BACKGROUND

PAPER Assisting the Developing

Countries: Foreign Aid

and Trade Policies of the

United States

September 1980

Congress of the United States

Congressional Budget Office
ASSISTING THE DEVELOPING COUNTRIES:

FOREIGN AID AND TRADE POLICIES

OF THE UNITED STATES

The Congress of the United States

Congressional Budget Office

For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402

PREFACE

As the Congress seeks to restrain the growth of federal

expenditures, foreign assistance has become the subject of careful

scrutiny, for it is an important discretionary component of the

federal budget. At the same time, Congressional decisions on the

amount and type of assistance have great significance to the less

developed countries, since the United States remains the largest

provider of such assistance.

This paper, prepared at the request of the Senate Budget

Committee, focuses on the evolution of the U.S. foreign assistance

program and its costs, together with options for modifying it

in the future. The paper reviews the size, scope, and distribution of funds among recipients of both bilateral and multilateral

aid. Because certain developing countries have come to rely on

commercial markets as an important source of funds, the paper

examines their past borrowings and their opportunities for continued access to private markets in the near term. And since

trade is a major source of foreign exchange for developing countries, U.S. trade policies aimed at increasing LDC exports are

analyzed. In keeping with CBO's mandate to provide objective

and nonpartisan analysis, the paper offers no recommendations.

This paper was prepared by E. Hazel Denton and Emery Simon,

with the assistance of Donald P. Henry, of the National Security

and International Affairs Division of the Congressional Budget

Office, under the general supervision of David S.C. Chu and

Robert F. Hale. The authors wish to acknowledge the valued

suggestions of Joan Schneider, and the very helpful contributions

of Jane DfArista, Richard Davison, Dora Jean Newman, Nancy Swope,

and Jason Waxier. Professors James Austin (Harvard Business

School) and Richard Baldwin (University of Wisconsin) commented

on portions of an earlier draft. (The assistance of external

reviewers implies no responsibility for the final product, which

rests solely with the Congressional Budget Office.) The manuscript was edited by Francis Pierce; it was typed for publication

by Jean Haggis.

Alice M. Rivlin

Director

September 1980

iii

CONTENTS

Page

SUMMARY xiii

CHAPTER I. INTRODUCTION 1

Overview 2

How Does Foreign Aid Help

the LDCs? 4

U.S. Foreign Aid Programs 4

Dimensions of the U.S.

Foreign Aid Budget 6

How U.S. Aid Donations

Compare with Those of

Other Countries 8

CHAPTER II. U.S. BILATERAL AID PROGRAMS 11

Legislative History 12

Current Program Operations

and Issues 15

Budgetary Treatment 28

Effects of the Bilateral

Aid Programs on

U.S. Exports 30

Future Choices for

Bilateral Aid 36

CHAPTER III. MULTILATERAL DEVELOPMENT BANKS 39

Operations of the Multilateral

Development Banks 40

What Should be the U.S.

Share of Contributions

to the MDBs? 40

How Should MDB Contributions

be Treated in the Budget? 45

Multilateral Versus

Bilateral Assistance 49

Conclusions 53
CONTENTS (continued)

CHAPTER IV,

CHAPTER V.

CHAPTER VI.

APPENDIX I-A.

APPENDIX I-B,

PRIVATE MARKETS AS AN ALTERNATIVE

SOURCE OF FUNDS 55

Terms for Lending 56

Who Borrows in the Private Market? ... 57

Private Lending and the Role

of Co financing 58

The Future Role of Private Lending ... 62

TRADE PREFERENCES AND U.S.

FOREIGN AID POLICY 65

Trade and LDC Development 65

The Generalized System

of Preferences 66

Offshore Assembly Provisions

of the U.S. Tariff Code 78

Quantitative Restrictions

on LDC Trade 80

FUTURE DECISIONS ON THE FOREIGN

ASSISTANCE BUDGET. 87

Current Budget Decisions 87

Choosing the Future Level

and Composition of

Foreign Aid: Strategies

for the 1980s 91

WORLD BANK LIST OF LESS

DEVELOPED COUNTRIES 95

DEFINITION OF OFFICIAL

DEVELOPMENT ASSISTANCE 97

vi
CONTENTS (continued)

APPENDIX II-A. DISBURSEMENTS OF U.S. BILATERAL

DEVELOPMENT ASSISTANCE

FUNDS BY MAJOR RECIPIENTS,

FISCAL YEARS 1962-1979

APPENDIX II-B. ECONOMIC SUPPORT FUND

DISBURSEMENTS BY MAJOR

RECIPIENTS, FISCAL YEARS

1962-1979

APPENDIX II-C. FOOD AID (P.L. 480)

DISBURSEMENTS BY MAJOR

RECIPIENTS, FISCAL YEARS

1962-1979

APPENDIX II-D. MULTILATERAL FOOD AID PROGRAMS ,

APPENDIX II-E. ESTIMATED NET BUDGET

COST OF P.L. 480

APPENDIX III-A. INTERNATIONAL ORGANIZATIONS

AND PROGRAMS

APPENDIX III-B. LOAN AUTHORIZATIONS BY

MULTILATERAL DEVELOPMENT

BANKS, U.S. FISCAL YEARS

1962-1979

APPENDIX III-C. TERMS AND ELIGIBILITY

CRITERIA OF U.S. AND

MULTILATERAL DONORS

APPENDIX III-D. DISTRIBUTION OF FUNDS FROM

MULTILATERAL DEVELOPMENT

BANKS TO MAJOR RECIPIENTS,

U.S. FISCAL YEARS 1962-1979. .

Page

98

100

100

103

105

111

113

114

116

vii
CONTENTS (continued)

APPENDIX V-A. METHODOLOGY USED IN

CALCULATING "TRADE CREATION"

AND "TRADE DIVERSION". . . . 119

APPENDIX V-B, SECTORAL DISTRIBUTION OF INCREASED

ELIGIBLE DEVELOPING COUNTRY

EXPORTS OF MANUFACTURES RESULTING

FROM GSP IN 1976 AND 1977 121

APPENDIX V-C, SECTORAL DISTRIBUTION OF INCREASED

EXPORTS OF ELIGIBLE DEVELOPING

COUNTRIES, OTHER THAN TOP

FIVE BENEFICIARIES, IF ALL

ELIGIBLE GOODS HAD ENTERED

DUTY FREE IN 1977 122

APPENDIX V-D, SECTORAL DISTRIBUTION OF NET

CHANGE IN GSP-ELIGIBLE COUNTRIES1

EXPORTS OF MANUFACTURES ON A

1977 TRADE BASE RESULTING

FROM TOKYO ROUND TARIFF

REDUCTIONS 123

APPENDIX V-E, ESTIMATED MAXIMUM LOSS IN NONRUBBER

FOOTWEAR EXPORTS TO THE

UNITED STATES FROM TAIWAN AND

SOUTH KOREA DUE TO QUANTITATIVE

RESTRICTIONS IN 1979 124

APPENDIX V-F, EXTENT TO WHICH AGGREGATE CEILINGS

ON U.S. TEXTILE AND APPAREL

IMPORTS WERE FILLED IN 1978. ... 125

APPENDIX V-G, NUMBER OF PRODUCT-SPECIFIC QUOTAS

ON U.S. TEXTILE AND APPAREL

IMPORTS FILLED BY 70 PERCENT

OR MORE IN 1978 126

viii
TABLES

Page

TABLE 1. NET FLOW OF LOANS AND GRANTS TO

NON-OIL-EXPORTING LDCs, 1978 3

TABLE 2. U.S. BUDGET AUTHORITY AND OUTLAYS

FOR FOREIGN ASSISTANCE,

FISCAL YEAR 1979 6

TABLE 3. U.S. MULTILATERAL AND BILATERAL

ASSISTANCE, SELECTED FISCAL YEARS

1970-1979 7

TABLE 4. NET OFFICIAL BILATERAL AND MULTILATERAL

DEVELOPMENT ASSISTANCE, DISBURSEMENTS 9

TABLE 5. ECONOMIC SUPPORT FUND

COMMITMENTS, FISCAL YEARS

1970-1979 18

TABLE 6. ECONOMIC SUPPORT FUND COMMITMENTS

BY COUNTRY AND TYPE, FISCAL YEARS

1975-1979 20

TABLE 7. U.S. SHIPMENTS OF FARM GOODS

UNDER P.L. 480, FISCAL YEARS

1962-1978 22

TABLE 8. ESTIMATED NET BUDGET COST OF THE

P.L. 480 PROGRAM IN AN AVERAGE YEAR 31

TABLE 9. U.S. COMMODITY SALES FINANCED THROUGH

BILATERAL LOANS AND GRANTS,

FISCAL YEARS 1977-1978 33

TABLE 10. DISTRIBUTION OF MDB LOANS TO

DEVELOPING COUNTRIES THROUGH

JUNE 30, 1978 41

TABLE 11. U.S. CONTRIBUTIONS TO THE

MULTILATERAL DEVELOPMENT BANKS 44

ix

66-811 0-80- 2
TABLES (continued)

TABLE 12.

TABLE 13.

TABLE 14.

MDB APPROPRIATIONS (1970-1979)

AND ANTICIPATED BUDGET

AUTHORITY REQUESTS (1980-1985),

BY FISCAL YEAR. 47

MAJOR RECIPIENTS OF U.S. BILATERAL

AID CONTRASTED WITH MAJOR

RECIPIENTS OF MULTILATERAL AID,

1962-1978 ...

MDB LENDING BY SECTOR,

FISCAL YEAR 1978. . .

50

51

TABLE 15.

TABLE 16.

TABLE 17.

TABLE 18.

TABLE 19.

PUBLIC DEBT OUTSTANDING

(DISBURSED) OF NON-OIL

DEVELOPING COUNTRIES,

BY SOURCE, 1973 AND 1978.

NON-OIL-EXPORTING DEVELOPING

COUNTRIES LISTED BY AMOUNT OF

PUBLIC DEBT OWED TO PRIVATE

AND OFFICIAL LENDERS, 1978. .

NET DISBURSEMENTS OF MEDIUMAND LONG-TERM LOANS AND OFFICIAL

GRANTS TO DEVELOPING COUNTRIES

BY TYPE OF CAPITAL AND BY

COUNTRY GROUP, 1976 AND 1990. . ,

U.S. IMPORTS FROM GSP-ELIGIBLE

DEVELOPING COUNTRIES, 1976-1978

58

59

63

69

ESTIMATED INCREASE IN U.S. IMPORTS

OF MANUFACTURES FROM ELIGIBLE

DEVELOPING COUNTRIES RESULTING FROM

GENERALIZED SYSTEM OF PREFERENCES,

1976-1977 71

x
TABLES (continued)

TABLE 20.

TABLE 21.

DISTRIBUTION OF U.S. GSP IMPORTS

IN 1978 BY ELIGIBLE DEVELOPING

COUNTRY INCOME GROUPING, AND

FOR FIVE LEADING TRADERS .... 72

INCREASE IN LDC EXPORTS, OTHER

THAN THOSE OF THE TOP FIVE TRADERS,

IF ALL GSP-ELIGIBLE GOODS HAD

ENTERED DUTY FREE IN 1977 75

TABLE 22. TRADE ACCOUNTED FOR BY QUOTAS

70 PERCENT OR MORE FILLED IN 1978. 84

FIGURE

FIGURE 1. PERCENT OF FOOD COMMODITIES

PROGRAMMED UNDER P.L. 480 TITLE I

GOING TO COUNTRIES BELOW THE IDA

POVERTY CRITERION 23

xi

SUMMARY

The United States has political, commercial, and humanitarian

interests in assisting the economic development of the lessdeveloped countries (LDCs). Through foreign aid programs and

preferential trade policies, it can increase the total resources

available to these countries and help them overcome import barriers that often hinder their economic growth. For the developing

countries, U.S. aid is of critical importance—not only because

the United States gives the largest amounts of aid in dollar

terms, but also because other countries are influenced by the size

of U.S. aid contributions in deciding upon their own aid levels.

During the 1970s, total U.S. aid of all kinds, measured in real

terms, increased modestly.

The Congress has been examining aid programs closely in

recent months in its attempt to restrain the growth of the

federal budget. To provide background information that will be

helpful in decisionmaking, this paper reviews U.S. foreign assistance programs, both bilateral and multilateral, and summarizes

the recent debate over their funding. Because the economic

viability of the LDCs depends not only on foreign governmental

assistance but also on loans they receive from private banks

and on their own export revenues, the paper discusses LDC borrowings from commercial banks and examines ways in which U.S.

trade policies might be changed to increase the LDCs1 export

earnings.

The LDCs vary enormously in their economic characteristics.

Hence, foreign assistance, commercial borrowings, export earnings,

and trade arrangements do not play the same roles for all of

them. A policy affecting one source of funds will benefit some

LDCs more than others:

o The low-income LDCs receive proportionately more funding

from national and international aid agencies and at

the most favorable rates; they borrow little from the

private sector; and they benefit little from preferential

trade policies of the developed countries.

o The middle-income LDCs receive funding from aid agencies

but on more stringent terms; they borrow more from the

xiii
private sector; and they benefit more from preferential

trade policies of the developed countries.

The upper-income LDCs receive some funding from the aid

agencies; they are the heaviest borrowers in the private

sector; and they are significantly affected by trade

policies of the industrial countries.

THE U.S. FOREIGN AID PROGRAM

U.S. aid moves through both bilateral and multilateral

channels. Bilateral aid is extended directly to the recipient

country. Multilateral aid is provided by international agencies

of which the United States is a member.

Bilateral aid, generally involving low-interest loans and/or

grants that LDCs use for approved projects, takes three forms.

Development assistance funds are aimed toward meeting the basic

needs of the poor through projects in agriculture, health, and

education. Allocations through the Economic Support Fund (ESF)

are less specific and are extended principally to countries in

which the United States has particular political or economic

interests. Food aid (P.L. 480) largely involves the subsidization

of U.S. food exports to countries with poverty-level incomes. The

Congress provided $1.6 billion in budget authority for development

assistance in fiscal year 1979, $2.2 billion for ESF, and $0.8

billion for food aid.

The United States also contributes to the multilateral

development banks (MDBs). These include the World Bank group,

the Inter-American Development Bank, the Asian Development Bank,

and the African Development Fund. The MDBs extend loans to lowincome developing countries at what are called concessional rates

(averaging 1 percent per annum with a 10-year grace period) and

to middle-income LDCs at somewhat higher, but still favorable,

rates (averaging 8 percent). The Congress provided $1.6 billion

in budget authority for paid-in capital to the MDBs in fiscal

year 1979.

Bilateral Aid Supports Immediate U.S. Political Objectives

In 1973, concerned with the uneven distribution of development benefits, the Congress passed the New Directions legislation.

This required that U.S. development assistance be targeted at

xiv
the poorer people of the world, and that it support countries

attempting to satisfy "basic human needs." As a result, by

1979 the United States was directing 81 percent of its development assistance funds to nations meeting the poverty criterion

established by the World Bank.

Not all U.S. aid is bound by the New Directions legislation,

however. Projects funded through the Economic Support Fund are

not tied to the poverty criterion, and this flexibility has

encouraged expansion of the ESF. Also, the ESF appropriation

request is largely earmarked for specific countries, unlike

development assistance, which is presented initially by functional

account. Because the United States has a political or economic

interest in the welfare of the selected recipients, ESF appropriations are less likely to be cut in the Congressional review

process. As a result, ESF allocations tripled in real terms in

the 1970s and now account for half of all U.S. bilateral aid.

Funds for development assistance remained stable, while food

aid fell.

Partly because of the importance of the ESF and its predecessors in the aid budget, U.S. foreign assistance has long been

concentrated on a relatively small number of countries, usually of

great political interest to the United States. In the early

1970s, Vietnam received a high proportion of U.S. foreign assistance, today, Egypt and Israel account for 40 percent of U.S.

bilateral aid.

Current Budgetary Treatment Misstates the Impact of Aid Programs

The annual development assistance budget gives a misleadingly

high estimate of the net flow of resources to the LDCs because it

does not allow for repayments on past loans. Consequently, the

net flow of resources to less-developed countries is overstated in

the budget request by the amount of interest and principal repayments on loans made in previous years. For example, in 1978

offsetting receipts for repayment of principal on ESF and development assistance loans amounted to $302 million and for payment of

interest to $217 million. The estimated budget outlays for

development assistance and ESF were $2.8 billion. The net flow to

the LDCs was thus $2.3 billion.

A different misstatement occurs in the food aid budget

request, which does not include an estimate of farm support

expenditures avoided by the existence of this program. CBO

xv
estimates that the net budget cost of the food aid program in

an average year may be only half of the total costs shown in

the federal budget.

Present Administration Plans Call for Significant Increases in

Multilateral Aid

The Administration plans to ask for a higher level of contributions to the multilateral development banks in the early 1980s.

Action by the Congress on these requests will involve decisions

not only on the overall level of U.S. assistance, but also on

the proportion to be offered through multilateral rather than

bilateral channels.

In contributing funds to the MDBs, the United States relinquishes direct control over their disbursement. Not surprisingly,

the way the funds are distributed by the MDBs differs from that of

U.S. bilateral assistance. A large proportion of U.S. bilateral

aid goes to the Middle East and South Asia, whereas multilateral

assistance is more uniformly distributed among the LDCs. MDBfinanced projects tend to be larger, and are likely to involve

industrial and infrastructural assistance of a kind not generally

supported by U.S. bilateral aid programs.

On the other hand, the fact that the MDBs distribute their

funds more evenly among regions leaves the United States free to

focus its bilateral aid more directly in line with its foreign

policy and trade objectives. Moreover, through the MDBs the

United States can give assistance to the populations of countries

that, for political reasons, it may not wish to aid directly.

Finally, the MDBs provide a vehicle for encouraging additional

assistance by other developed nations.

In recent years, the United States has sought to reduce its

share of MDB contributions. In the case of the World Bank group,

the U.S. share has declined from its original level of approximately one-third to about one-quarter.

LDC BORROWINGS IN THE PRIVATE MARKETS

The LDCs also tap the private capital markets for loans to

help support their development and growth. Many of them borrowed

heavily from private creditors, especially U.S. banks, when they

experienced balance-of-payments difficulties after the 1973 oil

xvi
price increase. As a result, by 1978 private sources accounted

for one-half of the outstanding debt of the non-oil-exporting

LDCs, as against one-third in 1972.

The bulk of private lending is heavily concentrated on

a small number of relatively high-income LDCs. Thus, at the end

of 1978, Brazil, Mexico, and South Korea accounted for one-half of

all public debt owed to private lenders.

The banking community has become concerned over the ability

of the LDCs to carry their current debt, and over the concomitant

risks for the lending banks. Some observers have suggested that

the rate of growth in lending to the LDCs is unlikely to be as

high in the next five years as it has been in the past five. In

response, the World Bank and the regional development banks have

recently encouraged "cof inane ing" as a way of joining with the

private banks in providing funds to the developing countries. So

far, the private banks have not expressed great enthusiasm for

cofinancing, although such arrangements are increasing. The U.S.

Agency for International Development (AID) is currently reviewing

possible cofinancing arrangements for assistance to the LDCs,

including U.S. government-guaranteed loans by the private sector

for use in AID projects and a nonguaranteed program of cofinancing

between AID and the private sector.

U.S. TRADE PREFERENCES FOR LDCs

The United States has two programs that allow LDC goods to

enter at reduced duty: the Generalized System of Preferences, and

the Offshore Assembly Provisions of the U.S. Tariff Code.

The Generalized System of Preferences (GSP) provides dutyfree entry for a large variety of manufactured goods and a more

limited number of agricultural goods from developing countries.

Although the program has led to a sizable increase in LDC exports

(estimated at about $500 million in 1977), the major portion comes

from only five of the most advanced LDCs. A number of proposals

have been made to change GSP in a way that would help the export

position of the poorer LDCs. But trade concessions cannot do

much for the least-developed LDCs because these nations lack the

ability to produce a variety of competitively priced products.

The Offshore Assembly Provisions (OAP) of the U.S. Tariff

Code also allow LDC exports to enter the United States at a

reduced duty. Goods that contain U.S.-made components can enter

xvii

66-811 0-80- 3
the United States subject to duty on the value of the finished

product, less the value of the U.S.-made components it contains.

LDCs have been taking increased advantage of these provisions in

recent years, although the provisions are not limited to products

assembled in LDCs. Again, it has been the more advanced LDCs that

have used the provisions most successfully.

A third way of promoting LDC exports would be to relax

quantitative restrictions (quotas) on imports. The United States

maintains quotas on a variety of manufactured goods, but only

two restrictions—those on nonrubber footwear and textiles—are

important to LDCs. For each of the countries subject to these

quotas, at least some products are constrained by the restrictions—for certain countries, the number of products affected is

quite large—and benefits would accrue to the affected LDCs from a

liberalization of quotas.

DECIDING ON THE FOREIGN ASSISTANCE BUDGET

In choosing the future level of foreign aid, the Congress

will be weighing assistance to the LDCs against other spending

priorities. If it approves the Administration's plans for fiscal

years 1980 and 1981, it will expand the amount of real resources

involved in the programs.

Whatever overall funding level the Congress selects, it will

also need to decide on the mix of programs through which the

aid will be delivered. The Congress could choose one of three

possible strategies:

Emphasizing U.S. political and economic interests, which

would imply increasing the share of aid disbursed through

the Economic Support Fund.

Emphasizing equitable growth among the poorer countries,

which would mean allotting a higher share of funds to

bilateral development assistance and food aid programs,

or to the multilateral development banks.

Emphasizing assistance to those countries best able to

help themselves, which could be accomplished through

additional trade concessions (although U.S. workers might

be injured by the resulting import competition).

xviii
CHAPTER I. INTRODUCTION

Over the past two decades, foreign aid and the role it should

play have been contentious issues. The debate has focused on

questions such as:

o What should foreign aid attempt to do?

o How large should the aid budget be?

o What form should country-to-country (bilateral) aid take?

o How much of its aid should the United States give directly

to the recipient countries, and how much should it channel

through the multilateral development banks?

Because of the importance of the United States as an international aid donor, the foreign aid decisions of the Congress play

an important part in determining the resources available to the

less-developed countries (LDCs), and thus affect their rate of

economic growth. JY The U.S. interest in growth of the LDCs stems

from several motives: a humanitarian concern for the welfare of

less fortunate peoples and nations, a desire to encourage these

countries as growing U.S. trading partners; 2J and the pursuit of

international political objectives.

I/ The World Bank defines less-developed countries as nonindustrialized countries. They range from Bangladesh (annual

per capita income of $90) to Venezuela ($2,660). They are

often divided into two groups: those for which oil exports

are an important source of foreign exchange (oil-exporting

LDCs) and the others (non-oil-exporting LDCs). The two groups

are listed in Appendix I-A.

2J Trade with the LDCs is increasing rapidly, especially in

manufactures. In constant 1972 dollars, U.S. exports of

manufactures to LDCs increased from $9.7 billion in 1970

to $22.4 billion in 1977, while U.S. imports of manufactures from LDCs increased from $3.5 billion in 1970 to $11.2
There are, of course, no definitive answers to the questions posed above. Nonetheless, a review of the current status of

U.S. aid programs, together with an analysis of other sources of

funds for the recipient countries, may help future debate on the

size and composition of foreign aid.

OVERVIEW

The United States has three distinct bilateral aid programs

that channel resources directly to LDCs: development assistance,

administered by the Agency for International Development; food

aid, in the form of agricultural commodities; and the Economic

Support Fund, intended to serve U.S. political and economic

interests. The United States also contributes heavily to the

multilateral development banks. Chapters II and III describe the

origins of these programs, their current costs to the United

States, and the very different ways in which they serve U.S.

objectives.

Some LDCs are also able to borrow from nongovernmental

sources. In 1978, one-half of the total funds channeled to

non-oil-exporting LDCs came from the private sector (Table 1).

The major share of the private funds went to the richer countries,

leaving the poorer countries dependent upon official sources. The

role of private financial markets is the focus of Chapter IV.

The LDCs are critically affected by the trade policies

of the developed countries, since their export earnings provide

funds for importing industrial goods. Some analysts have proposed

that trade concessions, giving LDCs greater access to markets in

the developed countries, might be substituted for more direct

forms of assistance. Chapter V reviews the trade preferences that

have so far been extended by the United States to the LDCs

and examines their effect on LDC export revenues.

The immediate decisions on the foreign aid budget facing

the Congress are reviewed in Chapter VI, together with a discussion of alternatives for the coming decade.

billion in 1977. National Foreign Assessment Center, The Role

of the LDCs in the U.S. Balance of Payments (September 1978),

Table 27.
TABLE 1. NET FLOW OF LOANS AND GRANTS TO NON-OIL-EXPORTING LDCs, 1978 (Billions of dollars)

Income Group a/

Higher

Upper Middle

Intermediate

Lower Middle

Low

Total

Total

Loans

and

Grants

0.9

11.9

13.6

6.7

7.7

40.8

Private

Loans b/

0.4

9.6

8.8

1.6

0.3

20.6

Government

Loans

1.2

0.8

2.2

1.2

2.4

7.8

Loans from

International

Financial

Institutions c/

d/

0.8

1.4

1.2

2.5

5.9

Grants

0.2

1.7

1.7

2.4

2.8

8.8

International

Monetary Fund

-0.9

-1.0

-0.5

0.3

-0.3

-2.4

SOURCES: World Bank, World Debt Tables, Vol. I (December 1979), Tables 6-C, 6-D, 6-E, pp. 122-127; International Monetary Fund, International Financial Statistics (February 1977), pp. 12-13 and (February

1978), pp. 9-10; Organization for Economic Cooperation and Development, Development Cooperation:

1979 Review (November 1979), p. 229.

NOTES: Table does not include data on private debt that is not publicly guaranteed, local currency loans,

direct investment, short-term capital movements, or debt of countries that are not members of the

World Bank.

