HARVARD UNIVERSITY

CENTER FOR INTERNATIONAL AFFAIRS

ROBERT R. BOWIE, Director
HOLLIS B. CHENERY
SAMUEL P. HUNTINGTON
ALEX INKELES
HENRY A. KISSINGER
EDWARD S. MASON
THOMAS C. SCHELLING
RAYMOND VERNON

6 DIVINITY AVENUE

CAMBRIDGE

MASSACHUSETTS 02138

October 5, 1965

To: Messrs. Bowie, Chenery, Emerson, Halperin, Huntington, Inkeles, Kaysen Kissinger, Lewis, Lipset, Mason, Mesthene, Meyer, Montgomery, Neustadt, Papanek, Price, Smithies, and Vernon

From: T.C. Schelling

Subject: Cost-effectiveness in the State Department

The State Department has just set up a Center for Overseas Program Analysis (COPA) to do, or to experiment with, "systematic analysis of the effectiveness of the wide array of overseas programs and activities which support our foreign policy objectives." I believe this is part of the effort that Harry Rowen has been promoting since he joined the Budget Bureau. The Director of COPA is Howard E. Ball; he and two colleagues from COPA, John Golden and Joseph Mintzes, have asked me to give them a chance to consult with some of the Harvard community, to tell us about their plans and to get our comments, and I believe also to discover what kind of continuing help they can expect from people at Harvard. They will spend Friday October 15 here as my guests.

I told them I would set up a meeting at 10:00 in the morning to which I would invite the people I thought would be interested, so they could tell their story once and get a little discussion. I hope to confine that to one hour. Thereafter, through lunch and the afternoon, they would like to talk to us individually or in small groups, or if there were that much interest, the same large group.

I have put together a list of about twenty of us who may have some interest, to whom I am sending this announcement. I personally think their job is one in which we ought to have an interest, or at least some curiosity, and at least some of us ought to try to be of help. The reason I am organizing this is partly that this Center is a good place for them to visit, mainly that Joseph Mintzes is an old friend from Marshall Plan days, and I wanted to be personally helpful.

I am not urging you to be interested. I shall not be embarrassed nor
consider the occasion wasted, if only two or three of us show up and I told the
State Department people that I didn't want to make work for them or my colleagues
just to keep the day full. I propose to meet in our seminar room, on the second
floor, if I expect more than eight or nine people, and in Bowie's office on the
ground floor if we are fewer, just to be more comfortable and informal.

You do not need to let me know in advance whether you will show up.
If I expect six and twelve show up we can easily walk upstairs. If you would
like to see these people for fifteen minutes or an hour, it would help me to
know it. I can then shchedule their day and ours. Lunch is available if anybody
wants to lunch with them. If you wish, you can wait until you hear them and
then express interest but my computer facilities for scheduling the rest of the
day will be less burdened if I can make dates in advance.

I enclose the "guidelines" that they sent me. Please respond on
either Ext. 2124 to Miss Cox or 2174 to Mrs. Coleman.

TCS:ac

HARVARD UNIVERSITY

FEB 10 1966

February 8, 1966

TO: Messrs. Chenery, Emerson, Halperin, Huntington, Inkeles, Lipset, Mason Papanek, and Vernon

FROM: T. C. Schelling

SUBJECT: Occasional Papers

We agreed at an earlier meeting that it was wise to go on with our series of "Occasional Papers" and that on the average we might expect to publish three or four in a year. We agreed that the Occasional Papers should be an outlet for manuscripts that did not readily fit any of the established journals, or that were a little too long for the established journals, or that might be of such timely value that they shouldn't wait for the production lag of the regular journals, or that were so specialized (like annotated bibliographies) that the Center would want to produce them as a kind of public service. We agreed that the Papers could be an outlet for Research Associates, for Fellows, and occasionally for visitors or faculty members.

We have, however, no regular editorial procedure for deciding what manuscripts are eligible. An Occasional Paper is likely to cost $1000-1500 not counting the "overhead" of editorial handling within the building. We have no prescribed budget for this purpose and probably should not.

It might be wise to have an acknowledged editorial procedure. I should think that if the manuscript falls naturally in one of our regular research areas, and the people responsible for that research area are prepared to use the funds under their jurisdiction, the simple procedure should be to submit the manuscript to the Director through the Editor, with the presumption that the substantive judgment on the worth of the manuscript is the business of the sponsoring faculty member.

If the papers proposed for publication with Center funds are outside
the jurisdiction of the sponsoring faculty member, or if the manuscript is
generated outside of our identified research areas--such as a paper written by
one of the Fellows--perhaps the procedure should be that several of us should
read the paper, if necessary asking some research associates or outside friends
to read it, and publish it if a significant number of us are willing to commit
ourselves with some enthusiasm. A "significant number" might be about three.
Perhaps Bob Erwin is the one to decide, in consultation with either the Director
or one or two interested faculty members, who should be asked to read it. Some
kind of brief written endorsements (or longer letters with suggestions or criticisms)
could then be submitted to Bob Erwin. I suppose the Director should then be the
one finally to decide that the reading procedure has been adequate and the manuscript
has passed, and should authorize Bob to go ahead with production.

Any comments or suggestions?

TCS:ac

cc. B. Brown
R. Erwin
R. Bowie
H. Kissinger

HARVARD UNIVERSITY

February 8, 1966

TO: Messrs. Chenery, Emerson, Halperin, Huntington, Inkeles, Lipset, Mason, Papanek, and Vernon

FROM: T. C. Schelling

For our lunch meeting on February 16th (12:15 ending at 2:00) I hope to have less business than would occupy the whole time, and have suggested to Bob Bowie that he join us and talk to us about the work he is doing this year. As you perhaps know, he is trying to work ahead a decade in the field of foreign policy--or at least that is my understanding, and probably my understanding is poor. That is one reason why I thought we all might like to talk with him. And he said he would like to talk with us. This will be the first such lunch meeting devoted partly to "entertainment" rather than just business.

TCS:ac

cc. R.R. Bowie
H. A. Kissinger

HARVARD UNIVERSITY

FEB 10 1966

February 8, 1966

FROM: T. C. Schelling

In addition to research proposals that fall within our presently recognized areas of research, and that are fairly clearly the responsibility of an identified faculty member or perhaps two faculty members, there are some proposals that may have merit that are of more general interest. Not everything interesting in international affairs falls readily into one or two presently recognized areas of responsibility; as a matter of fact even "international affairs" doesn't necessarily fit anywhere now.

The problem partly arises with respect to promising junior faculty people at Harvard who might be associated with us. These are often very productive people, very energetic people, people willing to take on work and responsibility for the privilege of being affiliated with us, people who are not yet spoiled by a high level of office support, people who cost us only a fraction of a comparatively small salary, and people who provide an active link with the Harvard community. The desirability of affiliating a few such people with us each year probably ought not to depend on whether or not they have a research interest that fits an area that happens to have some spare money.

We do not have enough proposals of this sort now to justify my asking all of you to assemble to go through a budgetary procedure, although in principle that might be the proper thing to do. Instead I propose we let a committee handle this and I hereby appoint such a committee to consist of Inkeles, Huntington and Vernon and myself plus any other faculty member who is willing to volunteer. Because scheduling is so hard for all of us, I will set up a meeting when those three can meet with me, and anyone else who would like to join us either to discuss a proposal, to see what goes on, or just to enjoy our company, is welcome and may just call me or Mrs. Coleman to find out when the meeting is.

