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# THE CLAY REPORT

The Committee to Strengthen the Security of the Free World (called the Clay Committee after its chairman), appointed by President Kennedy to review the U.S. Foreign aid program, issued a 25 page Report in March, 1963, which has had substantial influence on subsequent Administration foreign aid recommendations.

The Report, which was basically limited to a general discussion of aid programs and guidelines for administering them, endorsed the value of "properly conceived and administered foreign aid programs to the national interest". _It recommended_, however, that the program be tightened up to increase accomplishment and to ensure higher quality by reducing quantity.

## I. GENERAL GUIDELINES RECOMMENDED BY THE COMMITTEE

1. Aid should not be limited to countries which "always agree with us".

2. Aid should not be given for projects establishing government owned enterprises which compete with existing private endeavors.

3. "Political" reasons for extending aid should be downgraded.

4. The basis of aid giving should be "enlightened self-interest".

The kind and basis of aid provided thereafter -- except when paramount military security or other extraordinary circumstances are involved -- are questions to be determined on economic grounds.

## II. SPECIFIC AREA RECOMMENDATIONS

1. Programs bolstering military capabilities of countries on the Communist bloc periphery should be endorsed. However, in some countries where indigenous forces are larger than necessary for their immediate mission of defense and not large enough for other defense missions, "phased reductions of a very substantial order" should be undertaken. Defense support to

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Clay -- 2.

border countries whose military forces are used primarily for
internal security purposes and to border countries not allied
with the U.S. should be reduced. Specific exceptions should
be made for India, Pakistan, Laos and Vietnam.

2. Indonesia should be aided only if it orders its internal situation, provides fair treatment to foreign creditors and enterprises, and refrains from international adventures.

3. Greece and Turkey still need economic and military support; other NATO countries should increase their contributions to these countries.

4. Economic and military aid to Africa should be reduced.
Western European countries should bear most of the burden. The problems created by military assistance to Africa would be greater than those they would forstall or resolve.

5. With regard to Latin America and the Alliance for Progress, the U.S. must increase its efforts to achieve greater Latin American performance "beyond promises" and to enact the reforms established in the Punta Del Este Charter as conditions for aid.

### III. GENERAL RECOMMENDATIONS FOR AID TO UNDERDEVELOPED COUNTRIES

#### 1. Sharing the Assistance Effort

The industrialized countries can and should do more than they are doing to share the burden of foreign aid to the less developed countries which has fallen unfairly upon the US. This matter should be the subject of systematic US representation at the highest levels of government.

Improvement of loan terms -- including maturities, interest rates and grace periods -- is especially important in the case of those nations undertaking comprehensive development programs. The International Bank for Reconstruction and Development and the Organization for Economic Coordination and Development should establish minimum terms for loans eligible to be considered as part of their banking agreements and other collective arrangements.

The United States should make clear its views to aid-giving and aid-receiving countries since both have a role to play in the improvement of the assistance effort.

Clay -- 3.

## 2. Multilateral Aid

Both multilateral and bilateral assistance programs are important.

The interests of the US and the developing nations will be best served by the gradual shifting to _effective international administration_, free of the complications arising from membership of the Soviet bloc, of as large a share of the responsibility for development as the cooperation of other free world aid-giving nations makes possible. Effective organization for international administration of development assistance is essential. The International Development Association (IDA), an affiliate of the International Bank for Reconstruction and Development, is a ready-made instrument for these purposes.

## 3. Country Planning

Intelligent priorities for the public investment program must be established. A sensible and consistent set of public policies to encourage growth in the private sector should be formulated.

## 4. U.S. Contribution to U.N. Assistance Agencies

American contributions to agency budgets should not exceed our proportionate share of our regular UN assessment. Exception should be limited to contributions designed to increase the totals of these budgets proportionately and should be discontinued promptly if they fail in this purpose.

## 5. Technical Assistance

Technical aid should be directed primarily at the removal of obstacles to effective utilization of resources and is a major means by which external aid can help develop leadership and technological skills where they do not now exist.

Projects should be undertaken only if deemed of sufficient value to be accepted and continued by the recipient country out of its own resources within a reasonable period of time. Projects should be of specific and limited duration, fixed as they are started, and scheduled for completion or to be turned over to the recipient country. Three years may be the average duration and seven years the maximum.

Clay -- 4.

A.I.D.'s ability to mobilize the high quality man-power necessary to implement and to supervise all current technical assistance programs is probably insufficient. It is recommended that new program starts be sharply limited until the present total program review is completed. The technical assistance program should be limited until and unless it can be demonstrated that an expanded, high quality program can be placed in operation.

Certain national resources have not been adequately tapped for the improvement of the technical assistance program. American universities, especially land-grant colleges as institutions created for development, should be able to provide more talent and experience in several fields than they currently do.

## 6. Loan Terms

Loan terms should be determined on a more flexible basis after country by country analysis. (With the establishment of AID, development loan terms were almost uniformly softened to a standard rate of 40 years maturity with 3/4% service charge and a ten year grace period.) Terms should be harder in some cases, and some strictly hard-term loans should be transferred to other agencies. Loans to countries with adequate debt servicing capacities in the foreseeable future should be made on harder terms. As foreign assistance made possible by the United States and other funds becomes increasingly available on soft terms from multilateral sources, soft U.S. bilateral loans should become somewhat less necessary.

## 7. United States Military Base Rights

Economic and military aid which the US provides to certain countries in exchange for bases should in many cases be viewed as defense costs. No further economic assistance should be provided where bases bring both considerable dollar income from expenditures by our personnel and substantial local employment. Every effort should be made to reduce assistance to foreign countries in return for bases, especially Spain and Portugal which already more than adequately are compensated.

## 8. Military Assistance Programs (MAP) in Less Developed Areas

Only in extraordinary circumstances should the US provide MAP aid, including military equipment of a small arms nature, where the principal quarrel of the recipient country is with a non-Communist neighbor with which the US also maintains friendly relations.

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Clay -- 5.

## 9. The Private Sector

Fuller cognizance than that already shown by AID of the vital role played by local and foreign private investment in the development process is necessary. The investment guarantee program should be expanded. Guarantee against commercial risk and continuation of aid to countries refusing to enter into investment guaranty agreements are considered inadvisable. AID's activity in expanding investment guaranty agreements and increasing the volume of guaranties is endorsed.

## 10. Food for Peace Program

The use of the "Cooley Loan" provision should be expanded. Food-for-work programs conducted on a bisis enabling foreign governments to use our surplus food as full wages for work performed should not be approved.

## 11. Organization of AID

The number and nature of AID overseas missions should be reduced to the type of representation required to implement approved programs. Regional offices, in the field and in Washington, D.C., can serve large areas of Africa and -- increasingly -- of Central America and the Caribbean.

## 12. Expropriation

Endorsement was given to the "Hickenlooper amendment" added to foreign aid laws in 1962, which required the cut-off of programs to countries which expropriated privately owned U.S. property without adequate compensation.

## IV. REDUCTIONS IN COSTS

1. Reductions in the foreign aid program should be phased over the next three years. The current $1.4 billion for military aid appropriation should be cut to $1 billion within three years instead of the five years envisioned by the Department of Defense.

2. Specific cuts in the over-all program were not recommended on the supposition that AID information indicates that if all the Clay criteria were applied to the $3.9 billion program for fiscal 1963, the existing program would be reduced by $500 million and there would be further cuts in the future as programs were reduced or phased out.

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CRITICAL ISSUES COUNCIL: THE FUTURE OF FOREIGN AID

A. The Future and Purpose of Foreign Aid

1. America's foreign economic program, specifically short-term unselective aid, has come increasingly under attack and is in danger of being scrapped altogether in the near future. Under criticism is aid given according to no defined principles and used as a crutch rather than a foundation for self-help in the developing nations. The heart of the problem is the failure, waste and ineffectiveness arising from the use of aid for short-run political purposes, the lack of firm principles to guide decisions on whom and how to aid, inadequate attention to personnel and indecisive administration.

