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# U.S. INTERNATIONAL ECONOMIC OBJECTIVES AND STRATEGY
## **OUTLINE**

SECTION I. INTRODUCTION

1. Relationship of Economic to Other Objectives

International economic objectives are meaningful only insofar as they relate to and implement U.S. foreign and domestic policy and support U.S. interests abroad. This may sound like a truism, but it is often ignored either because overall U.S. policy objectives are not carried out or because there is a conflict between foreign and domestic policy objectives, as in the case of our program for the disposal of agricultural surpluses abroad. Thus the first task of our survey is to assert, in necessarily broad terms, the nature of American interests in the world.

2. U.S. Interests in a Changing World

We are a country with a deep, if often inexpressible, sense of political, social and personal values. Our past material growth and our present political dynamism spring largely from the fact that those values

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found expression simultaneously in the development of an advanced
economic system and in the diffusion of our values throughout the world,
as well as within the minds and hearts of our citizens. Broadly speaking,
this dual progress took place in a world era of constantly increasing
political freedom, economic advancement and social progress; indeed
these conditions were essential to the fulfillment of the American dream
-- and so remain today.

Practically speaking, these philosophical observations may be
reduced to three pragmatic statements of American interests:

(a) We need, for the maintenance of our own economic system
and the continuance of our economic growth, a free and
expanding world economy, which can provide us with
essential resources and new markets;

(b) We need, both for the satisfaction of our political
aspirations and for the long-run maintenance of our

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individual freedoms, a continued growth and
strengthening of democratic ideas, ideals and ixn
institutions.

(c) We need, so that the former requirements can be met
and so that our own concepts of the common welfare
may find continued expression both at home and
abroad, continued progress toward the economic
betterment of individuals and toward the promotion of
social justice. Political democracy cannot long survive
under conditions of extreme economic and social inequity,
and while it may exist in poverty it flourishes better
where men have attained minimum satisfaction of their
valid needs.

Failing these conditions, it is questionable whether America as we
know it can continue to exist. At best, it might become an autarchic

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garrison state in a militarily threatening and economically impoverished
world; it might well, through frustration and disheartenment, abandon
those human values which have made it great.

## SECTION II. U.S. INTERESTS AND ECONOMIC POLICY

### SECTION II. U.S. INTERESTS AND ECONOMIC POLICY

#### 3. Foreign Economic Objectives

Assuming that the statements above indicate broadly our national interests in the politico-economic field, our foreign economic objectives might be stated as follows:

(a) Continued availability of foreign resources and markets needed to maintain an expanding domestic economy.

This will, on the economic side, also require an expanding world economy or, to put it differently, the expansion of both the productive base and the living standards in various countries.

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# SECTION III. THE SITUATION IN THE UNITED STATES

## 4. Trends and Developments Affecting Foreign Economic Policy

Historically the United States has been an economic phenomenon. Its balanced economy, its relatively high degree of self-sufficiency, and its high level of economic activity have enabled it to exercise a powerful if not dominant influence on world economic life while itself remaining affected to a lesser degree by trends and developments abroad. Moreover, the domestic market is so large and so active, and the rewards so high, as to inhibit the exportation of capital except, broadly speaking, in the extractive industries. Thus, although the United States is increasingly importing both raw materials and finished products, it has never been nor considered itself a trading nation as has, say, the United Kingdom. Total U.S. trade (exclusive of military and economic assistance) has averaged about $20 million annually for the post-war period, or approximately 5% of the present U.S. gross national product. This trade has amounted roughly

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to only about 10% of our industrial production and 20% of our agricultural
output, although in selected cases such as chemicals, farm machinery and
tobacco, the proportion is considerably higher. Certain trends which might
be foreseen as affecting this situation should be noted:

A reasonable assumption is that U.S. gross national product will
double over the next two decades. If only the same percentage of the U.S.
product is involved in foreign trade and aid programs these will amount to
some $50 billion annually.

However, our growing demands for raw material resources and the
shrinkage of low cost domestic supplies indicates an increasing reliance
upon foreign raw material resources. To the extent that this segment of
our imports expands at an increasing rate, additional foreign purchases
could be made in the U.S. However, the U.S. currently maintains a trade
balance only by various grants amounting to some $5 billion annually, so
that it is questionable whether increased raw material demands will suffice
to maintain a true balance of trade or payments.