THOMAS C. SCHELLING

Since 1958, Professor of Economics, Harvard University, and a faculty member of the Center for International Affairs, Harvard University.

Born 1921, B.A. 1943 (University of California), Ph.D. 1951 (Harvard University).

From 1948 to 1953 he was with the ECA Mission to Denmark, the Office of the ECA Special Representative in Paris, the Special Assistant to the President for Foreign Affairs, the Office of the Director for Mutual Security, and the Foreign Operations Administration. From 1953 to 1958 he was in the Department of Economics, Yale University. During 1958-59, on leave from Harvard, he was with the RAND Corporation.

He has been a regular lecturer on military policy at several war colleges and the Foreign Service Institute, and a consultant to the Departments of State and Defense, the Arms Control and Disarmament Agency, the RAND Corporation, the Institute for Defense Analyses, and other organizations concerned with national security. He is a member of the Defense Science Board, Department of Defense. During 1960-63 he was a member of the Scientific Advisory Board of the United States Air Force. During 1961-64 he was a member of the Research Advisory Board of the Committee for Economic Development.

He is the author of *National Income Behavior*, 1951, *International Economics*, 1958, *The Strategy of Conflict*, 1960, *Strategy and Arms Control* (with Morton H. Halperin), 1961, and of articles in *Operations Research*, *Foreign Affairs*, *Politique Etrangere*, *Europa-Archiv*, *World Politics*, *Bulletin of the Atomic Scientists*, *American Economic Review*, *Review of Economics and Statistics*, and other journals. His most recent book, *Arms and Influence*, is scheduled for publication by Yale University Press in May, 1966.

During 1965-66 he is Acting Director of the Center for International Affairs at Harvard University.

2/10/66

HARVARD UNIVERSITY

February 24, 1966

FROM: T.C. Schelling

You will all be happy to learn, perhaps even jealous, that Sam recently stuck gold while prospecting in New York on a grubstake provided by the Center, and proposes to spend a quarter million dollars over the next four years on something called "Political Institutionalization and Social Change." You will ask me what that is. I propose we let Sam tell us, and hope he will be able to do so at our next faculty lunch scheduled for March 2nd at the usual hour and with the usual refreshments.

I will try to finish the business before coffee and leave us at least forty-five minutes for discussion with Sam, which gives us slightly more than $5,000 per minute to talk about.

TCS:ac

cc. R.R. Bowie
H.A. Kissinger

Rough but Final

Four Days in Budapest
T.C.S.

I went to get impressions and I got some. Four days'
worth does not qualify me as an authority, but it was four
days more than I'd spent there before.

I recommend it. The city is drab -- window shopping is
no fun in a socialist country, nor looking at young women, at
least not yet -- and I commend another season than winter. But
I met some exciting people and picked an exciting moment in
history, I got some strong impressions. They may be wrong,
or distorted and in need of correction by people who know
better; but they are the currency in which I measure the
worth of the trip, and I calculate a net profit.

I talked to only eight people. Seven of them were men of
some distinction. Though I had repeated conversations with a
couple of them, my average is barely more than two conversations
per day. This low ratio was due partly to hasty planning at
the last minute, partly to the shortage of taxis and good
telephone connections, partly to a lack of aggressiveness
resulting from my not being sure just who the Hungarians
thought I was, and partly to my desire to do some ordinary
sightseeing. Four of the people had been selected by Alexander
Szalai, research director of UNITAR, (a Hungarian mathematical
sociologist), one by Milton Katz; the other three I met through

-2-

these first five. This was a biased selection, but Ed Alexander,
in charge of cultural relations at our embassy, thought it a
good selection.

We talked about economic reform, Vietnam, East-West
relations, and political life in Hungary. Nearly everybody,
whether his English was good or bad, was articulate and
communicative. Everybody was cordial. And though I was
sensitive that discussion might be inhibited I never, or
almost never, felt that anybody was lowering his voice, choosing
his words noncommitally, or speaking differently from the way
he might speak in my own home. I am not practiced at judging
this, but that's my judgment.

Only one of these people was represented to me as a
member of the Communist party. That was Peter Renyi, deputy
or associate editor of *Népszabadság*, the largest party newspaper
in Hungary. The three hours I spent with him were the most
rewarding, and, I'll describe his conversation in some detail.
The others I'll mention as we go along.

********

The strongest impression is that Hungarians consider
themselves on the verge of momentous economic reform. Technically,
the reform is all in the direction of freer markets, with prices
reflecting supply and demand and enterprises enjoined to seek
profits. In philosophy, it is not quite a return to the free

-3-

market; investment planning will remain under state control.

There is an ambitious effort to introduce mathematical programming into the state's economic planning; forty-one sectors of the economy will have the benefit of computerized input-output analysis. But the criteria behind this "rationalization" of the planning effort will apparently be the criteria familiar to, and used by, Western economist who deals with water resources, transport, land usage, and so forth. (I was struck by the analogy between what the Hungarians will have to do with their investment planning and what Secretary McNamara has been trying to do with the Defense Establishment.)

I spent two and a half hours with Professor Imre Vajda, recently retired from his professorship at the Economics University and evidently very active as an advisor to the government. (He told me he was confirming a prediction that Nicholas Kaldor had made, that once a man retires he becomes really busy, with committees, commissions and advisory boards.) He seemed a well-trained economist of the Western type. We discussed prices, rents, wages, import and exchange-rate policy, exports, the backwardness of the construction industry, savings and interest rates, the grey market in certain foreign currencies, the second-hand market in automobiles, and the bureaucratic management of business enterprises. I was struck with how similar our conversation was to conversations I had had with West-European economists in the early days of the Marshall Plan. In those days

-4-

the hangover of wartime controls and distorted exchange rates
led to exactly the same problems that Hungary is suffering
from now. There was almost nothing Vajda said in two and a
half hours that would identify him as a Hungarian of 1967...
rather than an English or Danish economist of 1949. In fact,
we spent a lot of time remarking together on how universal
these problems are. We discussed, for example, the evasion of
exchange controls, and agreed that west European economists of
the late 1940's would be at home in Hungary today dealing with
those problems. We discussed the housing situation and agreed
that Hungary's problems were much the same as those of prolonged
rent control in New York or anywhere else: old folks would not
vacate a large low-rate apartment after their children had
grown up and left home; subletting rates on one room of an
apartment were higher than the rental in the whole apartment;
maintenance was poor, arbitrary, and haphazard; the economic
advantage of a preposterously low rent to an individual tenant
was substantially washed out by salary levels that took his
low-rent payments into account; and so forth. Applications for
new automobiles are opened periodically, and had opened the day
before we talked; the scheme is that one must make a substantial
deposit in a postal savings account against an application to
purchase a new car, and the waiting list is approximately two
years. The post offices had been jammed with people making

-5-

postal-savings deposits, most of whom had nothing to lose by
making an application, many of whom expect to sell their car
secondhand if, in the end, they didn't want it, at a price
higher than they would pay for it.

And so forth. We were joined by Dr. Janos Kornaoi, a
first-rate mathematical economist, 39 years old, the man in
charge of the mathematical programming effort that I mentioned.
He added his own analyses and anecdotes, and the three of us
continued to sound like any three Western economists discussing
agricultural price supports, tariff policy, rent controls,
rationing, or public-utility regulation.