2. The fundamental purpose of foreign aid is to help build conditions aimed at a peaceful resolution of today's struggle with international communism, and with this, to help shape a certain kind of world community. A policy should, however, be established and firmly adhered to, not to use foreign aid for merely short run political purposes.

3. It is essential to strengthen the will and capacity of newly developing countries -- which themselves are so determined -- to maintain their independence and, by peaceful means, to develop with increasing individual freedom. (Note that the phrase "which themselves are so determined" is a cardinal point in the theory advocated.) This purpose conflicts with the policy of using aid to influence every country wobbling on the border line between freedom and Communism. Aid should be used to advance the free alternative to Communism to promote economic and social progress and improve the well-being of the people -- the conditions making independence possible. In some countries economic assistance is necessary to help stabilize economies endangered by expenditures for large military forces maintained to counter Communist aggression.

4. A reshaping of the program is needed, based on a clear definition and constant application of (a) the broad purposes which foreign aid is expected to advance, (b) the criteria to be applied in selecting countries to aid; (c) the guiding principles to govern specific individual programs; and (d) the arrangements necessary to improve the program's administration.

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Critical Issues -- 2.

5. Any reshaping of foreign aid must at the outset take fuller account of the basic shift that has occurred from recovery in the developed countries of Europe to development in the emerging countries of Asia, Africa, the Middle East and Latin America.

6. The President should have a special fund from which to advance "short-range political objectives in foreign countries" and which should be accounted for annually by the President to the Congress. It should not be confused with the economic and technical assistance directed toward foreign aid's appropriate role of achieving constructive longer-range purposes.

7. A sound and effective aid program is possible only when it rests on a solid basis of concurrent national interests and purposes, mutually understood and agreed upon. It is imperative to stress the basic principle of mutuality because an improper emphasis only on U.S. national interests and purposes enables insistent nationalism in some countries, fanned by subversive agents, to create the false impression that we provide aid only to serve U.S. interests.

## B. Criteria Determining What Countries to Aid

1. United States aid should be limited to countries which demonstrate by action as well as by proclamation, a determination to achieve its long-range development in ways that preserve its national independence, maintain and foster international peace, expand individual freedom, and base its government upon the consent of the people through means appropriate to its own institutions.

a. This means limiting economic assistance to countries that have made up their minds on fundamental directions.

b. It would make inelegible for aid any country which, after the criterion had been established, embarked on actions disrupting world peace and thereby began to destroy the conditions necessary for achieving mutually agreed upon purposes of aid.

Critical Issues -- 3.

c. In cases where economic aid cannot be justified under the proposed criterion, it often may be in the U.S. interest to grant certain kinds of technical aid, in the hope of fostering among individuals the concepts and attitudes inherent in the philosophy of freedom which our aid is intended to promote.

2. Economic aid should be granted only to countries undertaking self-help measures essential to effective utilization of American aid. Aid must not be a substitute for what a country can and ought to do itself. It is essential, for instance, that a country make sound use of all its own resources. When a country uses aid as a substitute for its own resources, rather than as a supplement to them, U.S. assistance should be stopped.

3. Recipient countries must positively encourage the private sector of their economy, although some government ownership should not be opposed. Far more important than where a country stands at the moment, in its reliance upon private enterprise, is the direction in which it is headed. Essential is a firm decision by the country to give positive encouragement to widespread and direct participation by the people in economic development through responsible private economic initiative, whatever government investment it also may undertake.

C. Guiding Principles on What Kind of Aid to Give

1. Aid programs should be tailored to a country's current stage of development and capabilities. In order to reduce disappointment, frustration and waste, unessential projects or those which a country is unable to use effectively should not be undertaken. A creative effort must be made to help the country concentrate on those projects most needed in its particular situation to remove impediments and advance development soundly at a growing pace.

2. A more thorough search should be made for effective means of overcoming the powerful influence of psychological factors, inherited from the past, often making development slow and difficult. The only practical solution is to arm the aid program with personnel of sufficient understanding to grasp the importance of these factors and trained to give them effect through concrete application in daily work.

Critical Issues -- 4.

3. Strong emphasis should be placed on education, health and agriculture.

a. The deep-lying problems of countries in transition require that education be concerned with more than professional competence and technical skills; education must be related effectively to the whole range of problems in countries going through the dynamic process of building a nation.

b. Health programs need to be extended to the rural as well as the urban areas.

c. A broad agricultural and rural program is needed to provide the motive as well as the knowledge and means for farmers to act. Such a program would provide effective extension arrangements, getting improvements into use on farms, channels for marketing to advantage, farmer-controlled farmer organizations, adequate irrigation, just land tenure arrangements, and credit at reasonable interest rates.

4. U.S. biltateral development assistance should be limited to the primary functions of production and growth. This represents a significant change in the basic structure of development aid given in U.S. programs. Under this concept aid loans for capital investment to advance industrial development would be available only for supporting facilities such as power, transportation and communications; loans would possibly be extended in special cases to include the manufacture of certain basic items essential to general economic progress. The main thrust of industrial development would be financed from the country's own resources, private investment and international lending agencies.

a. If the proposed shift in developmental aid is to be effected, greater U.S. assistance to appropriate multilateral agencies may well be necessary. An expanded role is also anticipated for American private investment in encouraging the growth of domestic private enterprise.

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Critical Issues -- 5.

D. Improvement of Program Administration

1. It should be recognized that frequent reorganizations of the Agency for International Development (AID) are a major cause for the high rate of turn over in personnel and for the difficulty of obtaining competent co career employees.

2. AID should be more genuinely responsible for its day-to-day operating decisions, within a framework of clearly defined policy and missions as set by the State Department and under the over-all control of the American ambassador in the field. Particularly vital to success is wisdom and sensitivity on the part of American aid administrators in handling relationships with officials of the host country.

3. Better training and orientation, comparable to that given Military Assistance Advisory Groups, should be provided for AID personnel.

4. Systematic evaluation of outstanding successes and failures in the handling of personal relations between AID and host country officials should be undertaken using the authority under Section 241, Title V of recent foreign assistance acts.

E. Leadership

1. Aid enterprises must have strong leadership from the White House if there is to be any hope of resolving the controversies over foreign aid.

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Critical Issues -- 6.

# The Critical Issues Council: The Balance of Payments

## A. Description of the Problem

1. The balance of payments drain is described as a "cancer" which is still going on, despite the fact that in 1964 we have enjoyed a reduction in the balance of payments deficit attributable mainly to what are considered "temporary factors".

2. The key points made in the analysis are:

a. The gold reserve has dropped $6 ½ billion -- from $22 billion to $15 ½ billion in the past decade (1953-63).

b. Current foreign claims of $21 billion could wipe out the remainder if they were cashed.

c. The Administration predicted that the payments deficit would be cured by the end of 1963 -- but the 1963 deficit was $3.3 billion. Stripped of embellishments, deficits of the last six years averaged $3-4 billion.

d. The paper presently expects an improvement of $1-2 billion due to: (a) the Administration's "Interest Equalization tax", (b) a rise in short-term interest rates due to an increase in the discount rate from 3% to 3 ½% in July, and (c) Administration steps to tie foreign aid to American exports.

e. Thus, the paper sees the remaining gap still may be $2-3 billion. (The Administration now estimates the 1964 deficit at $1 ½-2 billion on the basis of the first five months.)