Details may not add to totals because of rounding.

a/ Countries are listed by income group in Appendix I-A. The groupings are those of the World Bank, based

on 1976 per capita income levels in 1976 dollars: higher income, over $2,500; upper middle income,

$1,136-$2,500; intermediate middle income, $551-$!,135,* lower middle income, $281-$550; and low income,

$280 or less.

_b/ Private loans include suppliers1 credits, loans from private banks and other financial institutions,

publicly issued and privately placed bonds, and other obligations to private lenders.

c/ Loans from international financial institutions include loans from the World Bank Group, regional development banks, and other multilateral and intergovernmental agencies.

d/ Less than $100 million.
The remainder of this chapter provides basic information on

aid programs as an introduction to the issues considered in the

paper.

HOW DOES FOREIGN AID HELP THE LDCs?

Foreign aid benefits the LDCs in two ways. First, it

increases the total resources available to them. This facilitates

an increase in their rate of investment, which is a prerequisite

to the growth of production, employment, and income. The investment stimulated through aid may be in various areas, such as

education, agriculture, or industrial and social infrastructure.

Second, foreign aid increases the foreign exchange resources

of LDCs. Many of the inputs needed for economic growth must be

purchased abroad, and hence aid may significantly affect the

rate of growth.

Successful aid programs produce "graduates," in the sense

that economic growth becomes self-sustaining. Brazil and South

Korea are two of the most notable graduates among countries that

have received large amounts of U.S. aid.

U.S. FOREIGN AID PROGRAMS

The United States provides financial assistance to developing

countries through four major programs. Three consist of countryto-country (bilateral) aid; the fourth channels funds through

multilateral development banks. 3/

Bilateral Aid

The development assistance program is administered by the

Agency for International Development (AID). It provides loans and

,3/ The Congress appropriates funds for these programs under the

Foreign Economic and Financial Assistance section (subfunction

151) of the International Affairs Budget. Subfunction 151

does not include assistance directly for military purposes.

Included in the foreign economic and financial assistance

budget, but omitted from detailed discussion in this report,

are the Peace Corps and refugee assistance.
grants at concessional terms for functional development projects

and for programs in the areas of health, education, and agriculture. Its funds have been targeted on South Asia and Latin

America. Leading recipients in the 1960s were India and Pakistan,

along with Brazil. In the 1970s, major recipients were a group of

Asian countries: Pakistan, India, Bangladesh, Indonesia, and the

Philippines. (For a country-by-country breakdown, see Appendix

II-A.)

The Economic Support Fund (ESF) is also administered by AID.

It provides loans and grants at favorable terms for developmental

purposes—where feasible—for countries in which the United States

has special security interests. In practice, most of these funds

have been used for balance-of-payments support. From the mid1960s until the early 1970s, ESF was focused on East Asia—

primarily South Vietnam, which regularly received two-thirds of

ESF commitments. The bulk of ESF now goes to the Middle Eastern

countries of Egypt, Israel, Jordan, and Syria; they received 91

percent of the funds in 1979, as against only 1 percent in 1971.

(See Appendix II-B for details.)

The food aid program (P.L. 480) is administered by the U.S.

Department of Agriculture (USDA) and by AID. It finances U.S.

food exports through loans and grants on favorable terms. In the

1960s and 1970s, India was a leading recipient of food aid,

together with Pakistan in the early 1960s and Bangladesh in the

early 1970s. South Vietnam took a large share of P.L. 480 funds

in the period 1968-1974. In 1979, the three leading recipients of

food aid were India, Bangladesh, and Indonesia, accounting for 37

percent of total funding. (See Appendix II-C.)

Multilateral Aid

International financial institutions, including the various

multilateral development banks (MDBs) and other international

organizations, offer developmental assistance, primarily loans and

grants, on terms that depend on the economy of the recipient.

This assistance concentrates on providing economic infrastructure

(such as roads, irrigation systems, and port facilities). By

contrast, U.S. bilateral development assistance emphasizes the

social infrastructure (technical and financial assistance concentrated in agriculture and rural development)• The United States

usually contributes approximately one-third of the funds that MDBs

receive. India, Brazil, and Mexico were among leading recipients

of multilateral aid in the 1960s and 1970s, joined in the 1970s by

Indonesia. (See Appendix III-B.)
DIMENSIONS OF THE U.S. FOREIGN AID BUDGET

U.S. outlays for foreign aid totaled $4.4 billion in fiscal year 1979 (Table 2). The bulk of U.S. aid was offered

bilaterally, the Economic Support Fund being the largest single program.

Long-term trends in U.S. foreign aid can be seen in Table 3,

which shows budget authorizations for foreign assistance during the 1970s, expressed in constant dollars. Authorizations for

bilateral programs, excluding food aid, rose by 45 percent. But

among the major bilateral programs, authorizations for the Economic Support Fund more than tripled, while those for development

assistance fell slightly, and outlays for food aid declined

TABLE 2. U.S. BUDGET AUTHORITY AND OUTLAYS FOR FOREIGN ASSISTANCE, FISCAL YEAR 1979 (Millions of dollars)

Budget

Authority Outlays

Bilateral Assistance

Development assistance 1,534

Economic Support Fund 2,321

Food aid 806

Other 375

Receipts

Principal

Interest

Subtotal 4,361 3,519

Multilateral Assistance

Multilateral development banks 2,515 683

International organizations 260 200

Subtotal 2,775 883

Total 7,136 4,402
TABLE 3. U.S. MULTILATERAL AND BILATERAL ASSISTANCE, SELECTED FISCAL YEARS 1970-1979 (Millions of constant

1972 dollars)

1970 1972 1974 1976 1978 1979

Bilateral Assistance (Budget Authority)

Development assistance

Economic Support Fund a/

Other b/

Receipts

Principal

Interest

Net Total

Multilateral Assistance (Budget Authority)

Multilateral development banks

Callable capital

Paid-in capital

International organizations d/

Total Multilateral Aid

P.L. 480 Food Aid (Outlays)

Program costs

Receipts

Total P.L. 480 Outlays

1,026

437

165

-54

-21

1,553

769

(231)

(538)

147

916

1,397

-437

960

1,036

559

107

-45

-16

1,641

1,422 c/

(954)

(468)

152

1,574

1,320

-307

1,013

752

559

190

-23

-29

1,449

2,028 c/

(1,072)

(956)

132

2,160

873

-294

579

765

1,332

131

-153

-116

1,959

533

(74)

(459)

155

688

744

-215

529

858

1,488

142

-203

-146

2,139

1,292

(551)

(740)

161

1,453

799

-258

541

947

1,433

231

-194

-167

2,250

1,552

(545)

(1,007)

160

1,712

848

-246

602

NOTE: A U.S. GNP deflator was used throughout this paper to convert current dollars to constant dollars, where

1972 = 1.

a./ Includes Mideast Special Requirements Fund, Indochina Postwar Reconstruction Fund, and peacekeeping operations.

b/ Includes International Narcotics Control, Inter-American Foundation, refugee assistance, and the Peace Corps.

c/ In 1972, includes $1.08 billion to maintain gold value of U.S. dollar contributions; in 1974, includes $1.31

billion to maintain U.S. dollar value of contributions.

d/ Voluntary contributions to the international organizations,

function 153.

Assessed contributions are part of budget sub-
significantly. 4_/ Taking these divergent trends into account,

CBO estimates that average annual U.S. disbursements of aid

rose by 7 percent in the second half of the 1970s over the

level prevailing in the first half, when measured in constant

dollars.

HOW U.S. AID DONATIONS COMPARE WITH THOSE OF OTHER COUNTRIES

The United States is by far the largest donor of development assistance in terms of absolute amount. But when assistance

is measured against the size of the national economy, the United

States ranks below a number of other countries as a donor. The

United Nations has adopted a target for official development

assistance (ODA) of 0.7 percent of a member's GNP. 5J The United

States falls well below this target, along with many other countries. In 1978, the United States contributed 0.23 percent of GNP

in official development assistance, ranking thirteenth among 17

developed-country donors (Table 4).

The United States, France, and the United Kingdom provided

more than 80 percent of official development assistance in the

early 1960s, but in 1978 they gave only half. Other countries,

including the Scandinavian countries and Canada, have increased

their share of total assistance (Table 4).

The East European countries, the Soviet Union, and China

pledged more than $5 billion in economic aid for the developing

countries in 1978, with the Soviet Union committing $3.7 billion.

Soviet aid is used primarily to fund large industrial projects,

frequently on a loan basis, and is often geared to production of

items needed for Soviet use. The bulk of repayments is in

goods—if possible, those produced by the funded project. The

4/ Outlays for food aid reflect an actual year's new commitments

better than do authorizations, because they are not distorted

by carry-forward balances of the Commodity Credit Corporation

(the financing agent for food aid) and receipts.

5/ A definition of ODA is given in Appendix I-B. The United

States has not agreed to this target. All aid, not just the

grant element, is counted as ODA. A very small part of U.S.

development aid is not counted as ODA, such as disaster relief

for developed countries and funds for peacekeeping missions.
TABLE 4. NET OFFICIAL BILATERAL AND MULTILATERAL DEVELOPMENT

ASSISTANCE, DISBURSEMENTS (Millions of dollars and

percent of GNP)

1966-1968 Average 1978

Country

Australia

Austria

Belgium

Canada

Denmark

Finland

France

Germany

Italy

Japan

Netherlands

New Zealand

Norway

Sweden

Switzerland

United Kingdom

United States

Amount

148

15

84

187

25

4 a/

808

495

126

342

110

10

18

63

17

462

3,352

Percent

of GNP

0.57

0.13

0.43

0.30

0.21

0.05 a/

0.69

0.39

0.18

0.28

0.48

0.22

0.22

0.26

0.10

0.43

0.41

Amount

491

156

536

1,060

383

55

2,705

1,990

175

2,215

1,027

55

355

783

173

1,212

4,831

Percent

of GNP

0.45

0.27

0.55

0.52

0.74

0.17

0.57

0.31

0.07

0.23

0.79

0.34

0.90

0.90

0.20

0.39

0.23

Total 6,266 0.40 18,204 0.32

SOURCE: Organization for Economic Cooperation and

ment, Development Cooperation: 1979 Review

1979), p. 201, and Development Cooperation;

(November 1978), p,

Develop-

(November

1978 Review

191.

a/ Estimated.

East European economic aid program also aims at establishing new

markets and organizing a supply of raw materials. 6J

6 National Foreign Assessment Center, Communist Aid Activities in Non-Communist Less Developed Countries, 1978 (1979),

pp. 6-16.
Some oil-exporting countries belonging to OPEC have been aid

donors for a decade or more, but the majority became actively

involved in aid only in the early 1970s, when higher oil prices

created large current account surpluses. In 1978, the OPEC

countries contributed $3.7 billion, or 1.1 percent of their

combined GNP. TJ OPEC aid is largely untied, and the totals

include multilateral as well as bilateral assistance. Some

multilateral aid is channeled through OPEC agencies, but OPEC

members also made commitments in 1978 to the World Bank, the

African Development Fund, and the Inter-American Development Bank.

The dominant feature of OPEC bilateral commitments is general

support assistance, concentrated on Arab countries, but project

aid has increasingly been extended to non-Arab countries in Africa

and Asia. 8/

TJ Organization for Economic Cooperation and Development,

Development Cooperation: 1978 Review (November 1978), p. 147,

and Development Cooperation; 1979 Review (November 1979), p.

269.

%J Organization for Economic Cooperation and Development, Development Cooperation; 1979 Review, Chapter X, pp. 133-142.

10
CHAPTER II. U.S. BILATERAL AID PROGRAMS

Direct aid by the United States to other countries (bilateral

aid) includes three principal programs: development assistance,

food aid, and the Economic Support Fund. In fiscal year 1979,

bilateral aid comprised 80 percent of U.S. net outlays for foreign

assistance.

In a period when the Congress is attempting to restrain

federal spending, the competition for funding will place the

individual programs in conflict. If the Congress decides to

emphasize foreign policy objectives, it is likely to channel

most assistance through the Economic Support Fund. This would

continue a trend that characterized U.S. aid programs in the

latter half of the 1970s. If, instead, the Congress wishes to

emphasize longer-run development objectives, it will devote

a larger portion of funds to bilateral development assistance

(and perhaps to multilateral development banks, the subject of

Chapter III). How large a role food aid plays will depend on

whether it is seen principally as a mechanism for U.S. commodity

management or as a vehicle for underwriting part of the LDCs1

"calorie gap."

At the same time that the Congress confronts decisions on

priorities among foreign aid programs, it will be facing the issue

of whether U.S. assistance should be concentrated on a relatively

small number of countries—the historical pattern—or be spread

more broadly. A decision to emphasize political objectives, and

to increase the role of the Economic Support Fund, might well

result in increased concentration.

As a guide to the debate over levels of funding for the

various bilateral programs, this chapter summarizes their legislative history, describing the original Congressional objectives

and how they have been modified. The chapter then reviews the

current operation of the major programs, and discusses important

issues related to their funding. Comparisons among them are

complicated by the fact that current budget presentations of aid

do not fully reflect the net impact of every program: the chapter

provides estimates of these net figures where appropriate.

Finally, because some have argued that bilateral aid programs

11
stimulate demand for U.S. exports, the chapter reviews the evidence on this point.

LEGISLATIVE HISTORY

The foreign aid program in its current format began with

the establishment of the Agency for International Development

(AID) in 1961. The following section reviews the history of U.S.

foreign aid since that date.

Development Assistance I/

In the 1960s, U.S. development assistance programs concentrated on building "infrastructure," such as dams, roads, and

power plants. Concerned with the uneven distribution of development benefits, the Congress passed the New Directions legislation

in 1973, requiring that U.S. development assistance be targeted

upon the poorer people of the world and upon countries attempting

to satisfy basic human needs. Current development projects

stress improvement of water supplies and sanitation facilities, family planning programs, access to education and health

care, expansion of local energy resources, and agricultural

development. 2/

I/ A distinction is made between bilateral aid, which covers all

forms of assistance provided by the United States directly to

developing countries, and bilateral development assistance,

which refers only to the loans and grants administered by the

Agency for International Development and excludes the Economic

Support Fund and food aid.

2/ The Agency for International Development also engages in the

coordination of funding from different sources. An example of

this is the Club du Sahel, a regional development program for

eight neighboring African countries suffering from prolonged

drought. The Club began as an American-French initiative, but

is now centered in the OECD and involves more than 20 donor

agencies and organizations committed to an integrated program

of sectoral development in agriculture, fisheries, human

resources, marketing, and transportation. See Organization

for Economic Cooperation and Development, Strategy and Programme for Drought Control and Development in the Sahel (May

1979).

12
Interpreting the New Directions legislation has proved

difficult. The focus has shifted to the poorer countries and,

within them, to the poorer people, but assessing the beneficiaries

of a particular project has proved controversial. The U.S.

Agency for International Development has chosen a restrictive

interpretation. 3/

Economic Support Fund (ESF)

The Economic Support Fund is a descendant of the Marshall

Plan "defense support" funds of the 1940s. In 1961, with the

enactment of the Foreign Assistance Act (FAA), this type of aid

was formally designated as Supporting Assistance. In 1971 it was

renamed Security Supporting Assistance and placed under the FAA

title concerned with military, rather than economic, aid, thus

emphasizing its different goals as compared with development

assistance.

The International Security Assistance Act of 1978 replaced

Security Supporting Assistance with the Economic Support Fund

and Peacekeeping Operations accounts. This change was made

to identify more accurately the purpose of these programs,

which is "to provide budget support and development assistance

to countries of political importance to the United States." _4/

The intention is that ESF be used for development projects

wherever possible, but only 30 percent of the funds distributed

between 1975 and 1979 were directly for such projects.

_3/ Among projects not pursued because of this interpretation are

the upgrading of a road between Upper Volta and Niger, and

construction of a dam in Senegal to prevent salinization of a

river basin so as to protect the water for agriculture. See

Foreign Assistance Legislation for Fiscal Years 1980 to 1981,

Hearings and Markup before the Subcommittee on Africa, House

Committee on Foreign Affairs, 96:1 (February and March 1979),

Part 6, pp. 11-12.

—I Foreign Assistance and Related Programs Appropriations Bill,

1979, S. Kept. 1194, 95:2 (1978), p. 79.

13
Food Aid

The original goals of the Food for Peace program _5/ were

trade expansion, disposal of surplus U.S. agricultural goods,

agricultural price stability, foreign economic development, and

support of U.S. foreign policy.

Initially, farm goods were donated, bartered, or sold for

foreign currencies. As U.S. holdings of foreign currencies grew,

sales for dollars on concessional terms began.

A reevaluation of food aid in 1966 placed emphasis on

humanitarian concerns, shifting the program's focus from the

disposal of U.S. surplus goods to the alleviation of hunger

through agricultural development. Development concerns have

also been emphasized in recent legislation. Nevertheless,

establishing and maintaining commercial markets for U.S. products remain an underlying objective of the food aid program.

The inherent conflict among these multiple goals is compounded by

the inclusion of political considerations in the selection of

recipients.

Food aid provides agricultural commodities for donation

or resale under three titles:

Title I: Concessional Loans for Food Purchases ($755

million exported in 1979); 6/

Title II: Donations and Disaster Relief ($398 million

exported in 1979); ]_/

Title III: Food for Development ($85 million of Title I

in investments in 1979).

5/ Established under the Agricultural Trade Development and

Assistance Act of 1954 (Public Law 480).

bj Commodity costs; differential freight costs were $73 million.

TJ Commodity costs; transportation costs were $149 million.

14
Title I loans are made to LDCs at concessional rates to

finance purchases of U.S. agricultural commodities. JJ/

Under Title II, food is donated by the United States for

nutritionally vulnerable groups (such as young children and

mothers).

Title III, Food for Development, began as part of the International Development and Food Assistance Act of 1977. This title

provides that at least 15 percent of repayments under Title I be

invested by the LDCs in U.S.-approved self-help projects directed

to the rural poor. 9/

CURRENT PROGRAM OPERATIONS AND ISSUES

Development Assistance

The projects covered by development assistance are primarily

in the agriculture, rural development, and nutrition sectors; a

second area of significance is population planning. During the

second half of the 1970s, these two areas received an average of

55 and 15 percent of funding respectively. Health and education

each received around 10 percent.

Although highly concentrated in the past, development

assistance is now widely distributed. In fiscal year 1979,

8/ The loans are to be repaid over a period of up to 40 years,

with a grace period of up to 10 years, at interest rates of 2

to 3 percent, in dollars or convertible currency. No new

local currency sales agreements have been concluded since

December 31, 1971.

9/ Food for Peace, 1954-1978, Major Changes in Legislation,

prepared by the Congressional Research Service for the Subcommittee on Foreign Agricultural Policy, Senate Committee on

Agriculture, Nutrition, and Forestry, 96:1 (April 1979),

p. 16. Eligibility for forgiveness was specified to be for

countries meeting the World Bank poverty criterion, and the

forgiveness was extended to appropriate developmental use of

the food commodities themselves, not just the appropriate

developmental use of the funds generated by the local sale of

the commodities.

15

66-811 0-80- 5
68 countries received funding. During the second half of the

1970s, the three major recipient countries (Indonesia, Bangladesh,

and the Philippines) accounted for only 22 percent of all funds

directed to specific countries and regions. 10/

Some countries that were major recipients in the 1960s are

still major recipients, including India and Bangladesh (formerly

East Pakistan). Brazil, Colombia, and South Korea are among the

program's "graduates." Meanwhile, Kenya and Sri Lanka are "newcomers." ll/

In 1979, 81 percent of country loans and grants went to

nations meeting the poverty criterion of the World Bank. 12/

There are, however, several programs that benefit middle-income

developing countries. For example, the Housing Guarantee (HG)

Program, under which the Agency for International Development

guarantees repayment to private U.S. lenders who finance AIDapproved housing for low-income families, is used mainly by

middle-income developing countries. 13/ Another AID effort that

10/ There has, however, been an increase in expenditures on an

interregional (rather than country) basis, which in 1979

accounted for over one-third of all AID funding (see Appendix

II-A). These interregional expenditures in fiscal year 1979

included AID operating expenses, centrally funded programs,

disaster relief, ocean freight, and American schools and

hospitals abroad.

ll/ The annual distribution of AID funds among major recipients

from 1962 to 1979 is shown in Appendix II-A.

12/ The poverty criterion of the International Development

Association, the soft loan window of the World Bank, is

currently an annual per capita income of $625. See Agency

for International Development, Congressional Presentation,

Fiscal Year 1981, Main Volume, p. 124.

13/ By charging a fee for the guarantee, the program is made

generally self-sustaining. The statutory ceiling for housing

guarantees outstanding to September 1981 is $1.5 billion.

Among countries receiving HG funds are Korea, Thailand,

Taiwan, Argentina, Mexico, Venezuela, and Israel. See Ibid.,

pp. 82-85.
benefits middle-income countries is the Reimbursable Development

Program (RDP). Technical services and planning assistance are

provided, partly on a reimbursable basis, drawing together U.S.

companies to provide goods and services for projects identified by

host governments. 14/

Part of development assistance is offered through loans

rather than grants. An important policy question is what it

would cost an LDC to borrow the funds it receives in official

loans at commercial rates. Calculations show that the charges

in 1978 amounted to about 10 percent of the cost of borrowing commercially, so that 90 percent of the funds were the

equivalent of a gift. J-5/ These calculations are based on

a conventional market rate of 10 percent, which is too low

for the current economic situation. Thus, the grant element

in 1980 is even higher.

Economic Support Fund

ESF allocations are made to "promote economic or political

stability" in countries of concern to the United States. 16/

Commitments averaged $1.2 billion annually during the 1970s,

reaching a record high of $2.2 billion in 1978, as shown in

Table 5. (Details of annual flows by recipient are given in

Appendix II-B.)

In the early 1970s, 75 to 85 percent of ESF allocations

went to South Vietnam, but now similar percentages go to the

14/ AID is requesting $4 million for RDP activities in fiscal year 1981; the program is active in more than 40 countries, including Saudi Arabia, Bahrain, Kuwait, Colombia, Venezuela, Brazil, and Thailand. See Ibid., pp.

86-88.

15/ Organization for Economic Cooperation and Development,

Development Cooperation; 1979 Review (November 1979),

p. 228.

167 Agency for International Development, Congressional Presentation, Fiscal Year 1981, Main Volume, p. 65.

17
TABLE 5. ECONOMIC SUPPORT FUND COMMITMENTS, FISCAL YEARS 1970-

1979 (Billions of dollars)

Billions of Billions of

Fiscal Year Current Dollars 1972 Dollars

1970

1971

1972

1973

1974

1975

1976

TQ

1977

1978

1979

Total

0.50

0.57

0.62

0.63

0.64

1.23

1.13

0.89

1.77

2.22

1.98

12.18

0.56

0.61

0.63

0.62

0.58

1.00

0.87

0.66

1.27

1.49

1.22

9.51

SOURCE: Agency for International Development, U.S. Overseas Loans

and Grants, 1945-1976, p. 6-5 and U.S. Overseas Loans and

Grants, 1945-1979, p. 6.

Middle East (principally Egypt and Israel), reflecting the changed

focus of U.S. interests. 17/

17/ Relatively small amounts of ESF aid go to Europe, Latin

America, and Africa. In 1978, there was an increase in ESF

funding for Africa, reflecting a growth in commitments to

Botswana ($15 million), Lesotho ($5 million), Swaziland ($13

million), Zaire ($10 million), Zambia ($30 million), and the

regional account ($38 million). See Agency for International

Development, Congressional Presentation, Fiscal Year 1980,

Main Volume, p. 119.

18
Although ESF allocations are made according to political

criteria, the program is, nevertheless, economic and developmental in nature. It excludes the outright provision of military

aid. 18/

At Congressional request, the New Directions criteria

are used for ESF whenever possible. Since immediate economic

aid, rather than long-term equitable development, is the primary

concern, the format of the funding differs considerably from

development assistance and may include projects of an industrial

nature. 19/ More than 40 percent of ESF commitments between

1975 and 1979 were for commodity import funding, 20/ a quarter for

cash grants and loans, and 30 percent for project aid (Table 6).

18/ Since money is fungible, the effectiveness of these restrictions is questionable. As noted earlier, this report focuses

on development aid and does not touch upon military assistance. Funds for defense materiel and military training are

covered by other security assistance programs. These include

(1) Military Assistance Programs; (2) International Military

Education and Training; and (3) the Foreign Military Sales

Financing Program. Congressional Research Service, Foreign

Aid; Overview of the International Affairs Budget, Issue

Brief 78055 (February 15, 1980), p. 3.

19/ More specifically, it is unlikely that recent loans to

Egypt for gas turbine generators, a cement plant, textile

plant rehabilitation, or cargo handling equipment for a port

facility would have been made with regular development

assistance.

