# Rostow and Millikan, Key to an Effective Policy and Foreign Aid

## A. <u>Purposes of the Program</u>

1. A much-expanded long-term program of American participation in the economic development of the under-developed areas can and should be one of the most important means for furthering the purposes of American foreign policy.

2. Such a program is one of the few concrete instruments available for achieving the twofold result of: (1) increasing awareness elsewhere in the world that the goals, aspirations, and values of the American people are in large part the same as those of peoples in other countries; and (2) developing viable, energetic and confident democratic societies through the Free World.

3. There are two priority tasks for U.S. foreign policy: (1) to meet effectively the threat to our security posed by the danger of overt military aggression, a threat now inherent in the present capabilities and possible future intentions of the Communist bloc countries and which is to be met primarily by maintaining or increasing U.S. military strength and by solidifying alliances; (2) to promote the evolution of a world in which threats to our security and more broadly to our way of life are less likely to arise.

## B. <u>The Proposal</u>

1. <u>The central proposal</u> is that the United States should take the leadership in a new international partnership program for world economic growth. The United States, in participation with the other developed nations, should give assurance to every underdeveloped Free World country that it can secure as much capital as it can use productively in accordance with strict criteria of productivity.

2. <u>The strictly economic purposes</u> of the program would be:

(1) to make available sufficient capital to permit the low-income countries to launch an ultimately self-sustaining process of economic development; (2) to stimulate and assist the under-developed countries to overcome obstacles to their own development other than lack of capital; and (3) to create a climate of international economic activity in which the economies of the industrialized countries of Europe, Japan and the United States could continue to grow. The fundamental thesis is that there is a particularly critical period in the economic development of every country which determines whether that country will emerge into a long-run process of growth with expanding levels of per capita welfare or sink back into economic stagnation at the margin of subsistence.

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Note: Rostow in Stages of Economic Development (1960) defines "take-off" as requiring all three of the following related conditions:

a. a rise in the rate of productive investment from (say) 5% or less to over 10% of national income (or net national product).

b. the development of one or more substantial manufacturing sectors with a high rate of growth;

c. the existence of quick emergence of a political social and institutional framework which exploits the impulses to expansion in the modern sector and the potential external economy effects of the take-off and gives growth an on-going character./

3. Countries would be divided into three categories:

(1) those in the precondition stage, which would be offered an expanded volume of technical assistance and such capital as they could demonstrate they were ready for, much of it on a grant basis because they would not be able to administer loans or pay them back; (2) those in the transition state, which would be offered continued technical assistance and as much capital as they could well absorb and wished to borrow at favorable rates of interest and with long maturities, provided the proposed programs and projects met agreed criteria of productivity; and (3) those which have achieved self-sustaining growth, whose access to foreign capital would be determined by their credit worthiness as judged by existing international sources, private and public.

4. The amounts which would be taken up under such an offer over the next ten years or so would not at the most be more than two or three billion dollars a year higher than current levels of international capital movement. If a commitment to make available 3.5 billion dollars annually is entered into, it is unlikely that the rate of actual disbursement will rise above 60% of that amount. Thus on the average it is predicted that once the program got going, the average annual flow of capital would be approximately two billion dollars. But it is of the highest importance that sums of the full order of magnitude suggested above be offered to insure that capital is forthcoming whenever clear criteria for productive investment are met.

a. It is difficult to be precise about the breakdown of the 3.5 billion dollars by sources of supply. Under appropriate conditions there is room for a substantial expansion of private investment. Changes in the U.S. revenue code may help encourage more direct investment, as would a revitalization of the transfer guarantee by

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the Export-Import Bank. Development of institutions similar to the International Finance Corporation (IFC) affiliated with the International Bank within receiving countries (like the Indian Development Corporation) should be supported.

b. The maximum burden of the proposed program on the U.S. Treasury would be about two billion dollars a year, of which 80% would be loans, and part of it could be supplied in the form of U.S. agricultural surpluses.

5. The allocation of funds would be based on a banking concept rather than a subsidy concept; every request for assistance which met the criteria of productivity would be granted and the distribution of funds among countries would be determined by absorptive capacity rather than by considerations of equity or policies.