I was struck not only by the fact that these people
discussed economics the way we discuss it here, but that they
were reasonably optimistic about the relevance of all these
principles to policy in the immediate future. We talked a little
about resistance to this free-market economics, and they were
much less concerned about doctrinaire resistance from socialists
than about the difficulty of getting the present generation of
business managers to understand what was going to be expected
of them. Here was where the McNamara analogy was pertinent. The
problem is to introduce "cost-effectiveness" criteria in enter-
prises in which the managers are not used to it. Vidja mentioned
that in a recent meeting of managers of some enterprises, one
member of the managerial class commented that life was going to

-6-

be more uncomfortable under the reforms because he was going to
have a whole different approach to business management.

Let me anticipate at this point my description of Renyi's
remarks. (He's the Communist editor of the newspaper.) He began
our discussion with some emphatic remarks about the important
economic revolution that Hungary was going through. Nothing
he said contradicted what Vajda and Kornoai had said. What
impressed me was the precise and articulate way that he described
this economic reform. Hungary, he said, had recovered from the
war, had already exploited the most obvious opportunities for
investment, innovation, and expropriation, and had no miracles
of socialist planning waiting to be exploited. Hungary was
capable, he said, of a good but not spectacular level of
investment, dependent on its own savings for most of what it
could invest. No economic reform, he said, could break out of
the restraints that sheer arithmetic imposed on the Hungarian
rate of investment. But, he said, these new economic reforms,
in the direction of more rational prices, a better calculation
of profit and loss, and a better system of market information
would permit Hungary to apply its limited investment resources
in directions yielding greatest economic return. I did not take
notes and cannot quite reproduce his language, but he was quite
eloquent about the free market as a system of information,
permitting judgments of marginal returns. He spoke on this for

[Lc]

-7-

several minutes, and a tape recording of what this communist editor was telling me could, with minor editing, have gone right into the introductory chapter of an elementary economics text for use in American colleges. Furthermore, he was so emphatic about the importance of these reforms, that I felt I had not been led astray earlier by the sheer enthusiasm of a couple of economists.

I'm in no position to judge how far these reforms will go, or how successful they will be in raising the efficiency of the Hungarian economy. What I have instead is a strong impression that Hungarians are aware that they are on the verge of abandoning an enormous amount of outworn baggage, that this is with the full sympathy of the party leadership, that it is intended to be permanent and not a momentary detour that will bring them back in the end to older socialist planning principles; also that they know it takes more than just a decision to do it, it will take patience and political skill, and there will be a lot of opposition of the same kind that occurs in the West whenever protectionism is eliminated.

Incidentally, Vidja described the community of economists in Budapest as humming with activity and in close touch with each other. He said there are many seminars and discussion groups going on all the time, involving university people and research people in a number of ministries. He said these reforms were substantially initiated by the academic economists, and that all

[LC]

-8-

economists in the city were participants in this campaign.

********

I had several conversations with Ivan Boldizsar, editor of the *New Hungarian Quarterly*, a man of letters and a man about town who writes an easy and American style of English and is greeted in every restaurant by headwaiters and guests who come to his table to be recognized. We talked about a number of things, including what determines the quality of food in the best state-operated restaurants; when I asked how, for example, the proprietor would be appointed, he did not hesitate in calling the proprietor, whom he was on easy terms with, and asking him. We had a nice discussion about how waiters are better paid than proprietors because the salary differential is small compared with the tips waiters get. I have never seen a man take more pride in a restaurant he owned than this man took in the one he managed for the People's Republic of Hungary; but when I reflected that a navy captain takes pride in his ship, I decided this was not so strange.

I tried in indirect ways to find out from Boldizsar what it was like to be an editor of a journal in Hungary, particularly one devoted to literature and the social sciences for foreign consumption. (His journal is published in English; he had proposed the idea under Nagy, and several years later the Kadar government called him up and proposed he go ahead. He has been

[Lc]

-9-

publishing it for something like seven years; some of the
articles are written in English, most of them are translated
into English.)

He said that in all the time he had published the journal
he had never submitted a single manuscript to the scrutiny of
any government official prior to publication and that he had
never received any official expressions of approval or disapproval,
or anything like censorship. He told me how many copies he sells,
but I've forgotten the figure; it's somewhere in the range of
five to eight thousand, and the journal now pays for itself.
I wanted to go into the cost accounting to see where his salary
really came from, but did not have a chance; we did, though,
talk about the way an author publishes a book. It sounded about
the same as in this country (though publishers may exercise a
somewhat different kind of judgement). Financially, it is hard
to see how socialism accounts for the difference in authors'
contracts; there, upon signing a contract, the size of the first
printing is specified and the author gets one-third of his
royalties at once; he gets the second third upon submission of
the final manuscript, and the third upon publication.

I found that in this kind of conversation direct answers
to direct questions are less informative than the incidental
conversation. But at one point I must have been pressing in an
obvious way to find out just how much personal or literary
freedom there was in Hungary, because Boldizsar interrupted one

-10-

[LC]

of my tactful efforts to say he thought he knew what I was
driving at and he thought he knew how to answer it. He said
he sensed that I wanted to know just how much freedom, privacy,
justice, and trust there was in the Hungary of today. He
 described some of the differences in terms of court trials and
the prison system, censorship, travel, and various other
indices, and then he summed it up in what I thought was a striking
way. He said, "I should explain it to you this way. I spent four
months in the United States this past year, most of the time
in New York City. The difference between Budapest and New York
today is less than the difference between Budapest today and
Budapest before 1956." He paused; I looked inquiringly; he
nodded, and said, "That's right."

********

Vietnam arose in at least five of my conversations. In
all but two it arose casually and the discussion remained casual.
A good example is the way it arose with Professor Jozsef Bognar
(president of the Institute for Cultural Relations and director
of the Afro-Asian Research group, Academy of Sciences). Szalai
had told me that Bognar was a busy man, I'd be lucky to have any
time with him, should jump at the chance and get in touch with
him at once because he was such a busy man that we might not get
together. Bognar had not only received a letter from Zalyi but
had been told by Endre Ustor, the legal advisor to the Foreign

[LC]

-11-

Ministry, that I was coming; hit from two sides, he apparently
decided I was worth his time, and I had about an hour and a half
with him the afternoon of my first day. We first discussed the
impending economic reforms; then we spent a lot of time on his
ideas about economic development, a subject on which he is just
completing a book. I asked him whether he'd ever been to the
States. He said no, that he'd had a nice invitation from the
Ford Foundation and had wanted to accept it but, because his
was in reality a governmental position, it had been decided that,
because of the war in Vietnam, he shouldn't go. But he said he
hoped things would ease so that next fall he could go. Evidently,
he did not mean that he was looking forward to an end to the war.
He rather implied that last year Vietnam was enough of a
diplomatic obstacle to keep him from making the trip but maybe
the government would relax this year. He seemed almost as
casual about it as if he had been saying that last year he was
too busy, of last year his wife had been ill, that he was a
little sorry to have missed the trip and looked forward to
another chance. Nothing about his manner suggested Vietnam was
our fault. It was just there.