20/ Under the Commodity Import Program (CIP), funds are deposited

within the United States to be drawn down on behalf of the

countries in receipt of CIP funding. The purchases are

identified as relevant to the countries1 development needs

and reviewed by the United States. Excluded are military

goods, goods for which the United States is a net importer,

and certain other product categories. The ESF operates

with both loans and grants; the cash loans are made at

concessional rates, ranging between 15 and 40 years at 2

to 5 percent interest. Food is also shipped as part of the

CIP. Of the 2.6 million metric tons shipped in 1978, half

went to Israel and half to Egypt. Between 1963 and 1974,

19
TABLE 6. ECONOMIC SUPPORT FUND COMMITMENTS BY COUNTRY AND TYPE,

FISCAL YEARS 1975-1979 (Millions of dollars)

Commodity

Import

Program

Country

Egypt

Israel

Jordan

Syria

Greece

Portugal

Zambia

Jamaica

Total

3,331

3,405

476

438

65

435

50

12

South Vietnam 190

Malta

Cambodia

Other

Total

Percent

43

54

516

9,015

100

Grants

85

1,100

—

—

—

—

—

—

143

—

—

—

1,328

15

Loans

1,455

755

—

125

65

—

50

10

—

—

—

58

2,518

28

Cash

Grants

—

1,290

286

—

—

36

—

—

—

43

51

58

1,764

20

Loans

—

260

—

—

—

300

—

—

—

—

—

82

642

7

Project

Aid

Grants

1,005

—

19

37

—

6

—

2

47

—

3

259

1,378

15

Loans

786

—

171

276

—

93

—

—

—

—

—

35

1,361

15

SOURCE: Agency for International Development.

NOTE: Details may not add to totals because of rounding.

The relative flexibility of ESF funding encourages expansion

of the program. Also, the ESF appropriation, unlike development assistance, is almost entirely for country-specific amounts,

such shipments remained well below $100 million per year but

began to rise in 1975, and reached $319 million in 1978 (all

in 1972 dollars). U.S. Department of Agriculture, Foreign

Agricultural Trade of the United States (July 1977), p. 18,

and (January 1979), p. 62.

20
which, given the selection of the recipients, protects this

section of the aid budget from significant cuts. ESF allocations

tripled in real terms in the 1970s, while funds for development

assistance remained static and food aid fell (Table 3).

Food Aid

The food aid program has been significant for U.S. producers: an average of 60 percent of wheat exports and 40 percent of rice exports (by value) during the 1960s were shipped

under P.L. 480, declining to 14 percent and 20 percent, respectively, in fiscal year 1978. 21/ (Details of annual flows

by recipients are given in Appendix II-C.)

In fiscal year 1978, 4.3 million metric tons of food were

shipped under Title I (76 percent wheat, 11 percent rice) and

1.5 million metric tons under Title II (which, because of its

nutritional focus, has a wider range of commodities). 22/ P.L.

480 shipments represented 4 percent of U.S. agricultural exports

in 1978 (Table 7).

In 1977, the Congress mandated that 75 percent of concessional sales under Title I go to low-income countries, defined as

those meeting the World Bank poverty criterion. 23/ Figure 1

shows how Title I sales have been allocated to meet the poverty

criterion, and also documents the fact that, from 1968 through

21/ U.S. Department of Agriculture, Food for Peace, 1978 Annual

Report on Public Law 480 (June 1979), Table 5; Foreign Agricultural Trade of the United States (July 1977), Table 9;

U.S. Agricultural Exports under P.L. 480 (October 1974),

Table 2.

22/ U.S. Department of Agriculture, Food for Peace, 1978 Annual

Report on Public Law 480, Table 4.

23/ Initially, in fiscal year 1975, not more than 30 percent was

to go to countries other than those designated by the United

Nations as "most seriously affected" by food shortages. This

was modified to 25 percent to countries with per capita

incomes of $300 or less, and eventually to the poverty

criterion in 1977.

21
TABLE 7. U.S. SHIPMENTS OF FARM GOODS UNDER P.L. 480, FISCAL

YEARS 1962-1978

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

TQ

1977

1978

Millions of

Metric Tons

18.8

17.4

16.8

18.4

18.2

14.0

14.6

10.0

11.0

9.8

9.9

7.4

3.3

4.9

4.5

2.1

6.5

5.8

Billions

of Dollars

1.5

1.5

1.4

1.6

1.3

1.3

1.3

1.0

1.1

1.0

1.1

1.0

0.9

1.1

0.9

0.4

1.1

1.0

P.L. 480 Shipments

as Percentage

of Total

Agricultural

Exports

(by value)

29

29

23

26

20

19

20

18

16

13

13

7

4

5

4

7

4

4

SOURCE: Susan A. Libbin, "U.S. Agricultural Commodity Aid and

Commercial Exports, 1955-1976," in U.S. Department of

Agriculture, Foreign Agricultural Trade of the United

States (July 1977), p. 18; U.S. Department of Agriculture, Foreign Agricultural Trade of the United States

(January 1979), pp. 58-59; U.S. Department of Agriculture, Food for Peace, 1978 Annual Report on Public Law

480 (June 1979), Table 1.

22
Figure 1.

Percent of Food Commodities Programmed Under PI. 480 Title I

Going to Countries Below the IDA Poverty Criterion

75:25 Split

Mandated by the Congress

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978

SOURCE: Regina G. Ziegler, Congress, the 1970s Food Crisis, and U.S. Food Aid Policy, Massachusetts

Institute of Technology, Center for International Studies (July 1979), p. 57.

NOTE: Catendar years 1966-1974; fiscal years 1975-1978. Fiscal year 1976 includes transitional quarter.

23

66-811 0-80- 6
1973, far less than 75 percent was distributed to the poorer

countries. 24/

Food Aid and Malnutrition. One of the goals of the food

aid program is relief from malnutrition. How big is the problem?

How much impact can U.S. food aid have?

One measure of malnutrition is the per capita food supplies

available in a country as compared with the caloric intake

required for an adequate diet. 25/ To close the calorie gap

expected in 1985, it is estimated that the developing countries

would need to import approximately 140 million metric tons of

grain in that year. 26/

Countries can close the calorie gap by producing more food,

importing more food, or redistributing existing supplies. 27/

To fill the calorie gap from local production by 1985 would

require an increase in LDC agricultural production of between

5 and 6 percent per annum for the decade 1975-1985—an unlikely

rate of production growth.

24/ Tentative allocations for fiscal year 1980 indicate that 80

percent of food aid will go to countries meeting the poverty

criterion. (Letter, U.S. Department of Agriculture to Senate

Committee on Agriculture, Nutrition, and Forestry, September

28, 1979.) The United States signed an understanding with

South Korea in 1971 that P.L. 480 aid would be provided in

return for restrictions on exports of textiles over a fiveyear period. The amount of aid remaining to be exported

under this agreement in 1980 is $27 million.

25/ International Food Policy Research Institute, Recent and

Prospective Developments in Food Consumption; Some Policy

Issues (July 1977), p. 13.

26/ This estimate assumes that 40 percent of incremental supplies

would "leak out" to persons consuming more than the adequate

amount. Without such leakage, the necessary imports would be

about 120 million tons. See Ibid., Table 6.

27/ Per capita food availability in Brazil is sufficient to

achieve nutritional adequacy for everyone. Unequal distribution has, however, left about one-third of the population malnourished.

24
To fill the calorie gap by 1985 from imports, the major

grain exporters would have to sustain production growth of 4

percent per year, as against their actual long-term growth rate

of 2.5 percent per year. 28/

The total flow of bilateral and multilateral food aid

actually fell from 13 million metric tons in 1970 to 10.5 million

metric tons in 1978. 29/ Even if the United States returned to

the 17 million metric tons of food aid it shipped in the early

1960s, and other donors contributed a similar amount, food aid

would still provide only one-quarter of the supplies needed to

fill the estimated gap in 1985.

Evaluation of the Food Aid Program. Food aid is a versatile

foreign aid tool. Programs can be implemented relatively rapidly,

providing immediate benefit to those in need, without major

commitments of U.S. personnel. 30/

A key difference between financial aid and food aid lies in

the additionality factor—the extent to which the food adds

to total supplies rather than merely substitutes for commercial

imports. To the extent that it does so, the United States

28/ Only 14 developing market economies and a few developed

market economies have had growth of cereal production of 4

percent or more during the period 1960 to 1975. See International Food Policy Research Institute, Recent and Prospective Developments in Food Consumption, pp. 20-21.

29/ In 1977 (the latest year for which comparable data are

available), the United States gave an estimated $1.1 billion

worth of cereals in food aid, six times as much as the next

largest food donor, Canada, which gave $185 million. The two

major multilateral food aid programs are the World Food

Program, run by the United Nations, and the Food Aid Convention. (Details are given in Appendix II-D.) See U.S.

Department of Agriculture, Foreign Agricultural Trade of the

United States (December 1978), p. 73.

30/ Title III, Food for Development, requires a greater degree of

involvement, but this is a relatively small part of total

food aid.

25
is fulfilling its goal of increasing the availability of food.

Additionality is generally thought to be low, however. 31/

Title I food is generally resold, providing resources for the

recipient country. In this respect, food aid is equivalent to a

concessional loan, but the question arises whether, as a means

of providing resources, it is as beneficial to the recipient as

a concessional loan. For the United States, of course, the advantages of food aid may be greater because of its impact on the U.S.

agricultural sector.

The U.S. food aid program has been criticized as providing

a disincentive to local producers. The extent of the disincentive

depends on the factor of additionality. If the U.S. food is truly

additional, it must be offered in the recipient's market at a

lower price than would otherwise prevail, or it will not sell.

The disincentive effect then depends on the response of local

suppliers to the drop in price. 32/ If the food aid is not an

addition, but replaces commodities that otherwise would have been

imported, there need be no local disincentive effect. 33/

31/ The evidence is limited, and more research is needed, but

apparently food aid is only partially additional. Alexander H. Sarris, Philip C. Abbott, and Lance Taylor, "Grain

Reserves, Emergency Relief, and Food Aid," in William R.

Cline, ed., Policy Alternatives for a New International

Economic Order; An Economic Analysis (Praeger, 1979).

32/ Evidence on the extent of disincentives is relatively

limited and conflicting; one recent study of the literature

concluded that "theoretical analysis gives no proof that

food aid, if properly handled, has serious disincentive

effects on food production in recipient countries. Where a

case has been made for such short-term effects, these have

been far outweighed by the general advantages accruing to

the economy if the opportunities offered by food aid for

expanding overall consumption and investment are properly

utilized." World Food Program, Committee on Food Aid

Policies and Programmes, "A Survey of Studies on Food Aid"

(March 1978; processed), p. 2.

33/ A disincentive effect may be traceable to pricing policies of

a recipient government, particularly when food prices are

kept artifically low by means of subsidies. The disincentive

effect may then be wrongly attributed to the supply of food

aid.

26
Buffer Stocks and the Future of the Food Aid Program. Should

the U.S. contribution be viewed as a permanent flow of assistance

to ease the calorie gap? When food aid shipments began, U.S.

agricultural surpluses were common. Supply and (commercial)

demand for U.S. agricultural products are now, however, more

closely in balance. Nonetheless, the food aid program still

operates as if its major objective were to dispose of domestic

surpluses. The result is that food shipments tend to fall when

LDCs most need them (in periods of tight supply) and to expand

in periods when they are less critical (in periods of excess

supply). For example, in the mid-1970s, at a time when LDCs

were faced with poor crops and high world prices, the volume

of P.L. 480 shipments fell to less than half that of the preceding years, although the value of shipments remained stable

(Table 7).

It has been proposed that this instability be offset by

the creation of an emergency reserve of wheat to back up planned

P.L. 480 commitments. 34/ Under current conditions, given

the recent increase in government-held food stocks, there would

be little net cost to the United States. In the federal budget,

commodity costs in the international affairs function would be

offset by receipts in the agriculture function. Transportation

costs would add to this, however. To the extent that the reserve

would ease demand for wheat in a time of shortage, it would

depress prices and is therefore opposed by wheat farmers. On the

other hand, it would diminish the uncertainty of food aid shipments to the benefit of the recipient countries. 35/

A buffer stock may be needed if the United States is to meet

its commitment under the 1980 Food Aid Convention to provide 4.47

million metric tons annually. At present prices, that pledge

absorbs three-quarters of the fiscal year 1980 budget appropriation. If agricultural commodities experience price increases

without accompanying increases in appropriation levels, the United

States could have difficulty fulfilling its pledge in the future.

Thus, the establishment of a buffer stock could protect the U.S.

commitment.

34/ In H.R. 6635, Food Security Act of 1980.

35/ If the food was truly additional, as intended, the impact on

commercial sales would be minimal.

27
BUDGETARY TREATMENT

Development Assistance

The development assistance budget request does not take

account of repayments on AID loans. It is merely the sum of

all programs proposed for funding during the budget year. Consequently, the net flow of resources to less-developed countries

is overstated in the budget request by the amount of interest

and principal repayments on prior-year loans. 36/

For example, offsetting receipts for repayment of principal 37/ and interest on development assistance loans in 1978

amounted to approximately $500 million. 38/ Therefore, net U.S.

foreign aid commitments in that year were $500 million lower than

the amount actually appropriated. Net budget outlays are therefore clearly a better measure of U.S. efforts to assist the

LDCs.

With respect to future fiscal years, AID estimates that

repayments of principal and interest on commitments already

made will average around $800 million a year during the 1980s

36/ Principal repayments on AID and predecessor agency loans

are "netted" against the total of new budget authority and

outlays proposed for Subfunction 151 of the President's

Budget—Foreign Economic and Financial Assistance. Interest

charges on AID and predecessor agency loans are "netted"

against the total of new budget authority and outlays proposed for Subfunction 902 of the Presidentfs Budget—Deduction for Offsetting Interest Receipts. Thus, repayments on

AID and predecessor agency loans do not enter directly into

calculations of AID's budget request. (Information provided

to CBO by AID, November 1979.)

37/ Approximately 10 percent of these receipts were from ESF

loans, and the balance from AID loans.

38/ The Budget of the United States Government, Fiscal Year 1980,

p. 375. These payments appear large, but represent interest

on loans made for an average of 30 years at 2.5 percent,

which is in striking contrast to the cost of funds from

alternative sources.

28
(excluding repayments in local currencies). 39/ (Repayments in

local currencies amounted to $170 million in fiscal year 1978, but

this flow will diminish because no new loans are being made with

local currency repayment provisions.) 40/ It is noteworthy that

the existence of repayment flows offers the United States some

flexibility in easing the financial situation of past recipients

who may request rescheduling.

Food Aid

The net cost of the food aid program to the federal government is less than the program cost in the P.L. 480 budget request:

o Title I shipments are sales at concessional loan rates

producing a stream of repayments. 41/

o Some products are purchased from Commodity Credit Corporation (CCC) stocks, reducing the Department of Agriculture's net outlays--in effect, an intragovernmental

transfer.

39/ (Information provided to CBO by AID, November 1979.) From

the lender's point of view, the flow of repayments is a

separate issue from current budget allocations. Some of

the repayments come from countries that are no longer aid

recipients, such as the United Kingdom, Taiwan, and Yugoslavia. On a regional basis, new commitments to Latin

America in fiscal year 1978 totaled $385 million, against

repayments of $271 million. See Agency for International

Development, U.S. Overseas Loans and Grants, 1945-1979.

40/ (Information provided to CBO by AID, November 1979.) Repayments in local currency are omitted from the repayment figure

of $302 million. Approximately 60 percent of local currency

repayments represent payments on P.L. 480; the remainder,

payments on development assistance loans. By 1990, local

currency repayments are projected to be $119 million, and by

the year 2000, $25 million. See Agency for International

Development, U.S. Overseas Loans and Grants, 1945-1979.

41/ The budget request is net of receipts, unlike the budget

request for AID, for which repayments accumulate in the

Treasury as miscellaneous offsetting receipts and thus are

not available to offset new appropriations.

29
o When farm prices fall low enough to make support prices

operative, P.L. 480 minimizes farm program outlays by

raising prices. Against the higher prices, the taxpayer

balances lower taxes. 42/

Assuming that shipments under P.L. 480 do not displace

commercial sales abroad, it is estimated that the real net budget

cost of the program in an average year 43/ may be only half of the

total costs shown in the federal budget (see Table 8). Even

assuming that half of P.L. 480 shipments displace commercial

exports, the net budget cost is still reduced, with net program

costs estimated at two-thirds of the gross budget figure in an

average year. 44/ (The basis for these calculations is set out in

Appendix II-E.)

EFFECTS OF THE BILATERAL AID PROGRAMS ON U.S. EXPORTS

One argument sometimes made in favor of bilateral aid

programs is that they strengthen the market for U.S. exports.

The following paragraphs examine the evidence for this.

42/ Or a smaller deficit or increased expenditures on other

programs. There are also distributional issues to consider.

A shift from income taxes to food prices is doubly regressive because a progressive tax is lifted and a regressive one

imposed, since lower-income families tend to spend a larger

proportion of their incomes on P.L. 480-type commodities than

do higher-income families.

43/ Because of the recent embargo on grain sales to the Soviet

Union, coupled with large crops in many commodities, fiscal

year 1980 will be an atypical year for all agricultural

programs, including P.L. 480. Estimates of the actual

costs of P.L. 480 for fiscal year 1980 would therefore be

misleading. This discussion is based on a hypothetical

year—average crops, average inventories, average prices, and

typical farm programs, assuming the President's original

budget request and the intended shipment quantities as of

October 1979.

44/ By law, Title I sales should not displace any commercial

sales; however, displacement is difficult to detect. To the

extent that per capita consumption rises as some people are

provided with more food than would otherwise have been

available, the displacement factor is reduced.

30
TABLE 8. ESTIMATED NET BUDGET COST OF THE P.L. 480 PROGRAM IN AN

AVERAGE YEAR a/ (Millions of dollars)

Assuming No Displacement of Commercial Exports

Total program costs 1,399

Less loan repayments W -166

Less CCC reimbursements c/ -44

Less farm outlays saved d/ -505

Net cost 660

Net cost as percentage of program cost 47

Assuming 50 Percent Displacement

Net cost 923

Net cost as percentage of program cost 66

NOTE: The table summarizes calculations that are set out in

Appendix II-E.

a/ Assuming no significant disturbances in the time trends of

production, demand, stocks, and prices.

b/ Present discounted value of repayments based on sales made in

fiscal year 1980. This figure differs from loan repayments

reported in the budget, which are receipts from loans made in

previous years.

c/ Represents payments to the Commodity Credit Corporation from

the P.L. 480 program; in the absence of the P.L. 480 program,

CCC would not have received this money and would have been

holding more commodities.

Aj Price supports that would otherwise have been paid to farmers

if the P.L. 480 goods had been sold commercially, resulting in

lower prices.

Development Assistance and ESF

A large proportion of the funds distributed to the developing

countries in loans and grants is spent in the United State^.

These expenditures benefit U.S. producers. (This does not mean\^

of course, that the net cost of the aid is reduced. Instead of

providing only funds, the United States is providing goods and

31

66-811 0-80- 7
services.) This section reviews the magnitude of aid-financed

purchases in the United States, and examines which industries

benefit most.

Funds channeled through development assistance and the ESF

averaged $2 billion annually in fiscal years 1971 to 1977.

Approximately three-quarters of these funds were used for the

procurement of U.S. commodities and services, with a slight

decrease in recent years (in part attributable to the shift toward

programs emphasizing basic human needs, which require more local

currency operation). 45/ This reflects U.S. policies that require

commodity purchases from bilateral aid funds to be made in the

United States or in a limited number of other countries.

The purchase of commodities accounted for around half of

AID procurement. The impact of these purchases on the 10 major

commodity categories for fiscal years 1977 and 1978 is shown

in Table 9. Foodstuffs and machinery accounted for the largest

amounts of money (a total of $800 million). In relative terms,

however, purchases financed by bilateral aid accounted for less

than 1 percent of all machinery exports, and less than 2 percent

of all foodstuff exports. They were most significant for oils and

fats, of which almost 10 percent of exports were comprised of AID

commodity purchases in 1978.

To assist developing countries, AID loans and grants 46/

have been partially untied. 47/ In fiscal year 1978, however,

45/ Agency for International Development, "The U.S. Balance of

Payments and the AID Program" (June 1979; processed). Data

on technical assistance contracts, shipping and other services, and related activities that grow from AID activities,

by country of origin, were not available.

46/ Including ESF loans and grants to the least developed countries. ESF loans and grants to other countries and to the

Middle East continue to be restricted to U.S. procurement.

(Information provided to CBO by AID, November 1979.)

47/ Non-European countries with annual per capita incomes of

less than $1,716 (1978 dollars) and Israel may compete for

procurement; Latin American countries may use U.S. loans for

purchases from other Latin American countries. (Information

provided to CBO by AID, November 1979.)

32
TABLE 9. U.S. COMMODITY SALES FINANCED THROUGH BILATERAL LOANS

AND GRANTS, FISCAL YEARS 1977-1978 a/

Millions of Dollars

1977 1978

Percentage

of U.S. Exports

1977 1978

Foodstuffs

Fertilizers

Oilseeds and Nuts

Paper and Paper Products

Chemicals

Machinery, Equipment,

and Parts b/

Transportation Equipment

and Parts c/

Iron and Steel Products

Animal and Vegetable Fats

and Oils

Basic Fabricated Textiles

Other

Total

230

20

92

19

33

141

54

6

73

23

82

773

204

39

91

15

55

219

119

22

141

44

129

1,078

1.6

1.4

2.0

1.2

0.3

0.4

0.4

0.2

5.8

0.6

1.3

2.0

1.7

1.0

0.5

0.5

0.9

0.6

9.5

1.1

SOURCES: Agency for International Development, Bureau for Program

and Management Services, Office of Commodity Management,

Composition of Commodities Financed by AID (November 7,

1979), pp. 1-2; (January 11, 1978), pp. 1-3; (February

8, 1977), pp. 1-3; U.S. Department of Commerce, Bureau

of the Census, U.S. Exports, Schedule B Commodity

Groupings (June-December 1975; June-December 1976;

September-December 1977; September 1978).

aj Funded by development assistance programs and Economic Support

~" Fund.

b/ Electrical equipment and parts, industrial machinery and

parts, generators, transformers, motors, engines, tractors,

construction equipment, mining equipment, agricultural equipment, and miscellaneous equipment and parts.

£/ Buses, trucks, passenger cars, aircraft, and other vehicles.

All chassis, equipment, and parts for these items are also

included in this category.

33
only $0.02 billion of $1.08 billion spent on commodity procurement

went to non-U.S. producers. 487

To what extent do these sums represent net export gains

for the United States? Or, expressed another way, to what extent

does foreign assistance merely finance exports that would have

occurred in any event? Answering this question requires knowing

what exports would have amounted to in the absence of the tied

foreign assistance program. Up-to-date estimates are not available, but earlier work on this issue indicated that more than 90

percent of U.S. development loan monies returned in the form of

additional exports. 49/ If U.S. aid funds are spent instead in a

third country, there will, depending on the economy of that

country, still be some positive impact on U.S. exports. Estimates

range from 8 to 30 percent of the initial loss of the untied aid

funds. 50/

Food Aid

The food aid program is also said to improve commercial

markets for U.S. agricultural goods. A number of countries have

now made the transition from being aid recipients to becoming

commercial buyers: Brazil, Taiwan, Peru, Chile, Colombia,

Japan, and Spain. Others that still receive concessional exports

—such as South Korea, Portugal, the Philippines, Pakistan,

Indonesia, and Morocco—are major commercial purchasers; in fiscal

year 1978, they received $0.3 billion of concessional food and

purchased goods totaling $1.8 billion. 51/

48/ Agency for International Development, "The U.S. Balance of

Payments and the AID Program," p. 5.

49/ That is, exports which would not have occurred in the absence

of the loan program and its tied provisions. If this conclusion is still valid, most of the exports shown in Table 9

are in fact net additions to the U.S. export position.

Richard V.L. Cooper, The Additionality Factor in Tied U.S.

Development Assistance, R-974-AID (Rand Corporation, 1972).

50/ David S.C. Chu and Robert Shishko, The Respending Effects of

Untying Aid, R-975-AID (Rand Corporation, 1972).

51/ U.S. Department of Agriculture, Foreign Agricultural Trade

of the United States (January 1979), p. 62.

34
An obvious question is whether the U.S. food aid program

created markets for U.S. agricultural products or whether these

markets would have emerged naturally in the course of economic

development. If food were a differentiable product, the distribution of commercial purchases might show significant effects from

past donations. However, a product such as wheat is purchased on

the open market at world prices; presumably only the fact that

names and places in the United States have become familiar will

lead buyers to this country rather than elsewhere, transportation

costs being the only other variable.

Two other factors must be considered. The flow of P.L.

480 food often necessitates the opening of an office in the

recipient country, and the office is there when commercial sales

replace concessional goods, as was the case in South Korea. 52/

Also, tastes may be affected by the type of food provided; thus,

wheat consumption in Japan was minor until familiarity with the

product was acquired as a result of P.L. 480 shipments.

Putting emphasis on the development of commercial markets

may not be consistent with the U.S. aims of providing relief

from hunger and helping less-developed countries achieve agricultural self-sufficiency. It may necessitate changing local food

preferences (thus creating dependency) and directing shipments to

potential customers among the richer, rather than the poorer,

LDCs.

52/ A study for the Overseas Development Council concluded

that introducing P.L. 480 food to a country, through export

sales and branch office establishment, may lead to a further

decision to invest locally. For example, in 1969 KoreaCargill Co., a subsidiary of Cargill, Inc., established

a plant to process livestock feed in South Korea, at a

time when South Korea was receiving major corn shipments

under P.L. 480. Although it has not been established that

this corn was used in the Korea-Cargill operation, the

availability of the corn under Title I may have influenced

the Cargill decision. See Richard Gilmore, with the assistance of Frederick Blott, "U.S. Food and Beverage Industry

Report for the U.N. Centre on Transnational Corporations"

(Overseas Development Council, January 1978; processed),

p. 35.

35
FUTURE CHOICES FOR BILATERAL AID

Although the stated goals of the U.S. bilateral aid programs stress humanitarian concerns, the distribution of funds

largely reflects U.S. political and economic interests. This is

particularly true of ESF, and of food aid loans.