6. The proposal is designed to provide maximum incentives to the governments of the underdeveloped countries to take the steps necessary to promote development and thus make the countries eligible for assistance. The underlying assumption is that development of capacity to use capital effectively to promote growth is a job mainly for the underdeveloped countries themselves. The program should provide for the expansion of a country's absorptive capacity because economic growth would in many areas depend more on the development of this capacity than on the availability of capital funds.

7. Existing technical assistance programs should be reviewed in the light of the experience of the past decade and if necessary expanded, and should be purposefully reshaped to mesh with the proposed program of loans and grants. In general, where the bulk of a country's loan or grant applications fail to meet the proposed criteria, a prima facie case for expanded technical assistance would exist. There are several kinds of technical assistance which deserves more priority and resources than they have hitherto been given:

a. Countries just starting the process of working out consistent and detailed national development programs and whose ability to absorb loans and grants would be severely limited by the lack of such well-considered programs should be supplied with technical assistance which could greatly accelerate their progress.

b. Two kinds of assistance would be useful to meet the shortage of managerial and administrative skills: (1) to help establish educational and training programs designed to increase the supply of indigenous managerial and administrative talent; (2) to help meet the interim deficiency in such talent by providing

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foreign managerial skill under arrangements which would not compromise domestic control. The possibility of a radical expansion of foreign management contracts should be explored.

c. Existing technical assistance programs under both U.S. and U.N. auspices should be greatly expanded. It might be possible to organize an international pool of engineering experts with experience in the problems of adapting engineering design to the conditions present in underdeveloped areas. Such a pool, in addition to providing consultants on request, might conduct research into problems of engineering design common to a number of countries.

d. More fundamentally, a purposeful effort should be made to apply new scientific knowledge to the economic problems of the underdeveloped areas. The arrangements being set up for the development of atomic energy for peacetime use could be made the focal point for a more general cooperative scientific program. Imaginative effort on an adequate scale might well produce important developments on such problems as making fresh water from sea water at low cost, rainfall control, the capture and use of solar energy, the development of algae as food sources, and chemical means of population control. Regional laboratories or institutes could be established to work on these problems, and scientists and engineers from the entire Free World could be brought to them.

8. Positive criteria of eligibility should be established which will have the agreement and respect of both the recipient countries and the participating suppliers of capital. These should include the general conditions that development be undertaken for the benefit of the entire population of the recipient country and that the goals of its development program be related to the aspirations of all of its people. They should also include quite severe technical conditions governing the economic effectiveness of assistance in promoting development. Programming discussions must result in agreement that the recipient country has worked out: (1) a consistent national development program; (2) practical ways of implementing it with available skills and facilities, and (3) effective ways of mobilizing the country's own national resources, including a high rate of saving for development. The U.S. agencies responsible for this program should set up such a code to govern their own behavior and discuss this code with participating suppliers of capital and with recipients.

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9. Sponsorship of this program should be international rather than national. This does not mean that all administration of the program must be turned over to the United Nations or some other international organization. It is possible to retain a large number of separate channels of financing and at the same time bring them all within the framework of an internationally agreed program. An international code of criteria would set the basic philosophy and ground rules to which both the supplying and recipient countries would adhere. This could be supported by an international secretariat, perhaps broken down into regional commissions, to maintain information, review programs, co-ordinate various elements in the international flow of capital and act as a broker between countries needing assistance and those who might supply it.

10. Capital should be made available only where there is reasonable assurance that it will be productively used. The criteria of eligibility for assistance must involve at least four kinds of considerations:

a. It must be within the technical and administrative capabilities of the receiving country to carry out its proposed project with reasonable efficiency, over the time period of the loan or grant.

b. Steps must be taken to insure that the rest of the economy of the receiving country is being developed sufficiently to make the proposed project fully productive in the time period envisaged by the loan.

c. The receiving country must have an over-all national development program designed to make the most effective possible use of its resources; this should include not only a series of interrelated capital projects but also necessary educational and training programs. Such programs are necessary to insure: (a) that the various component projects interrelate and reinforce each other; (b) that the general objectives implied in the entire pattern of projects are ones which the people of the country will support; (c) that the collection of projects and measures undertaken will produce a faster growth of national product than any other which is consistent with the goals of the society; (d) that the resources of the economy have been tapped for the maximum contribution they can make to its development; and (e) that foreign exchange requirements have been minimized.