In every conversation about Vietnam, I was given to
understand that it was an obstacle to the improvement of East-
West relations, or at least a nominal obstacle. In none of the
conversations did I get the impression that anyone was blaming
the United States for Vietnam. It was almost as though Vietnam

-12-

were a deplorable event, like an earthquake in a foreign
country, but one that was obstructing the improvement of
relations. No, the earthquake analogy is not right because
usually the tone of discussion suggested that a settlement or
resolution or decision was up to the Americans, not because it
was our war but because we were the only ones that had any
freedom of action. In most cases I put forth the observation
that what was distinctive about the Vietnam war was not how
much it had hindered East-West relations but how little it had
done so; and I pointed to progress on space agreements, non-
proliferation treaties and consular agreements, and the general
absence of bitterness in Soviet-American relations. On the
whole everybody agreed with me that the war had been an acid
test of detente, and it had passed the test.

Two of my conversations about Vietnam, though, were
exceptional. One was the discussion with Renyi, the communist,
which I'll mention in a few minutes. The other was a conversation
at dinner with Kornai, the mathematical economist. This is a
very fine man, and we had had enough professional conversation
about mathematical programming, economic planning, game theory
and economics in general, to have become two rather friendly
members of the same profession by the time dessert was served.
He had been present for an hour and a half of my conversation

[Lc]

-13-

with Vajda; we had then had lunch together; and now we were
having dinner together two nights later. I forget how Vietnam
came up; I think it came up casually. He said that he had no
strong feelings about the moral issues involved, and no
reliable opinion about the political issues. He had a good
deal of sympathy for the problem the United States faced and
no recommendation to offer. But one thing he wanted to impress
on me. He was convinced that there was a strong positive
correlation between the state of East-West relations and the
state of internal politics in Hungary. He thought the war in
Vietnam had had more of an adverse impact on the internal health
of Hungarian politics than any other event of the past few
years. He was afraid that the political advantages in Southeast
Asia of the American policy might be more than offset by the
adverse political consequences within Eastern Europe, as
typified by Hungary. He said the political situation in Hungary
was not as good as it had been two years before. And as he
said it, I realized that somebody else had said something similar
and I had brushed it off.

If I understood him correctly, he was not arguing that the
war in Vietnam was spoiling East-West relations. He was saying
that because it was spoiling East-West relations it was spoiling
the internal development of Hungary. He said this with feeling,
not with blame or resentment, but just with feeling about what

[Lc]

-14-

had happened to the trend of political life in Hungary. I did not ask him to specify or document just how things were worse in Hungary now than two years ago. I have no idea whether they are. I have no doubt, though, that he thought either things were not as good as they were two years ago, or that things had not improved in the last two years as they should have. Incidentally, he, too, has had plans to come to the United States for four months next fall, but was a little apprehensive that he might not be permitted on account of the war in Vietnam.

The point about Hungarian internal politics and the war in Vietnam is an important one, if true. Equally important, I thought, was that none of these people gave the slightest indication that he was on the "other side" in the war. Rather, I had the impression that they identified more with the United States-not because they favored us in the war, but because they just felt closer to us, better informed about us, less estranged from us, while Hanoi and the NLF were somewhat beyond their reach and their comprehension.

********

Let me talk now about my conversation with Renyi, the communist editor of the newspaper. He began with a discussion of economic reform, which I've already remarked on. After warming up on that subject for fifteen or twenty minutes we went

-15-

on to talk about democracy, or "politics". Let me describe
him a moment. He is in his late forties or early fifties,
smiles easily, immediately gets down to business, speaks bluntly
and very deliberately, has an exceptional command of English that
he learned in school, but gets his eloquence from mental rather
than linguistic ability. I felt more at ease in my conversation
with him than with anybody, possibly because he was not a host
that I had to be gracious to but a man with whom there could
be acknowledged fundamental disagreement.

I forget how we got onto the subject, but he said one of
the things he envied about the United States was our ability
to make democracy work. He meant our ability to get popular
participation in discussion of public affairs. He said his
newspaper had been trying for years to get Hungarian citizens
concerned with important issues, but there was something about
Hungarian politics or the Hungarian press or the Hungarian citizen
that made it terribly hard. And he said in particular they
were poor at "propaganda". He said whenever they tried, as a
party, to put something across in the form of "inspired"
stories and editorials, the response they got was that it was
boring. We spent a little time on why it was that political
issues got more active attention in the United States than in
Hungary. I proposed that it might be because we had a two-party
system, and an opposition party provided vocal leadership in

[10]

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debate. He seemed interested and acknowledged that maybe that
was the case.

Then we went on to the problem of petty local interests.
We had a fifteen minute discussion of the problem of raising
tramway fares. He said that the Budapest tramways had had
preposterously low fares and the decision had been reached to
double the fares. A storm of protest broke out. The party
didn't have the strength to face it. Every Hungarian who rode
the tramways felt he was a victim of injustice, and there was
organized opposition. In the end, he said, they raised the fare
fifty per cent, but only as part of a compromise in which so
much additional service had to be provided that the end result
was no more economical than before. I said it sounded like
the problem of raising the New York subway fare; and we discussed
it for a while and agreed that socialism and capitalism in their
ability or lack of ability to perpetrate minor economic reform,
like adjusting fares upward, were not so different.

I raised the question, though, how the citizen of Budapest
who didn't want the tram fares raised brought any pressure on
the top party leadership. I said I could understand in New
York City how an opposition party, or some trade unions, or some
disgruntled public officials, or some newspapers trying to boost
circulation, could voice opposition to an increase in the
subway fare; but I wasn't sure how, in a country like Hungary,

[L.C]

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where there was no opposition party and neither an opposition press nor a commercial press, a popular protest could get organized and formulated in a way that would intimidate the nation's leaders. He said the answer was simple. There were about half a million party members in Hungary, and with half a million members there was always a large number of people who identified with whatever group it was that felt inconvenienced by any policy change you might propose. I asked him whether this meant that the party leaders wanted to be popular and didn't want to offend people, or were afraid of the political strength of party members who opposed the move, or wanted to maintain the morale of the party, or were persuaded by the arguments, or what. He said he thought it was a little of all of that.

I then remarked that in discussions of economic reform I had been struck by the universality of these economic problems, how I'd been reminded of the Marshall Plan period in Western Europe by the discussion of Hungarian economic problems, and how many of our own problems like agricultural price supports, tariffs, subway fares, and so forth, sounded as though they had their counterparts in Hungary. He agreed, and poured me a glass of brandy to celebrate the common economic woes of all countries.

Then we got into the only part of the conversation that proved he was a communist. He said the one thing they didn't

-18-

have in Hungary, that we had, and that made a political difference, was a capitalist class. I said I agreed that was a difference, but I thought it was not dominant. I said that as a political force in the United States maybe the poor white in the South, or the Western farmer, was as much of a selfish political force as the capitalist class. He seemed a little skeptical, and I said furthermore, he probably ought to distinguish between the managerial class in our country, the people who run the big enterprises, and the people who are wealthy and live off dividends and interest. (Somewhere along the way he had made a scissors of two fingers to suggest the clipping of coupons.) He had also mentioned that the capitalist class would be interested in things like selling arms abroad, which was bad for the world, and that socialist countries didn't permit any such interests to intrude into foreign policy. I remarked that I thought that there was a real difference between his government's ability to control business enterprises and our government's ability to control enterprises, but that I wasn't sure nationalizing the firms would make all that difference. I said our government had a little trouble policing the Department of Agriculture, and one difficulty with nationalizing firms was that they were then part of the government and had a new kind of influence as part of the government. He then said that he thought I underestimated the influence of the capitalist class,

[Lc]

-19-

because--and I was reminded of arguments about the insidious
role of the devil -- the capitalist class was particularly
good at disguising its own influence. He then went on to say
that furthermore Marx had shown that there were objective factors
that would cause a greater and greater concentration of wealth
in the hands of the few. I had just said that Marx has been
dead a long time and maybe we should look at the facts, when the
telephone rang. I took advantage of the interval to think about
whether to pursue this question or change the subject, and when
he returned I asked him what we ought to do about the war in
Vietnam.