## B. Proposals for Action

1. As far as possible, the payments deficit must be improved by an expansion of exports, by: (a) keeping prices and wages competitive, (b) by bargaining down foreign tariffs and other trade restrictions aggressively, (c) providing better insurance

Critical Issues -- 7.

for credit risks run by exporters, (d) promoting American goods more effectively and (e) studying means of providing the same tax incentives to exporters that our competitors offer.

2. We should cope with the capital outflow by creating an environment that is conducive to home investment, and that does not permanently damage our position as the world's leading supplier of capital. The paper cautions against infringement of free markets, although it does not specifically urge rejection of the "interest Equalization tax", which is considered of "dubious" effectiveness.

3. We should explore every possibility of reducing the cost of keeping our forces abroad consistent with maintaining our military posture. Our defense must not be governed by financial considerations, but we must become more effective in getting our allies to honor their military commitments and take on their proper share of the common defense burden.

4. We should tighten up foreign aid procedures by becoming more selective in our choice of recipients and applying our limited resources where they will do the most good.

5. The international financial system should be reformed along lines that maintain the role of the dollar as the world's leading currency. First priority must, however, be given to other steps to cure the U.S. deficit.

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# Hoffman, Paul G. Should We Reassess Our Foreign Aid Program?

## A. The Proposal

1. It is imperative that we reassess our foreign aid program by reviewing the contribution external aid has made up till now and by investigating the dimensions, complexities, and nature of the problem of speeding the development of the less-developed countries.

2. We are in the midst of one of the most significant events of our time: the "revolution of rising expectations", the revolt of two thirds of the world's people against continued acceptance of poverty, illiteracy and chronic ill-health.

3. Economic growth in the less-developed countries clearly should be speeded. The first task of each nation is to set its own goal and determine and execute its own program for achieving this goal. The industrialized countries must realize that their own prosperity depends on a growing and expanding world economy and that it is therefore in their interest to help the less-developed countries achieve a more rapid economic growth.

4. In addition it is proposed that the developed nations fix as our goal to double in the 1960's, as compared with the 1950's, the annual per capita rate of economic growth in 100 countries and territories containing a billion and a quarter of the world's people.

a. If we achieve this goal it will mean increasing the per capita economic growth rate of the less-developed countries from an average of one percent a year in the 1950's to an average of two percent in the 1960's.

b. To do this it will be necessary for the less-developed countries to sustain an annual rate of economic growth of four percent. This will mean a total increase of nearly twenty five percent in ten years. It will mean increasing annual per capita income from the estimated present figure of around $100 to around $120 in 1970. This means increasing per capita income over the decade of the 1960's by about 25 percent per person or an average of about $2.50 per person per year.

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Hoffman -- 2.

5. This goal is the very minimum we should seek to bring about in the less developed countries today if explosive pressures building up in the world are to be released into constructive channels. Nothing is needed more today than examples of countries that -- under free institutions -- have achieved this goal. It is Hoffman's personal view that at least twenty countries can achieve self-sustaining economies in the 1960's.

6. Theoretically this achievement should be readily attainable because the underlying reason for underdevelopment is underutilization of natural and human resources. The human and mineral resources, industrial potentialities, etc. have been shamefully neglected.

7. To achieve this goal, it will be necessary to place our priorities in the right order and to make our thinking and action accord with the facts.

a. This means there must be a sharp increase in technical assistance and particularly in pre-investment work in the underdeveloped countries, that a greater flow of private capital must be attracted, and that public investment in basic facilities and services must be increased substantially.

b. It also means that we must make a new approach to the task, based upon the fact of interdependence between the industrially advanced and the underdeveloped countries.

B. Summary of the New Approach Necessary

1. All must recognize that today no single country, rich or poor, can achieve maximum economic growth except in an expanding world economy. The first responsibility of each country is to speed its own development. Its second is to assist other nations in accordance with its means.

2. It must be recognized frankly that we in the industrialized countries promote economic development in the low-income countries because it is in our own interest to do so. At the same time, the leaders of the underdeveloped countries, for their part, must accept their own responsibilities for a maximum effort. Both must recognize that they are working together to accomplish a common purpose that will benefit all.

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Hoffman -- 3.

3. Economic assistance should be divorced from international politics. Helping to promote greater prosperity in expanding freedom is an objective worthy to be pursued for its own sake. The effort must not be defeated by political strings or by trying to buy good-will or to make momentary gains in a cold war. All nations should be urged to participate in the task of economic assistance in concert to avoid confusion and waste.

4. Greatly expanded use should be made of the United Nations and its specialized agencies operating in the development field. U.N. aid is politically more acceptable to the underdeveloped nations and better results can be obtained through the U.N. machinery at substantial monetary savings.

5. We must recognize in a practical way the urgent need to speed and expand programs of technical assistance, especially work such as that of the United Nations Special Fund in surveying natural resources and training people in the skills they must have to make effective use of their resources. Sound business practice requires that the U.N. program of technical assistance and the work of the Special Fund be expanded quickly in the coming year or two and be somewhat increased in the following years.

6. With regard to investment as an essential part of the attack on the problem of economic development, far the larger part of the responsibility for supplying the capital needed to speed development must come from the poorer countries themselves. A substantial percentage of their incomes -- however low -- must go into savings to finance the major parts of their development programs which can be financed with local currencies. These countries must also earn by their exports the larger part of the foreign exchange required to finance their imports from the developed countries.

a. The less developed areas can raise their merchandise exports substantially in an expanding world economy in the 1960's. The capital deficit of the underdeveloped countries over and above their estimated earnings through the sale of goods on the world market and the present capital flow for development from outside sources should amount to about $30 billion over the 1961-1970 period.

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Hoffman -- 4.

b. $10 billion of this deficit could be covered by increased private investment and bankable loans and increased exports. The remaining $20 billion will have to be financed through soft loans (these are really long range investments). Ideally this should be furnished through multinational institutions such as the International Development Association. The rest will have to come from individual countries or from regional associations.

c. The United States will, in all probability, have to provide for half of this investment, approximately $10 billion.

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# Jackson, Barbara Ward. Foreign Aid: Strategy or Stopgap?

1. In the large context of peace and war, the fundamental aim of economic assistance is to build up stability in unstable states. This cannot be done by piecemeal patching up, by casual subsidies and handouts. The most successful of all programs of economic aid so far -- the Marshall Plan -- clearly illustrates the need for change in depth. The same vision and daring are needed in the infinitely more complex pursuit of stability among the extra-European peoples.

2. Action is needed at two levels -- to complete the modernization of the local economies and to devise a world system that fosters the necessary change. Development policies, to be effective, have to be based not on generalities but on detailed analysis of the community which is to be aided. The West's increasing acceptance of the need for "country plans" is a fruitful recognition of how specific the problems of development are likely to be.

3. The essential task of economic assistance is, therefore, to correct and complete the old lopsided structure. Within the developing countries, it is a question of extending the colonial infrastructure expanding education beyond a small elite, raising savings and channeling them into dynamic farming and growing industry where more savings can be secured by higher productivity. Thus the cycle of sustained growth can be set in motion. At the international level, the task is above all to restore a worldwide economy which stimulates and does not depress the possibilities of local development.

4. The starting point is a progressive attempt to increase the flow of domestic capital. By general agreement it must rise to at least 15 percent of national income if sustained growth is to be secured. Such an increase does not happen easily or naturally in post-colonial economies.

a. A strategy of saving must be worked out. There are no general rules for either the techniques or the scale of saving. But governments can hardly be said to be seriously bent on development unless they are willing to raise the level of taxation to some 20% of national income.

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Jackson -- 2.

b. New resources should go to infrastructure -- of power, transport, and trained minds. Static farming must be overcome. Where land is available, the need is for new land settlements combining individual ownership with general managerial supervision and a cooperative structure. But where no more land can be opened up, there is no alternative to drastic land reform, establishing the peasant as owner on the land he has formerly tilled as sharecropper or tenant, and backing him with a fully cooperative apparatus.