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d. The receiving country's national development program must be consistent with the requirements of expanding world commerce and the international division of labor. Though the underdeveloped countries will establish home industry, and will become somewhat more self-sufficient, they must not develop as autarchies. If we and they follow trade and monetary policies designed to restore an effective international trading community, and if their investment programs are consciously designed to exploit their international comparative advantage, *not* only will we and they benefit, but the other industrialized nations, especially in Western Europe, will be able to maintain rates of economic growth they would otherwise have difficulty supporting.

11. The large agricultural surplus of the United States and the other agricultural exporting nations could, with a little intelligent planning, be made to play a much more important part in international efforts to promote development than it has done to date. Many of the underdeveloped countries have a huge unemployed or underemployed labor force which remains unused because of (1) a scarcity of administrative and managerial talent to supervise projects on which this labor could be employed, (2) the lack of the minimum amounts of capital equipment required to undertake even the most labor-intensive types of projects, and (3) the fact that the unemployed are underfed and underclothed. If the unemployed are put to work at wages supplied by the government, they will spend these wages largely on additional food and clothing; if there is not a sufficient supply available, the prices of essential articles will rise and lead to general inflation. Because the risks of inflation are aggravated by the uncertainties of weather, the authorities are limited in the volume of wage payments they feel they can safely undertake.

a. It is proposed therefore that there be established an international food and fiber bank on which the underdeveloped countries could draw to implement plans to employ productively a considerably greater part of their presently idle labor force. Favorable results could be expected only if assurance were given that both the capital and the food and fiber supplies would be available over a considerable period of time.

b. Countries should be assured that they could draw on food and fiber supplies if necessary to meet expanding demands or abnormally short supplies, but that they would be under no obligation to take such supplies if domestic supplies and normal imports were adequate.

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c. Exporting countries themselves would be invited to participate in supplying commodities to the international food and fiber bank on a basis determined by their normal shares in international commodity movements.

12. New institutional machinery would be necessary to carry out the expanded program of development assistance as proposed (1) for more effective programming and co-ordination of development activities and (2) to administer a portion of the additional funds which according to the proposal, should be made available.

a. Existing institutions should carry as much of the load as their charters and terms of reference permit.

b. In order to avoid the proliferation of unnecessary new machinery and to utilize existing skills, talents, and accumulated data, the proposed machinery, an international agency, should co-operate as closely as possible with the International Bank. It should, however, have a separate executive body and a Director General not involved in any of the Bank's lending activities. It could take over from the Bank some of its present functions of conducting country studies and reviewing over-all programs.

c. Recipients should be prepared to discuss fully with the Agency their development programs and their plans to finance and suppliers should stand ready to consult, at the Agency's request, with other suppliers and with recipients on co-ordinated means of financing. The Agency should have as one of its functions the promotion of private capital movements. In addition to supplying information and arranging contacts between private investors and enterprises in need of funds, it might undertake the negotiation among all governments concerned of an international code governing the treatment of foreign capital invested in a country.

d. The United States should urgently undertake serious discussions with the governments of other supplying countries both as to the order of magnitude of the contribution they might be willing to make to a program of this kind and as to what institutions they might want to set up to handle their share of it.

e. In the United States there should probably be a new agency, separate from any of the regular Departments, such as State and Defense, which might be set up with a capital fund in the manner of the Export-Import Bank with a provision that a stated fraction of this fund could be used for activities from which no repayment

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was expected. As the fund was drawn upon, especially
for grants, it could be replenished by annual Congressional
appropriations, but these should be in the nature of
contributions to capital expendable over at least a
five-year period. Technical assistance should continue
to be handled partly through the U.N. and partly through
national bodies in a better position than the U.N. to
recruit certain kinds of people. It should be set up
with more assurance of continuity than in the past.

13. As part of the general program, the U.S. government should offer to provide a new long-term capital fund of from approximately ten to twelve billion dollars to be made available over a five year period for loans and grants to accelerate economic growth in underdeveloped countries. In many instances individual loans and grants should be in the form of stand-by agreements covering the full period of a national development program. Although an initial five year allocation is recommended, the plan would look ahead to a longer period, at least a decade.

a. This sum provided by the U.S. should be accompanied by commitments from the governments of other advanced industrialized countries to make additional loans and grants of from two to three billion dollars over the same time period as part of a unified Free World program.

b. Concerted measures should be taken to enlarge the international flows of private capital. Such measures might yield an addition over present levels of $2 to $2.5 billion during the first five-year period.

c. These sums must be made available to Free World Countries without any military or political strings, but under strict business like criteria designed to guarantee that the loans and grants could be repaid within a reasonable period of time.