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Contrariwise, unless agricultural surpluses are reduced, pressures for the disposal through governmentally-subsidized programs of cotton, tobacco, soy beans, dairy products and eggs, etc., will continue, thereby administering an artificial stimulus to our export trade. If American agriculture were generally more competitive at world prices the demand for certain of its products would probably increase, particularly with growing world population.

Industrial machinery, tractors and accessories, automobiles and accessories, chemical products, textiles and petroleum are among the most important export items. In some instances over 10% of industrial output in a given class goes to the export trade. Whether or not this export ratio will be continued depends partly on demand for similar or alternate products in the domestic market; however, there is no reason to believe that these export lines should not continue to grow with gross national product, at least at a comparable linear rate.

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To summarize, while contradictory pressures make trade trends difficult to forecast accurately, there seems to be no reason why total trade (exclusive of foreign aid) should not at least double over the next two decades. It is possible that increased imports may offset a volume of foreign aid of the present magnitude ($4-5 billion annually) even though foreign aid may still be given in this quantity; in other words, foreign countries may have, twenty years hence, additional dollar credits amounting to $10-15 billion annually, part of which could be used for machinery and other capital goods. Although U.S. private capital export (which has averaged for the last ten years slightly over $1 billion annually, may also increase, there seems little reason to believe that any increase will be of such magnitude as to materially affect our projected totals. Hence accrual by the underdeveloped countries of capital for rapid industrialization will depend primarily upon increased sales of raw materials and other products, secondarily upon grant economic assistance or governmental loans, and only to a tertiary degree upon private U.S. investment and financing.

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## 5. Relation between Foreign Economic Policy and Other Aims

Harmony between U.S. foreign economic policy and U.S. domestic economic policy can be readily established through the common objective of growth -- which, as indicated, will be the primary factor in providing capital resources for the underdeveloped countries. Growth is the accepted objective of U.S. domestic economic policy and is explicitly or implicitly assumed by businessmen, union members, and professional economists as well as by politicians. This economic growth has certain important significances.

The American economy represents almost half the economic activity of the world outside the Soviet Communist orbit. Whatever degree of success may be anticipated in the lowering of American tariffs or the removal of other trade barriers, this degree of success is unlikely to affect America's availability as a market as much as a sustained and increasing high rate of activity in the American economy. Thus growth is

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significant -- indeed crucial -- in creating markets for the products of other societies.

As indicated previously, U.S. economic growth, with its presumed increase in imports, is the sine qua non of capital availability for the underdeveloped areas. In addition, growth, in the broad sense of the word, is essential if we are to provide the technicians, the managers and the other human resources which must play a major role in the development of foreign economies. Parenthetically, U.S. growth must be spiritual as well as physical so that in addition to expansion in such areas as industry, agriculture, technology and education, we must similarly increase our knowledge and our understanding of mankind in general and of our system of American values in particular. For example, the maintenance, expansion and strengthening of the American educational system is of the essence for U.S. international economic objectives and strategy as well as for U.S. domestic economic objectives and policy.

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Economic growth is of tremendous importance in our worldwide
struggle with the Communist Bloc. Growth must provide the additional
resources needed to maintain for us and our Allies adequate levels of de-
fense, to provide needed support in the development of other economies, and
to show that our productive system is equal or superior to that of the Soviets.

It may be doubted whether the American economy can grow at a
satisfactory rate if the economies of the other free societies and uncommitted
areas do not also grow. One obvious illustration concerns the raw material
problem. Industrial growth since 1939 has been at a far higher rate (world-
wide) than the growth in the production of raw materials. In addition, as
indicated by the report of the President's Materials Policy Commission,
America is increasingly a deficit nation in almost all metal ores. The very
rate of growth of the American economy will assure the extension of these
deficits, and lead to increasing demands upon the productive resources of
other countries.

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Finally, growth is of importance in and of itself. It is a symbol of the success of the American system and an essential element in enabling our citizens to realize their deeper potentialities as human beings. For these reasons, as well as for its meaning to our economic policy, growth is important.

## 6. Growth and Cohesion

The ultimate objective of American foreign policy is a peaceful, just and workable international order in which free societies may flourish and free men have a reasonable chance to fulfill their potentialities as human beings. A foreign economic policy, to reflect and support this objective, should not only promote growth but should also be cohesive.