He said, "Stop it." I said, "How?" He thought a while,
and said that the main thing was to get a truce. I asked what
kind of settlement we should seek after the truce, and he said
it didn't matter, that the main thing was to get a truce. The
important thing was to get the war stopped.

I raised a few questions about how to keep a prolonged
truce. I asked who got to use the roads during the truce, what
village leader got to spend the night in his village, whether
taxes were to be collected, whether food deliveries were to be
made, and so forth, and pretty soon he acknowledged that he just
didn't know. He finally said that he hadn't given enough detailed
thought to the subject to see just how the war could be stopped.

Then he said a few things that I found interesting. One

[LC]

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was that he thought that North Vietnam was suffering badly and was going to suffer worse. He thought that the difficulties in China might shortly prevent the overland provision of aid to North Vietnam from Russia and other eastern European countries. He implied, if he did not quite say, that Hanoi was having the worst of it and might be expected to show a real interest in some kind of settlement. He also said that he thought these next weeks would be critical. (Whether he had just been reading the news stories about Robert Kennedy, I don't know.) He did say that he thought if we continued to put pressure on Hanoi, especially with the bombing, this might play into the hands of the hard-line people in Hanoi and make it harder to get a settlement. I didn't understand and he didn't explain. He may have been just trying to persuade me that we ought to take the best we could get now.

It was not the contents so much as the tone of what he said that impressed me. He really entered into a discussion of the difficulties of settling a hard war, and there was just no sign that this communist-party newspaper editor was really against us in the war. Again I had the feeling that he identified with us, and was talking about what the United States should do to end the war, not because he thought we were in the wrong and we were the ones who ought to yield, but just because he didn't like the war and was asking himself what "we" could do to stop

[Lc]

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it, we being the Hungarians and Americans.

I asked him how much authority he thought Hanoi had over
the Viet Cong, and whether a truce negotiated with Hanoi could
be enforced in the south. He allowed as how he really didn't
know; he read the same newspapers I read. Vietnam was a long
way off, reports were unreliable, and we poor editors and
professors just couldn't be sure how the other side was
organized. I exaggerate a little, but on the whole he and I
were having the same kind of perplexed discussion about Vietnam
that I have all the time with my friends, or that I might have
with an Englishman or a German. He badly wanted the war
stopped, and in the end acknowledged that he just didn't see
how he would stop it.

He did make one remark, though, that stuck in my mind
and that I recalled vividly when I got back to my hotel. (I
wondered whether this shows that he was a communist.) At
one point he was discussing the possibility that President
Johnson, as a magnanimous gesture and in faith that everything
would turn out all right, would make some grand unilateral move
to get the war stopped, either by declaring a unilateral truce
or by beginning to withdraw or something of the sort. He was

-22-

only half serious, but he said that he thought President Johnson was not the kind of man to do that. That, he said, might have been done only by a President like.... I knew he was going to say "Kennedy," and I got ready for my usual argument about whether Johnson had done so much differently from what President Kennedy might have done. But I was wrong. He said "Roosevelt." I don't know any American, or European, who in a discussion of Vietnam hankers after a President like Roosevelt. I felt almost ashamed at my own surprise.

I asked him what he thought the Chinese influence was on Hanoi. He expressed perplexity. On China, he got serious for a moment and hoped that the United States would not "take advantage" of the present Chinese difficulties. He seemed to fear there was a great temptation for us to do something dangerous.

When I stood up to go, he said there was really only one important impression he wanted to make on me. That was that "We Hungarians are sensible people." He went on to say that Hungarians were like everybody else, they had problems just like everybody else. He described Kadar as a pragmatic man. He thought Kosigyn was, too. He said the real test of political leadership is whether one could, as Lenin could, keep his eye forever on the goal while continually maneuvering to stay on

[LC]

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a feasible course. Lenin, with his New Economic Policy, had been able to turn 180° while keeping his eye on the ultimate goal of socialism. He said, "We can't do that." That much freedom of maneuver, he said, they didn't have. But they had to try. And he wished that I could understand that Hungary was run by politicians who were trying to solve the same kinds of problems that people had everywhere else.

Since it was then 8 p.m. of my last day in Budapest and I had collected all the impressions I was going to collect, I summed them up in my own mind and decided that I had fulfilled his wish. That was the impression I had got. I don't think I was hoodwinked.

That was a funny business about the capitalist class. It was a doctrinaire interlude, a brief "signature" that reminded me that I was talking to a communist, or at least to a man who pretended to be one. I reflected on this conversation for an hour or so back at my hotel, wondering whether Renyi had been motivated to say things for effect. In the end I couldn't see where he would have been motivated to say things he didn't mean.

So my strongest impression was this last one, my three hour conversation with a party member who manages the biggest

newspaper in Hungary. Together we achieved true perplexity
over Vietnam; together we acknowledged bewilderment over China;
together we were frustrated over the tramway fares in his
country and mine; at his initiative we recalled President
Roosevelt together; and he communicated to me his envy of the
American editor who could print stuff that didn't bore his
readers and would provoke popular discussion of political issues
in a country that wanted to be democratic. I think the man
genuinely enjoyed talking with me.

Dates in Budapest: February 1-4, 1967

90th Congress
1st Session

COMMITTEE PRINT

PLANNING-PROGRAMMING-BUDGETING

---

PPBS AND FOREIGN AFFAIRS

MEMORANDUM

PREPARED AT THE REQUEST OF THE
SUBCOMMITTEE ON NATIONAL SECURITY AND
INTERNATIONAL OPERATIONS

(Pursuant to S. Res. 54, 90th Cong.)

OF THE
COMMITTEE ON GOVERNMENT OPERATIONS
UNITED STATES SENATE

Printed for the use of the Committee on Government Operations

87-828 O

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 1968

# PPBS AND FOREIGN AFFAIRS

By
Thomas C. Schelling

I respond with diffidence, as anyone must, to your invitation to comment on PPBS in relation to foreign affairs. Foreign affairs is a complicated and disorderly business, full of surprises, demanding hard choices that must often be based on judgment rather than analysis, involving relations with more than a hundred countries diverse in their traditions and political institutions—all taking place in a world that changes so rapidly that memory and experience are quickly out of date. Coordination, integration, and rational management are surely desirable; but whether it is humanly possible to meet anything more than the barest minimum standards is a question to which an optimistic answer can be based only on faith.

## PPBS AS A TOOL OF EVALUATION

Furthermore, PPBS is a method or procedure whose worth depends on the skill and wisdom of the people who use it. Identifying coherent objectives, relating activities to objectives, identifying costs with activities, comparing alternatives, and weighing achievements against costs, are bound to be unimpeachable activities if properly done. But human ingenuity is so great that hidden assumptions can be introduced into any analysis, benefit of the doubt can be prejudicially awarded, quantitative data can be subtly made prominent to the detriment of important qualitative considerations, and even the objectives themselves can be gathered into the wrong packages. The success of PPBS in the Department of Defense over the past half-dozen years—and I think there can be no doubt that the system has been a great success—may be due as much to the quality of the people engaged, and their confidence in each other, as to the logic of the system.