The New Directions legislation of 1973 required that development funds be focused on the poorer people in countries

that support the provision of basic human needs, with the goal

of avoiding unbalanced growth that would destabilize their economies. It is difficult to say what the impact of the legislation

has been. The most obvious effect has been on the types of

projects supported by U.S. bilateral development assistance

programs. Another effect has been to encourage the funding of

projects through the ESF, which is not bound by the New Directions

legislation.

The ESF has grown rapidly during the 1970s, tripling in

size, compared to relatively static funding for development

assistance (as measured in constant dollars). To the extent

that the bulk of ESF funds are not used directly for project

assistance, the proportion of total U.S. aid funds allocated

specifically to development has therefore declined. During the

period 1975-1979, 70 percent of ESF funds went to commodity import

programs or for cash grants and loans; these are basically budget

support programs for countries with balance-of-payments problems

and relate only indirectly to development assistance.

The food aid program has developed conflicting goals,

suggesting that priorities need to be clarified. Despite the

expressed concern for alleviating malnutrition in the LDCs, and

the considerable progress that has been made in directing assistance to the poorer countries, the size of the food aid program

depends on U.S. agricultural stocks. When U.S. stocks are low,

resulting from poor crop yields or high U.S. domestic demand, the

amount available for shipment to LDCs may be limited. Although a

floor has been established for the volume of agricultural stocks,

it is limited by appropriations and the availability of commodities. Establishment of a buffer stock could ease this problem.

In shaping the future level and form of U.S. bilateral

aid programs, the Congress faces a distinct choice between conflicting goals. It can continue the recent trend, in which the

use of aid to support other U.S. foreign and domestic policies has

been the principal concern, with the result that the total aid

36
effort has been concentrated on a relatively few countries. This

would mean continued growth of the ESF, possibly at the expense of

food aid and development assistance. Alternatively, the Congress

could pursue the goals expressed in the New Directions legislation

of promoting equitable self-sustaining growth in the LDCs. In

that case, the development assistance programs would need to be

expanded, and food aid more clearly separated from the problems of

managing the agricultural marketplace.

37

CHAPTER III. MULTILATERAL DEVELOPMENT BANKS

In addition to providing bilateral assistance, the United

States participates in the multilateral development banks (MDBs),

formed by international agreement to operate as financial intermediaries to facilitate economic growth of the LDCs. if The MDBs

lend to the LDCs for development projects. Their funds originate

from paid-in capital of member nations and from funds raised in

the private markets, backed by members' pledges of callable

capital.

The Congress has expressed concern about the growth in

U.S. contributions to the MDBs and has questioned the extent to

which funds should be channeled through such organizations rather

than through bilateral operations. If Administration plans are

approved by the Congress, U.S. contributions to the MDBs will be

substantially higher in the 1980s than they were in the 1970s.

This chapter reviews the multilateral aid programs to

provide a background against which the future role of U.S. multilateral aid contributions can be assessed. 2j It considers three

issues of interest to the Congress:

o What should be the U.S. share in contributions to the

MDBs?

o How should MDB contributions be treated in the federal

budget?

I/ The multilateral development banks are: the World Bank

Group's International Bank for Reconstruction and Development

(IBRD), International Development Association (IDA), and

International Finance Corporation (IFC); the Inter-American

Development Bank (IDB); the Asian Development Bank (ADB); and

the African Development Fund (AfDF), the concessional lending

affiliate of the African Development Bank (AfDB).

.27 The United States also extends voluntary support, beyond the

assessed contributions, to various international organizations, detailed in Appendix III-A.

39

66-811 0 - 80 -
What balance should the United States maintain between

multilateral and bilateral assistance?

OPERATIONS OF THE MULTILATERAL DEVELOPMENT BANKS

The MDBs make two kinds of loans—"soft" and "hard." Soft

loans are extended at highly concessional interest rates; hard

loans, at somewhat less concessional rates. _3/ Most hard loans go

to middle- and upper-income developing countries, while soft loans

are extended primarily to low-income countries (Table 10). kj

Thirty-six percent of the MDB loans made in 1978 were soft. 5/

The World Bank Group, by far the largest among the MDBs,

made more than three-quarters of all MDB commitments in 1978,

as shown in Appendix III-B.

Rates charged by the MDBs in 1979 for soft loans ranged from

0.75 to 2 percent per annum with a 10-year grace period; rates for

hard loans ranged from 7.7 to 8 percent with grace periods of 2 to

7 years (see Appendix III-C). By comparison, private loans in

January 1980 ranged from 14.5 to 15.75 percent, plus management

fees averaging 0.5 percent of the total amount of the loan.

WHAT SHOULD BE THE U.S. SHARE OF CONTRIBUTIONS TO THE MDBs?

Each MDB is governed by a board of executive directors.

The United States and other major donors each have their own

3/ The terms "soft" and "hard" relate only to the interest rate

charged.

47 Foreign Assistance and Related Programs Appropriations for

1980, Hearings before the Subcommittee on Foreign Operations,

House Committee on Appropriations, 96:1 (1979), Part 2,

p. 53. The MDBs attempt to graduate from their programs

countries above $2,000 annual per capita income, although the

specific policies vary among the MDBs. The movement from soft

to hard loans is also a function of per capita income level

($550 in 1976 dollars) and of ability to borrow elsewhere.

^j Net figures. See Organization for Economic Cooperation and

Development, Development Cooperation: 1979 Review (November

1979), p. 238.

40
TABLE 10. DISTRIBUTION OF MDB LOANS TO DEVELOPING COUNTRIES THROUGH JUNE 30, 1978 (Percentages)

Countries

by Income

Group a/

Low-Income

Middle-Income

High-Income

Mo re- Ad vane ed

Mediterranean

countries and

centrally planned

economies

World Bank Group

IBRD bl

18

49

19

15

100

SOURCE: Foreign Assistance and

IDA c/ IFC

86 14

13 36

29

1 21

100 100

Inter-American

Development Bank

Ordinary and Fund

Interregional for Special

Capital b/ Operations d/

2

43 71

57 27

—

100 100

Related Programs Appropriations for 1980,

Asian Development Bank

Asian African

Ordinary Develop- Development

Capital

26

70

4

e/

100

Hearings

b/ ment Fund c/ Fund c/

89 86

6 14

e/

5

100 100

before the Subcommittee on

Foreign Operations, House Committee on Appropriations, 96:1 (1979), Part 2, p. 38. Calculations based

on nominal dollars. Loan authorizations by individual MDBs from 1962 to 1979 are detailed in Appendix

III-B.

NOTE: Detail may not add to totals because of rounding.

a./ Based on 1976 GNP per capita in 1976 U.S. dollars.

Low-income: - $280 or less

Middle-income: $281-$!,135

High-income: $1,136-$2,700

b/ "Hard" loans.

c./ "Soft" loans.

d./ "Hard" and "soft" loans.

£' Less than 1 percent.
executive director, and smaller donors share executive directors, bj After an initial distribution of membership votes, the

voting power of each director is set in direct relation to the

subscription provided by the country he represents. 7/ U.S. governmental directives on foreign assistance are relayed to the U.S.

directors; the extent to which such directives are reflected in

decisions by the boards is a function both of the issue to be

decided and of the voting power of the U.S. director. 8/

The United States was the main donor at the establishment of

each bank, but has since chosen to reduce its share of contributions to the MDBs. This represents a deliberate U.S. policy to

spread the burden of support. 9/

The Congress has sometimes appropriated less than the Executive Branch has pledged for U.S. MDB capital subscriptions.

These appropriations decisions have had a serious effect on

U.S. voting power in the MDBs. In the World Bank, for example,

67 The United States shares a director in the AfDF.

TJ No country has an automatic veto over bank board decisions,

although the United States has sufficient votes in the IDB

to block the two-thirds majority necessary to approve concessional loans from the Fund for Special Operations.

87 The influence of the United States extends beyond its calculated voting share. Frequently, the United States takes the

lead in advocating a position in which it is then joined by

other members. Examples of effective U.S. influence in the

MDBs are the adoption by the World Bank of a major program of

energy lending, a sectoral shift toward agriculture and rural

development, adoption of a formula relating interest charges

to the cost of borrowing, and creation of an independent

Operations Evaluation Department. (See statement by C. Fred

Bergsten, Assistant Secretary of the Treasury for International Affairs, in Foreign Assistance and Related Programs

Appropriations for 1980, Hearings, Part 6, pp. 455-456.)

_9/ At the inception of the Asian Development Bank, the United

States and Japan provided equal subscriptions; the U.S. role

in the ADB has, however, diminished over time. The United

States plans to join the African Development Bank (AfDB)

in fiscal year 1980, and will be the leading nonregional

subscriber.

42
the U.S. share of subscriptions has fallen far below the 24

percent level recommended in the fiscal year 1979 foreign assistance appropriations act (Table 11). As a result, U.S. voting

strength in the Bank is now just over 20 percent and is in

danger of falling below the 20 percent level necessary to assure

protection of U.S. veto power over charter amendments. The

charter of the Inter-American Development Bank provides that the

United States maintain 34.5 percent of the total voting power;

shortfalls in U.S. capital subscriptions may therefore prevent

other members from subscribing their anticipated shares of capital

stock. For the Asian Development Bank, the current U.S. capital

share (9.9 percent) is appreciably less than the parity with Japan

(14.4 percent) originally envisaged when the Bank was established

in 1966. Indeed, the Congress cut the Administration's requested

authorization for the IDB, ADF, and AfDF for fiscal years 1980-

1983—the first time in 35 years that authorization legislation

for the MDBs has been subject to Congressional reduction. 10/

Trigger Effect of the U.S. Contributions

Because of Congressional reluctance to approve the capital

replenishment commitments made by the Executive Branch (as well as

some problems involving contributions from other nations), recent

replenishment arrangements for several MDBs ll/ contain measures

to preserve negotiated cost-sharing arrangements. Thus, the

Fifth Replenishment of the IDA Resolution (IDA-V) provides that,

unless unqualified commitments of "at least 80 percent of the

second installment are made, IDA will not enter into new credits,

disbursements for which would be drawn from the second installment

of donors1 contributions." 12/ A trigger mechanism thus operates,

10/ Funds for the Inter-American Development Bank were reduced by

10 percent, and for the Asian Development Bank by 15 percent.

117 International Development Association, African Development

Fund, Inter-American Development Bank (Fund for Special

Operations), and Asian Development Bank.

127 U.S. Department of the Treasury, "Trigger Arrangements for

Replenishments of the Soft Fund Windows of the Multilateral

Banks" (August 3, 1979; processed), p. 1. Agreement for the

Fifth Replenishment was for a country's commitment to be

unqualified in the total amount, or unqualified as to

the first installment but qualified (that is, subject to

appropriation) for the second and third installments.

43
TABLE 11. U.S. CONTRIBUTIONS TO THE MULTILATERAL DEVELOPMENT

BANKS (Percentages)

Sense of the Congress

Provision on

Original Contributions

Share (1979)

World Bank Group

IBRD

IDA

IFC

African Development Bank

Special Fund

Asian Development Bank

Ordinary capital

Asian Development Fund

Inter-American Development Bank

Ordinary capital

Fund for Special Operations

34.0

42.3

32.0

29.0

20.0

29.0

41.0

69.0

24.0

25.0

23.0

18.0

16.3

22.2

34.5

40.0

SOURCES: Jonathan E. Sanford, Multilateral Development Banks;

Can the U.S. Limit the Use of Its Contributions? Congressional Research Service, Issue Brief 79114 (November 7, 1979), p. 4; Public Law 95-481, Foreign Assistance and Related Programs Appropriations Act, 1979.

cutting off IDA lending activities, and the United States, by

virtue of the size of its contributions, is a significant factor

in activating the trigger. IDA-V could not have become effective

without U.S. participation, since the U.S. share amounted to

32 percent of the total replenishment. 13/

13/ The Asian Development Fund provides an example of the trigger

mechanism at work. Replenishment for fiscal years 1980-1983

is arranged in four equal annual tranches; loans cannot be

made using contributions to the second tranche until all contributions to the first tranche have been received. The delay in authorization of the U.S. contribution for fiscal year

1980 has forced the ADF into making only conditional loans.

44
Conditionality

At times, the Congress has tried to influence the use of

U.S. contributions to the MDBs by attaching restrictions to their

appropriations. For example, the House amended the fiscal year

1980 appropriation for the International Development Association

with the provision that "none of the funds appropriated or otherwise made available by this paragraph shall be obligated or

expended to finance any assistance or reparations to the Socialist

Republic of Vietnam." 14/

To accept funds subject to restrictions would indirectly

violate several provisions of the banks' charters. (The charters

do not specifically address this problem.) 15/ Acceptance of

funds that have restrictions on their use has been deemed inconsistent with the charters of the MDBs by the general counsels of

the World Bank, the IDB, and the ADB, as well as by the U.S.

Treasury, the U.S. Comptroller General, and the American Bar

Association. In 1975, the IDB refused to accept a contribution

from the United States until a restriction on its use had been

removed. 16/

HOW SHOULD MDB CONTRIBUTIONS BE TREATED IN THE BUDGET?

Callable and Paid-in Capital

U.S. contributions to MDBs, in terms of outlays from the U.S.

Treasury, can be separated into two components: "paid-in" and

"callable" capital. Paid-in capital consists of funds authorized

and appropriated by the Congress that are actually disbursed to

the MDBs. The bulk of these funds are used to make loans, at

rates well below those prevailing in the international market, to

the poorest developing countries. Callable capital, while subject

to similar Congressional authorization and appropriation, is not

14/ See House debate on H.R. 4473, Foreign Assistance and

Related Programs Appropriations Act, Fiscal Year 1980, in

Congressional Record (July 18, 1979), p. H6157.

15/ Jonathan E. Sanford, Multilateral Development Banks; Can the

U.S. Limit Use of Its Contributions? Congressional Research

Service, Issue Brief 79114 (November 7, 1979), p. 2.

167 Ibid., pp. 2, 4.

45
disbursed to the MDBs by the U.S. Treasury. These funds, along

with similar obligations on the part of other donor countries,

provide indirect guarantees for the bonds that the MDBs issue to

raise capital in world financial markets. The proceeds from bond

sales are lent by the MDBs to middle-income LDCs at interest rates

that reflect the cost of MDB borrowing. Funds would be called up

from the donor countries only if an MDB was for some reason unable

to meet the amortization and interest payments on its outstanding

bonds.

About half of the budget authority requests for MDBs between

1970 and 1979 were for callable capital (Table 12). In the period

1980-1985, the split between callable and paid-in capital will

remain about the same, although average annual requests for

budget authority will be more than double those in the 1970s.

In the fiscal year 1981 budget, the President has introduced

revisions making callable capital subject to program limitations

in appropriations acts, but not to appropriation. Whether callable capital should be appropriated or not is an issue that has

been addressed repeatedly by the Congress, the Administration, and

the MDBs • 17/ The strongest argument in favor of removing callable capital from the budget is that it has never resulted in

actual disbursements from the Treasury. (The United States now

has a total of $11.5 billion in callable capital that has been

appropriated and would be available in case of MDB defaults.) 18/

It should be noted that most other donors treat callable capital

as an off-budget loan guarantee, so that removing it from the U.S.

budget would in fact bring the United States into conformance with

the practice of other donors. 19/

17/ The House Committee on the Budget implicitly, and the Senate

Committee on the Budget explicitly, accepted this change in

their reports on the First Concurrent Resolution on the

Budget for Fiscal Year 1981.

18/ In the event of default, the callable capital of each government could be drawn upon, on a pro-rata basis, with liability

limited by the uncalled portion of the subscription.

19/ Changing the way callable capital is treated would not affect

comparisons of the percentage of GNP allocated by the United

States and other countries for foreign assistance to the

developing countries, since such comparisons are based on

funds disbursed.

46
TABLE 12. MDB APPROPRIATIONS (1970-1979) AND ANTICIPATED BUDGET

AUTHORITY REQUESTS (1980-1985), BY FISCAL YEAR (Billions of dollars) a/

Paid-in Capital Callable Capital Total Request

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980 b/

1981 b/

1982

1983

1984

1985

0.5

0.3

0.5

0.6

1.1

0.6

0.6

0.8

1.1

1.6

1.6

1.7

1.6

1.6

2.2

2.2

0.2

0.2

0.9

0.2

1.2

0.1

0.4

0.8

0.9

1.0

1.6

2.3

2.3

2.5

2.5

0.7

0.5

1.4

0.7

2.2

0.6

0.7

1.1

1.9

2.5

2.7

3.3

4.0

4.0

4.7

4.7

SOURCES: U.S . Participation in the Multilateral Development

Banks, Senate Committee on Governmental Affairs, Committee Print, 96:1 (April 1979), p. 13; information

provided to CBO by the U.S. Department of the Treasury,

November 1979.

a/ Estimates based on negotiations where completed, and other-

~~ wise on assumption of continuation of the rate of growth of

previous replenishments. If the proposal to treat callable

capital as a program limitation is accepted, no budget

authority would be required for fiscal years 1981 to 1985.

b/ President's revised budget request, March 1980.

Although callable capital would no longer be included in

the budget, other limits may affec t its authorization, since

callable capital is a form of loan guarantee. While it is

not explicitly included in the new credit budget, it may be

subject to the credit budget ceilings that the Administration

has proposed for fiscal year 1981. The implications of these

restrictions for callable capital are unclear.

47

66-811 0-80- 9
Changes in the way callable capital is dealt with in the

appropriations process may have implications for the passage of

the annual foreign aid appropriations bill. Congressional appropriations of callable capital give the semblance of a larger

contribution to the MDBs than is actually the case, and increase

the size of the federal budget. Changing the treatment of

callable capital in the foreign aid appropriations bill would

decrease the total appropriation, which might serve to accelerate

enactment of the bill. More rapid enactment might, however, lead

to less detailed Congressional debate of issues relating to MDB

operations.

Since callable capital is an indirect guarantee of MDB

borrowing, changing the way in which these guarantees are provided

could make purchasers of MDB bonds less confident of their creditworthiness, forcing the MDBs to pay higher interest on their

loans. This increase in the cost of MDB borrowing could raise

the banks' rates of interest on their loans to LDCs, resulting

in a general reduction in the volume, or an increase in the

cost, of the funds that flow to LDCs. The change in MDB borrowing

costs is likely to be quite small, however, since most other

donors already treat callable capital as an unappropriated

guarantee.

Arrearages

Accumulating gradually through the 1970s, U.S. arrearages

in contributions to the MDBs totaled $1.3 billion by 1979. 20/ An

arrearage is the difference between the funds authorized by the

Congress for contributions to the MDBs and the amount actually

appropriated. Of total U.S. arrearages through 1979, paid-in

capital—the amount actually disbursed by the U.S. Treasury—

amounted to $373 million.

If requests for callable capital are more acceptable to the

Congress as program limitations than as budget authority, this may

improve the degree of agreement between the Congress and the

Executive Branch on appropriate levels for callable capital in

20/ International Bank for Reconstruction and Development, $863

million; International Development Association, $6 million;

Inter-American Development Bank, $249 million; Asian Development Bank, $155 million; and African Development Fund, $17

million.

48
the future. Without such agreement, the large size of future

requests, as shown in Table 12, suggests that the arrearage

problem could become much more serious in the 1980s than it was

in the 1970s.

MULTILATERAL VERSUS BILATERAL ASSISTANCE

In donating funds to the multilateral agencies, the United

States relinquishes direct control over their disbursement. Does

this result in a regional or sectoral pattern of aid that differs from that of U.S. bilateral assistance? If so, are such

differences supportive of U.S. foreign policy objectives? Apart

from these differences, what other gains or losses accrue to the

United States from giving aid through multilateral rather than

bilateral channels?

U.S. and MDB Regional Expenditures

In 1979, 64 percent of U.S. bilateral aid went to the Near

East and South Asia, 11 percent to Latin America, and 15 percent

to Africa. The MDBs channeled 23 percent of their aid to the

Near East and South Asia, 34 percent to Latin America, and 16

percent to Africa. 21/ These differences reflect the strong

interest of the United States in Asia and the Middle East stemming from its traditional ties and security interests in those

regions. As shown in Table 13, countries such as Israel, Jordan,

and South Vietnam have received major amounts of U.S. bilateral

aid but only limited multilateral assistance. In contrast,

Argentina, Mexico, and Venezuela have received little U.S. aid but

major amounts of multilateral funds. To some extent, the divergence is by design. The World Bank, for example, takes into

account the receipts of a country from other official development

sources in making its own funding decisions.

To the extent that the United States is concerned with

economic development on a worldwide scale, the fact that the MDBs

cover the regions more evenly allows the United States freedom

21/ U.S. bilateral commitments totaled $4.7 billion in 1978, $0.9

billion of which was allocated on an interregional basis and

is excluded from these calculations. (See Agency for

International Development, U.S. Overseas Loans and Grants,

1945 to 1979.)

49
TABLE 13. MAJOR RECIPIENTS OF U.S. BILATERAL AID CONTRASTED WITH

MAJOR RECIPIENTS OF MULTILATERAL AID, 1962-1978 a/

Major Recipients of Major Recipients of

U.S. Bilateral Aid but Multilateral Aid but

Not of Multilateral Aid Not of U.S. Bilateral Aid

Cambodia Algeria

Israel Argentina

Jordan Kenya

Laos Malaysia

South Vietnam Mexico

Venezuela

a/ The annual distribution of funds from the MDBs to major

recipients in 1962-1979 is shown in Appendix III-D.

to distribute its bilateral aid funds more directly in line with

its foreign policy and trade objectives. In addition, there are

some countries that the United States, for political reasons,

does not wish to aid directly, although it may have a humanitarian interest in assisting their populations. The existence of

a multilateral lending organization can accommodate these otherwise conflicting objectives.

U.S. Development Assistance by Sector Compared with MDB Expenditures

U.S. development assistance is aimed specifically at efforts

to help the poorest people in recipient countries. Agricultural

programs of low capital intensity have received special attention,

as has population planning. In fiscal year 1979, these two

sectors absorbed 70 percent of AID sectoral expenditures.

Although an increasing proportion of MDB funding goes to

agriculture, little is directed specifically to population planning (Table 14). Moreover, the MDBs channel around one-third of

their funds into energy, power, and industry. This behavior is

50
TABLE 14. MDB LENDING BY SECTOR, FISCAL YEAR 1978 (Percentages)

World U.S.

Bank Inter-American Asian Functional

and Development Development Development

IDA Bank Bank Assistance

Agriculture a/

Population

Planning

Health b/

Education and

Human Resources

Energy and Power

Industry

Other d/

25

1

10

5

15

16

28

100

32

-—

12

22

14 c/

20

100

33

-

9

6

26

2

24

100

54

16

12

9

•

-

10

100

Billions of

Dollars 10.0 2.2 1.3 1.1

SOURCES: World Bank, 1979 Annual Report, p. 30; Agency for

International Development, Congressional Presentation,

Fiscal Year 1981, Main Volume, p. 116; information

provided to CBO by U.S. Department of the Treasury.

a/ Includes food and nutrition.

b/ Includes water and sewage.

c_/ Industry, mining, and tourism.

d_/ Includes technical assistance, tourism, urbanization, transportation, and communications.

taken into account by the development assistance plans of the

United States, which implicitly assume that infrastructure projects will be handled through multilateral organizations.

MDB lending is now directed primarily at the poorer people in

each country, and at the provision of basic human needs. This

resulted from a policy shift in the 1970s, supported by the United

51
States. In practice, this means that MDB projects are reviewed in

light of who the beneficiaries are, what needs are served, and how

the benefits are transferred. 22/ To the extent that these

reviews are effective, MDB lending is in line with the expressed

humanitarian concerns of the United States.

Comparative Size of Projects

Larger pools of funds enable the MDBs to finance larger

projects than AID. Of 88 agricultural projects supported by the

World Bank or IDA in fiscal year 1978, eight represented commitments of $100 million or more. 23/ In contrast, no country

received as much as $100 million in development assistance from

AID in that year.

On the other hand, the smaller AID operations enable the

United States to introduce experimental programs and technical

innovations that the MDBs may hesitate to undertake. In some

instances, AID funds act as "seed money," financing the first

step in a major program that will later be assumed by the host

government or an MDB. 24/

Effects on the U.S. Balance of Payments

Calculations of the net impact of the MDBs on the U.S.

balance of payments indicate that at least as much funding

22/ Recent projects include provision of sanitation and social

services in a slum of Manila, a drainage and bilharzia

control program in Egypt, rural and secondary education

projects in Upper Volta, and provision of infrastructure,

including producer credit and technical assistance, to

rural areas of Mexico.

23/ World Bank, 1979 Annual Report, p. 9.

24/ For example, the Basic Village Education Project in Guatemala

was an experimental program of nonformal instruction in

agricultural practices for subsistence farmers that did not

require literacy for participation. After being run by AID

for nearly three years, the program was picked up by the

Guatemalan government and is now being copied in Bolivia.

The AID funding from inception to completion was $1.7

million.

52
returns to the United States as was originally subscribed. 25/

Nonetheless, it should be stressed that this does not diminish

the real resource transfer involved in U.S. contributions to the

MDBs: the net effect is the provision of resources instead of the

provision of money.

Moreover, MDB-financed projects appear to purchase proportionately more goods and services from the United States than from

other countries. The share of LDC purchases from the United

States related to MDB loans averaged 19 percent over three recent

years, compared with the U.S. share of world exports to the

non-OPEC LDCs of 16 percent. 26/

CONCLUSIONS

What should be the U.S. share in contributions to the

MDBs? The MDBs and the U.S. bilateral agencies support different

activities in different regions, but their work is complementary.

