means that in reality the donor has given program aid, whether it is
    realized or not. However, despite fungibility, the donor probably
    has more of an impact on the sector it is actually assisting. Also,
    as noted earlier, the policy dialogue presumes some disagreement
    between donor and recipient on desirable economic policies - and
    hence probably also on the composition of the development budget. It
    then becomes quite possible that project \"A\" will be carried out
    only because aid is available for it specifically, and the linking
    of assistance to project is effective.

[^16]: *^?^*Thus, the World Bank\'s introduction in 1980 of Structural
    Adjustment Lending (SAL) added a significant new policy and
    conditionality dimension to the Bank\'s assistance.

[^17]: *^?^*This principle has been recognized for centuries. For
    example, the medieval escape clauses to the prohibition of usury
    rested on either lucrum cessans (cessation of a gain), or damnum
    emergens (emergence of a loss).

[^18]: ^?^In countries where a charge of external interference is
    considered a total disaster for a politician, oral agreements may be
    far more easily reached than formal written ones. Depending on the
    judgment concerning the seriousness of the government\'s efforts at
    policy reform, the quiet, informal approach may not necessarily
    imply a weaker policy dialogue.

[^19]: ^?^As the summary record of the 20th High-level Meeting of the
    DAC notes, there was widespread agreement at that meeting that
    \"past failure on the part of donors as well as recipients, should
    be sufficient to call for a certain humility with respect to the
    offering of policy advice\" (DAC/M(81)11(Prov.), of 3 December 1981,
    p. 15.

[^20]: ^?^Nelson, Aid, Influence, and Foreign Policy, p. 83.

[^21]: ^?^Nelson, Aid, Influence and Foreign Policy, pp. 89-90.

[^22]: ^?^A similar point was emphasized from the very beginning of
    USAID, with the 1961 Report of the President\'s Task Force on
    Foreign Assistance counselling reliance on \"persuasion\" as the
    primary means of influencing recipient countries\' economic
    policies.

[^23]: ^?^Nelson, Aid, Influence and Foreign Policy, p. 63.

[^24]: ^?^A recent analysis concluded that the extent of liberalization
    in various policy areas has depended largely on the interaction
    between the government and those groups that stood to lose from the
    liberalization. Morrison and Arreaga, Economic Liberalization in
    Developing Counties, p. 6.

[^25]: ^?^A detailed plan concerning the use of economists in USAID and
    requirements for new positions has been prepared by the Chief
    Economist, partly on the basis of the staffing implications of the
    economic policy dialogue.

[^26]: ^?^U.S. Embassy personnel often possess the needed economic
    skills and relevant experience, and judicious coordination with them
    at the country level can do much to limit direct USAID staffing
    requirements. Much of the same point can be made with regard to
    coordinating with State and/or Treasury on the economic policies to
    be urged on the MDBs, or on the IMF. Certainly, better coordination
    and a greater USAID role in the formulation of instructions to the
    U.S. Executive Directors of the MDBs and of the IMF, would do much
    to lessen the need for conducting the policy dialogue on a bilateral
    basis, and would do much to lessen the need for conducting the
    policy dialogue on a bilateral basis, and would consequently serve
    to keep down the number of USAID staff required.

[^27]: ^?^It should also be kept in mind, as the experience of the 1960s
    shows, that the size and \"deployment\" of the policy dialogue staff
    depend on the nature and intensity of the dialogue, with more staff
    required by a formal conditioning approach than by an informal
    dialogue.

[^28]: ^?^On IMF conditionality, the most useful references are: Joseph
    Gold\'s Conditionality; Manuel Guitian\'s three articles in Finance
    and Development of 1980-81; IMF documents EBS/81/152 of July 14,
    1981, and EBS/81/152 Supplement 1 of September 1, 1981. a number of
    papers were also presented at a conference on IMF conditionality,
    organized by the Institute for International Economics in washington
    on March 24 - 26, 1982, and some of these are useful analyses.
    Another recent treatment is R.S. Eckaus\' important conceptual piece
    \"The Conditionality of International Financial Institutions and
    U.S. Policy\", presented in draft form to the M.I.T. conference on
    U.S. International Financial Policy on February 25, 1982. On the
    World Bank, Edward Mason

    and Robert Asher discuss the earlier Bank experiences with the use
    of leverage in their 1973 study The World Bank Since Bretton Woods.
    For a description of the policy dialogue through structural
    adjustment lending programs, see Pierre Landell-Mills\' \"Structural
    Adjustment Lending: Early Experience\", Finance and Development,
    December 1981. See also the Treasury Department\'s U.S.
    Participation in the MDBs in the 1980s. (Full references are shown
    in the Bibliography.)

[^29]: ^?^\"Notes on Bilateral and Multilateral Aid\", p. 13.

[^30]: ^?^LDC officials have in fact participated in their personal
    capacities in meetings at the Development Center and in informal
    workshops held under DAC auspices. The subjects of these meetings,
    such as rural development, have often dealt with recipient country
    as well as donor policy issues.

[^31]: ^?^As a follow-up to the UN Conference for the Least Developed
    Countries (LDCs) in September 1981, the UNDP has organized a series
    of roundtables at the request of individual LDCs.