I should like to emphasize something that is implicit in the testimony you heard from both Charles Schultze, Director of the Budget, and Alain Enthoven, Assistant Secretary of Defense (Systems Analysis), but that they perhaps made too little explicit. PPBS, backed up by a competent analytical staff, can hardly fail to be helpful to a decision-maker who insists on making his own decisions and on understanding how he makes them; it can be a seductive comfort, and in the end an embarrassment, to a lazy executive who wants his decisions to come out of a process in which his own intellect does not participate. PPBS can be a splendid tool to help top management make decisions; but there has to be a top management that wants to make decisions.

Let me use an analogy, if I may. A court-room adversary proceeding has been evolved as a comparatively good way to provide the judge

1

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in the dispute with the arguments and evidence on which to base a
decision; but the crucial element in the proceedings is the judge himself.
Systems analysis and other modern techniques of evaluation require
a consumer, some responsible person or body that wants an orderly
technique for bringing judgment to bear on a decision. PPBS works
best for an aggressive master; and where there is no master, or where
the master wants the machinery to produce his decisions without his
own participation, the value of PPBS is likely to be modest and,
depending on the people, may even be negative.

A third point I would emphasize is that PPBS works best, and
historically has been mainly applied, in decisions that are largely
budgetary. Budgetary choices are typically choices among good things,
some of which are better than others, when there are limits on what
things or how much of them one can have. The questions are not,
"What is good?" but, "Which is better?," not whether more is better
than less, but whether it is enough better to be acquired at the ex-
pense of something else. A budgetary proposal never arises in the first
place unless someone thinks it has merit. A bad budgetary judgment
is usually—not always, but usually—bad in proportion to the money
that is wasted; there are probably few things that the military
services have proposed for purchase that would not have been worth
having if they were free of charge.

Outside the budget, big mistakes are cheaper.

It is noteworthy that your committee, in questioning Secretary Enthoven about the sufficiency of bombs for bombing missions in Vietnam, did not ask what PPBS would say about a bombing truce, or the bombing of targets in Cambodia. These are not decisions for which money or economic resources are the main considerations. Having more bombs than necessary is bad only because they cost money; using bombs, or failing to use them, can be bad irrespective of what the bombs cost.

In foreign affairs, more of the hard decisions are of this non-
budgetary sort. That is, bad decisions are not merely wasteful of
money, and good decisions do not merely promote efficiency. Even in
defense there are plenty of decisions that are not mainly budgetary;
the defense budget, though, is so big that the scope for good budgetary
practice is ample, and no one can deny the significance of PPBS if it
"merely" helps to spend 50 or 75 billion dollars per year more sensibly.

In foreign affairs, quite broadly defined, annual expenditure is about a tenth of that. The Director of the Budget cited a figure of 5.6 billion dollars to your committee, exclusive of expenditures on military forces and intelligence. No one will claim, I am sure, that decisions made in the field of foreign affairs are only one-tenth as important as those made in the field of military affairs; and indeed a good many of the non-procurement decisions in the field of military affairs can be construed as a specialized part of foreign affairs.

I shall not question the worth of being more efficient in the use of 5
billion dollars, even though the amount seems small compared with the
defense budget. Furthermore, those of us who think that foreign
affairs sometimes receives stingy treatment in Congressional appro-
priations, compared with defense procurement, must be especially
concerned that scarce resources not be wasted. Nevertheless, few among
us—and I suspect I can include most of your subcommittee here—
when we think about the management of foreign affairs, have an over-
riding concern with how the 5.6 billion dollars gets spent. Money is

3

not the primary consideration in nuclear proliferation, recognition of the Greek military regime, or new commitments to Thailand. Your committee's interest in the Skybolt affair indicates, furthermore, your concern that PPBS, being focused on costs and other "tangibles," may even divert attention from those elements of a decision, sometimes dominant elements, that cannot be translated straightforwardly into budgetary terms.

There is consequently genuine concern that PPBS and other techniques of management that are essentially budgetary or quantitative may be not only of less positive value when applied to foreign affairs but even, through their tendency to distort criteria and to elevate particular kinds of analytical competence, to be of positive harm. A rather striking manifestation of this concern is the extreme reluctance with which any among us, including perhaps your committee and the Director of the Budget, approach the question of whether the Central Intelligence Agency is part of "foreign affairs" and ought to be subject not only to similar program planning but to the same process of planning, programming, and budgeting.

I believe the spirit of PPBS, even some of its most familiar techniques, is as much needed in handling non-quantitative and non-budgetary "costs" as in the more traditional budgeting; the "costs" of, say, meeting certain objectives in Jordan or India may be the sacrifice of certain objectives in Egypt, Algeria, Israel or Pakistan, and the disciplined judgment that PPBS demands may prove an advantage. The estimates will have a higher component of judgment in them, a lesser component of organized data; at the same time, the temptation to hope, or to pretend, that the "system" gives answers, instead of mere'y providing the framework for disciplined judgment and confrontation, will be correspondingly smaller.

## PPBS AS A MEANS OF CONTROL

My fourth general observation is that any discussion of PPBS is unrealistic unless it is acknowledged that budgetary processes are a means of control, as well as a means of evaluation. Secretary McNamara surely did not use PPBS and other techniques of financial management merely to cut waste and to improve efficiency or to save money. He took advantage of his central role in the defense-budgeting process to exercise what he believed to be his authority over military policy. Some people have more instinct than others, or better training than others, for using the purse strings as a technique of management and a source of authority; but almost anyone concerned with administration sooner or later discovers that control of budgetary requests and disbursements is a powerful source of more general control. (This is true of universities as well as government agencies.) Anything that makes budgeting more effective will add to the authority of those involved in the budgeting. Budgetary procedures provide invaluable opportunities for holding hearings, demanding justifications, spot-checking the quality of planning, identifying objectives, and even enhancing competition among lethargic subgroups. Furthermore, the budgetary process being geared to an annual cycle, it provides a regular and systematic way of repeatedly examining into these subjects.

4

My own experience was quite vivid. In 1951 Congress passed the Mutual Security Act. All aid funds were appropriated to the President, who could delegate authority to the Director for Mutual Security. Appropriations for all aid programs were first authorized and then appropriated in a single Act, the titles of which were differentiated by region, not by agency or program. Both in going up to the Hill, through the Budget Bureau and the President, and in getting apportionments of appropriated funds, the several operating agencies were subject to coordination by the Director for Mutual Security. An extraordinary degree of centralized coordination occurred. It was accomplished by a small staff working closely with the Bureau of the Budget. The extent of coordination was undoubtedly more satisfying to the coordinators than to the coordinated; but there can be no question that coordination occurred, and that it occurred precisely because the Director for Mutual Security was put directly at the center of the budgetary process.