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Staley, Eugene. The Future of Underdeveloped Countries.

A. Criticism of United States Aid Policy

1. The official justification of the United States program aimed to aid economic development has been too negative and narrow, too concentrated on mere defense against Communism. To look on development aid mainly from the defensive viewpoint of checking Communism and to present it in these terms is self-defeating. Economic development is not a guarantee of social and political improvement.

B. Proposals

1. American interests can best be served by a combination of many types of aid -- both technical and financial -- provided by government business and private associations of all kinds and by channelling increasing proportions of government aid through multinational institutions, though a large program administered directly through our national agencies is also necessary.

2. American interests will require both increased flow of private capital and larger government outlays for loans and grants in the immediate future for three reasons:

a. the capacity of the less developed countries to use capital effectively increases as technical know-how improves;

b. as rearmament expenditures level off, the U.S. should use new funds to promote the non-military aspects of our world interests;

c. the importance of rapid economic and social advance in the underdeveloped countries outside the Iron Curtain will increase as the Communists concentrate on economic frustrations and national aspirations.

3. More continuity in a long term program than that provided by annual authorizations and appropriations should be developed.

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Staley -- 2.

Both public, intergovernmental capital (grants and loans) and private international development should be encouraged. It would be illusory to think that private funds can be relied upon mainly, but they should be encouraged.

4. Development aid should be distinguished from military aid, especially in non-aligned courtires, so that development aid is not associated with military alliance-building or pressures to take sides in the cold war. The relationship between military and economic aid should be restudied with a view to:

a. where and how far from the potential firing line does our contingent of military aid personnel exceed personnel engaged in technical aid to education, health, agriculture, and other facets of economic and social development;

b. how much we are spending on military aid and the development of the civilian economy;

c. the effect of aid on the social structure and whether we are creating more military officers than businessmen.

5. United States interests are best served when aid stimulates initiative, self-reliance and responsibility. There is no formula for democracy because democracy is more an attitude than a formula. Also the U.S. should know and admit frankly its political interests which are to enhance American security and to combat the Communist threat by lessening politico-economic vulnerability of the underdeveloped world to subversion and by building up the military strength of the free world.

6. The U.S. must recognize the interests of the underdeveloped countries, the revolution of rising expectations, the strength of the psychological drive in the underdeveloped countries for improved status, respect, and self esteem, the national desires for firm independence, higher prestige and a build up of military potential.

a. The United States must take a positive attitude on the side of progressive reform and "social justice." We must assist

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Staley -- 3.

gladly regimes trying to correct social
situations of a few rich and many poor and
must be hesitant about assisting repressive
regimes even though they claim anti-Communism
and stability.

b. The United States should avoid trying to promote the private enterprise system against socialism. We should talk rather about concrete economic and social progress. We should distinguish only between a democratic type of socialism and the Communist variety. Within the broad aim of encouraging the growth of democracy, we should retain flexible thinking about forms of government. Often efforts to engraft western forms of representative democracy actually impede them.

7. The United States must not underestimate either the military or political and economic side of the Communist methods for seizing power in underdeveloped areas.

8. A properly balanced American policy toward the underdeveloped areas must concern itself not merely with material technology and physical capital, but even more with social technology and the intangible capital represented by the building of social institutions and the development of human skills and democratic methods of organization and management.

9. In technical assistance programs, more emphasis should be put upon the social side of technology -- public administration, business management, labor leadership, educational leadership, leadership in the communications media, cooperative movements, democratic political organization, and countless civic activities carried on by voluntary citizens' groups in democratic countries.

10. Ways should be found to assure newly developing countries that they can reasonably count on an expanding market for their exports. The United States and other advanced economies must face the issue of adjusting their internal production and foreign trade to accommodate new kinds of imports including manufactured products of labor-intense types where the developing countries will have a comparative advantage. The developing countries should as soon as possible be put in a position to earn rather than beg for the development funds they need.