5. All developing countries need to break from their total dependence on primary exports. Foreign capital is an essential element in all industrialization since under-industrialized countries lack, by definition, the tools and machines for growth.

6. The tough core of the assistance effort is the question of the will to bring about the needed changes. At least three quarters of the processes of modernization can be accomplished only by the recipients themselves.

a. In theory, the path is clear. No government is worth supporting unless it is prepared to undertake the two or three key policies needed to set growth in motion. But in practice, such governments often do not appear or cannot be coaxed into activity.

b. It is at this point that Western governments have to remind themselves of what they are really trying to do -- to build viable states capable of cooperating in a viable world order. They must also remember that they are not operating solely in terms of immediate conflicts, failures and successes but are attempting, over time, to produce profound modifications in the social order. To prop up, on any terms, a regime which will neither analyze its economy nor take the crucial steps to set it in motion can do no more than stave off and finally aggravate revolutionary upheaval.

7. In some particular situations, subvention may be necessary -- to counteract a bad harvest, to maintain a local army or check incipient guerrilla fighting, to tide over a balance-of-payments crisis. But -- as the Alliance for Progress attempts to recognize -- these grants should have nothing to do with economic assistance. Funds given for foreign aid have to be given within a framework that at least aims at a strategy for growth.

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Jackson -- 3.

a. Governments with no plans for popular and technical education, with no policy for raising taxes toward the needed 20 percent of national income, with no ardor for land reform, with no general strategy for fostering savings and channeling them into productive investment -- such governments are simply incapable of becoming valid partners in a serious effort of economic aid.

8. The refusal to give aid can be somewhat sweetened. If the local government is simply not technically competent to produce an effective plan, it can be given time, temporary financial assistance and the help of planning experts to put a program into shape. Such experts can and should be drawn in part from international agencies and from the country or continent in which the plan is being carried out. Far closer consultation with local opinion, more joint research work in Western and local universities, more field work by joint teams are all needed as essential guarantees of success.

9. The most persuasive pressure is likely to come not from the negative side of refusing aid where reform is lacking, but from the positive side of aid generously given when conditions are favorable. So far this "demonstration effect" is missing. The maintenance and extension of generous programs of aid would ease the Western task in yet another way. Among new politicians in ex-colonial lands, among young firebrands in backward, cast-ridden societies, among the rising intelligentsia of the developing continents, the reaction to the West is all too often one of resentment and suspicion. If the aid programs continue, if pressure for reform is sustained and the officials who administer assistance are not identified with the old order but look intelligently and devotedly to new relationships, these facts cannot fail to have a vital political impact.

10. If the Western powers really intend to develop an imaginative long-term strategy, efforts to persuade and enlighten the electorates of the West have to be intensidied. Aid may not ensure progress but there is no change in the argument that the alternatives to assistance are all worse. Aid, therefore, in the most literal sense, remains an essential instrument in Western security.

Knorr, Klaus E., Ruble Diplomacy: Challenge to American Foreign Aid.

A. Dangers of the Trade and Aid Push of the Soviet Bloc

1. The economic drive of the Soviet Bloc and especially of the Soviet Union in economically retarded countries will probably gather further momentum. Although the extension of Bloc trade and aid has not as yet reached dangerous proportions, it has risen sharply. It is evident that the conditions under which Bloc aid becomes available seem attractive to many underdeveloped countries; credit terms appear generous, rates of interest are low, and permission to service loans in goods or local currency is frequent.

2. The effectiveness of Soviet economic diplomacy and the dangers it presents to the West depend to a large extent on how the West reacts to Bloc moves.

B. Recommended Counter-Measures for United States Aid Policy

1. United States policy in the underdeveloped countries must be realistically based on Bloc capabilities and intentions. Although realistic recommendations seem unspectacular and inadequate to deal with Soviet initiative, if they were applied forcefully the overall results would be far from inconsiderable.

2. The United States must help underdeveloped countries as much as possible via trade. Part of our reaction to the Soviet economic offensive should be to keep American import barriers down and to play a constructive part in managing a reasonably free world trading system.

3. The United States should not shift more foreign aid from a gift or "fuzzy loan" basis to a straight loan basis. Instead, the U.S. should consider American support for some additional loan funds to be administered by the United Nations, so that the U.N. and not the U.S. would assume the burden of asserting the rights of the creditor.

Knorr -- 2.

4. With regard to the program of grants and special loans, the United States should not play the game of matching Bloc offers throughout the underdeveloped world. As a general policy (there may be some specific exceptions), the United States should pursue its own constructive purpose, i.e.: to help economically less developed societies which display reasonable determination and efficiency in pushing their economic development under non-totalitarian institutions. The principal U.S. goal is to influence the direction of basic political, social and economic change in the underdeveloped countries.

a. This policy must be backed with sufficient resources. It is probable that annual expenditures of between $2,500 million and $3,000 million strictly for this purpose would be adequate in the immediate future.

b. These resources should be distributed with a view to maximizing the ultimate effects we are seeking. Big and influential countries call for the most serious consideration. The U.S. should in general prefer to back countries which make the best use of our resources and their own, rather than to persistently try to shore up hopeless positions of little consequence in the world political picture.

c. The United States should not even implicitly insist that political and economic institutions in recipient countries be formally constructed along American or Western lines. For the most part, countries in Southeast Asia and the Middle East do not have the kind of social structure, cultural standards, patterns of personal and group motivations which would allow most of their citizens to play the roles essential to liberal democracy or to a liberal economic system with any prospect of success.

d. Economic aid should be given without political strings. Defense and military support should be kept separate from the economic aid program and should not affect the distribution of economic aid.

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Knorr -- 3.

5. The United States must make every effort to recruit highly qualified personnel for technical assistance duty abroad (a) by setting up a system under which the U.S. government can hire qualified people directly from other countries for such jobs and (b) by channelling greater proportions of our technical assistance through the United Nations which can draw upon qualified personnel in Western Europe, Japan and Latin America as well as the U.S.

6. Headquarters personnel at American Missions abroad should be reduced in numbers. Much of the work could be done just as easily in Washington. This would help improve the quality of personnel abroad by weeding out the less efficient. With less staff abroad, there would be less interference in the details of local administration which foreign governments find so irritating.

7. It is important that U.S. policy gain flexibility and speed of maneuver; all proper and promising methods for achieving them should be promptly explored. There is not doubt that flexibility in our aid policy demands the elimination of most Congressional conditions on the use of foreign economic aid. In particular, the allocation of funds among different aid purposes and different recipient areas should be left to the discretion of aid administrators. The importance of the annual review resulting from annual foreign aid appropriations is too great to justify the substitution of a general fund for long term financing. But it would be wise to permit administrative use of a limited fund for long range commitments to a few countries which are of special importance to the U.S. and which have a good record of using foreign aid effectively.

[LC]

# Mason, Edward S., Foreign Aid and Foreign Policy

## A. Recommended Basis for Foreign Aid

1. The relatively firm basis on which a foreign aid program can and should be built is made up of two demonstrated facts:

a. that in at least a large part of the less developed world, foreign aid can make and has made an effective contribution to economic development; and

b. that most countries, developed and undeveloped, desperately want to be independent of external control. In most of the underdeveloped world, the problem is essentially to keep open the possibility of independence and to encourage the unfolding process of economic and political development that offers a real alternative to Communism.

2. Doctrinaire views on the direction and use of foreign aid are unlikely to be effective. Under certain circumstances we may have to sacrifice a desire to promote wider participation of the governed in order to preserve a modicum of effective government. On the other hand, it is clearly useless to try to support governments who assert their anti-communism but lack the effective support of their citizens.