In part, this stems from the leadership role the United States has

exercised in the MDBs. Such leadership will be more difficult to

maintain if the United States reduces significantly its role in

the banks. Recent delays in authorizing replenishments suggest

25/ "Through the contributions of other MDB donors . . . MDB

loans result in expenditures on U.S. goods and services well

in excess of U.S. contributions to the banks. From the

inception of the banks through 1978, the cumulative current

account surplus for the United States directly attributable

to the MDB activities . . . has been $11 billion. Cumulative

U.S. paid-in contributions to the banks, by comparison, totalled $7 billion." See statement of Hon. G. William Miller,

Secretary of the Treasury, in International Development Association Sixth Replenishment and African Development Bank

Membership, Hearings before the Subcommittee on International

Development Institutions and Finance, House Committee on

Banking, Finance, and Urban Affairs, 96:2 (March 1980),

p. 31.

26/ Years are 1976 to 1978, based on data from International

Monetary Fund, Direction of Trade; Organization for Economic

Cooperation and Development, Development Cooperation; 1979

Review (November 1979), p. 238; and information provided to

CBO by the U.S. Department of the Treasury.

53
that the Congress is having second thoughts about its 1979 guidance on what these shares should be.

How should MDB contributions be treated in the budget? The

amount of U.S. funds actually going to the MDBs is obscured by the

division of MDB resources into callable and paid-in capital, for

which a modified budgetary treatment has been proposed for fiscal

year 1981. The President's proposal would make callable capital

subject to a program limitation rather than being appropriated in

full. The treatment of callable capital would then be more

consistent with that of domestic loan guarantees in the budget

process.

The balance to be struck between multilateral and bilateral

aid ultimately involves a political decision on the part of the

Congress. Although in its participation in multilateral aid the

United States loses direct control over its funds, it exerts

influence within the MDBs based on the size of its contributions. The existence of the multilateral channel provides the

United States with a mechanism for implementing policies that

complement its bilateral activities, and also for pursuing longrun objectives that might otherwise appear to be in conflict with

its immediate foreign policy goals.

To the extent that the MDBs encourage development strategies

that are supported by the United States but for which the United

States provides only a fraction of the funding, the continuation and strengthening of their operations is in line with U.S.

interests. To the extent that they are seen as acting in a manner

inconsistent with U.S. objectives, or as being a less efficient

means of furthering U.S. interests than the direct application of

bilateral funds, U.S. support is likely to wane. This will be a

crucial issue during the next decade, since the Administration is

presently seeking a substantial increase in U.S. contributions

during the 1980s over the level that prevailed in the 1970s.

54
CHAPTER IV. PRIVATE MARKETS AS AN ALTERNATIVE SOURCE OF FUNDS

The developing countries have made extensive use of private

capital markets as a source of foreign exchange. In fact, loans

from the private sector to the LDCs have increased over the past

decade. In 1972, private creditors accounted for one-third of the

outstanding debt of the non-oil developing countries. By 1978,

private sources accounted for one-half. JL/

To the extent that the LDCs can borrow in the private markets, their need for bilateral and multilateral aid may be

reduced. Chapters II and III discussed the efforts of the aid

agencies. This chapter concentrates on the present and future

role of private lenders.

The oil price rise of 1973-1974, coupled with a decline

in prices of commodities exported by many LDCs and the subsequent

worldwide recession, stimulated borrowing by the developing

countries in the international capital market. 2/ Since then,

there has been an explosion of commercial bank lending to the

more advanced LDCs, led by banks in the United States and followed

by banks in Germany, Japan, and the United Kingdom. 3/ This was

I/ World Bank, World Debt Tables, Vol. I (1979), Tables 1-A, 1-B,

and 1-E, pp. 18-21, 26-27. A distinction is made between loan

commitments and debt disbursed. Disbursements represent

drawings on loan commitments and are shown in the year in

which the drawing takes place. These data refer to disbursed

debt, total outstanding.

2J Helen Hughes, "Debt and Development: The Role of Foreign

Capital in Economic Growth," World Development (February

1979), p. 105.

3/ Although the developing countries long had access to the

private markets, borrowing was at a relatively low level

before 1974. Such borrowing as occurred generally reflected

a preference for avoiding the conditionality attached to

official credits rather than a lack of resources from bilateral and multilateral agencies. See M.S. Wionczek,

55
accompanied by a decline in interest rates and an increase in loan

maturities. 4/

The recent rise in oil prices has increased the LDCs1 need to

borrow. The estimated current account deficit of the non-oilexporting LDCs was $46 billion at the end of 1979 and is projected

to rise to around $80 billion in 1980. 5/ . Can the private markets

substitute for official aid, or at least reduce the demand for

official funds? This chapter addresses the following elements of

this question:

o On what terms can the LDCs borrow in the private markets?

Are these likely to change?

o Which countries borrow most in the private markets? Are

these countries also large borrowers from the multilateral

development banks?

o To what extent might "cofinancing" of loans encourage

additional lending by the private sector?

TERMS FOR LENDING

Until recently, loans from the private sector to the developing countries were extended for considerably shorter periods than

"Possible Solutions to the External Public Debt Problem of the

Developing Countries: Final Report," World Development

(February 1979), p. 217.

4/ As a result, the share of commercial bank lending to non-oil

LDCs by U.S. banks (including foreign branches) fell from 54

percent in December 1975 to 38 percent in June 1979. (See

Rodney H. Mills, Jr., "U.S. Banks are Losing their Share of

the Market," Euromoney (February 1980), p. 52.) Lending to

the LDCs is still, however, a major part of U.S. banking. The

10 largest U.S. multinational banks reported in 1979 that 43

percent of their earnings came from international business;

lending to non-OPEC countries comprised approximately onethird of their international lending. See Salomon Brothers,

Lending to LDCs; Mounting Problems (April 2, 1980).

5/ World Financial Markets (December 1979), p. 3.

56
were loans to industrialized countries. The difference narrowed,

however, as lenders competed; the differential in rates charged

also narrowed. The spread on lending to LDCs shrank from at least

2 percent over the London Interbank Offer Rate (LIBOR) in 1974 to

barely 0.75 percent in 1979. 6/ During the past year, however,

spreads have widened on loans to developing countries. Concern

has increased as to the ability of the borrowers to handle their

rising debt in the face of new oil price increases and a world

economic recession.

WHO BORROWS IN THE PRIVATE MARKET?

The richer countries have been the major borrowers from

private sources (Table 15). Conversely, the poorer countries have

borrowed little from the private markets, depending instead on

official loans. There has been remarkably little change in the

distribution of private and public lending by LDC income class

between 1973 and 1978, although the dollar totals have tripled.

Private lending is concentrated to a striking degree upon a

small number of countries. These countries tend to have large

economies and, by their very size, tend to dominate the totals.

At the end of 1978, one-half of all public debt owed to private

lenders had been loaned to three middle-income countries—Brazil,

Mexico, and South Korea (see Table 16).

In contrast, official lending is distributed more evenly.

In 1978, 23 countries received 75 percent of official loans

disbursed to non-oil-exporting LDCs, whereas 9 countries received

81 percent of private funds.

It is notable that certain countries (Mexico, Brazil,

and South Korea, for example) are not only major borrowers of

private funds but also receive large amounts of official funds.

The terms they receive from official lenders are generally more

attractive, as shown by the average interest rates on commitments

in Table 16. 7/

6/ The spread is the amount of the increase in interest rate over

~~ LIBOR charged by the lender—in effect, the profit margin.

TJ Official loans are also for longer periods and at fixed

rates, compared to the generally shorter periods at floating

rates for private loans.

57
TABLE 15. PUBLIC DEBT OUTSTANDING (DISBURSED) OF NON-OIL DEVELOPING COUNTRIES, BY SOURCE, 1973 AND 1978 (Percentages)

Country

Income

Group a/

High

Upper Middle

Intermediate

Lower Middle

Low

Total

11

18

31

9

31

1973

Official

8

12

28

9

43

Private

17

28

38

7

10

Total

10

20

35

10

24

1978

Official

8

11

28

12

41

Private

12

30

43

9

5

Total 100 100 100 100 100 100

Value

(billions of

dollars) 74 48 26 210 109 101

SOURCE: World Bank, World Debt Tables, Vol. I (1979), Tables I-A,

1-B, 1-E, pp. 18-21, 26-27.

NOTE: Detail may not add to totals because of rounding.

a/ Definition of income groups and listing of countries is given

in Appendix I-A.

PRIVATE LENDING AND THE ROLE OF COFINANCING

Official aid may play a complementary role in encouraging

private lending: it provides an inflow of foreign exchange,

which indicates a continuation of investment in development. From

a commercial bank's viewpoint, this may be one of the factors

considered in determining a country's ability to make repayment.

Even countries that have good access to the private markets

are eager to remain borrowers from the MDBs, for several reasons:

the ongoing economic dialogue that ensues; the reassurance this

provides to commercial lenders; and the technical assistance MDBs

can give with "institution building."

58
TABLE 16. NON-OIL-EXPORTING DEVELOPING COUNTRIES LISTED BY AMOUNT OF PUBLIC DEBT OWED

TO PRIVATE AND OFFICIAL LENDERS, 1978 (Billions of dollars and percentage

interest rates)

Owed to Private Lenders Owed to Official Lenders

Country

Amount

Disbursed

Average

Interest Rate

on Loan

Commitments Country

Amount

Disbursed

Average

Interest Rate

on Loan

Commitments

Brazil

Mexico

South Korea

Spain

Argentina

Israel

Peru

Chile

Morocco

Greece

Philippines

Ivory Coast

All Others

Total

22.0

21.3

6.8

6.0

4.6

3.6

2.8

2.5

2.5

2.3

2.2

2.1

22.5

101.2

10.1

8.3

9.8

9.6

10.2

5.6

12.7

11.1

9.3

10.2

8.8

8.9

9.6

India

Egypt

Pakistan

Israel

Turkey

Brazil

South Korea

Mexico

Yugoslavia

Bangladesh

Peru

Morocco

Colombia

All Others

15.1

8.5

7.2

5.6

5.4

5.2

5.2

3.5

3.0

2.6

2.5

2.1

2.0

40.9

108.8

1.8

2.3

2.0

4.2

6.9

7.5

7.4

7.8

7.7

1.4

6.1

4.5

7.6

5.0

SOURCE: World Bank, World Debt Tables, Vol.

12, pp. 18-21, 26-27, 195-211.

I (December 1979), Tables 1-A, 1-B, 1-E, and
The role of the International Monetary Fund is of particular

interest to commercial bankers. If a country has negotiated a

standby agreement %J with the IMF, and has thus implicitly had

its economic strategy approved, this provides a measure of confidence for the commercial banks, even if no IMF funds are drawn.

Thus, among noncommercial lenders, the IMF has played a significant role even though it was not a net lender in several recent

years. 9J

The World Bank and the regional development banks have

recently encouraged "cofinaneing," in which they join with the

private banks in providing funds to developing countries. 1Q/

A borrower country is considered less likely to default or delay

payments if to do so would jeopardize its credit rating with a

multinational organization. This arrangement also gives the

private banks access to detailed country information through

the international organization.

As yet, private banks have not expressed great enthusiasm for

cofinancing, although such arrangements are increasing. Commercial bankers argue that cofinancing entails increased administrative costs for the private banks, while it may not achieve

much reduction in risk, ll/ Access to information is, however,

of great interest to private banks. Their participation in

cofinanced projects has tended to be focused on the richer LDCs,

which offer more potential for additional business. The private

sector contributed $550 million to World Bank cofinanced projects

8/ Agreements that members may draw upon IMF credits, usually

of one year in duration.

9J International Monetary Fund, International Financial Statistics (February 1977), pp. 12-13, and (February 1978), pp.

9-10.

10/ Jessica P. Einhorn, "Cooperation Between Public and Private

Lenders to the Third World," The World Economy (May 1979),

p. 36.

ll/ As one banker put it: "The only time one needs the crossdefault clauses is when there is trouble; and if there

is trouble, it's better to be in alone and able to react

quickly."

60
in fiscal year 1979, as compared with a total of $22 billion in

development assistance from official lenders in 1978. 12/

The Agency for International Development is currently

reviewing forms of cofinancing that could be directed toward

the LDCs. Proposals include U.S. government-guaranteed loans by

the private sector for use in AID projects, and a nonguaranteed

program of cofinancing by AID and the private sector. 13/ Loan

guarantees would be a new departure in cofinancing; they would

also be a new departure for AID, requiring additional legislation. Opportunities for riskless overseas investment would

presumably be highly attractive to private lenders and would

channel funds into countries and sectors in which private lenders

do not currently invest. The net result for the U.S. government

would be an off-budget increase in AID funds. 14/

12/ Organization for Economic Cooperation and Development,

Development Cooperation: 1978 Review (November 1979), p.

199,and information provided to CBO by the World Bank,

October 1979. The OPEC countries have found cofinancing a

useful vehicle for distributing funds to non-oil LDCs at a

time when they have relatively few mechanisms for project

identification and appraisal. In fiscal year 1978, OPEC

agencies (multilateral and bilateral) were involved in 25

cofinancing projects with the World Bank, contributing $523

million; in fiscal year 1979, however, they reduced their

participation to 15 projects at $267 million. By comparison, non-OPEC bilateral agencies (including U.S. AID) were

active in 48 World Bank cofinanced projects in fiscal year

1979, contributing $1.15 billion, and non-OPEC multilateral

agencies were involved in 55 projects, providing $585

million.

13/ Peat, Marwick, Mitchell & Co., "Selection and Development of

a Private Sector Financing Instrument," prepared for the

Agency for International Development under Contract No.

AID-otr-C-1499 W.O. No. 17 (September 1979). AID has been

successful with a similar program, the Housing Guarantee

Program, with its current ceiling of $1.5 billion.

14/ Other official programs that involve coordination with

private funding in developing countries are the International

Finance Corporation (IFC), an affiliate of the World Bank

61
THE FUTURE ROLE OF PRIVATE LENDING

The debt servicing that accompanies both private and public

loans may impose a significant burden. For example, Brazil paid

66 percent of its export earnings for payments of principal and

interest in 1979 (on all loans, including those from multilateral

development banks). 15/ The banking community is concerned over

the ability of the LDCs to carry their current debt, and over the

concomitant risks for the banks that have lent to them. Observers

doubt that the rate of growth in lending to the LDCs in the next

five years will be as high as it was in the past five.

The World Bank nonetheless anticipates that private lending

will continue to play an important part in the supply of credit to

developing countries. In 1990, according to a World Bank projection, the middle-income LDCs will obtain three-quarters of their

external assistance from private loans financed at market terms.

Low-income LDCs, however, will obtain only one-tenth of their

needs trom such sources (Table 17).

The World Bankfs projection is based on assumptions that

may prove optimistic. It assumes modest rates of economic growth

for the LDCs and continued growth in private lending of about

4 percent per year. 16/ Moreover, the recent rise in oil prices

that supports private enterprises, selling off its investments as the businesses develop; the U.S. Overseas Private

Investment Corporation, which facilitates American investment

in LDCs and is financed on a self-sustaining basis; and the

U.S. Export-Import Bank, which assists in the financing of

U.S. exports and is under a separate subfunction of the

budget.

15/ Bank for International Settlements, "Press Review" (March 14,

1980), p. 4. The proportion of export earnings needed for

debt service is not a sufficient measure of a countryfs

credit-worthiness. It is, however, a guideline.

16/ Low-income countries are projected to grow at 4.7 percent

from 1975 to 1985, and at 4.9 percent from 1985 to 1990;

middle-income countries at 5.3 and 5.8 percent in the same

periods; and industrialized countries at 3.4 percent from

1970 to 1980 and 4.2 percent from 1980 to 1990 (average

annual percentage growth rates, 1975 prices). (See World

Bank, World Development Report, 1979, pp. 3-4, 9.)

62
TABLE 17. NET DISBURSEMENTS OF MEDIUM- AND LONG-TERM LOANS AND

OFFICIAL GRANTS TO DEVELOPING COUNTRIES BY TYPE OF

CAPITAL AND BY COUNTRY GROUP, 1976 AND 1990 (Percentages)

Low-Income

Countries a/

Middle-Income

Countries b/

Official Grants

Concessional Loans

Loans at Market Terms

Official

Private

Total

1976

Actual

21

47

32

(10)

(23)

100

1990

Projected

43

46

11

(7)

(4)

100

1976

Actual

12

10

77

(10)

(67)

100

1990

Projected

11

11

78

(14)

(64)

100

SOURCE: World Bank, World Development Report, 1979 (August 1979),

p. 9.

aj Low-Income: Developing countries with annual per capita

incomes at or below $300.

b/ Middle-Income: Developing countries with annual per capita

incomes above $300.

and the recession in the industrialized countries have worsened

the balance-of-payments outlook for the LDCs. While private

lending helped the LDCs adjust to oil price rises in the early

1970s, it is unlikely to do so on the same scale in the 1980s.

Private bank lending has been concentrated on a handful

of the most advanced developing countries, leaving the others

largely dependent on official institutions for loan funds. For

this reason, official lending will play a crucial role in the

1980s. Cofinancing may prove to be a way of using official

lending to encourage additional private efforts, but the device is

too new to permit a full evaluation of its future role.

63

CHAPTER V. TRADE PREFERENCES AND U.S. FOREIGN AID POLICY

In 1978, developing countries derived about 10 times as much

foreign exchange from trade as they did from bilateral and multilateral aid flows. This chapter considers the part that a preferential trade policy might play, as a complement to official aid

programs, in assisting the LDCs.

TRADE AND LDC DEVELOPMENT

Many LDCs are engaged in development programs aimed at

increasing their exports, particularly of manufactures. This

strategy has two basic objectives:

o To accelerate industrialization, and thereby increase

employment and output; and

o To increase foreign exchange earnings.

The effectiveness of such trade-oriented development strategies is circumscribed by several factors. Perhaps most critical

is that many LDCs lack the necessary infrastructural and industrial base to produce competitively priced manufactures. The

development of competitive export-oriented manufacturing industries may require a large investment of capital and labor, diverting these resources from other economic activity. Production for

export may also be more demanding of skilled labor, capital, and

other inputs than is domestic production, requiring a reallocation

of scarce resources. A third obstacle is posed by barriers to

free trade, such as tariffs and import quotas.

In the mid-1960s, the LDCs as a group—through the United

Nations Conference on Trade and Development (UNCTAD)—asked for

preferential access to the developed countries' markets. \J The

I/ The stabilization of commodity prices has been another

major issue at the last two UNCTAD conferences, and is at

the center of the current dialogue between developed and

developing countries. Because the primary aim of LDCs with

respect to commodities concerns pricing policy rather than

volumes of trade, commodities will not be considered further

in this chapter.

65
proposed export incentives would take the form of lower tariffs on

imports from LDCs than on similar imports from other sources, and

the liberalization of nontariff barriers. The effect of these

trade concessions on LDC exports would depend on the products

covered, the reduction in duty provided, and the capacity of the

particular LDC to respond to these incentives.

Three trade preference policies are examined in this chapter,

two of which are already in operation: the U.S. Generalized

System of Preferences, and the Offshore Assembly Provisions

of the U.S. Tariff Code. The analysis focuses on the additional

trade created by these two programs, and its distribution among

the LDCs, as a guide to decisions relating to possible modification of the programs.

A third approach would be to relax or remove altogether

quantitative restrictions on LDC exports to the United States.

But the reasons that prompted the imposition of such restrictions

in the first place make it unlikely that they will be relaxed or

abandoned. Nonetheless, this chapter provides an assessment of

the benefits that might accrue to LDCs if they were.

THE GENERALIZED SYSTEM OF PREFERENCES

The Generalized System of Preferences (GSP), authorized by

the Trade Act of 1974 and put into effect in January 1976, allows

many agricultural and manufactured products of developing countries to enter the United States free of duty. In the early

1970s, most other developed countries set up similar schemes,

with slight variations in the products and countries that were

eligible.

Whether GSP is judged a success or not depends on the

increases in the volume of eligible developing country (EDC)

exports that can be attributed to the scheme. 2/ Evidence

2J Certain countries are excluded from the U.S. GSP program by

the Trade Act of 1974. Among those excluded are all OPEC

nations and all nations "dominated by international communism" unless they are signatories of the General Agreement on Tariffs and Trade and members of the IMF. Because

of some modifications in the program introduced by the

1979 Trade Agreements Act, several OPEC members will become

eligible for GSP concessions. They are Indonesia, Venezuela,

and Ecuador.

66
suggests that the export-promoting effect of GSP has been modest,

both in terms of the overall increase in exports and in terms

of the number of countries that have benefited. Of almost

100 eligible countries, five—Hong Kong, Taiwan, South Korea,

Mexico, and Brazil—account for well over half of total GSP

trade.

Product Limitations

GSP's limited effect is attributable primarily to the

fact that a number of important EDC exports are excluded from

eligibility. Several products were declared ineligible because employment and output in competing U.S. industries might

be reduced by increased imports of those products. Among the

products excluded are watches, import-sensitive steel, electronics

and glass articles, textiles, and footwear.

The exclusion of textiles and footwear is of particular

importance. EDC economies are well suited to produce these

goods competitively: their manufacture requires large inputs

of semiskilled and unskilled labor, of which EDCs have an abundance, while the technology is well known, easily available,

and relatively inexpensive. Duty-free treatment for these products would increase the benefits provided by GSP, particularly

since the average duty on both textiles and footwear is quite

high. 3Y Because most textiles and nonrubber footwear exports

from the major EDC suppliers are also constrained by quantitative

limits (quotas), a removal of such barriers would further promote

these nationsf exports.

The Competitive Need Criteria

Besides product exclusions, the effect of GSP is also

limited by the Competitive Need Criteria. These were adopted in

part to compensate for the disparity in competitiveness among

EDCs, and in part to prevent major disturbances in U.S. domestic

3/ The average tariff on apparel products in 1979 was 27.0

percent, while on footwear it was 10.4 percent. The average

tariff on all manufactures was only 8.1 percent.

67
industries. 47 Of $9.7 billion of U.S. imports eligible for GSP

in 1978, $3.2 billion were denied duty-free entry because of

competitive need limitations. (See Table 18 for data on the first

three years of operation of GSP.)

The competitive need criteria have been criticized both

by the eligible developing countries and by representatives

of those U.S. industries that are affected by GSP imports.

Developing countries have focused their criticism on the 50

percent market share limitation. They contend that, because

product categories are defined very narrowly, it is easy to exceed

the market share limit, while the volume of the products shipped

may be quite small. 5J The 1979 Trade Agreements Act addressed

this issue, modifying the 50 percent market share rule so that it

will be invoked only if U.S. imports of a GSP product exceed $1

million, bj

The two criticisms of the competitive need criteria most

often voiced by U.S. labor and business are that products cannot

be removed permanently and that no mechanism exists for removing

countries from eligibility. TJ A product can be redesignated

as eligible if, in the year subsequent to its removal from eligibility, exports drop below the ceilings. U.S. labor representatives contend that permanent removal of a country's eligibility

_4/ Exports of specific products are declared ineligible for GSP

benefits if the products attain a specific level of competitiveness. As defined by the 1974 Trade Act, a product is

deemed competitive, and therefore ineligible, if in any one

year exports exceed $25 million in 1974 dollars (in 1979 this

amount was $41.9 million) or if it accounts for more than 50

percent of U.S. imports of the product.

57 Testimony by H. Cubillos, Director, GSP Project, UNCTAD/

UNDP, before the Inter-Agency Trade Policy Staff Committee on

the Generalized System of Preferences (September 18, 1979.)

t>J As with the other competitive need limitations, this ceiling

is linked to growth of the U.S. GNP.

l_l Statements by Stanley Nehmer, President, Economic Consulting Services, Inc., and Rudolph Oswald, Director, Department of Research, AFL-CIO, before the Inter-Agency Trade

Policy Staff Committee on the Generalized System of Preferences (September 18 and 20, 1979).

68
TABLE 18. U.S. IMPORTS FROM GSP-ELIGIBLE DEVELOPING COUNTRIES,

1976-1978 (Billions of dollars)

1976 1977 1978

Total Imports from Eligible

Developing Countries

Most Favored Nation Imports

Duty free

Dutiable

28.1

7.1

14.4

34.7

9.2

17.8

41.4

10.0

21.6

Eligible for

Generalized System

of Preferences

Less

Exceeds 50

percent limit aj

Exceeds dollar

limit a./

Not granted GSP b/

6.5

(0.7)

(1-2)

(1-5)

7.7

(0.8)

(2.0)

(1.0)

9.7

(1.0)

(2.2)

(1.3)

Granted Generalized

System of Preferences

Agriculture

Manufactures

3.2

(0.5)

(2.6)

3.9

(0.6)

(3.3)

5.2

(0.6)

(4.6)

SOURCE: Office of the U.S. Trade Representative.

a/ Denied duty-free entry because of competitive need criteria

limitations.

]b/ Denied duty-free entry because insufficient share of value

added originated in the exporting country, or because of

transshipment or other factors.

for specific products, as well as permanent removal of countries

from eligibility, are necessary in order to assure that the

poorest developing countries have a chance to take advantage of

GSP. These contentions are discussed in more detail below.

69
Some Eligible Products Not Granted Duty-Free Entry

Another set of factors also limits the effect of GSP. For a

variety of reasons, a sizable percentage of products that could

qualify for GSP concessions do not in fact enter duty free. In

some cases, neither exporters nor importers are aware of GSP. In

other cases, goods that are designated as eligible are not

admitted duty free because transshipment of the product makes it

difficult to document the place of origin, or because the product

does not fulfill the requirement that at least 35 percent of its

value originate in a beneficiary country. In 1978, $1.3 billion

worth of otherwise eligible goods failed to enter free of duty

because of these considerations (Table 18).

Effect of GSP on Eligible Developing Countries' Exports

For the reasons discussed above, only about one-half of the

products designated as GSP-eligible in 1978 entered duty free

(Table 18). Of those, the vast majority were manufactures, with

agricultural imports accounting for only 12 percent.