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Staley -- 4.

11. American public opinion must be considered. American attitudes depend more on level of understanding and information than any other factor. Informed voters are more favorable to aid programs. The American people are likely to respond to leadership that helps them to acquire an accurate picture of the world situation.

### C. Proposals for a New World Community Approach

1. A philosophy of development aid which focuses on the task of building a viable world community must be based upon international cooperation. Such an emphasis on world community development implies a fundamental change in the foreign policy creeds of the U.S. and other nations: i.e.: the concept of national security based on national military power is obsolete and the only proper aim of foreign policy in an atomic age must be the national interest in the context of increasing world security and economic progress for all mankind.

2. Greater emphasis on *mutuality and multilateralism* should be made in development efforts. Consequently, the responsibility for participation in the policy-making process should be shared by countries receiving and supplying aid. The underdeveloped nations prefer multilateral aid. The burden of contributions is shared among several nations and they are in a better position to insist on adequate effort and performance by the aid-receiving countries. Multilateral efforts insure a wider range of choice in recruiting experts, etc.

a. Wherever possible, the United States should channel aid through United Nations organizations. It is as important to use development aid as an instrument for strengthening institutions necessary for a viable world community as it is to achieve economic growth.

b. Opposition to Communist bloc aid should be effected not merely through stepped-up United States bilateral aid, but through multilateral institutions and the United Nations.

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Staley -- 5.

3. Commitment to a _long-term purpose_ is necessary to ensure continuity of effort over several decades. Targets must be set for economic growth, education, health, position of women and underprivileged groups, rural and urban community development and the training of administrative and managerial personnel.

4. World Development aid must be _better coordinated_. Larger resources, administrative improvements and coordination are necessary. A World Development Authority might be created within the UN system.

5. Adequate international funds must be appropriated. Funds might take the form of:

a. grants or loans on terms that represent substantially less than normal returns to capital and therefore include a considerable element of subsidy; or

b. fully repayable loans and investments.

6. International Private Investment and trade must be stimulated. An international charter and code of behavior for private international investors and host governments might be worked out to stimulate more effective utilization of international private capital and enterprise. United States leadership is needed here and in the opening of world wide markets to the exports of newly developing countries. The United States and other highly developed countries should plan to import an increasing flow of labor-intensive types of manufactured products from the newly industrialized countries.

7. Education and Research must be promoted. A massive program for building up or strengthening educational systems and training teachers is especially necessary in Africa. Arrangements should be supervised by regional or other agencies related to the United Nations so that education will not be subject to power politics or political and cultural domination.

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1.

Staley, Eugene and D. C. Fulton. *Scientific Research and Progress in Newly Developing Countries*. International Industrial Development Center, Stanford Research Institute, California, 1961.

## I. SCIENTIFIC RESEARCH

It is essential to do everything possible to make technical and economic assistance to newly developing countries more effective. Scientific and technical research are important tools for technical and economic aid programs.

## II. PROPOSALS

1. The United States Government should establish an adequately funded Office of Research and Development (possibly within the International Cooperation Administration or its successor agency) to formulate specific research needs and to act as a coordinating body in getting these needs met. The office would perhaps do some research internally, but mainly it would allocate grants or contracts to research institutions for:

a. the study of specific problems related to newly developing countries

b. studies on theories and methods of development

c. support of long-term relationships between research institutions in the United States and those in newly developing countries, including training programs, exchange of personnel, provision of equipment, etc.

2. Technical assistance funds should be made available in considerable sums to strengthen local scientific institutions in newly developing countries, including the training of scientists as well as staffing and equipping of laboratories.

3. Scientific attaches or officers with appropriate scientific background should be included in United States missions to newly developing countries. One of their principal functions would be to advise on research needs and on opportunities for inter-institutional collaboration in research.

4. Foundations, other private agencies, the United Nations and other Multilateral agencies should put further emphasis on the international aspects of scientific and technical research.

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Wit -- 2.

B. The inadequacy of U.S. foreign aid efforts to promote socio-economic development can be traced to a lack of insight into the development process or to a failure to apply the available knowledge to the formulation of U.S. aid programs.

(1) It is essential to recognize the need for a veritable social revolution as a precondition of economic development.