3. A *sine qua non* of any sensible aid program is the ability of a receiving country to make effective use of whatever aid is provided for whatever purpose.

4. For any success in the sharing of the development burden, two conditions must be fulfilled:

a. there must be some mutuality of interest, some recognition of common purpose among potential contributors; and

b. there must be at least a rough consensus concerning the meaning of equitable sharing, i.e.: *per capita* or an equal percentage share of the national income.

[LC]

Mason -- 2.

Sharing the burden of aid embraces a complex set of problems involving not only the amounts, terms and conditions of financial transfer but also the existing and possible patterns of international trade as they affect export earnings of underdeveloped countries and the capacity of advanced countries to make and aid contribution. There must also be very close agreement among the countries of the Atlantic Community on such matters as military strategy, appropriate levels of defense spending, purpose of economic assistance, the relationship between trade and aid, and what constitutes "equality" in burden sharing.

## B. The Alliance for Progress

1. The United States should support a proposal for nonreciprocal reductions by the developed countries of tariffs on manufactured products. Without preferential tariffs at least for a period of time such exports are unlikely to be able to meet the competition of established manufacturing enterprises in the developed world.

2. Although it would be greatly desirable to use the foreign aid program to promote U.S. private investment in Latin America, there is not much the U.S. alone can do to improve the climate for private investors even with the leverage of a large foreign assistance program. The primary responsibility for action is lodged in Latin America.

3. The United States should support a proposal for the development of the Alliance as a regional organization. We should install the machinery capable of producing a consistent set of policies relevant to Latin America and should coordinate the interagency committees on which the Administration is represented along with the spokesmen for many other interests.

4. The Alliance must work toward something like the Marshall Plan arrangements both in Washington and Latin America, though this is likely to be a rather slow process. The main difference between the Marshall Plan and the Alliance for Progress is the organizational arrangement outside Washington. The Alliance should have a body ressembling the Organization for European Economic Cooperation, with a highly qualified staff and frequent meetings on which the United States could rely for annual estimates of country requirements. The Latin American partners should create an organization capable of understanding some of the repercussions on regional development of the actions of individual countries and prepared to intervene in the traditionally domestic concerns of these countries.

McCloy, John J., "Foreign Economic Policy and Objectives".

# I. THE AIM OF FOREIGN ECONOMIC POLICY

1. The long run requirement is to build a world where free institutions can be preserved and extended. This task must not be undertaken by the United States alone but with the cooperation of all the free world.

2. The central objectives of free world policy should be sound economic growth, without inflation, for the United States, the West and for less developed lands, with the goals of eliminating hungar, epidemic diseases, expansion of education and achievement of substantial improvement of living conditions.

3. Economic aid alone is insufficient to accomplish these aims, which involve the entire network of economic relations between nations: foreign trade, private foreign investment, development of regional groups and international agencies.

# II. ECONOMIC ASSISTANCE TO THE LESS DEVELOPED LANDS

1. The less developed countries and their need for sustained growth pose one of the most difficult and important problems confronting the United States over the next decade. The less developed countries must help themselves but great assistance must also be given by the outside world.

2. The objective of the United States and other industrialized nations should be to assist those less developed countries which so desire to raise their rate of economic growth substantially -- at least to 4% per annum wherever possible. To achieve such a growth rate would require an investment of approximately 20% of the Gross National Product. Parallel advances in education and training and a non-inflationary fiscal policy as well as whole-hearted cooperation by the developing countries would also be necessary. In these circumstance a significant improvement in living conditions could be achieved over the course of a generation.

3. Aid without trade would be unacceptable to any developing country, either in the form of gifts or loans. It is essential that industrial nations, especially the U.S. and countries of Western Europe, relax tariff barriers to the products of these countries, including those they will come to manufacture.

[LC]

McCloy -- 2.

4. The needs of the less developed lands can only be met by cooperative action on the part of the industrialized nations. Therefore the United States should make every effort to enlist the cooperation of Western Europe and Japan in a coordinated effort to assist the developing countries.

5. The major stimulus to enlarged private overseas investment must come from actions by foreign governments to provide a more hospitable climate.

a. The United States government can take positive steps to emphasize private investment in the less developed areas. The negotiation of Treaties of Friendship, Commerce and Navigation will help to assure non-discriminating treatment of U.S. investments and to focus attention on the need for policies to attract such investment.

b. Tax treaties can make it possible for the less developed nations to offer tax incentives to attract private investment from abroad.

c. Two other available methods to increase the contribution of private investment are:

(1) the imaginative application and expansion of guarantee programs to reduce unusual risks incurred in foreign investment; and

(2) greater use of management contracts to develop, construct and operate projects in areas where risks would preclude direct investment.

d. A far greater effort to spread an understanding of the contributions U.S. private investment can make to local development is needed.

6. Because the provision of technical assistance is essential to developing countries, the United States should make every effort to assist these countries to overcome educational and technical deficiencies -- both by opening our own facilities to them and by helping to organize training within their borders.

McCloy -- 3.

a. The United States should prepare itself more adequately for overseas work and technical assistance. Our aim should be the creation of a body of well-motivated, technically competent representatives who are knowledgeable in the language and customs of the countries in which they will be located.

7. One of the paramount objectives of U.S. policy should be an effort for successful control of the ups and downs of the business cycle in order to help maintain a stable demand for world commodities. The less developed countries depend mainly on the export of raw materials and agricultural commodities for the needed foreign exchange.

a. With regard to the attempt to control the prices of individual commodities, perhaps the best method is the concept of creation of buffer stocks for certain products which might lend themselves to such a procedure. It might be possible to work out an internationally administered buffer stock program. The case of farm products is most difficult, but the U.S. economic aid program could helpfully stress farm diversification. Short term actions to forestall crises should be accompanied by longer-term measures to deal with basic causes.

b. The U.S. should assume leadership in joint efforts on the part of industrialized and less-developed nation to deal with the problem of commodity prices as part of the general development program.

8. It is essential that the United States' international payments be balanced so that the problem will not become so acute as to thwart the fundamental objectives of the nation's foreign economic policy.

9. The proper grouping of the forces of the free world, both on the side of the developed and less developed nations is imperative and could be the chief stabilizing factor to a nuclear age.

McCloy -- 4.

a. A start has been made in the difficult problem of fashioning adequate machinery for co-ordination and cooperation of multi-nation assistance in the form of the Organization for Economic Cooperation and Development (OECD). The aim of the OECD is to join the Western European nations with the United States and Canada for coordinated planning and action and to allocate the burden of global aid among the various members.

b. The role of international institutions like the International Bank for Reconstruction and Development, the International Monetary Fund, the United Nations Special Fund and the GATT organization could be increased.

Mikesell, Raymond F., Problem of International Harmony

1. The United States' responsibility for maintaining free world defense capabilities must be shared to a greater degree. A gradual shift should be effected to multilateral development assistance, i.e.: assistance administered by agencies whose political objectives are in accord with those of the U.S. and other members of the Western Alliance.

2. Fundamentally, large scale aid programs involving a significant portion of the national budget must be justified on security grounds. In the long run, stability and democratic progress, the bases of free world security, depend upon the ability of governments to deal successfully with a variety of economic, political and social desires and conflicts. A rise in the level of living conditions is an important but not a sufficient condition for democratic progress.

3. Wherever possible, U.S. aid should give highest priority to constructive efforts within the host government and in the private economy to create conditions for long run political stability. Substantial technical and financial assistance for land reform and creation of credit institutions for strengthening small industries and farms may represent more effective use of aid resources than, for example, a hydroelectric dam.

4. Aid programs should be designed to assure that economic objectives will be carried out fully. Therefore both the quantity and duration of economic assistance will need to be larger.

5. Foreign aid should be employed as a means of bringing to bear the maximum amount of influence -- both economic and political -- on the less developed countries.