This is important. It means that in talking about enhancing the budgetary effectiveness of the Secretary of State or his Office, we are talking about enhancing much more than that. A real test of whether an aid program, an information service, an agricultural program, an intelligence activity or a peace corps is subordinated to the executive authority of the Secretary of State is whether, and how aggressively, he exercises authority over their budgets. (His authority over their personnel ceilings would be a second such test.) I have no doubt that the coordinating role of the State Department in respect of foreign aid would have been greatly enhanced, perhaps permanently so, had the Mutual Security Act of 1951 given budgetary authority to the Secretary rather than to a Director for Mutual Security. (And I have little doubt that the Congress knew exactly what it was doing.)

## THE QUESTION OF A FOREIGN AFFAIRS BUDGET

My fifth and final observation about PPBS and foreign affairs—and the one most directly related to whether the experience in Defense could be translated into the State Department—is that the budget does not yet exist to which PPBS might be applied in the field of foreign affairs. When Secretary McNamara assumed office, he was at least fifteen years ahead of where the Secretary of State is now in having a recognized budget. There is a "Defense Budget"; there is not a "Foreign Affairs Budget." Both legally and traditionally the defense budget is fairly clearly defined; around the edges there are the Atomic Energy Commission, some space activities, perhaps the Maritime Commission, that one may sometimes wish to lump into a comprehensive "defense total," and over which the Secretary of Defense does not exercise direct budgetary authority. But he has always had his 50 billion dollars or more that were unmistakably his responsibility; and money spent by the uniformed military services evidently came under his authority. The Secretary of Defense makes an annual comprehensive presentation of his budget, typically in the context of a broad evaluation of the military threat to the United States; it is a "State of the Union" insofar as national security is concerned. The committees in Congress that deal with the defense budget have no doubt that they are dealing with national defense and no doubt about what budget it is that they are considering.

(L)

5

Not so the Secretary of State, whose own budget of about a third of a billion dollars a year corresponds, to take a very crude analogy, to the budget that the Secretary of Defense might present for the operation of the Pentagon building and the people who work in it. The 5.6 billion dollars cited by the Director of the Budget is neither a "State Department Budget" nor a "Foreign Affairs Budget." It is a composite figure that makes a lot of sense to the Director of the Budget but has no official status and corresponds to no appropriations procedure. I have no doubt that his composite is a reasonable one; but if I were to present you my own figure I'm sure that it would be different, because there is no official definition that keeps me from adding, on the basis of judgment, a few things that his figure leaves out or deleting, on the basis of judgment, a few things that he and his staff think it expedient to include. Even he acknowledges that his figure leaves out intelligence as well as all expenditures on U.S. military forces; and while I may agree that it makes practical sense at the present time to put intelligence in a wholly separate category, it is not for "official" reasons. We know that the CIA is outside the defense budget because we know what the defense budget is; we do not know whether the CIA would be outside a "Foreign Affairs Budget," because we do not even know whether there ever will be a foreign affairs budget.

Let us imagine that Mr. Charles Hitch had been, instead of Assistant Secretary of Defense (Comptroller), Assistant Secretary of State (Foreign Affairs Comptroller). If he were to perform a task in the field of foreign affairs comparable to what he and Secretary Enthoven and others did for Secretary McNamara, he would have had to invent a budget, not merely to rationalize one. There would not have been a history of "Foreign Affairs Reorganization Acts" defining his budgetary jurisdiction. Nor could he have simply folded into one comprehensive foreign-affairs budget the budgets of several subordinate agencies; not all the agencies would have been subordinate, and some programs over which he might have wanted some coordinating authority would have been lodged in agencies, like the Department of Agriculture, whose primary responsibilities were not in the field of foreign affairs. By a heroic exercise of both intellect and authority, and with the full cooperation of the Budget Bureau, he might have achieved a welcome consolidation of budgetary plans on their way through the White House to Capitol Hill, but there the whole package would have had to be disintegrated to correspond to the Congressional appropriations structure. This would have been a different task, and in many ways a harder one, than the budgetary task that he actually took on—and that one itself was a task that an ordinary mortal would have shrunk from.

## A DILEMMA OF STATE DEPARTMENT ORGANIZATION

I called my fifth generalization "final," but I'd like to make one organizational comment about the Department of State. It has been widely remarked, especially in the early years of the McNamara regime, that there were frictions between civilians and the military in the Pentagon, that "civilian control" was occasionally resented, that there was not always mutual trust and respect as between

6

civilians and the military, and that the civilians lacked direct ex-
perience in military command and the conduct of ground, air or naval
operations. Just suppose the reverse had been true, and the Chief of
Staff of the Army were ex officio Secretary of Defense, all his Assistant
Secretaries chosen from the Army, all of their "whiz kids" being
bright, promising young Army officers. I think the situation would
have been impossible. The entire OSD, being strictly Army, would
have had no experience in naval command or the conduct of modern
strategic air operations; professional bias and service loyalty would
have made it beyond the credulity of the Air Force and Navy that
they were receiving fair, sympathetic and impartial treatment.
Secretary McNamara had the disadvantage that he and his staff
were a class apart—civilians—but he had the great advantage that
he was unambiguously a civilian, not identified with a particular
service, with no special bonds of personal sympathy or loyalty to any
one service, and not obliged to devote part of his time to running
one service while being the rest of his time the President's executive
manager of them all.

The Secretary of State presides over, or can aspire to preside over,
a number of civilian services and operations. But he is also traditionally
identified with one particular service, the Foreign Service. The
Department of Defense is essentially OSD, "the Office of the Secre-
tary of Defense"; the Department of State is both OSS—"the Office
of the Secretary of State"—and the Foreign Service. (It is also quite
ambiguously related to ambassadors abroad, who are nominally the
President's representatives, but who are more and more expected to
be professional graduates of the Foreign Service.) The Congress has
never quite recognized the OSS function of the Department of State;
putting the Marshall Plan under an independent agency, the Economic
Cooperation Administration, was a Congressional vote of "no con-
fidence" in the executive talents of the State Department. Resent-
ment and distrust of "State" by people in foreign aid programming,
through a long sequence of agency reorganizations, has been not
wholly dissimilar to the distrust that the military allegedly have for
civilians in OSD.

Furthermore, by putting some of the specialized professional re-
sponsibilities in quasi-independent agencies like AID, USIA, Peace
Corps, and so forth, the Executive Branch and the Congress have pre-
cluded the State Department's acquiring the professional talents, the
internal organization, and the executive experience to lord it over
these other agencies. No uniform distinguishes the AID official from
a country director, or Deputy Assistant Secretary of State; but he
may feel a little the way an Air Force officer would feel if the Con-
gress had created the Defense Department by elevating one service
into executive status while preserving the operating role of that
service.

I have to discuss this because, as I mentioned earlier, techniques
and procedures that are intended to enhance the budgetary role of a
particular office tend, when successful, to enhance the executive author-
ity of that office. The matter is not simply one of providing better
analytical staff work to a senior official of the government; more than
that, the issue is how to generate more coherent planning and better
coordinated operation in the field of foreign affairs. The first thing to
decide is whether we want more coherence, more coordination, and

(LC)

7

an identified responsibility for executive direction. If we do not, then PPBS probably becomes an analytical specialty that is not really worth the attention of your committee. If we do, then I believe we have to recognize that the Department of State presently combines both what might be called the "Office of the Secretary of State," and the Foreign Service, and that this constitutes an encumbrance that the Department of Defense did not have to suffer.