(2) Social change and economic development actually occur, in simplist terms, through the introduction into a society by some of its own members of necessary scientific, technological, managerial and behavioral innovations which are often in direct conflict with prevailing norms. Creative leadership or at least the presence of would-be leadership groups in a society is the critical catalytic element needed to start the development process.

(3) Once this spearhead group appears, the development process can be initiated by skillful foreign aid programming which assists such a group to take the lead, demonstrate the validity of its attitudes and thereby provide examples which can serve to convert large numbers of fellow citizens to the cause of modernization. The foreign aid can help to generate socio-economic development by the provision of equipment and funds to stimulate economic growth where local savings for investment are in short supply, by a program of technical assistance to transfer skills, and by assistance in the building of appropriate institutions and an economic infrastructure.

## II. GUIDELINES FOR FOREIGN AID STRATEGY

### 1. Criteria

A. An effective foreign aid strategy must be related to:

(1) the importance of a given country to U.S. national security;

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Wit -- 3.

(2) the internal conditions of that country; and

(3) the extent and nature of the communist threat to that country.

## 2. Underdeveloped Countries of Major Importance to U.S. Security and Economic Well-Being

A. When U.S. authorities determine that certain countries fall within this classification, a major program of assistance is clearly in order. Moreover, U.S. assistance, if at all possible, should have socio-economic and political development as its primary objective. The time bought by foreign assistance which pays salaries, supports and develops armed forces and otherwise keeps a friendly government operating and secure against direct external military attack, must be used to full advantage by promoting long-term internal modernization and development.

B. Under this category of underdeveloped countries, several particular contingencies should be examined:

(1) If the governing elite of a specific country reveals a commitment to development and modernization and is willing to promote the necessary cultural and social changes (these are to be determined by a thorough research and analysis of the prevailing culture, institutions, manpower characteristics and scientific-technological resources), substantial development assistance should be programmed. Simultaneously, other kinds of economic and military assistance should be provided to maintain the country's basic security and independence.

In these circumstances, entrepreneurial or "spearhead" groups should be identified -- presumably the country's governing elite will remain dominant in view of their present position and foresight -- and they should be encouraged to devote their energies and creativity to socio-economic development. Such groups must be given appropriate incentives; allowed to benefit from their efforts (except where conflicts of interest might arise in the case of political and governmental leaders); encouraged to apply their energies to those institutional areas of society which contribute most to

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Wit -- 4.

socio-economic development; and provided with the
necessary managerial and technical skills to make the
most effective use of their motivations. Their
attention should also be turned away from the con-
struction of restrictive family enterprises and pursuit
of quick financial returns; they should be encouraged
rather to achieve satisfaction in ways which contribute
to the broader economic growth of the country.

Foreign aid can also be provided to build the
essential economic infrastructure, such as transportation
and communication systems and harbor facilities and to
create institutions and procedures -- adjusted to local
environment but not antagonistic to balanced development
-- for capital accumulation in order to channel local
savings into investment for economic growth (eg., banking
systems, corporative devices and properly enforced tax
systems). Training and educational institutions can be
created to promote both modern scientific-technological
skills and the requisite value and behavioral changes.
In addition, help can be provided to develop effective
value and material incentives in order to encourage
blue collar workers, white collar employees and farmers
to work harder and in more modern ways.

The governing elite should be evaluated
primarily in terms of its willingness to support broad
development planning rather than in terms of its
immediate willingness to strengthen political democracy.
In many underdeveloped countries, some form of "progres-
sive authoritarianism" may be the best government
possible at this stage of development. The political
test of a government, therefore, should be based upon
its demonstrated willingness to prepare the society for
economic development and social change as well as its
ability to rally popular support for this program.
Ultimately, developmental progress is likely to con-
tribute to political modernization and probably will
bring increased popular participation in government.
It cannot be assumed, however, that political democracy,
as defined in the West, must be adopted by non-Western
societies before a regime can be considered "popular".
Even Western democracy has undergone considerable changes
during this century in favor of ever-greater executive
leadership, and all Western states had authoritarian
characteristics in their early stages of development.

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Wit -- 5.

(2) If, after a country has been receiving a considerable amount of development aid, it becomes clear that the ruling elite is not fundamentally committed to modernization and is not willing to sponsor the necessary socio-economic reforms, but nevertheless has a large measure of popular support, development aid should be reduced gradually to a level which offers some hope for limited modernization. Foreign aid for "holding" purposes should not be reduced, in view of the country's presumed importance to U.S. national interests. Military assistance should be employed, wherever possible, for civic action purposes and for socio-economic development.