6. The United States should consider the entire socio-economic structure of a country in determining the elements of strength and weakness in the growth process and in discerning the most politically desirable as well as the most economically feasible directions in which we ought to assist the economy in moving. The self-generating growth approach provides a better basis for economic aid than piecemeal and sporadic assistance which fails to consider the economy as a whole in relation to the political objectives to be achieved.

[LJ]

Mikesell -- 2.

a. Political stability and independence from Communism need a gradual but measurable rate of growth in the level of living and the output per capita.

b. Foreign capital should be provided in such amounts and for whatever time necessary to achieve a satisfactory rate of growth in the output *per capita* on a self-sustaining basis, i.e.: without further net capital imports.

c. The purpose of the external capital is to raise the level of capital formation to a rate consistent with the growth in output per capita and to maintain this rate at that level till domestic savings are large enough to support a rate of investment growth sufficient to finance the desired rate of growth in output.

d. The critical level of investment must be maintained until the economy "takes off" on free flight of self-sustaining growth.

7. Institutional and other obstacles to the implementation of aid programs for achieving steady economic progress along these lines are as follows:

a. The lack of sufficient policy coordination at the country level to influence the direction of the host country's economic progress along the lines dictated by the overall assessment of internal economic and political factors.

b. The failure of the United States and the host countries to formulate long-range development programs and adopt sensible monetary, fiscal and exchange policies -- often because of political instability and weak or corrupt administrative machinery.

c. The predominantly loan character of our development assistance and the limitations on the capacity of many less developed countries to service additional investment.

[LC]

Midesell -- 3.

8. There must be a substantial change in the nature and volume of United States development assistance unless the less developed countries expand their rate of export growth. The problem of the relatively slow growth in value and volume of the exports of many of the less-developed countries seeking to achieve a high rate of output expansion with the aid of foreign capital will have to be met along three different lines:

a. the expansion of exports

b. greater reliance on grants and soft loans

c. some revision of loan policies of public lending institutions.

9. It is the responsibility of the United States and other Western industrialized countries to broaden their markets for both primary commodities and manufactured products of the less developed countries. The U.S. needs:

a. a strong defensive establishment for ourselves and our allies which is not weakened by arbitrary limits derived from budget accounting,

b. a foreign aid program aimed at supplying, in cooperation with other industrial countries, all the capital the less developed countries can productively employ in accord with reasonable standards of performance;

c. a program of education and training which will be limited only by intellectual capacities and personal desires of our youth and geared to the manpower needs of a high productivity modern economy; and,

d. a vastly expanded program of research, both basic and applied.

10. Soft loans might differ from hard loan by provision of exceptionally long grace periods, by very long amortization schedules and by liberal but definite contingency arrangements which might waive or defer payments of interest or principle in years of exceptionally low export receipts.

Mikesell -- 4.

11. With regard to the loan policies of public lending agencies such as the World Bank and the Export-Import Bank, some way must be found for these agencies to look at loans they make to less developed countries in terms of more or less continuous flow of capital rather than simply in terms of financing specific projects.

12. There is also a need for a single institution or agency charged with the job of maintaining a close and continuous relationship to the developing countries in order to assist in the planning of capital imports in relation to development programs and debt service capacity.

# Montgomery, John D., The Politics of Foreign Aid

## I. THE INTERNATIONAL POTENTIALS OF FOREIGN AID

A. **For an Effective Policy:** The only reasonable prospect for effective American policy toward the underdeveloped countries lies in the direction of more purposeful foreign aid programs, which must be closely integrated with other forms of our economic and political diplomacy. The total purpose of foreign aid cannot be resolved for all time into one neat formula, but it is equally clear that foreign aid requirements will increasingly force the United States to discover a means of balancing our many concerns, both in the formulation of policy and in its application to the special circumstances of each underdeveloped country.

B. **Policy Obscurities:** In many cases, American purposes appear clear enough to begin with, but in the process of their implementation the original clarity of our concern with stability and decency becomes obscured. Some loss of clarity is inevitable, due to the combination of obstructive friction and deadening routine that goes with a great administrative machine; but some indeterminate part of the uncertainties in our practice must be traced to confusion in principle.

## II. COORDINATION OF FOREIGN AID PROGRAMS

A. **Country Approach to Administration:** Because foreign aid has served so many national and international objectives -- political, military, economic, social, and cultural -- it must be seen and managed in its particulars. Placing authority for coordinating aid within each recipient country offers the most promising means of integrating the various forms which it takes. Administrative coordination of the manifold activities of foreign aid can scarcely be achieved by agencies located outside the recipient country, especially those relying upon temporary inspections or routine exchanges of information. It is especially doubtful if coordination can be achieved in the large technical or administrative groups in Washington or New York whose role is arranging clearance rather than creative participation.

B. **Problem of Sovereignty:** Assuming that authority for coordinating aid programs must be partially entrusted to foreign planning experts, the fundamental question is what effect upon sovereign prerogatives a truly integrated aid program would have.

Montgomery -- 2.

One great principle is clear: aid must be offered with equal
respect for the requirements of economic development and for
the politics of sovereignty. The proposed country approach to
aid planning does not imply a substitution of one sovereign
will for another. But the donor is obliged, both by morality
and by prudence, to offer his aid in its most useful form,
even if it is not accepted. Frequently, in fact, this
obligation may require a deliberate and sustained effort at
persuasion.

C. <u>Need for Political Leadership</u>

1. **Coherent Position:** The country approach includes not only a determining of needs and priorities, but also the definition of a coherent American position. The absense of a political consensus has produced a vacillating and unpredictable program of operations, damaged the morale of foreign aid personnel, and encouraged widespread public acceptance of irrelevant or ill-founded views and judgments on foreign aid aired in the press and in the popular literature. What continuity there is in American foreign aid programing has been more a function of bureaucratic perseverance than a result of deliberate policy. The fact of administrative continuity has been insufficient to arrest a deterioration in the effectiveness of the vast aid program to which the United States appears to be so reluctantly committed. The somewhat mechanical performance that has resulted has brought about a significant decline in international respect for America's role as a leading power and a questioning of the sincerity of the humanitarian gestures and political ideals which are a part of our approach to the world. Clarification of national purposes as a prelude to the strengthening of the will to achieve them can provide sufficient protection against these disabilities.

2. **Leadership:** Political leadership must come from the President, the party chieftains, and Congress. The exercise of dramatic authority by the President cannot in itself resolve all of these problems, although it is clear that no national consensus is likely to develop without it. Both parties must restrain their appetites for spoils appointments in foreign operations and afford them strong and continuing support. There are also opportunities at the working administrative level to improve congressional

[Lc]

Montgomery -- 3.

understanding of foreign aid. The annual effort to
justify the program has resulted in a frantic search for
new ideas, and occasionally in overselling them. Confusion
among political, military, and economic purposes remains
a major weakness of U.S. foreign aid programs. Past
disappointments and disillusionments have contributed to
the defensive attitude of the executive branch, which has
invited only further distrust and criticism. The adminis-
tration's defensive posture has led it to concentrate on
justifying the minutiae of programming to the neglect of
major policy issues in foreign aid operations. These are
matters of national leadership not merely of legislation
or organization.

3. Authorization of Funds: The most important procedural change necessary for the development of a stable foreign aid policy relates to the authorization and appropriation of funds. The fourfold congressional obstacle-course through which the agencies must pass each year not only occupies much more time than would be required for funding the program on a long-term basis, but also contributes to confusion when inconsistent views are developed in the various committees or at different times. Authorization, even by an impressive majority, is not proof against substantial cuts at appropriation time.