## THE COUNTRY AS THE PACKAGE

Now let me turn—"finally," if I may use that word again—to the first rudimentary step in the establishment of PPBS. It has nothing at all to do with computers, little to do with systems analysis, and in the first instance little to do with analysis of any kind. It harks back to the first elementary thing that Secretary Hitch did in the Department of Defense and that Secretary Enthoven may have emphasized too little, partly because of the progress he has made and partly because of the general interest in the mystique of systems analysis.

The most crucial thing that Secretary Hitch ever did was to identify his basic "program packages"—what are sometimes called the "outputs" of the defense budget. It is important, in thinking about a "foreign-affairs budget," not to pass on too readily to the examination of "program elements," and all the techniques of analysis that can thereafter be applied. Eventually most of PPBS is likely to be concerned with the evaluation of "program elements" and comparisons among them, with cost estimates and so forth. But this is already way beyond what first needs to be done in foreign affairs; that all comes after the basic program packages have been identified.

What is it that corresponds, in the field of foreign-affairs planning, to the original program packages that were developed under Charles Hitch? I believe the Director of the Bureau of the Budget gave you his answer when he said, "First,"—and I am glad he put it first—"individual countries constitute useful categories" under which to analyze an agency's foreign affairs activities as a means of achieving U.S. objectives." Let me say it differently: Individual countries are the basic "program packages" for foreign affairs budgeting. (I do not at this point want to argue with people who think that regions rather than countries are the basic packages; I think they are wrong, but they are not the ones I want to argue with.) The basic package is not the program—Peace Corps, intelligence, AID, agricultural surpluses, technical assistance, Ex-Im bank credits—but the country. Secretary Hitch identified originally, I believe, about seven basic packages. I wish in foreign affairs we could get along with as few; as Charles Schultze indicated, the number of countries we now recognize in the world has grown to 119. I'm afraid this is an irreducible minimum number of pacifies, except as we can exercise selectivity in treating some as far more important than others.

Mr. Schultze understated it; individual countries are more than "useful categories," they are the basic packages for not only budgetary decisions but most other policy decisions. Countries cannot, of course, be treated in isolation—India separately from Pakistan, Jordan separately from Syria and Israel, Thailand separately from Vietnam and Cambodia. But neither can the Defense Department's strategic

8

defenses be considered wholly in isolation from strategic offenses, or "general purpose forces" from sea-lift and air-lift. The point is that the basic program package is not Peace Corps, financial aid, military aid, agricultural surpluses, propaganda, or diplomatic representation; the basic package is the country.

Maybe somebody can think of a better package. But what we are presently struggling for in our budgetary procedures is an identification of the objectives or "outputs" toward which our programs are supposed to be oriented. Just getting recognition that the country, rather than the agency or program, is the basic unit of analysis would be a heroic step. After that the people with specialized analytic talents, with schemes for the orderly collection of data, and with professional training in PPBS can go to work. The first step toward PPBS is officially identifying program packages; and that step has not yet been taken.

## WHO COORDINATES FOREIGN POLICY?

To say that the basic program package in foreign affairs is the individual country can provoke either of two objections—that it is wrong, or that to say so is trivial. Those who object that it is wrong do not worry me; I share their discontent with the country as the basic package, but do not believe they can identify a better package, and in the end we shall, equally discontent, settle on the individual country as the least unsatisfactory basic package for foreign affairs budgeting.

Anyone who says that the individual country is so obviously the basic package that in saying so I have said nothing, is plain wrong. What I have said is trivial as far as analytical budgeting is concerned; but bureaucratic it is revolutionary. Charles Schultze is a sensible and responsible man; that does not mean he is not revolutionary, only that he makes his revolution slowly, carefully, and responsibly. The revolution is in considering all programs for a country together, rather than all countries for a program together. It is examining what the United States does with respect to Greece, Thailand, Brazil, India, or Nigeria, rather than what the United States does with aid, Peace Corps, agricultural surpluses, military assistance, and propaganda.

This is revolutionary not just because somebody would be looking at the totality of U.S. programs with respect to a particular country all together, relating them to the same set of objectives, comparing them with respect to their effectiveness, demanding that the same set of objectives be acknowledged in the consideration of each program, eliminating inconsistency and reducing duplication. Nor is it that, once the basic country packages are identified, countries would be compared with each other as claimants for U.S. resources and U.S. attention.

No, what would be revolutionary is that somebody or some agency has to do this, and it has to be decided who or which agency would do it. (It also has to be decided whether the Congress wants this done; and that may depend on who does it.)

Who should do it? An easy answer is that the Budget Bureau should do it; the Budget Bureau is the centralized agency that brings consistency and compatibility to the claims of diverse governmental programs, foreign and domestic. But what I said earlier about the

9

relation of budgeting to control commits me to the belief that we
are talking about the question, "Who coordinates foreign policy?"
I do not believe the answer should be the Bureau of the Budget.

Maybe the answer is "nobody." Maybe, as a practical matter, the
answer is that the coordination will be fragmented, and the Budget
Bureau will exercise a good part of the coordination. But if both the
President and the Congress want this responsibility fixed unambigu-
ously, in the absence of a drastic reorganization of the Executive
Branch it would be hard to identify any formal locus of responsibility
except the Office of the Secretary of State.

But to put this responsibility on the Secretary of State is to give
him both a means and an obligation to assume the kind of executive
authority that has never, in spite of executive orders and the logic of
ideal government, either been wholly acceptable to the Department
of State or freely offered to it. This is to put the purse strings directly
into the hands of the Secretary of State with encouragement to use
them in the executive management of foreign policy.

I think it makes sense, but I am not sure that this is what the
Congress wants nor sure that this is what Secretaries of State and
their senior staffs want. But this is where we are led by the philosophy
of PPBS; and we are led there not by fancy analytical techniques but
by the simple logic of "program packages" and the need to develop
policies, as well as budgets, in a coherent process that recognizes the
country as the primary unit of budgeting and policy-making.

I am not trying to lead your subcommittee, through any line of
reasoning or casuistry, to a particular conclusion. If we were concerned
exclusively with architecture, we would end up with a good case for
demanding of the Secretary of State that his Office do this kind of
budgeting and do it with the impartiality that would estrange the
Foreign Service from the Office of the Secretary of State. But these
issues cannot be settled by reference to the aesthetics of organization
charts. These are pragmatic questions. Do we want coordination at
the *price* of centralization? Can we split the Department of State
into an executive foreign-affairs office and the Foreign Service? Does
coordinated, centralized programming undermine the decentralized
initiative and responsibility of programs like the Peace Corps, AID,
or cultural exchanges? Does the Congress itself lose bargaining power
when the Executive Branch gets better organized for foreign affairs,
and is the Congress willing to encourage this?

I should like to see the Office of the Secretary of State accept the
philosophy according to which it is the executive arm of the President
for foreign affairs, and emancipated from the Foreign Service. I
should like to see it use the budget process to clinch its authority
and to rationalize its decision processes. I should like to see all over-
seas programs and activities brought under the purview of an "Office
of the Secretary of State," streamlined to provide executive direction.
And I should like to see the Department of State enjoy the benefits
of modern analytical techniques of the kind that Secretary Enthoven
has brought to the Department of Defense, as well as other kinds.
But I cannot—I wish I could, but I cannot—declare with any con-
fidence that this can be done. I come back to the remarks with which
I began this memorandum. Foreign affairs is complicated and dis-
orderly; its conduct depends mainly on the quality of the people
who have responsibility; decisions have to be based on judgments,