(3) If, from the outset, a ruling elite is not committed to development, but the country's long-term importance to U.S. interests is clear, U.S. aid administrators should seek to identify potential "spearhead" elements of the society and design the aid program with an eye to assisting these groups to whatever extent is possible under the existing regime. Where local tensions and subversive forces render the situation increasingly dangerous, efforts must be made to encourage such "spearhead" groups, and pressure should be applied to the country's governing officials to permit the expansion of development efforts. The military assistance program, moreover, should be designed to exploit its potentialities for civic action, for modification of traditional attitudes, and for managerial and technical training which has nonmilitary applications.

(4) If, in a country of major security importance to the U.S., the ruling elite is inflexibly opposed to modernization of any kind and "spearhead" elements do not exist or cannot be identified, but internal security is well established, the U.S. foreign aid program must be drawn up with the realization that significant developmental change may not occur under this generation of leaders. Massive economic aid in these circumstances is wasteful and much less important than providing assistance in the form of educational and training techniques and facilities. This form of assistance may spur elements in the population, basically friendly to the U.S., to question their existing values and

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Wit -- 6.

behavioral norms and prepare them for eventual modernization. In these circumstances, the transmission of complex modern skills may have to await the development of greater psychological and cultural receptivity. In the meantime, ensuring the survival of the society as an independent entity must be the primary purpose of U.S. aid.

### 3. Underdeveloped Countries Which are of Limited Importance to United States Security.

A. Where specific foreign countries are judged to be of some limited importance to U.S. security, a measure of economic aid may be in order if it is also clear that the country faces a real threat from communist subversion or communist-sponsored insurgency, or if the country faces some other internal crisis which may have a serious impact upon U.S. national interests. In such circumstances, the United States must evaluate the nature and extent of the threat; the related socio-economic and political conditions which may, in part, be the cause of the unrest; and the willingness and ability of the existing government to ameliorate or eliminate those unhealthy internal conditions.

B. If the existing government is not willing to take the steps necessary to remedy conditions, then the United States either should not provide foreign aid or it should program limited amounts of aid with the clear recognition that this is a "holding operation". In nonmilitary terms such an operation could involve small grants, or preferably loans, for the purpose of influencing the recipient's domestic and/or foreign policy. Certain technical assistance programs might be financed in areas which hold the promise of socio-economic and political improvements. However, massive aid should not be made available under the guise of promoting development, and the United States should not permit itself to be blackmailed into providing large amounts of aid simply because the local government threatens to turn to the communists for massive assistance. If the local government carries out such a threat, then a major program of U.S. aid probably would have been useless. If its bluff is called and it does not take the threatened actions, it may thereafter be more willing to negotiate a limited and realistic aid program.

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Wit -- 7.

C. The United States should be willing, when necessary, to reject aid requests from countries in this category. Even under the best possible circumstances, i.e., when the local leadership is both willing and able to eliminate the causes of internal dissension and dissatisfaction upon which subversion feeds, U.S. aid should probably be restricted to gaining limited military and economic objectives without being committed to a vast renovation of the society. It is unwise for the United States to overextend its financial resources and fritter away the valuable time of foreign aid personnel on dozens of countries which have limited bearing on U.S. national interests and little potential for significant development in the foreseeable future.

4. Underdeveloped Countries Which are of No Obvious Importance to United States Security

A. Although it is possible to argue that every underdeveloped country is important to U.S. security and thus qualified to receive U.S. aid, the national interest is not served by such an undiscriminating policy. It is essential to reduce or eliminate commitments to countries of no demonstrable importance to American welfare. Where political expediency necessitates some aid as a bribe or reward, such aid should be composed chiefly of technical assistance in the hope that this form of aid will lay the groundwork in the recipient society for future cultural and social changes. In short, the strategic conception of a U.S. foreign aid program should be the development of selected positions of strength in critical areas throughout the underdeveloped world rather than the drawing of a "foreign aid line" around the globe.