Theoretically, the best solution would be for
Congress to authorize foreign aid on a permanent or long-
term basis, permitting the committees dealing with foreign
affairs to concentrate on the general oversight of
operations. Even if the Appropriations Committees de-
clined to forgo the panoply of annual hearings, this
proposal would eliminate the annual repetition of execu-
tive branch pleas for authorizing legislation and relieve
the administration of a large part of its burden. The
administration would be freed of the obligation to devise
new justifications every year for the same operation, a
course which is self-defeating and counter-productive.
The enforced search for new ideas in the justification
and rationale for foreign aid is fruitless: wise continuity
is needed more than glittering novelty.

Montgomery -- 4.

### III. SUMMARY PROPOSALS FOR THE FUTURE

A. **Requirements for Next Decade:** The American experiences in Southeast Asia suggest further requirements for foreign aid operations in addition to the need for a greater sense of national political purpose and a clearer statement of the requirements for American involvement in the planning for economic and social development of other countries:

1. Greater delegation of responsibility for program design and flexibility in administration to American ambassadors, who, in turn, would be assisted by professional coordinators and planners of military, economic, and technical aid. The "country approach" remains essential.

2. Greater flexibility in the advance designing of special impact projects for use when speedy performance is necessary, especially in countries where U.S. aid is an innovation or a controversial issue.

3. Renewed emphasis on the possibility of introducing widespread consumer and public benefits as a legitimate end of foreign aid, recognizing the fact that the capacity to respond to mass needs and at the same time to dramatize the individual-oriented character of the American society is an important and, thus far, unique feature of U.S. bilateral aid programs.

4. Greater and better coordinated use of non-governmental aid resources, emphasizing the unique and pluralistic nature of the American society, whose divers resources are nevertheless capable of working toward common purposes.

5. Greater flexibility in using expert help not now generally available to U.S. aid operations, including short-term technicians, semi-professional operating personnel, voluntary associations, and university research and consulting services.

6. Greater attention to the probable impact of U.S. aid upon political, social and moral development of the receiving country, so that encouragement can be given to responsible democratic tendencies within the traditional social framework of developing societies.

[LC]

Montgomery -- 5.

7. Acceptance of the implications of a continued Communist trade-and-aid offensive, and the development of criteria by which countries may be encouraged to receive aid from any source so long as it does not have injurious political or economic consequences.

B. **The Doctrine of Nonintervention:** Of the changes necessary to accommodate to these requirements, none is more significant than the changing concepts of national sovereignty and of nonintervention in the affairs of other nations. What is lacking is not a redefined doctrine of nonintervention but a rationale for the legitimate and inevitable involvement that occurs in foreign aid relationships and an understanding of both the opportunities and the limitations of such involvement.

1. The problem is not how to keep from influencing the internal affairs of other nations, but how to do it legitimately and on a continuing basis. Efforts to minimize anticipated failures and undesirable consequences of change constitute a form of American interference that is almost inescapable. Perhaps the minimum policy requirement of the doctrine of non-intervention is that the United States should avoid interference that is needless or irrelevant to major foreign policy purposes.

2. A further obligation imposed by respect for the sovereignty of other nations is to discover administrative means that will minimize the embarrassment surrounding the intrusion of foreign funds, personnel and ideas. Foreign aid agencies have developed institutions that conform to special political circumstances and it is likely that further concessions to the political requirements of other governments will be necessary, both in the negotiation of bilateral agreements and in the organizational formalities of aid diplomacy.

3. The interventionist tendencies of foreign aid are also minimized when several sources of funds and personnel become available. The possibility of choosing among aid agencies has at least reduced the sense of political involvement that might follow from substantial dependence on a single source.

[L.C.]

Montgomery -- 6.

## IV. NEED FOR LEGITIMIZING FOREIGN AID

A. **Collective Impact:** Perhaps the most compelling argument in favor of recognition of foreign aid as a continuing and legitimate instrument of American policy is the consequence a vigorous reaffirmation could have. Overseas operations could achieve a collective impact from American efforts that even the best administration of the present array of independent agencies could not approach.

B. **Field Level:** At the field level the country team, under the ambassador, would find less fragmentation of direction from Washington, would have less to fear from appeals by the host government to Washington for reversals of its technical decisions, and could anticipate speedier answers to its requests for policy guidance because of better coordination among the agencies concerned. Independent staffs for program review of the operations of these agencies at the country level could provide Washington with more effective, policy-oriented oversight of field operations.

C. **Career Service:** Other important administrative gains from such a step could be anticipated from the greater stability of staff and policy that would result. A genuine career service would be possible among a nucleus of the best qualified of the aid administrators and technicians, with a standing fully equal to that of the Foreign Service. Establishment of a career service would not only improve recruitment prospects but could also contribute to a better employment of skills already available. It would be possible to establish permanent training programs for the career development of officials which could eventually become a prerequisite for advancement to the highest administrative and technical positions, and at the same time serve as a focus of continuing research and evaluation of political, technical, and economic phases of foreign aid administration.

D. **Career Staff and Military Aid:** The military element of foreign aid (the largest single component) has been surrounded by a formidable mystique that has hitherto prevented adequate participation by professional outsiders. Assignment of career aid administrators to military service schools could develop a versatility on the civilian side that the military services already possess in reverse, and could even lead to a mixing of career personnel in the development and administration of defense support and military aid programs.

Montgomery -- 7.

E. **Multilateral Projects:** A decisive American recognition of the legitimacy of foreign aid as an integral and permanent part of foreign policy would also encourage other countries to join in multilateral arrangements including both donor and receiving governments. The apparently tentative nature of the American commitment has remained a bar to long-term arrangements.

F. **Project Termination:** The probability of continued U.S. participation in bilateral aid operations does not rule out the need for planning systematically for the termination of programs that have fulfilled their objectives and for withdrawal from those whose results are not serving American purposes. It is the U.S. commitment to foreign aid rather than to specific policies and programs that should be permanent. Continuation of individual projects could be considered a voluntary action for both parties once the principle of a continuing American participation in foreign aid is established. At the same time, U.S. commitment to unproductive aid activities should be subjected to much more critical review than is possible under the present uncertainties of American purpose and direction and the preoccupation with tactical considerations.

G. **Ideological Requirements**

1. Among the political potentials of foreign aid is the promotion of stable institutions for the protection of individual rights, the principal limitations being those imposed by the sovereign relationships between governments giving and receiving aid. When foreign aid is considered from this standpoint and not merely from that of cold war strategy, the roles of local armies, internal policy forces and other public and private institutions receiving American aid can be identified as they contribute to the broad national purposes of the U.S. and the host country. Our own long term objectives in the underdeveloped countries are served everywhere by the creation of economic and political conditions favorable to their independence and to the growth of individual and social freedom.

2. The successful entry of the Communist bloc into foreign aid is an accomplished fact, and American aid policies and operations must find means of blunting its political effects and, where possible, converting this additional aid resource into an asset. Whatever activities contribute to the creation of economic and political conditions favorable to independence and individual freedom

[LC]

Montgomery -- 8.

should be accepted regardless of the source; whatever
does not should be blocked or avoided if possible. But
it is at the same time imperative to see the Communist
challenge over the next four decades as more than rivalry
in military weapons sytems and foreign aid operations:
total systems are competing in the developing world
south of the Tropic of Cancer.

3. A different concentration or balance of aid efforts in each country and among sectors of its society is also essential. In some circumstances the West must find means of supplying consumption commodities at costs that will free local capital for reinvestment without sacrificing the popular standard of living. The Western world in supplying consumer goods out of its own abundance, and in making substantial contributions to capital development as well, would be demonstrating important aspects of its superiority over the Communist economic model.