Duty-free entry changes the relative price of GSP items

with respect both to domestic goods and to imports from ineligible

countries. Table 19 presents estimates of the increase in U.S.

imports of manufactures from eligible developing countries that

resulted from these two effects. 8/ The increase in 1977 was

valued at $549 million, consisting of $511 million because of

improved price competitiveness relative to U.S.-produced goods,

and $38 million because of diversion of trade from nonbeneficiaries. 9J This increase represents a gain of about 2 percent

in exports of all manufactures from eligible countries to the

United States and a gain of 9 percent in exports of GSP-eligible

manufactures.

8/ Only the changes in imports of manufactures were analyzed,

both because of data limitations and because GSP is aimed

primarily at increasing manufactured exports from EDCs.

9/ These estimates may be overstated because of the large volume

of trade classified as miscellaneous manufactures, which,

due to data limitations, could not be disaggregated. The

estimates are also, however, somewhat understated because

average tariffs for each category were used rather than

tariffs for specific GSP products.

70
TABLE 19. ESTIMATED INCREASE IN U.S. IMPORTS OF MANUFACTURES

FROM ELIGIBLE DEVELOPING COUNTRIES RESULTING FROM

GENERALIZED SYSTEM OF PREFERENCES, 1976-1977 (Millions

of dollars)

1976 1977

Increased Exports Because of

Additional U.S. Demand 360 511

Increased Exports Because of

Diversion from Nonbeneficiaries 29 38

Total Increase 389 549

SOURCE: CBO estimates, calculated from data provided by the

Office of the U.S. Trade Representative.

NOTE: For a description of the methodology used to perform the

calculations, see Appendix V-A; for a breakdown by sector,

see Appendix V-B.

Distribution of Increases in Exports

The largest share of these increased exports accrued to

five of the most advanced EDCs: Taiwan, South Korea, Hong Kong,

Mexico, and Brazil. As Table 20 demonstrates, these countries

accounted for 68 percent of the imports that entered the United

States under GSP in 1978. This is particularly striking in that

these countries accounted for only 56 percent of total imports

of manufactures from all eligible developing countries. The

differences in ability to export GSP-eligible products are further

illustrated by the fact that the high-income eligible countries as

a whole accounted for 86 percent of U.S. GSP trade in 1978, while

middle- and low-income eligible countries accounted for only

11 percent and 3 percent, respectively.

Some observers suggest that the GSP scheme should be modified so as to distribute benefits more widely among the eligible countries. Proposals as to how best to achieve this are

71
TABLE 20. DISTRIBUTION OF U.S. GSP IMPORTS IN 1978 BY ELIGIBLE

DEVELOPING COUNTRY INCOME GROUPING, AND FOR FIVE

LEADING TRADERS (Percentages)

Distribution of

Total Imports

from Eligible

Developing

Countries

Distribution of

Trade Entering

Under GSP

Income Groups

Advanced developing

countries aj 72.3

Middle-income

developing countries _b/ 22.3

Low-income

developing countries c/ 5.1

85.5

11.2

3.3

Leading GSP Traders

Taiwan

South Korea

Hong Kong

Brazil

Mexico

Total

12.5

9.1

8.3

6.7

14.6

51.2

27.5

12.5

10.3

9.0

8.8

68.1

SOURCE: Office of the U.S. Trade Representative.

_a/ GNP of $900 or more per capita.

W GNP of $900 to $300 per capita,

c/ GNP of $300 or less per capita.

numerous. They include changing the competitive need criteria

so that a country's eligibility to export specific products

under GSP is permanently removed, eliminating additional countries

from eligibility, and expanding the range of products that are

eligible for duty-free entry. Some of the proposals, such as

expanding the product coverage of GSP, are advocated by developing

countries but opposed by U.S. labor and business, while others,

72
such as the so-called country graduation schemes, are advocated

by U.S. domestic interests but opposed by most developing countries. Although many of these proposals have evolved from a

desire to expand the export-promoting effect that GSP has on the

least competitive countries, it is unlikely that any of the

proposals could markedly affect their capacity to export manufactures in the immediate future. 10/

A recent study prepared by the Department of Labor investigated the effect that removing products from eligibility would

have on the exporting countries, ll/ In the first two years of

operation of GSP, there were 181 products for which at least

one of the top five beneficiaries lost eligibility because of

competitive need limitations. The Labor Department study analyzed

changes in the trade of these goods from 1976 to 1977, and found

that net duty-free exports of the four top traders not losing

preference, and those of the more than 90 other exporters, increased by similar amounts ($33 million and $38 million, respectively), while net duty-free exports from the countries losing

preference decreased by $200 million.

Changes in trade flows responding to changing circumstances

usually occur after a lag, and the period considered here may

be too short to take this into account. Nevertheless, the results

suggest that losses of preferences caused by competitive need

criteria do not result in immediate dramatic increases in exports

from the least competitive countries (although they clearly hurt

the countries losing preferences). A change in product eligibility for GSP is but one of many factors that affect the exports

of developing countries. Actual exports depend on the ability of

the economy to produce competitively, and preferences of the

sort granted by GSP may not be sufficient to compensate for the

differences in competitiveness among countries, or between U.S.

producers and those in the developing countries.

10/ Trade concessions have the greatest immediate export-promoting effect when a country has established industries,

which, with some extra advantage, can compete successfully in

world markets.

ll/ "GSP Graduation," Memorandum from Howard D. Samuel, Deputy

Under Secretary for International Affairs, U.S. Department of

Labor, to members of the Trade Policy Review Group (March 29,

1979, processed).

73
Similarly, it is not clear that by graduating certain countries, greater benefits would accrue to those still eligible. The

notion of graduation that is currently being debated 12/ assumes

that, with the exception of five to ten countries, all EDCs

are equally competitive. This is hardly the case. The developing

countries of the world are not a homogeneous group; wide disparities exist among them in terms of resources, infrastructural base,

and the availability of skilled labor. The elimination of the

most advanced EDCs would not alter this situation—at least not in

the short run. Thus, although it is impossible to estimate the

effect that the graduation of the most advanced EDCs would have,

the exports of countries with continued GSP benefits would not be

likely to increase immediately.

The permanent removal of products from eligiblity, together

with country graduation, might, however, have an effect on those

U.S. industries that compete with GSP products. A number of

cases are known in which competition from GSP items has caused

disturbances in the U.S. economy. 13/ A more stringent application of competitive need and eligibility criteria, in effect

reducing the number of products that enter duty free (particularly

if directed at certain import-sensitive items), might reduce the

disruptions caused by GSP. The cost of such measures would of

course be borne by those developing countries whose exports became

ineligible for duty-free entry and also by U.S. consumers, who

would pay higher prices.

Another way of increasing benefits to the less competitive

exporters, while not changing the eligibility of the major beneficiaries, would be to allow all their GSP-eligible products

to enter free of duty, regardless of competitive need criteria

or other considerations. CBO estimates that this would have

increased the developing countries' exports to the United States

in 1977 by $66.2 million, raising the trade-promoting effect of

GSP by 52 percent (Table 21). The products registering the major

increases would include nonferrous metals, textiles, 14/ lumber,

12/ See testimony of Nehmer and Oswald.

13/ The most important such product was leather apparel, which

was originally a GSP-eligible item but was removed from

eligibility in 1978.

14/ A small number of textile products are eligible for GSP.

74
TABLE 21. INCREASE IN LDC EXPORTS, OTHER THAN THOSE OF THE TOP

FIVE TRADERS, IF ALL GSP-ELIGIBLE GOODS HAD ENTERED

DUTY FREE IN 1977 (Millions of dollars)

Increase

in Exports

Trade Benefits of All Eligible

Countries Under Current GSP Limitations 549.2

Top five eligible

countries (422.8)

All other eligible

countries (126.4)

Increase in Exports if

Restrictions Were Removed,

Excluding Top Five Trading Countries 66.2

SOURCE: CBO estimates calculated from data provided by the Office

of the U.S. Trade Representative.

NOTE: For distribution of increases for 25 manufacturing categories, see Appendix V-C.

and miscellaneous manufactures. Although this would be a large

increase in benefits, it would be relatively small in comparison

to total exports of those countries to the United States. For

certain countries with limited exports, however, even a small

increase in trade volume would represent a sizable net gain.

Multilateral Trade Negotiations

Developing countries are concerned about the effect that

tariff reductions, agreed to by the industrial nations in the

recently concluded Tokyo Round of Multilateral Trade Negotiations,

may have on GSP benefits. This concern is justified. The level

of preferential access granted to developing countries' exports by

GSP is dependent on tariff levels. More specifically, it depends

on the difference between the zero duty charged on GSP items and

the tariff charged on imports of similar items from nonbeneficiary

75
sources. Reductions in tariffs decrease the relative price

advantage that GSP imports enjoy over other imports. Presumably

as a consequence of this change in relative prices, some U.S.

domestic demand would shift from GSP to non-GSP sources, thereby

reducing GSP trade.

Tariff reductions are, however, likely to provide some

important benefits for the LDCs. Only one-fourth of eligible

countriesf dutiable exports to the United States are currently

granted duty-free entry under GSP; the remaining three-fourths

are subject to tariffs. Among those items subject to tariffs

are exports excluded from GSP because of import sensitivity

considerations, as well as products subject to competitive need

limitations. 15/ While GSP concessions have been granted for a

limited period of time, the Tokyo Round tariff reductions are

permanent (although they will be phased in over an eight- to

ten-year period). If the GSP program were to lapse, the eligible

countries would still be assured the benefit of lower tariffs

negotiated in the Tokyo Round.

The net effect that tariff reduction will have on developing

countries1 exports depends on whether or not the decline in

GSP exports is offset by increased exports of non-GSP products.

Excluding trade in agricultural products and textiles, and using a

1977 trade base, CBO estimates that exports of GSP-eligible

manufactures to the United States will decline by $39 million

and non-GSP exports will increase by $367 million, for a net

increase of $328 million. 16/ About one-fourth of the estimated

15/ Over time, an increasing number of products that are currently eligible for GSP will exceed competitive need limitations and become subject to tariffs. The lower the tariff,

the smaller the disruptions that are likely to result from

loss of duty-free access.

16/ These calculations assume that all tariffs will be reduced

at the same time, therefore overstating, perhaps markedly,

their estimated effects. Because of data limitations, it was

necessary to use average tariffs for each of 24 industrial

categories rather than the average tariffs on the dutiable

component of these sectors, therefore understating the

effects of the reductions in duty. The methodology used to

perform these calculations is described in R.E. Baldwin and

T. Murray, "MFN Tariff Reductions and Developing Country

76
decline in exports will result from a shift in U.S. demand for

imports of consumer electronics products to nonbeneficiary

countries (mostly developed nations), while the major increases

in exports will come in miscellaneous manufactures, rubber

and plastic products, consumer electronics, and scientific and

measuring instruments. 17/

Conclusions on GSP

The success of the GSP program depends on the criteria

used to evaluate it. As a device for accelerating and expanding exports from those developing nations that have attained a

moderate level of international competitiveness, GSP has been

largely successful. As a means of promoting exports of manufactures from those developing nations that have demonstrated only

a very limited capacity to engage in trade, it has achieved only

modest results. The increase in trade volumes attributable to GSP

in absolute terms are impressive: an additional $500 million

worth of manufactured exports to the United States in 1977, and

presumably larger increases in 1978 and 1979. These results

compare favorably with the more traditional U.S. foreign aid

programs. (In 1977, total U.S. bilateral development assistance

outlays amounted to $4.2 billion.) On the other hand, compared

with total exports from eligible countries to the United States,

the share attributable to GSP is less striking. The program has

been in operation for only four years, however, and in time

developing countries may improve their response to the incentive

GSP provides.

Trade Benefits Under the GSP," Economic Journal (March 1977).

The authors, using a 1971 trade base including agricultural

products but excluding textiles and footwear, and assuming a

50 percent across-the-board tariff cut, estimated that net

EDC exports to the United States will increase by $38 million. In a paper prepared for UNCTAD, P.J. Ginman and

others, using a set of different assumptions and a 1976

trade base, estimated that net exports from EDCs will decline

by $316 million. (See P. J. Ginman and others, "Implications

of the Tokyo Round of Multilateral Trade Negotiations for

Exports from the Developing Countries" (July 1979, updated

August 1979; processed.)

17/ See Appendix V-D for breakdown by sector.

77
A number of proposals have been advanced to modify GSP.

These proposals fall into two categories: those aimed at increasing the advantage that the least competitive countries derive

from the program, and those aimed at reducing the disruptions that

it causes in U.S. industries. These goals involve contradictory

policies. The first, increasing the product coverage of the

scheme, implies increased imports, while the latter involves

re4ucing product coverage, and thereby reducing duty-free imports.

OFFSHORE ASSEMBLY PROVISIONS OF THE U.S. TARIFF CODE

The offshore assembly provisions (GAP) of the U.S. Tariff

Code allow certain exports of manufactured products to enter the

United States at reduced duty. Both developed and developing

countries may benefit from these provisions. They apply to metal

products and to manufactures containing U.S.-made components. 18/

Metal products sent abroad for processing and returned to the

United States for further processing are charged a tariff upon

reimportation only on the value of the processing performed

abroad (Tariff Code 806.30). Similarly, any manufactured product

assembled abroad that contains U.S.-made components is subject

to a tariff on the total value of the product less the value of

the U.S. components that it contains (Tariff Code 807.00). Of all

products entering the United States under OAP, about 90 percent

enter under this clause. As with GSP, OAP is not unique to the

United States; the tariff codes of most industrial nations contain

similar clauses.

These offshore assembly provisions provide a variety of

incentives to developing countries to promote their manufacturing

industries. In effect, the provisions allow labor-rich developing

nations to exploit their competitive advantage in labor costs.

The incentives provided by Tariff Code 806.30 tend to be limited

by the restriction that the offshore operation involve only

processing. The stimuli provided by Tariff Code 807.00 affect a

18/ These provisions consist of items 806.30 and 807.00 of the

U.S. Tariff Code. Item 806.30 was enacted by the Tariff Act

of 1930 in order to allow U.S. manufacturers to ship their

goods to Canadian plants for processing that could not be

accomplished in the United States. Item 807.00 was enacted

in 1965 to correct an anomalous practice that arose under the

Tariff Act of 1930. Both provisions have been modified

several times, most recently in 1974.

78
wider range of industrial activities, since duty is charged on the

value of the U.S.-made components regardless of the number of

manufacturing steps or their complexity. Manufacturers in LDCs

may be encouraged to produce locally a variety of components that

can be added to the U.S.-made ones, and since the regulations

require only that the U.S. components not be materially altered,

the assembly process may involve a variety of processes, further

encouraging diversification in the LDCs.

The fact that GAP has provided incentives to LDCs to increase

their exports is demonstrated by the rapid rate of increase of GAP

exports from LDCs to the United States. From 1970 to 1978, LDC

exports of GAP goods increased almost fivefold in real terms.

In nominal terms, the increase has been from $540 million in

1970 to $4.3 billion in 1978, the latter figure representing

about 10 percent of U.S. imports of manufactures from LDCs in

1978. The major products were electric machinery, apparel,

measuring and controlling instruments, nonelectrical machinery,

and transportation equipment.

As with GSP, a small group of the most advanced LDCs accounted for most of the trade. In 1978, the top five GSP beneficiaries accounted for 66 percent of the U.S. GAP trade with

developing countries. 19/ If Singapore and Malaysia are included, seven countries accounted for 88 percent of the trade. 20/

The low-income developing countries (with annual per capita

incomes of $300 or less) were, as in the case of GSP, able to take

only very limited advantage of the program, accounting for less

than 10 percent of the GAP trade.

Developing countries have not put great emphasis on the

offshore assembly provisions, preferring instead to press for

expanded GSP programs and for increased foreign aid. The benefits from GAP are, however, significant. One analyst estimated

19/ Taiwan, Hong Kong, South Korea, Mexico, and Brazil.

20/ One country in particular, Mexico, accounted for more than

one-third (36 percent) of the GAP trade with LDCs in 1978. A

large number of industries have developed along the border

with Mexico, particularly along the Texas border, specializing in GAP products. Many of these factories are in fact

subsidiaries of U.S. manufacturers who ship their components

to these border factories for assembly in order to take

advantage of the lower labor costs in Mexico.

79
that if GAP had not existed in 1975, LDC exports of manufactures

to the United States during that year would have been $235 million

lower. 21/

Along with benefits, GAP may also entail certain costs for

LDCs. Incentives to utilize U.S.-made components may discourage

some local LDC industries from producing these components.

Furthermore, inefficiencies may be introduced if the U.S.-made

components are not the cheapest available.

QUANTITATIVE RESTRICTIONS ON LDC TRADE

The second major type of barrier to LDC trade, other than

tariffs, consists of quantitative restrictions on imports. Many

of the products limited by quantitative restrictions are also

subject to tariffs, which for some manufactured products are quite

high.

Some observers suggest that developed nations could provide

effective export incentives to developing countries by relaxing or

removing quantitative restrictions on imports. The success of

such a policy would depend, of course, on the degree to which

quotas currently restrict LDC exports. 22/

21/ This estimate excluded textiles. Curiously, in the absence

of GAP, net U.S. textile imports would have increased by

about $59 million. This would have occurred because foreign

producers would have substituted more expensive foreign

components for U.S. components, thus increasing the price of

their goods, while maintaining their exports constant as

allocated by U.S. import controls. Including textiles, net

LDC exports to the United States in the absence of GAP would

have declined by $177 million. See Thomas Birnberg, "Trade

Reform Options: Economic Effects on Developing and Developed

Countries," in William R. Cline, ed., Policy Alternatives for

a New International Economic Order (Praeger, 1979), pp.

240-245. For a technical explanation, see J.M. Finger,

"Trade and Domestic Effects of the Offshore Assembly Provision in the U.S. Tariff," American Economic Review (September 1976), pp. 598-611.

22/ The trade-restricting effect of a quota depends on the

level at which the ceiling on imports is set. If the ceiling

is near to or above the productive capacity of the exporter,

80
The following sections will analyze the effect of U.S.

nonrubber footwear and textile quotas on the exports of the LDCs

subject to them. 23/

Footwear

The United States has negotiated bilateral agreements to

restrict trade in nonrubber footwear with two countries, Taiwan

and South Korea. These understandings, known as Orderly Marketing Agreements, went into effect in July 1977 and will expire in

1981. Taiwan has agreed to ship no more than 506 million pairs

over the four-year period, and South Korea has agreed to a fouryear ceiling of 145 million pairs.

These quotas have indeed restricted Taiwanese and South

Korean exports. In the first full year of operation (July 1,

1977, to June 30, 1978), both countries largely filled their

quotas: Taiwan shipped 124.7 million pairs, 99 percent of the

amount allowable; and South Korea, 28.3 million pairs, or 78

percent of the quota.

There is more direct evidence of the effect of the quotas on

Taiwanese and South Korean exports. From calendar year 1977 to

calendar year 1978 (1978 being the first full year that the quotas

were in force), the two countries1 combined market share of

total U.S. nonrubber footwear imports dropped from 61 percent to

40 percent. Net U.S. imports from the two countries combined

declined by 77.2 million pairs, while total U.S. imports increased

by 5.5 million pairs. From 1978 to 1979, their net exports to the

United States of nonrubber footwear increased slightly, by 1.4

million pairs, while total U.S. imports increased by 31.1 million

its trade-restricting effect is likely to be modest. If the

ceiling is at a level substantially short of the current

productive capacity of the exporter, however, and if there

are no alternative markets available for these goods, the

quota could inhibit new investment in the industry, and even

result in some plant closings.

23/ The United States also has quantitative restrictions on a

number of agricultural products that LDCs export, as well as

on color television exports from South Korea.

81
pairs. 24/ While it is difficult to make accurate calculations,

estimates of the productive capacities of the nonrubber footwear

industries in Taiwan and South Korea suggest that they have

remained virtually constant since 1976-1977. Furthermore, total

U.S. imports of nonrubber footwear have been increasing since

1976, while domestic demand and production have stagnated,

suggesting that the quotas have hurt South Korea and Taiwan while

being ineffective in protecting U.S. producers. The country that

increased its exports of footwear most dramatically over the

period was Italy—not a developing nation—which achieved a 24

percent share of the U.S. import market in 1979, up from 13

percent in 1976.

As sinning that all the reductions in South Korean and Taiwanese exports were the result of U.S. quotas, 25/ a maximum trade

loss can be calculated. This loss is estimated by taking the

average share of the U.S. market for imports of nonrubber footwear

that these countries accounted for in the two years before the

quotas took effect, 1976 and 1977, 26/ and applying these market

shares to 1979 trade volumes and values. The results of these

calculations suggest that Taiwan lost a maximum of $191 million

worth of trade and South Korea a maximum of $217 million, if

quotas were the sole cause of the change. 27/

Textiles

Estimating the effect of changes in U.S. textile quotas

is more difficult, partly because the United States has negotiated

24/ Total U.S. imports of nonrubber footwear between 1976 and

1979 were: 1976, 370 million pairs; 1977, 368 million pairs;

1978, 374 million pairs; and 1979, 405 million pairs.

25/ A variety of other factors—such as changes in exchange rates

and relative wage rates, development of markets other than

the United States, and changes in competitiveness—could

also have contributed.

26/ Shipments from both countries in the first half of 1977 were

exceptionally high because of an attempt to make sales

before the quotas went into effect. Therefore, the average

market share in these two years is somewhat overstated.

27/ See Appendix V-E for calculations.

82
different bilateral agreements on textile trade with each of the

19 countries (18 developing countries and Japan) subject to

quantitative limits. The restrictions in most countries apply to

yarn, fabric, and apparel manufactured from cotton, wool, and

manmade fibers. Furthermore, while aggregate ceilings on all

textile trade are binding for a majority of the countries subject

to them, product-specific ceilings are binding only on a fraction

of the products exported by these nations. Because of this, and

various data limitations, it is difficult to assess either the

volume or value of trade that has been discouraged by the quotas

or the increase in trade that would result from their removal or

relaxation.

It is possible, however, to identify those countries that

have been most affected by the quotas, which are also those

countries that probably would benefit most from a relaxation of

the current restrictions.

Of the 13 nations subject to aggregate quotas—which set

ceilings on a nation's exports of all products manufactured from

the three types of fibers, measured in square-yard equivalents—

seven countries (Hong Kong, Taiwan, South Korea, Macao, Pakistan,

Haiti, and Poland) filled their quotas by 70 percent or more in

1978. 28/ However, four of these—Pakistan, Macao, Haiti, and

Poland—accounted for only 8 percent of the volume of controlled

U.S. trade in textiles in 1978, and for 5 percent of total

trade. The other three countries that filled their quotas by

70 percent or more—Hong Kong, Taiwan, and South Korea—were the

major exporters of textiles to the United States in 1978, accounting for 58 percent of the volume of controlled imports and 38

percent of total imports. 29/

The product-specific quotas give another measure of the

effect of U.S. restrictions. Table 22 presents data on the share

28/ It is assumed that the disruptive effects of a quota first

manifest themselves at the level of 70 percent filled.

Although this may be too low a level for some products,

particularly for those that are shipped in large quantities

and are subject to large quotas, conversations with several

observers who monitor textile trade and quotas suggest that

this is a plausible level to select. For detail of quotas by

country, see Appendix V-F.

29/ See Appendix V-G for detail by country.

83
TABLE 22. TRADE ACCOUNTED FOR BY QUOTAS 70 PERCENT OR MORE FILLED

IN 1978 (Millions of square-yard equivalents)

Shipments Accounted

Hong Kong

Taiwan

Pakistan

South Korea

Thailand

Mexico

Singapore

Malaysia

Poland

Romania a/

India

Macao

Colombia

Haiti

Brazil

Philippines

Total

Shipments

924.2

700.0

165.1

541.7

76.3

134.9

123.3

27.5

32.3

12.3

85.6

38.7

45.8

75.4

33.0

161.2

for by Quotas

70 Percent or

More Filled

828.8

595.2

139.2

444.4

56.2

94.5

79.1

17.3

20.3

6.9

48.9

21.4

23.7

36.0

14.9

57.4

Percent of Total

Shipments Accounted

for by Quotas

70 Percent or

More Filled

90.0

85.0

84.0

82.0

73.7

70.1

62.9

62.9

62.8

56.1

56.1

55.3

51.7

47.7

45.2

35.6

SOURCE: CBO calculations performed from data provided by the U.S.

Department of Commerce.

a./ Only products made from wool and manmade fibers.

of total exports accounted for by quotas that were 70 percent or

more filled. These comparisons presume that the greater the total

share of exports for which a product accounts, the greater its

importance in the export package of the nation. Once again, the

three major exporters, plus Pakistan, stand out, with over 80

percent of each country's total exports of textiles accounted

for by those products for which quotas were 70 percent or more

84
filled. 30/ These data could be interpreted as suggesting that

quotas have a relatively greater importance for these countries

than for most others subject to restrictions on textile trade.

For the majority of the other countries, products for which quotas

were 70 percent or more filled accounted for between 50 and 65

percent of total trade by volume.

Conclusions on Quotas

A relaxation of U.S. quotas on footwear and textiles would

lead to increased exports from most of those LDCs subject to

them. A relaxation or removal of restrictions on Taiwanese and

South Korean footwear exports could result in a maximum increase

in trade that compares favorably with the benefits these nations

derive from the Generalized System of Preferences. Changes in

U.S. textile quotas would be likely to result in increased exports

from all nations subject to them, but the countries that would

benefit most in the short run are the ones for which quotas have

the greatest export-restraining effect—Taiwan, Hong Kong, South

Korea, and Pakistan.