[LC]

BIBLIOGRAPHY

A. Sources Included in the Proposal Paper

Clay Report: "The Scope and Distribution of the United States'
Military and Economic Assistance Program." Report to the
President of the United States from the Committee to
Strengthen the Security of the Free World. Department of
State, March 20, 1963.

Critical Issues Council: The Future of Foreign Aid. Paper
Number 8, June 5, 1964.

The Balance of Payments: A Time for
Fundamentals, Paper Number 6, May 21, 1964.

Hoffman, Paul G. "Should We Reassess Our Foreign Aid Program?"
Annals of the American Academy of Political and Social
Science, July 1960.

Jackson, Barbara Ward: "Foreign Aid: Strategy or Stopgap?"
*Foreign Affairs*, October 1962.

Knorr, Klaus E.: *Ruble Diplomacy: Challenge to American Foreign
Aid.* Princeton: Center for International Studies, 1956.

Mason, Edward S.: *Foreign Aid and Foreign Policy*. Published for
the Council on Foreign Relations, New York: Harper and
Row, 1964.

Economic Planning in Underdeveloped Areas:
*Government and Business*. New York: Fordham University Press,
1958.

An analysis of development planning by the governments of
less developed countries. Not a discussion of foreign aid.

McCloy, John J.: "Foreign Economic Policy and Objectives".
*Goals for Americans*, The American Assembly, New York: Prentice
Hall, Inc., 1960.

Mikesell, Raymond F.: "Problem of International Harmony: Economic Policies for a Lasting Peace". *American Economic Review*, Vol. 2, Number 2, May 1960.

Mongomery, John D.: *The Politics of Foreign Aid, American Experience in Southeast Asia*. New York: Frederick A. Praeger, 1962.

Morgenthau, Hans J.: "A Political Theory of Foreign Aid", Foreign
Aid, Public Affairs Conference Center, The University of
Chicago, 1962.

[LC]

Bibliography - page 2

Rostow, W.W. and Millikan, Max F.: *Key to an Effective Policy*,
New York, Harper Brothers, 1957.

____________________: "Foreign Aid: Next Phase",
*Foreign Affairs*, April 1958.

Staley, Eugene: *The Future of Underdeveloped Countries*, (first published 1954), New York: Praeger, 1961.

____________________ and D.C. Fulton: *Scientific Research and Progress in Newly Developing Countries*, International Industrial Development Center, Stanford Research Institute, California, 1961.

Wit, Daniel: "A New Strategy for Foreign Economic Aid". *Orbis*, Volume VII, Number 4, Winter 1964.

B. *Other Sources Not Useful or Not Consulted*

Almond, G.A. and J.S. Coleman (Editors): *The Politics of the Developing Areas*, 1960.

Banfield, Edward C. : *American Foreign Aid Doctrines*, Washington,
D.C.: American Enterprise Institute for Public Policy Research,
1963.

A comprehensive study of foreign aid rationale, but no useful
specific proposals for foreign aid policy.

Black, Eugene R.: *Diplomacy of Economic Development*.

Unavailable.

Feis, Herbert: "reflections on Foreign Aid", *The New Leader*, March 20, 1961.

An enumeration of the perplexities of foreign aid with no
positive proposals.

*Foreign Aid*: Four essays by H.B. Chenery ("Objectives and Criteria for Foreign Assistance"), E.C. Banfield ("American Foreign Aid Doctrines"), H.J. Morgenthau ("Preface to a Political Theory of Foreign Aid"), J. Cropsey ("The Right of Foreign Aid"). Public Affairs Conference Center: The University of Chicago, 1962.

Concerned with the fundamental purposes of foreign aid; the
Morganthau paper has been included as the most a propos.

Bibliography - page 3

Friedman, Milton: "Economic Aid Reconsidered: A Reply", *The Yale Review*, Summer, 1961.

No helpful proposals.

Heilbroner, Robert L.: "Dynamics of Foreign Aid", *The New Leader*, September 18, 1961.

No new proposals.

Pezzinelli, Corrado: "The Failure of Aid". (Translated from *Comunità*, Milan), Atlas, March, 1964.

No positive proposals.

Schumacher, E.R., "A Humanistic Guide to Foreign Aid", *Commentary*, November, 1961.

No new proposals.

Wolf, Charles, Jr.: "Economic Aid Reconsidered", *The Yale Review*, Summer, 1961.

No new proposals.