4. These proposals imply the need for overcoming present inadequacies of resources, personnel and knowledge. Although in a few countries, financial aid has been poured in at (or above) the point of saturation, most of the underdeveloped world continues to be short of investment and operating capital and of adequate supplies of managerial and technical personnel. Even the development of proposals for loans or grants on a project basis cannot occur quickly enough under the normal entrepreneurial processes to offset these shortages.

V. PRACTICAL POLITICS AND FOREIGN AID

A. Political Changes Necessary: If foreign aid is to fulfill its promise as an instrument of American diplomacy in the years ahead, important political changes will be required. A national consensus must be built; congressional and party support must be adequate to withstand the threats of destruction to which the policies and programs are periodically subjected; congressional participation in establishing and reviewing basic foreign aid policies must be broadened; and the administrative arrangements for foreign aid, both nationally and internationally, must be designed to achieve a maximum impact from the resources available. The task of developing a national consensus is one of continuous public education about purposes, potentials and programs in which the President himself may have to participate constantly in support of executive agencies and friendly congressional leaders.

[LC]

Montgomery -- 9.

**B. Executive Branch:** It is the responsibility of the executive branch to devise means of better informing the public and the congressional rank and file about the operating problems and requirements of foreign aid as well as to improve its own administrative arrangements. One device would be more thoroughgoing reviews arranged by the executive with congressional support, as by special task forces to evaluate foreign aid programs in the light of major international policies and purposes. Such teams, consisting of executive and congressional appointees, could supplement the work of executive audits and well-staffed congressional investigations without undermining the independent position of the executive branch. Unification of aid operations capable of smoothing out the administrative obstacle course would have to take place at a sufficiently high level of government to avoid inter-agency impasses.

**C. Administrative Problems:** The basic administrative problem in foreign aid is the marshalling and deployment of resources. Even after many reorganizations different agencies are offering various forms of technical, economic and cultural assistance, making decisions and seeking funds independently. Although it is clear that coordination among these agencies must take place at the national level, the country requirements call for administrative flexibility within the operating agencies as well. The use of short-term consultants and special contractors supporting a country team's permanent nucleus of planners and technicians often makes it possible to reduce the self-perpetuating tendencies of a standing administrative group; but this approach is not a substitute for long-term country planning. Often the denial of flexibility in the awarding of contracts and use of contract personnel is a rigid form of protection against corruption or malfeasance that could be better controlled by post-audit devices.

**D. Flexibility:** Operational flexibility would also make it possible for the United States to act more promptly on legitimate and urgent requests for aid. Some attention should be given to the appropriation of funds for projects to be administered under special or emergency provisions designed for speed and effectiveness; the Communists need have no inviolable monopoly on successful "impact" projects. Special task forces with procedures for entering quickly into contracts for services and supplies would match the best demonstrations offered by the Communists. Normal post-audit procedures could control misuse of funds once the purposes had been clarified, the impact areas chosen and the necessary agreements reached.

Montgomery -- 10.

VI. MULTILATERAL AND BILATERAL AID

A. Inspite of the advantages of internationalizing aid operations, it is almost inconceivable that multilateral approaches can wholely replace specifically American programs. The absense of political coloration of international aid and the informal and uncomplicated use of individual technicians may be useful in many respects, but international programs cannot fill the need met by the military and political operations conducted under American programs designated as "defense support" and "special assistance".

Morgenthau, H.J., "A Political Theory of Foreign Aid"

1. The question of what kind of policy of foreign aid the United States ought to have cannot be evaded. The United States has interests abroad which cannot be supported by military means and for the support of which the traditional methods of diplomacy are only in part appropriate. If foreign aid does not support them, they will not be supported at all.

2. As it has developed in recent years, our policy of foreign aid is fundamentally weak. It has been conceived as a self-sufficient technical enterprise, covering a multitude of disparate objectives and activities, responding haphazardly to all kinds of demands, sound and unsound, unrelated or only by accident related to the political purpose of our foreign policy. The United States, in short, has been in the business of foreign aid for more than a decade, but it has yet to develop an intelligible theory of foreign aid that could provide standards of judgment for both the supporters and opponents of a particular measure.

3. The first prerequisite for the development of a viable philosophy of foreign aid is the recognition of the diversity of policies that go by that name. Six types of aid can be listed, and only one of them -- humanitarian aid (which governments extend to each other in case of natural disasters) -- is non-political per se. The other types of aid, subsistence, military, bribery prestige, and economic development, are directed to attainment of political purposes and must be tied to foreign policy aims.

a. Subsistence foreign aid is extended to governments which -- like Jordan and Libya -- do not command the resources to maintain minimal public services. It performs the political function of maintaining the status quo. Where there is a political alternative to an unviable regime, subsistence foreign aid diminishes its chances of materializing.

b. Much of what goes by the name of foreign aid today is in the nature of bribes. These bribes differ from traditional ones in that

(1) they are justified primarily in terms of foreign aid for economic development and

(2) money and services are transferred through elaborate machinery fashioned for genuine economic aid.

In consequence, these bribes are a less effective means for the purpose of purchasing political favors than were the traditional ones.

Morgenthau page 2

c. Foreign aid for military purposes is a traditional way by which nations buttress their alliances. It is today not only extended to allies but also to certain uncommitted nations, and it obligates the recipient toward the giver. The military context within which such aid is bound to operate is likely to strengthen the ever-present tendency to subordinate the requirements of aid for economic development to military considerations.

d. Prestige aid (the highway leading nowhere, the idle steel mill) is concealed by the ostensible purpose of economic development. The advantage for the giver is three-fold:

(1) he may receive specific political advantages in return for the provision of aid;

(2) the increased prestige of the recipient enhances the giver's generosity and prestige;

(3) prestige aid is relatively cheap; a spectacular but economically useless symbol may bring disproportionate political dividends.

4. Foreign aid for economic development has a very much smaller range of potentially successful operation than is generally believed; its success depends in good measure not so much upon its soundness in strictly economic terms as upon intellectual, moral and political preconditions, which are not susceptible to economic manipulation if they are susceptible to manipulation from the outside at all. Furthermore, the political results of successful foreign aid for economic development may be either unpredictable or counterproductive in terms of the political goals of the giving nation (if these are the recipient's social and political stability). In any event, they are in large measure uncontrollable.

a. The popular mind and through it, much of the practice of foreign aid, have proceeded from certain unexamined assumptions. Correlations have been established between the infusion of capital and technological know-how into a primitive society and economic development, between economic development and social stability, between social stability and democratic institutions, between democratic institutions and a peaceful foreign policy. But these correlations are not borne out by the experience we have had with our foreign aid policies nor by general historic experience.

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b. A nation may suffer from deficiencies of natural and human resources which no amount of capital and technological know-how supplied from the outside can cure.

c. If there is a ruling group which derives its political power from the status quo, foreign aid must go hand in hand with political change. Even then the different alternative groups may be equally unattractive or there may be no other group at all.

d. The promotion of drastic social change on the part of the giving nation creates the precondition for economic development, but also conjures up the spectre of uncontrollable revolution.

5. The major conclusions for policy to be drawn from this analysis are three:

a. the requirement of identifying each concrete situation in the light of the six different types of foreign aid and of choosing the quantity and quality of foreign aid appropriate to the situation;

b. the requirement of attuning, within the same concrete situation, different types of foreign aid to each other in view of the over-all goals of foreign policy; and

c. the requirement of dealing with foreign aid as an integral part of political policy.

6. In order to be effective for the establishment of a community between giver and recipient, the procedures through which aid is given and the subject matter to which it is applied must lend themselves to the creation of a connection between aid and the policies of the giver which reflects upon the credit of the latter.

7. The problem of foreign aid is insoluble if it is considered as a self-sufficient technical enterprise of a primarily economic nature. It is soluble only if it is considered an integral part of the political policies of the giving country, which must be devised in view of the political conditions and for its effects upon the political situation, in the receiving country.