30/ Pakistan is somewhat different from the other three countries. Most of its trade was accounted for by exports of

cotton fabric, and 1978 was an exceptional year in that

Pakistan exported twice the volume of cotton products that it

did in 1977.

85

CHAPTER VI. FUTURE DECISIONS ON THE FOREIGN ASSISTANCE BUDGET

The basic decisions to be made regarding the foreign aid

budget concern its level and its composition:

o How much aid should the United States provide?

o How should it be divided between multilateral and bilateral channels?

o How should it be distributed among bilateral programs?

This chapter reviews the immediate decisions facing the

Congress, and examines how their outcome will affect both the

level and the composition of foreign aid. It concludes with a

discussion of the alternative courses of action open to the

Congress for the decade of the 1980s.

CURRENT BUDGET DECISIONS

The Level of Foreign Aid

In attempting to limit the growth of the federal budget,

the Congress will give close scrutiny to foreign aid as a source

of possible savings. The developing countries, however, will seek

increased assistance as slower growth in the developed countries

and further increases in the price of oil constrain their earnings

and development prospects.

Fiscal Year 1980. The difficulty of reconciling these

conflicting pressures became evident in the deliberations on the

foreign assistance appropriations bill for fiscal year 1980.

The Revised Second Concurrent Resolution on the Budget

for Fiscal Year 1980 included $15.2 billion in budget authority

and $10.5 billion in outlays for the international affairs

87
function. I/ Spending legislation previously enacted for this

function totals $14.5 billion in budget authority and $10.2

billion in outlays. Enactment of the 1980 foreign assistance

appropriations bill would require an additional $1.1 billion in

budget authority and $282 million in outlays. Other pending

supplementals would require $275 million in budget authority and

$254 million in outlays. Thus, the new budget ceiling will not

accommodate all of the Administration's spending proposals for

1980.

Fiscal Year 1981. The constraints on the level of aid

operations caused by the restrictive funding of fiscal year 1980

are not likely to be eased for fiscal year 1981.

The First Concurrent Resolution on the Budget for Fiscal

Year 1981 included $23.6 billion in budget authority and $9.5

billion in outlays for the international affairs function. CBO's

preliminary reestimate of the Administration's revised budget

request for fiscal year 1981 is, however, $24.43 billion in budget

authority and $10.26 billion in outlays. The targets in the first

concurrent resolution suggest that the Congress is unlikely to

approve the full amount of the Administration's request. The

outlay ceiling poses a particular problem for foreign aid. Some

assistance programs (bilateral development assistance and contributions to the multilateral development banks) result in only

small outlays in the budget year. Thus, quite significant cuts in

these programs would be needed to meet the outlay ceiling. Other

programs (ESF, food aid) require larger outlays in the budget

year, but the historical record suggests that these are less

likely to be reduced.

Bilateral Aid

The distribution of aid to countries varies among the

three bilateral aid programs. Currently, development assistance and food aid are widely spread geographically, while ESF is

focused primarily on the Middle East.

I/ Function 150, International Affairs, covers bilateral development assistance, multilateral development banks, international

organizations and programs, migration and refugee assistance,

foreign military credit sales, the Foreign Military Sales

Trust Fund, administration of foreign affairs, the International Communications Agency, and the Export-Import Bank.

88
Development Assistance* The Administration proposes a real

increase in bilateral development assistance for fiscal year

1981. As compared with the conference report on the foreign

assistance appropriations bill for fiscal year 1980, which,

although not enacted by the Congress, is indicative of the position of the Appropriations Committees, the Administration's

(revised) request for fiscal year 1981 would provide 9 percent

real growth in funding for development assistance. Measured in

current dollars, budget authority would rise from $1.65 billion to

$1.94 billion.

If approved by the Congress, this increase in funding would

be in line with the New Directions goal of supporting long-term

economic development and providing for basic human needs. The

countries most dependent upon this kind of official aid are the

poorer developing countries. Their needs are increasing with the

rise in oil prices and the reduction of export opportunities.

Economic Support Fund. The ESF has tripled in real terms

over the past decade, but the Administration does not propose to

continue this growth. Its request for fiscal year 1981 shows

no increase over the level contained in the foreign assistance

appropriations conference report for fiscal year 1980, which,

in real terms, was 25 percent below the fiscal year 1979 level.

But the reasons behind the ESF's growth make it unlikely

that funding will fall much in the near future. ESF aid supports

countries in which the United States has a security interest,

primarily Middle Eastern countries. And the fact that the funds

are mostly earmarked by country helps to preserve them from the

across-the-board cuts made in development assistance programs,

which are presented by functional account.

Food Aid. The amount of U.S. food aid is related to domestic agricultural production and to commercial demand for farm

products. An increase in agricultural exports, coupled with a

decline in food aid funding, has resulted in sharply diminished

aid shipments during the 1970s.

During the 1970s, increases in LDC cereal production kept

pace with population growth, 2^1 but little progress was made

toward decreasing the LDCs1 need to import food. Since the rate

2J Information provided to CBO by the International Food Policy

Research Institute, June 1980.

89
of agricultural production is not likely to accelerate in the

1980s, the need for U.S. food aid will continue.

How much the United States contributes in food aid will

depend both on the dollar level of P.L. 480 appropriations and on

commodity prices. Under the 1980 Food Aid Convention, the United

States is pledged to a minimum annual shipment of 4.47 million

metric tons of food grain. The food aid budget level implicit in

the fiscal year 1980 budget, including supplemental requests,

would permit shipments of 6 million metric tons at current prices,

compared to the 6.7 million shipped in fiscal year 1979. The

Administration's budget request for fiscal year 1981 also implies

shipments of 6 million metric tons.

Multilateral Development Banks

Until this year, the Congress had always approved the Administration's authorization requests for the MDBs without reduction.

Recently, however, the Congress has shown a reluctance to continue

full support, as reflected in recent amendments to authorization

legislation for replenishments falling due in fiscal years 1980

to 1983. For example, the foreign assistance authorizations

conference report for fiscal years 1980 to 1983 provided for

contributions of $4 billion (for the Inter-American Development

Bank, the Asian Development Bank, and the African Development

Fund), but the bill as passed by the Congress in May 1980 authorized only $3.6 billion.

Other contributing countries have expressed concern as to

future U.S. participation in and support for the MDBs, especially

as MDB requests in the 1980s will exceed requests during the 1970s

even if authorization is sought only for paid-in capital. The

next decision will be made in fiscal year 1981, when authorization

will be requested for the proposed IDA-VI replenishment of $3.2

billion over three years. If passed, this would result in annual

appropriations of approximately $1.1 billion* _3/

Although Administration plans call for a significant increase

in U.S. support of the MDBs in the 1980s, the Congress may decide

that these funds are better employed in other parts of the foreign

assistance program, or for domestic purposes. To maintain paid-in

capital contributions in the first half of the 1980s at the same

real level as in the last half of the 1970s would require the

3/ The replenishment is in support of soft loans and is therefore

fully paid in.

90
Congress to approve at least 75 percent of the Administration1s

planned requests.

A decision not to proceed with current Administration plans

for MDB contributions could have a Variety of consequences. The

size of the U.S. share in the MDBs affects the ability of the

United States not only to veto a specific decision, but also to

lead the banks in policy changes. Past U.S. leadership in the

MDBs has encouraged development of policies in line with U.S.

preferences, and U.S. contributions have thus triggered funding

many times greater than its own in support of such policies.

U.S. Trade Policy Toward LDCs

U.S. trade policy toward developing countries is not likely

to change in the near term. The Generalized System of Preferences, now in the fifth of the ten years for which it was authorized, is undergoing review. Recommendations and proposals from

interest groups in the United States have focused on incremental

adjustments aimed at making GSP operations more efficient.

Proposals advanced by LDCs to expand the list of eligible products, and to raise the limits on the value of shipments, are

not likely to be acted on favorably. The offshore assembly

provisions are subject to change in the context of U.S. tariff

code revisions, but no modifications of them are foreseen at this

time. Finally, the domestic economic factors that prompted the

imposition of U.S. quantitative restrictions on textiles and

footwear have not changed. The bilateral agreements on footwear

and the multilateral agreement on textiles are both subject to

renegotiation in the early 1980s.

CHOOSING THE FUTURE LEVEL AND COMPOSITION OF FOREIGN AID; STRATEGIES FOR THE 1980s

During the 1970s, U.S. foreign assistance outlays rose

modestly in real terms. Marked changes took place in the composition of U.S. assistance, with the share of the Economic Support

Fund increasing as other aid programs stabilized or declined.

Because ESF is the vehicle for assisting countries of particular

political interest to the United States, it typically focuses on

only a few nations. At the moment, Egypt and Israel are the major

recipients of ESF monies.

These trends run counter to the Basic Human Needs legislation

enacted by the Congress in 1973. That legislation called for

91
focusing U.S. aid on support of developing countries' efforts to

provide for basic human needs. Funds directly supporting this

policy have shown no real growth during the past decade, and one

component, food aid, has even been reduced.

In choosing the future level of foreign aid, the Congress

will have to weigh assistance to the poorer countries against

other objectives, such as the domestic needs of the United

States. In deciding on the composition of foreign aid, the

Congress can follow one of several possible strategies:

o Emphasize U.S. security interests. This would continue

the trend of the 1970s, but run slightly counter to

current Administration proposals. It would increase

ESF funding relative to other aid programs, and would

concentrate funding on a small number of countries.

o Emphasize concern for equitable growth within the poorer

countries. This would imply more bilateral development

assistance and food aid, and/or increased support for the

multilateral development banks. It is consistent with

some Administration proposals, but would be a shift from

the trend of the 1970s.

Whether it would mean distributing aid to a larger

number of countries would depend on whether the United

States concentrated its efforts on a small number of

beneficiaries (as some other donors have done) or gave

modest amounts of assistance to a large number of countries. The balance between bilateral and multilateral

programs depends on the emphasis one wishes to give to

development via capital infrastructure (support of

the MDBs) or via social infrastructure (support of

bilateral development assistance and food aid). It also

depends on the value attached to an international approach

(through the MDBs) as against more direct U.S. control

(through bilateral programs).

o Emphasize assistance, by trade concessions, to those

countries best able to help themselves. The chief beneficiaries, at least initially, would be the more developed

countries. Although this strategy could reduce the total

aid budget, it might have a negative effect on U.S.

employment because of increased import competition.

92
APPENDIXES

APPENDIX I-A. WORLD BANK LIST OF LESS-DEVELOPED COUNTRIES

Upper-Middle- IntermediateHigher-Income Income Middle-Income

(over $2,500) ($l,136-$2, 500) ($551-$!, 135)

Greece

Israel

Oman

Singapore

Spain

Argentina

Bahrain

Barbados

Brazil

Cyprus

Fiji

Lebanon

Malta

Panama

Portugal

Uruguay

Yugoslavia

«

Algeria

Chile

China,

Republic of

Colombia

Costa Rica

Dominican

Republic

Guatemala

Ivory Coast

Jamaica

Jordan

Korea,

Republic of

Malaysia

Mauritius

Mexico

Nicaragua

Paraguay

Peru

Syrian Arab

Republic

Tunisia

Turkey

Lower-MiddleIncome

($281-$550)

Bolivia

Botswana

Cameroon

Congo, People's

Republic of

El Salvador

Ghana

Guyana

Honduras

Liberia

Mauritania

Morocco

Papua New

Guinea

Philippines

Senegal

Sudan

Swaziland

Thailand

Zambia

Oil-Exporting

Developing

Low-Income ($280 or less) Countries a/

Afghanistan

Bangladesh

Benin, People's

Republic of

Burma

Burundi

Central African

Empire

Chad

Comoros

Egypt, Arab

Republic of

Ethiopia

Gambia, The

Guinea

Haiti

India

Kenya

Lesotho

Madagascar

Malawi

Mali

Nepal

Niger

Pakistan

Rwanda

Sierra Leone

Somalia

Sri Lanka Algeria

Tanzania Ecuador

Togo Gabon

Uganda Indonesia

Upper Volta Iran

Yemen Iraq

Arab Republic Nigeria

Yemen, People's Trinidad and

Democratic Tobago

Republic of Venezuela

Zaire

SOURCE: World Bank, World Debt Tables, Vol. I (1978), pp. 21-23.

NOTE: Based on 1976 GNP per capita in 1976 U.S. dollars.

a./ Countries that export large quantities of oil, or for which oil exports are of considerable importance.

APPENDIX I-B. DEFINITION OF OFFICIAL DEVELOPMENT ASSISTANCE

In order for foreign aid flows to be counted as Official

Development Assistance (ODA), as defined by the Organization for

Economic Cooperation and Development (OECD), the aid flow must

meet the following requirements:

o It must go to a country on the OECD list of less-developed

countries or to a multilateral institution that provides

development assistance to such countries. (All proposed

fiscal year 1980 U.S. development assistance funds will go

to such institutions and countries.)

o The aid must be provided for the promotion of economic

development and welfare. Any aid that is clearly to be

used for military weapons or for military purposes is not

included.

o The aid must be concessional in character, containing

a "grant element" of at least 25 percent. The grant

element is the difference between the face value of a

financial loan commitment and the discounted present

value (using a 10 percent discount rate) of the service

payments the borrower will make during the lifetime

of the loan, expressed as a percentage of the face

value.

All U.S. food aid counts as ODA, as does the Economic Support

Fund. A very small amount of U.S. foreign economic assistance

does not count as ODA—for example, military-type operations, such

as the U.S. contribution to the UN forces in Cyprus and the U.S.

Sinai Support Mission ($21 million in fiscal year 1980); the

subsidy paid to the U.S. Merchant Marine for transporting P.L. 480

commodities ($93 million in fiscal year 1980); and a few loans

that are provided on terms that are insufficiently concessional to

qualify as ODA (none planned for fiscal year 1980). I/

I/ Information provided to CBO by the Agency for International

Development, November 1979.

97
APPPENDIX II-A. DISBURSEMENTS OF U.S. BILATERAL DEVELOPMENT ASSISTANCE FUNDS BY MAJOR

Country

India

Pakistan

Brazil

Turkey

Colombia

Indonesia

Bangladesh

Chile

South Korea

Philippines

Bolivia

Nigeria

Tunisia

Panama

Ethiopia

Afghanistan

Subtotal

Other Countries

and Specific Regions

Total Funds through

AID to Specific

Countries and Regions

Total Interregional

AID Funds _b/

Total

(Current Dollars)

Total

(1972 Dollars)

SOURCE: U.S. Agency

19S2

467

217

85

16

8

17

-

143

38

4

13

21

19

3

7

8

1,066

487

1,553

151

1,704

2,438

1963

402

186

61

77

93

15

-

41

38

3

26

27

26

8

10

17

1,030

569

1,599

110

1,709

2,403

1964

344

236

130

131

79

10

-

79

33

3

48

46

22

9

5

22

1,197

366

1,563

129

1,692

2,347

1965

265

188

235

158

4

3

-

100

52

3

5

28

19

7

6

11

1,084

328

1,412

144

1,556,

2,117

for International Development,

1966

310

127

244

140

86

-

-

93

86

4

25

23

18

9

35

11

1,211

277

1,488

146

1,634

2,167

1967

212

137

215

139

105

-

-

16

70

11

15

22

26

25

14

25

1,032

317

1,349

153

1,502

1,928

1968

301

132

194

72

78

23

-

58

40

10

4

21

14

19

7

9

982

281

1,263

163

1,426

1,767

U.S. Overseas Loans and

1969

203

104

12

44

101

56

-

35

25

6

11

17

9

16

17

9

665

271

936

166

1,102

1,304

Grants ,

1945-1971, and 1945-1978; information provided to CBO by AID.

98
RECIPIENTS, FISCAL YEARS 1962-1979 (Millions of dollars)

1970

224

124

88

43

76

56

-

18

25

9

3

12

15

12

16

7

1971

206

7

79

54

84

79

-

2

61

11

4

14

13

11

20

9

1972

6

62

12

59

93

115

199

1

30

31

54

22

17

23

31

10

1973

17

96

41

17

77

122

102

1

27

36

17

11

3

7

9

27

1974

15

58

5

2

40

79

29

5

27

44

39

4

2

11

21

13

1975

20

96

3

1

14

43

62

31

20

55

20

7

2

8

17

16

1976

_

106

1

-

14

50

27

21

6

54

22

-

3

23

6

6

TQ

_

31

-

-

7

17

10

1

-

7

2

-

a/

4

-

2

1977

_

71

1

-

1

42

62

1

-

35

36

-

11

14

1

20

1978

60

20

-

1

-

74

95

a/

-

53

35

-

20

21

5

5

1979

91

9

-

70

a/

95

90

a/

1

44

29

-

15

20

3

3

Total

3,143

2,007

1,406

1,024

960

896

676

646

579

423

408

275

254

250

230

230

728 654 765 610 394 415 339 81 295 389 470 13,407

308 261 265 346 277 315 280 129 402 479 509 6,467

1,036 915 1,030 956 671 730 619 210 697 868 979 19,874

201 220 237 271 322 384 407 114 459 522 589 4,888

1,237 1,135 1,267 1,227 993 1,114 1,026 324 1,156 1,390 1,568 24,762

1,387 1,211 1,292 1,199 900 912 786 241 819 932 968 24,680

a./ Indicates less than $0.5 million.

b/ Includes operating expenses, centrally funded programs, transportation, disaster

~~ relief, and American schools and hospitals.

99
APPENDIX II-B. ECONOMIC SUPPORT FUND DISBURSEMENTS BY MAJOR RECIPIENTS, FISCAL YEARS

Country

South Vietnam

Israel

Egypt

Jordan

South Korea

Laos

Syria

Portugal

Thailand

Zaire

Other Countries

Total

(Current dollars)

Total

(1972 Dollars)

SOURCE: U.S. Agency

1962

113

-

20

37

93

29

-

-

16

63

428

799

1,143

for

1963

133

-

10

36

90

38

-

-

10

35

261

613

862

1964

160

-

-

34

76

33

-

-

7

20

136

466

646

1965

217

-

-

33

70

39

-

-

12

15

106

492

669 1

International Development

1945-1971, and 1945-1978;

APPENDIX II-C. FOOD AID (P.L

India

Pakistan

South Korea

South Vietnam

Egypt

Indonesia

Bangladesh

Brazil

Chile

Israel

Morocco

Philippines

Sri Lanka

Tunisia

Turkey

Cambodia

Other Countries

Total

(Current dollars)

Total

(1972 dollars)

SOURCE: U.S. Agency

1962

252

152

71

32

158

2

-

73

7

25

16

21

4

17

113

-

407

1,350

1,931

for

1963

251

173

73

53

98

5

-

48

22

18

45

10

7

32

33

-

548

1,416

1,992

information provided

1966

583

-

-

32

61

46

-

-

30

19

134

905

,200

, U.

to

. 480) DISBURSEMENTS BY

1964

268

155

113

59

94

5

-

151

27

17

20

16

3

19

36

-

474

1,457

2,021

1965

391

158

63

50

95

3

-

25

14

29

22

11

4

30

32

-

426

1966

567

23

115

143

26

24

-

25

14

27

34

6

7

2

17

-

552

1,353 1,582

1,841 2

International Development

1945-1971, and 1945-1978; information provided

,098

, U.

to

1967 1968

490

-

-

32

45

46

-

-

36

17

107

773

992

S. Overseas

CBO by AID.

392

-

-

10

35

53

-

-

36

15

61

602

746

Loans

MAJOR RECIPIENTS,

1967

360

94

62

74

12

26

-

79

8

-

36

29

3

28

8

-

146

965 1

1,239 1

S. Overseas

CBO by AID.

1968

325

163

95

139

-

58

-

22

23

52

56

5

23

35

12

-

326

,334

,653

Loans

1969

299

-

-

-

20

41

-

-

25

3

55

443

524

and

1970

361

-

-

-

10

44

-

-

19

-

69

503

564

Grants,

FISCAL YEARS

1969

269

8

189

99

-

178

-

10

15

37

28

10

18

37

47

-

270

1,215

1,438

and

1970

222

86

104

111

-

146

-

62

7

41

17

14

4

28

46

-

237

1,125

1,261

Grants ,
1962-1979 (Millions of dollars)

1971

384

-

-

5

-

41

-

-

17

-

126

573

612

1972

385

50

-

55

-

47

-

-

15

-

68

620

634

1973

312

50

-

50

-

45

-

-

11

-

154

622

608

1974

333

50

9

45

33

33

-

-

5

-

132

640

580

1975

188

325

253

88

-

24

83

15

-

-

290

1,266

921

1976

2

700

253

46

35

-

17

35

-

12

22

1,122

859

TQ

__

75

537

86

-

-

79

65

-

-

49

891

663

1977

._

735

700

70

-

-

80

20

-

20

141

1,766

1,265

1978

_

785

751

93

-

-

90

300

-

10

192

2,221

1,490

1979

_

785

835

93

-

-

90

-

-

-

179

1,982

1,223

Total

4,352

3,555

3,368

845

568

559

439

435

239

229

2,710

17,299

16,201

1962-1979 (Millions of dollars)

1971

235

101

107

188

-

98

-

35

6

56

40

27

18

31

29

7

250

1,228

1,311

1972

105

103

212

68

-

125

87

6

6

54

36

38

17

24

8

21

313

1,223

1,248

1973

64

82

159

188

1

118

59

10

3

60

17

37

11

14

6

26

264

1,119

1,094

1974

71

43

7

270

13

11

51

6

3

2

17

16

9

7

4

183

260

973

882

1975

228

85

14

50

117

46

242

8

62

9

13

11

30

10

4

94

315

1,338

1,087

1976

'181

97

117

1

206

57

183

1

59

14

29

19

26

8

-

-

302

1,300

995

TQ

22

33

13

-

16

38

-

2

4

4

3

2

2

-

-

-

53

192

143

1977

126

37

75

-

209

92

83

1

32

7

23

49

44

12

-

-

403

1,193

855

1978

136

58

56

-

192

123

99

-

6

7

25

27

38

18

-

-

444

1,229

824

1979

138

41

38

-

50

96

117

1

9

5

21

24

21

16

-

-

507

1,084

669

Total

4,211

1,692

1,683

1,525

1,287

1,251

921

565

327

464

498

372

289

368

395

331

6,497

22,676

22,215

APPENDIX II-D. MULTILATERAL FOOD AID PROGRAMS

WORLD FOOD PROGRAM

The World Food Program was approved by the United Nations

in 1961. The program is a coordinating mechanism for projectoriented multilateral food aid. The Title II donations of the

United States (and some Title I donations) comprise the U.S.

contribution. The program selects the recipients for its allocation of Title II aid in line with U.S. Congressional directives.

FOOD AID CONVENTIONS

Food Aid Conventions do not distribute food aid directly but

rather coordinate the political and economic aspects of bilateral food assistance. The Food Aid Convention of 1980 commits

donors to providing a minimum volume of 7.6 million metric tons

of food grain annually, with the United States being the major

donor. I/ Whereas donors under the World Food Program make a

monetary commitment, Food Aid Convention donors pledge a specific

quantity. This difference is significant in periods of short

supply and high prices, as in 1973 to 1974. Under the current

convention, the United States is pledged to provide a total of

4.47 million metric tons. Donations under Titles I and II are

counted toward this goal, but not food provided through the

Economic Support Fund.

i/ Press Release, Food Aid Committee, July 2, 1980,

103

APPENDIX II-E. ESTIMATED NET BUDGET COST OF P.L. 480

Table 8 in Chapter II shows the estimated net costs of the

P.L. 480 program in an average year. Total costs are adjusted to

reflect two categories of offsetting amounts: savings in the

overall federal budget, and increases in export revenues.

The assumptions upon which these calculations are based are

outlined below.

It should be emphasized that these calculations are not

based on an actual year but rather on an "average" fiscal year

1980. Because of extraordinary and unsettled events in international agricultural markets, calculations for the actual fiscal

year 1980 are impossible. Using a hypothetical year makes

these calculations typical rather than actual.

PURCHASES FROM THE COMMODITY CREDIT CORPORATION

Some P.L. 480 products are purchased from Commodity Credit

Corporation (CCC) stocks, which reduces net Department of Agriculture outlays. This is in effect an intragovernmental transfer. In fiscal year 1979, reimbursements to the CCC accounted for

only 3 percent of P.L. 480 program costs, or $44.1 million. This

figure was used in the estimate for fiscal year 1980 as well.

LOAN REPAYMENTS

Loan repayments from countries in the P.L. 480 program will

reduce future budgets. The present discounted value of these

repayments should therefore be subtracted from the program costs.

As only Title I sales involve any sort of repayment, the budget

savings will be sensitive both to the overall program level and to

the mix between Title I and Title II funding. CBO has arrived at

a present value of these loan repayments of 26 percent. This

figure is based on the following assumptions:

o 15 percent of Title I loans are made with a two-year grace

period at an interest rate of 2 percent, followed by 19

years of repayment in equal installments at 3 percent

interest on the outstanding balance.

105
o 85 percent of the loans are made with a 10-year grace

period at an interest rate of 2 percent, followed by 31

years of repayment in equal installments at 3 percent

interest on the outstanding balance.

o Future repayments are discounted at a rate of 10 percent.

The value of loan repayments based on sales made in 1980 is

equal to 26 percent of the original Title I budget request for

fiscal year 1980 of $843 million, less $93 million for transportation and 15 percent of Title I funds reinvested under Title III,

for a total of $166 million.

PRICE EFFECTS

In estimating the effect of P.L. 480 on price levels, one

critical parameter is the degree to which P.L. 480 shipments

displace commercial shipments. By law, Title I and Title II

shipments are supposed to be completely additional: they should

not displace commercial shipments at all. Displacement, however,

is difficult to detect. Title I recipients are required to meet a

"usual marketing requirement" and maintain commercial imports near

their average levels for the previous five years, but past imports

are not always a good indication of future import intentions. A

country with increasing imports can, over time, displace commercial imports with P.L. 480 aid. Furthermore, a country that might

increase imports in response to a production shortfall could meet

its "usual marketing requirement" and instead utilize P.L. 480

aid. Any estimates of the actual degree of displacement require

information about the import intentions of recipient countries,

information not readily available from those countries. Because

an accurate displacement figure is difficult to derive, two

displacement figures are used in estimating program costs: no

displacement (0 percent) and 50 percent displacement, which

correspond to complete (100 percent) and 50 percent additionality.

Wheat

With no displacement, P.L. 480 will increase the U.S. and

international price of wheat by about $0.20 per bushel. With 50

percent displacement, the price change should be closer to $0.10

per bushel. These price changes are based on the following

assumptions:

106
Prices will rise by $0.125 per bushel for every additional

100 million bushels of P.L. 480 exports, as supplies on

the commercial markets are reduced. ($0.125 is the middle

of a price response range of $0.10 to $0.15 calculated by

the Department of Agriculture.)

P.L. 480 wheat shipments are 4.3 million metric tons (1.58

hundred million bushels). The P.L. 480 program was

expected to ship this quantity of wheat at the beginning

of fiscal year 1980, before the events in Cambodia and

Afghanistan.

With no displacement, the entire 1.58 hundred million

bushels represent a reduction in supply. If the price

effect of such reductions is $0.125 per bushel per each

hundred million bushels, then 158 million bushels will

raise the price by $0.20 per bushel. With a 50 percent

displacement rate, the additional shipments amount to only

79 million bushels, and prices will rise by only $0.10 per

bushel.

Rice

With no displacement, P.L. 480 will increase the U.S. and

international price of rice by about $1.54 per hundredweight

(cwt.). With 50 percent displacement, the price change will be

closer to $0.77 per cwt. These price changes are based on the

following assumptions:

o Prices will rise by $0.175 per cwt. for every additional

million cwt. of rice shipped under P.L. 480. ($0.175 is

the middle of a price response range of $0.15 to $0.20

calculated by the Department of Agriculture.)

o P.L. 480 rice shipments are 0.4 million metric tons (8.8

million cwt.). The P.L. 480 program was expected to ship

this quantity of rice at the beginning of fiscal year

1980.

o With no displacement, $0.175 per cwt. per million cwt.

times 8.8 million cwt. is equivalent to $1.54 per cwt.

With a 50 percent displacement rate, the additional

shipments amount to only 4.4 million cwt., and prices will

rise by only $0.77 per cwt.

107
FARM PROGRAM SAVINGS

The farm program savings were calculated based on crops

of 2.0 billion bushels for wheat and 120 million cwt. for rice.

Eligibility for deficiency payments is assumed to be 80 percent

for wheat and 100 percent for rice. These figures are roughly

consistent with previous time trends and past experience. The

farm price is assumed to be at or below the target price established by the U.S. Department of Agriculture, and no set-asides or

diversions are in effect. The farm program savings are calculated

by multiplying the price changes effected by P.L. 480 shipments by

the eligible crop. This amount would otherwise go to farmers as

deficiency payments. If prices were to fall as far as the loan

rate, the federal government would have to spend an equivalent

amount on the loan program. With no displacement, P.L. 480 will

reduce farm program outlays by $320 million for wheat and by $185

million for rice, yielding a total farm program savings of $505

million. With a 50 percent displacement rate, the total is

reduced to $252 million.

Farm program savings were calculated only for wheat and rice

because other commodities are shipped in such small quantities

compared to total production that price effects are probably

negligible. P.L. 480 feed grain shipments are about 0.2 percent

of the total crop, while both wheat and rice are about 7 percent.

EXPORT REVENUE CHANGES

Calculations of export revenue changes are based on total

exports of 1.2 billion bushels for wheat and 75 million cwt. for

rice. In all cases, the present discounted value of P.L. 480 loan

repayments, or $166 million, represents an increase in export

income.

P.L. 480 was estimated to account for 158 million bushels

of wheat and 8.8 million cwt. of rice. Commercial exports would

thus be 1.04 billion bushels for wheat and 66 million cwt. for

rice. If it is assumed that P.L. 480 commodities are taken

entirely from domestic supply, and that there is no displacement,

the price increases effected by P.L. 480 of $0.20 per bushel for

wheat and $1.54 per cwt. for rice will increase the value of wheat

shipments by $208 million and rice shipments by $102 million,

which, together with the P.L. 480 repayments, will increase the

export earnings of the United States by $476 million.

108
Assuming 50 percent displacement, the price effects are cut

in half. Commercial wheat exports would bring in $104 million

more, and commercial rice exports would bring in $51 million

more. Some commercial exports have, however, been displaced, and

the revenues that would have resulted from these sales must be

subtracted from the price gains. It is assumed that the wheat is

sold for $3.40 per bushel and the rice for $9.05 per cwt. (These

were the target prices at the beginning of fiscal year 1980.) I/

If half of P.L. 480 wheat sales (79 million bushels) and half of

rice sales (4.4 million cwt.) are displacements of commercial

sales, $261 million will be lost on wheat and $36 million on rice.

This loss of $297 million is offset by the increase in revenue

from the price rise effected by P.L. 480, $104 million on wheat

and $51 million on rice, for a loss of $155 million on commercial

shipments. When the P.L. 480 repayments are added to this figure,

the net gain is $23 million.

P.L. 480 commodities might not be taken entirely from domestic supply. The price rise might discourage other foreign

buyers. In the unlikely event that all the commodities were taken

from exports, then net export earnings would drop by a total of

$96 million with no displacement, and by $273 million with 50

percent displacement. In this case, the domestic price elasticity

would have to be zero.

I/ These prices reflect the effect of the P.L. 480 program. Were

it not for the program, the prices would be lower: $3.20 for

wheat and $7.51 for rice with no displacement, and $3.30 and

$8.28 with 50 percent displacement. These prices were used to

calculate the loss in export revenues.

109

APPENDIX III-A. INTERNATIONAL ORGANIZATIONS AND PROGRAMS

The United States makes contributions to various agencies

of the United Nations and to other international organizations

such as the Organization of American States and the Organization

for Economic Cooperation and Development. These contributions are

either assessed or voluntary. The bulk of the U.S. donations are

assessed on the basis of ability to pay, usually measured by

net national income. _!/

Only voluntary contributions are considered under the Foreign

Economic and Financial Assistance section of the budget (Function

150), and therefore are subject to annual Congressional authorization and appropriation. The major recipient agencies are the UN

Development Program, which concentrates on technical assistance;

the UN Relief and Works Agency, which aids refugees; and the UN

Children's Fund, which provides clothing, food, and clinics for

children. As shown in Appendix Table III-A1, these contributions

have risen by $68 million in the past three years, from $191

million in fiscal year 1976 to $259 million in fiscal year 1979.

Measured in constant dollars, however, there has been only a small

increase.

Currently, U.S. contributions comprise around 20 to 30

percent of the international organizations1 budgets, a decline

from the level of the mid-1960s but a level consistent with

encouraging more sharing of financial responsibilities by the

various donor countries.

I/ In fiscal year 1979, the United States contributed an assessed

share of $386 million to international organizations.

Ill
APPENDIX TABLE III-A1. APPROPRIATIONS FOR U.S. VOLUNTARY CONTRIBUTIONS TO INTERNATIONAL ORGANIZATIONS AND

PROGRAMS, FISCAL YEARS 1976-1979 (Millions

of dollars) a/

1976 1977 1978 1979

United Nations and

Related Agencies

UN Development Programs 100 100 115 126

UN Relief and Works Agency 40 67 52 52

UN Childrens1 Fund 20 20 25 30

Other 2 15 19 20

Subtotal 162 202 211 228

Organization of American States 24 15 18 16

Other 5 6 10 15

Total

(Current dollars) 191 223 239 259

Total

(1972 dollars) 146 160 160 160

SOURCE: Information provided to CBO by the Agency for International Development.

aj Some voluntary contributions are funded under other accounts.

These include the UN Fund for Regulation Activities (funded

through AID); UN Forces in Cyprus (funded through ESF); and

the UN Fund for Drug Abuse Control (funded through the Department of State).

112
APPENDIX III-B. LOAN AUTHORIZATIONS BY MULTILATERAL DEVELOPMENT BANKS, U.S. FISCAL YEARS

1962-1979 (Billions of dollars)

1962-71 1972 1973 1974 1975 1976 TQ 1977 1978 1979 Total

World Bank Group

IBRD

IFC

IDA

10.2

0.5

3.1

1.9

0.1

0.7

1.8

0.2

1.7

3.5

0.2

1.1

4.0

0.2

1.6

4.8

0.2

1.7

1.1

a/

0.2

5.8

0.2

1.4

6.0

0.3

2.8

7.2

0.4

2.6

46.3

2.3

16.8

IDB

ADB

AfDB

Total

3.6

0.4

£/

17.8

0.5

0.3

£/

3.5

0.9

0.4

£/

4.9

1.1

0.4

0.1

6.4

1.1

0.6

0.1

7.7

1.4

0.9

0.2

9.2

0.3

0.1

a/

1.7

1.4

0.7

0.3

9.8

1.9

1.0

0.2

12.3

2.0

1.0

0.2

13.4

14.2

5.9

1.1

86.6

SOURCE: Agency for International Development, U.S. Overseas Loans and Grants, 1945-1978,

p. 204, and 1945-1979, p. 208.

NOTE: Detail may not add to totals because of rounding,

a./ Less than $100 million.
APPENDIX III-C. TERMS AND ELIGIBILITY CRITERIA OF U.S. AND MULTILATERAL DONORS

Inter-American

Agency for World World Development Bank,

International Bank Bank Ordinary and InterDevelopment (IBRD) a/ (IDA) Regional Capital a.

Lowest-Income Recipients

Maturity (years)

Grace period (years)

Grace period

(percentage interest rate)

Amortization period

(percentage interest rate)

40

10

50

10

3/4 W

3/4 b/

Middle-Income Recipients

Maturity (years)

Grace period (years)

Grace period

(percentage interest rate)

Amortization period

(percentage interest rate)

20

2

2

3

15-20

3-5

7.9

7.9

15-30

£/

7.9

7.9

SOURCE: Information provided to CBO by the Agency for International Developmen

(July 1980).

NOTE: All terms were those in effect in mid-1979.

114
Inter-American International Fund

)evelopment Bank, Asian Asian African African for Agricultural

Tund for Special Development Development Development Development Development

Operations Bank Fund Bank Fund (IFAD)

40 40

10 10

1 - 1 b/

50

10

3/4 b/

50

10

1 b/

1 b/ - 3/4 b/ 1 b/

25-30

5-7

2-4

2-4

10-30

2-7

7.7

7.7

12-25

2-6

8

8

15-20

3-5

4-8

4-8

i/ The interest rate is 1/2 percent above the bank's cost of borrowing. Rates change

every quarter. These rates were in effect April to June 1979.

>/ These loans are not subject to interest payments. The charge is for the cost of

the services associated with processing the loans.

\l The grace period is tied to the time required to finish the project plus an

additional six months.

115
APPENDIX III-D. DISTRIBUTION OF FUNDS FROM MULTILATERAL DEVELOPMENT BANKS

Country 1962 1963 1964 1965 1966 1967 1968 1969 1970

India

Brazil

Mexico

Indonesia

South Korea

Philippines

Colombia

Argentina

Yugoslavia

Turkey

Thailand

Bangladesh

Egypt

Malaysia

Morocco

Pakistan

Nigeria

Peru

Kenya

Iran

Subtotal

Other Countries

195

26

183

-

-

39

95

122

-

-

-

-

-

-

-

22

-

15

3

-

700

437

203

19

48

-

14

23

85

33

65

27

37

-

-

-

17

54

14

16

-

-

655

226

95

22

72

-

-

-

60

5

35

-

1

-

-

59

-

133

32

26

3

17

560

577

207

157

48

-

-

26

23

51

70

39

23

-

-

-

15

98

117

29

10

37

950

593

199

147

225

-

-

5

66

24

-

1

31

-

-

30

38

77

32

79

-

10

964

521

226

237

43

-

-

49

51

77

10

25

11

-

-

53

-

68

1

36

18

25

930

606

25

138

213

-

17

-

83

118

60

-

54

-

-

14

4

45

-

39

15

36

861

496

209

183

109

51

93

18

189

188

46

88

42

-

-

36

11

174

20

-

4

68

1,529

813

271

374

280

93

72

68

181

167

99

15

57

-

26

30

75

61

36

9

46

47

2,007

994

Total

(Current

dollars) 1,137 881 1,137 1,543 1,485 1,536 1,357 2,342 3,003

Total

(1972

dollars) 1,627 1,239 1,577 2,099 1,969 1,972 1,682 2,772 3,364

SOURCE: Agency for International Development, U.S. Overseas Loans and Grants,

1945-1971, and 1945-1979.

116
) MAJOR RECIPIENTS, U.S. FISCAL YEARS 1962-1979 (Millions of dollars)

L971

243

291

175

131

145

61

118

207

99

122

27

-

-

67

45

47

99

100

44

169

,190

,212

1972

314

675

336

104

99

78

62

134

118

158

60

-

30

60

24

8

120

13

56

110

2,559

927

1973

722

362

332

218

289

104

236

106

109

201

129

223

51

93

109

20

3

11

9

97

3,424

1,476

1974

442

695

466

148

153

228

122

13

148

242

208

91

44

204

140

-

109

95

84

367

3,999

2,384

1975

849

478

558

441

410

309

82

216

262

220

67

319

231

143

66

31

107

75

104

52

5,020

2,640

1976

901

831

542

678

513

402

184

107

292

254

269

209

175

128

77

55

70

147

130

-

5,964

3,248

TQ

80

175

95

31

61

34

64

91

-

26

81

-

52

48

77

18

17

46

45

-

1,041

612

1977

891

706

263

541

446

475

371

493

336

145

208

196

373

156

180

70

62

154

123

-

6,189

3,652

1978

1,602

888

636

695

540

665

397

323

452

205

344

203

165

171

89

58

90

6

113

-

7,642

4,631

1979

1,207

960

932

1,071

666

436

518

383

275

500

367

425

340

173

422

235

182

186

265

-

9,543

3,827

Total

8,881

7,364

5,556

4,202

3,518

3,020

2,987

2,858

2,476

2,268

2,016

1,666

1,487

1,465

1,389

1,274

1,111

1,082

1,072

1,035

56,727

29,872

,402 3,486 4,900 6,383 7,660 9,212 1,653 9,841 12,273 13,370 86,599

,631 3,557 4,790 5,787 6,268 7,054 1,230 7,049 8,231 8,253 74,151

117

APPENDIX V-A. METHODOLOGY USED IN CALCULATING "TRADE CREATION"

AND "TRADE DIVERSION"

The equations used to calculate changes in eligible developing country (EDC) exports resulting from trade concessions follow

the methodology used by Baldwin and Murray. I/ The equation for

increases in LDC exports resulting from additions to U.S. demand,

referred to as trade creation (TC) in the economics literature,

is:

TC = Mie±[ At± 4- (1 + t±)]

Where

M. = initial level of imports from the EDC by

the developed nation granting preferences;

e = import demand elasticity;

At = change in tariff rate;

t = the initial tariff level; and

i = the ISAC trade categories. 2/

The diversion of trade from nonbeneficiary sources is

calculated by weighting trade creation by the ratio of imports

from nonbeneficiary sources (M ) to domestic production (V.):

I/ R.E. Baldwin and T. Murray, "MFN Tariff Reductions and Developing Country Trade Benefits Under the GSP," Economic Journal

(March 1977), pp. 30-46.

2J Data on tariff rates and trade volumes were obtained from

the Office of the U.S. Trade Representative, and the import

demand elasticities from William R. Cline and others, Trade

Negotiations in the Tokyo Round; A Quantitative Assessment

(The Brookings Institution, 1978).

119
TD = TC.(M -S- V.)

i n . i

This equation is based on the assumption that the substitutability

of imports between goods originating from ineligible countries—

mostly developed countries—and EDCs is the same as the substitutability between U.S.-made goods and imports from EDCs.

120
APPENDIX V-B. SECTORAL DISTRIBUTION OF INCREASED ELIGIBLE DEVELOPING COUNTRY

EXPORTS OF MANUFACTURES RESULTING FROM GSP IN 1976 AND 1977 (Millions

of dollars)

1976 1977

Diversion

Additional From

U.S. Ineligible

Demand Countries Total

Diversion

Additional From

U.S. Ineligible

Demand Countries Total

Textiles

Lumber

Paper

Industrial Chemicals

Drugs and Soaps

Paints, Miscellaneous

Chemicals

Rubber, Plastic

Leather

Stone, Clay, Ceramics

Ferrous Metals

Nonferrous Metals

Cutlery, Hand Tools

Other Fabricated

Metals

Construction, Mining

Equipment

Office Equipment

Non-Electric Equipment

Heavy Electrical

Machinery

Consumer Electronics

Scientific Instruments

Photographic Equipment

Non-Consumer

Electronics

Transportation

Equipment

Aerospace

Automotive

Miscellaneous

Manufactures a/

Total

13.2

5.1

0.2

1.7

1.6

0.3

27.1

26.0

4.2

3.3

12.4

7.1

18.8

0.1

2.0

6.7

7.6

13.5

8.7

3.5

0.5

5.3

3.3

3.3

184.0

359.5

0.3

0.3

—

0.2

0.1

—

1.0

3.7

0.2

0.3

0.9

0.2

0.6

—

0.1

0.4

0.2

4.9

0.6

0.3

—

0.3

0.1

0.5

14.0

29.3

13.5

5.4

0.2

1.9

1.7

0.3

28.1

29.7

4.4

3.6

13.3

7.4

19.4

0.1

2.1

7.1

7.8

18.4

9.3

3.8

0.5

5.6

3.4

3.8

198.0

388.8

17.7

6.4

0.3

2.1

2.1

0.3

39.8

23.3

7.2

6.4

5.7

11.0

30.2

0.1

2.1

9.3

13.1

13.1

14.9

4.9

1.2

13.7

3.3

6.6

276.0

510.8

0.4

0.4

—

0.2

0.1

—1.3

3.5

0.4

0.7

0.4

0.4

1.0

—

0.1

0.5

0.4

4.4

1.0

0.6

—

0.8

0.1

0.9

20.8

38.4

18.1

6.8

0.3

2.3

2.2

0.3

41.1

26.8

7.6

7.3

6.1

11.4

31.2

0.1

2.2

9.8

13.5

17.5

15.9

5.5

1.2

14.5

3.4

7.5

296.8

549.2

SOURCE: CBO estimates based on data provided by the Office of the U.S. Trade

Representative.

a/ This category includes sporting goods; toys and games; jewelry; musical instruments; furniture; printing and publishing; writing instruments; small arms and

ammunition; and manufactures not elsewhere classified.

121
APPENDIX V-C. SECTORAL DISTRIBUTION OF INCREASED EXPORTS OF ELIGIBLE

DEVELOPING COUNTRIES, OTHER THAN TOP FIVE BENEFICIARIES, IF

ALL ELIGIBLE GOODS HAD ENTERED DUTY FREE IN 1977 (Millions

of dollars)

-

Textiles

Lumber

Paper

Industrial Chemicals

Drugs and Soaps

Paints, Miscellaneous

Chemicals

Rubber, Plastic

Leather

Stone, Clay, Ceramics

Ferrous Metals

Nonferrous Metals

Cutlery, Hand Tools

Other Fabricated Metals

Construction, Mining

Equipment

Office Equipment

Non-Electric Equipment

Heavy Electrical

Machinery

Consumer Electronics

Scientific Instruments

Photographic Equipment

Non-Consumer Electronics

Transportation Equipment

Aerospace

Automotive

Miscellaneous

Manufactures

Total

Increased

Trade

Due to GSP

6.4

3.0

—

1.4

1.0

0.2

7.3

17.0

1.3

2.4

5.0

2.3

4.1

—

0.8

2.3

2.6

2.1

3.8

1.1

0.1

2.4

3.4

1.6

54.7

126.4

Additional

Increase Due

to Removal of

Limitations a/

4.5

1.2

—

0.2

0.6

0.2

0.4

2.4

0.6

0.1

9.1

0.1

0.5

—

2.6

0.5

2.5

4.7

0.5

0.5

0.1

1.8

0.3

0.4

32.4

66.2

Percent of

Increase

68

40

—14

60

100

5

14

46

4

182

4

12

32—5

22

96

223

13

45

100

75

9

25

59

52

SOURCE: CBO estimates based on data provided by the Office of the U.S.

Trade Representative.

aj These restrictions include Competitive Need Criteria (50 percent market

shares and ceiling on value of trade in specific products) and valueadded limitations, transshipment, etc.

122
APPENDIX V-D. SECTORAL DISTRIBUTION OF NET CHANGE IN GSP-ELIGIBLE COUNTRIES1 EXPORTS OF MANUFACTURES ON A 1977

TRADE BASE RESULTING FROM TOKYO ROUND TARIFF REDUCTIONS (Millions of 1977 dollars) a/

Additional U.S. Net Changes in

Diversion Demand for Exports GSP-Eligible

from GSP from GSP-Eligible Countries' Trade

Exports Due to Countries Due to Resulting from

Tariff Reductions Tariff Reductions Tariff Reductions

Lumber

Paper

Industrial Chemicals

Drugs and Soaps

Paints, Miscellaneous Chemicals

Rubber, Plastic

Leather

Stone, Clay, Ceramics

Ferrous Metals

Nonferrous Metals

Cutlery, Hand Tools

Other Fabricated Metals

Construction, Mining Equipment

Office Equipment

Non-Electric Equipment

Heavy Electrical Machinery

Consumer Electronics

Scientific Instruments

Photographic Equipment

Non-Consumer Electronics

Transportation Equipment

Aerospace

Automotive

Miscellaneous Manufactures

0.1

—

0.1

0.2

—

1.6

1.1

0.3

1.5

1.1

0.3

0.4

—

0.2

0.3

0.4

9.7

2.1

0.4

0.3

0.4

0.2

0.3

18.0

8.4

0.2

0.9

0.4

0.3

38.0

8.0

2.8

8.7

8.4

1.3

3.7

0.2

2.4

1.8

8.0

24.4

15.9

1.8

17.9

3.3

7.2

2.7

199.9

8.3

0.2

0.8

0.2

0.3

36.4

6.9

2.5

7.2

7.3

1.0

3.3

0.2

2.2

1.5

7.6

14.7

13.8

1.4

17.6

2.9

7.0

2.4

181.9

Total 39.0 366.6 327.6

SOURCE: CBO estimates based on data provided by the Office of the U.S. Trade Representative,

a/ Excluding textiles.
APPENDIX V-E. ESTIMATED MAXIMUM LOSS IN NONRUBBER FOOTWEAR

EXPORTS TO THE UNITED STATES FROM TAIWAN AND SOUTH

KOREA DUE TO QUANTITATIVE RESTRICTIONS IN 1979

Taiwan South Korea

1979 Percentage Share

of U.S. Market 30.9 6.0

1979 Volume of Exports

(millions of pairs) 124.9 24.4

1979 Value of Shipments

(millions of 1979 dollars) 463.1 166.6

Average Percentage Share

of U.S. Market,

1976-1977 43.6 13.9

Volume of Trade in

1979 Corresponding to

1976-1977 Market Share

(millions of pairs) 176.4 56.2

Value of 1976-1977

Market Share in 1979

(millions of 1979 dollars) 654.1 a./ 383.7 b/

Net Loss in Value of Shipments

(millions of 1979 dollars) 191.0 217.1

SOURCE: CBO estimates based on data provided by the U.S. Department of Commerce.

a./ Assuming an average unit price of $4.045, obtained by dividing

the value of shipments by the volume of shipments.

b/ Assuming an average unit price of $6.856, obtained by dividing

the value of shipments by the volume of shipments.

124
APPENDIX V-F. EXTENT TO WHICH AGGREGATE CEILINGS ON U.S TEXTILE

AND APPAREL IMPORTS WERE FILLED IN 1978 (Millions

of square-yard equivalents)

Pakistan

Hong Kong

Taiwan

Macao

South Korea

Haiti

Poland

Philippines

Singapore

India

Colombia

Romania aj

Brazil

Aggregate

Quota Level

150.0

957.7

758.9

42.4

623.7

88.5

44.5

255.1

232.0

186.2

104.0

33.5

130.5

Total Volume

of Shipments

165.1

924.2

700.0

38.7

541.7

75.4

32.3

161.2

123.3

85.6

45.8

12.3

33.0

Percent of

Aggregate

Quota Filled

110.1

96.5

92.2

91.4

86.9

85.2

72.5

63.2

53.1

46.0

44.0

36.7

25.3

SOURCE: U.S. Department of Commerce, Bureau of Textiles,

a/ Only products made from wool and manmade fibers.

125
APPENDIX V-G. NUMBER OF PRODUCT-SPECIFIC QUOTAS ON U.S. TEXTILE

AND APPAREL IMPORTS FILLED BY 70 PERCENT OR MORE IN

1978

Number of Number of Quotas Percent of Quotas

Product-Specific 70 Percent 70 Percent

Quotas or More Filled or More Filled

Uong Kong

South Korea

Pakistan

Taiwan

Poland

Macao

Thailand

Malaysia

Haiti

Singapore

Mexico

Romania

India

Brazil

Colombia

31

77

28

80

45

36

55

40

43

56

79

52

74

30

75

23

36

11

29

13

10

14

9

9

12

16

7

9

3

6

74

47

39

36

29

28

25

23

21

21

20

13

12

10

8

SOURCE: CBO estimates based on information provided by U.S.

Department of Commerce, Bureau of Textiles.

O

126