In operating terms, a policy of economic cohesion means the identification of actual common economic interests, together with a realistic appraisal of the point at which these interests diverge, and the organization of arrangements to give effect to the common interests, and to reduce

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to a minimum the elements of friction or disaffection.

The importance of economic cohesion cannot be over-emphasized.

Stalin argued shortly before his death that World War II resulted in the disintegration of a single universal world market, the establishment of a separate economic bloc consisting of the Communist countries, and an intensified economic struggle among the capitalist countries within the restricted orbit. While the first two points of Stalin's thesis are factual, the third holds true only if, either through Soviet efforts or because of divisive tendencies among the free nations, competition overshadows cooperation. In some respects this is a relatively simple process. For instance, the growing U.S. demand for metals could be made the basis of a stable American market for metals produced abroad and the prospect of such a market could make the producing enterprises an attractive and practical opportunity for dollar investment. Thus the long-range need for an expansion in metal imports by the U.S., and the availability of in-

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vestment capital in the U.S. would be mutually supporting factors in
economic cooperation with other countries. This, in conjunction with
 efforts toward expanded trade, requires increased pressure for convertibility
and for a flow of funds which will both protect and make easier the currents
of trade. An important part of such policy should be circumstances, such
as political or financial guarantees, which will encourage the export of
private capital from the U.S. This is important not only <u>per se</u> but because
it gives an opportunity to bring American managerial and technical talent
directly to bear in a great variety of private and semi-private relation-
ships, thereby promoting the diffusion of American values.

In both these fields multi-lateral economic organizations, whether
these be limited to a single field such as tariffs or expanded to cover a
wide range of economic activity, will assume increased importance. To
illustrate, these might provide for commodity agreements which would
enable long-run price stabilization or, as in the European Coal and Steel

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Community, enable the pooling of both resources and market, or in other ways speed the task of expanding trade.

## SECTION IV. THE SITUATION IN THE UNDERDEVELOPED COUNTRIES

### 7. Trends and Developments Affecting U.S. Foreign Economic Policy

Certain generalizations, while not equally applicable in each country, can be made concerning the situation in the so-called underdeveloped countries of Asia, Africa, and, with exceptions, Latin America.

To a lesser degree these factors also apply to some of the states of southern and southeastern Europe.

Population is increasing at 2-3% annually, due primarily to reduced mortality and continued high birth rates. Population pressure puts a severe strain on available resources, requires greater capital accrual and investment than would be necessary with a less rapid growth of population, and (coupled with latent or active anti-Westernism) tends to

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cause the adoption of nationalistic economic and political
programs.

A cultural lag on the part of some peoples affects both their readiness and their ability to undertake programs of economic expansion.

Even basic agriculture is in many instances woefully inefficient and progress may depend on such simple things as improved hand tools, the provision of better seeds, or new methods of utilizing human and animal fertilizer. This cultural lag is reflected not only in the technical field but in the attitudes of individuals and groups toward organized and sustained productive efforts.

In some instances the mores and customs of the people mitigate against the introduction of new ideas, new habits, or new attitudes -- however necessary these may be in improving economic or social conditions. For example, nepotism is not only condoned but encouraged, village life cannot easily adapt itself to the needs of an industrial society and the land tenure system may actually inhibit the peasant from

and the land tenure system may actually inhibit the development from
the village life cannot easily beht itself to the needs of an industrial society
therefore necessarily these may be in improving economic or social condi-
against the introduction of new ideas, new habits, or new attitudes --

In some instances the more and more of the people migrate
sustained productive efforts.

but in the attitudes of individuals and groups toward organized and
fertilizer. This cultural lag is reflected not only in the technical field
vision of better seeds, or new methods of utilizing human and animal
ground may depend on each simple things as improved hand tools, the bus-
even basic agriculture is in many instances most fully inefficient and bio-
ness and their ability to undertake programs of economic extension.

A cultural lag on the part of some peoples affects both their resili-
ance programs.

because the adoption of nationalistic economic and political

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attempting to increase production.

Since the backward countries are primarily agricultural, a major
and immediate problem is increasing agricultural production and productivity.

In many instances, as in Egypt and India, additional land is not readily
available; even in cases where additional arable soil may be found, such
as South Vietnam, organizational techniques, technical knowledge and
capital to effectively utilize this land are frequently lacking.

Accrual of capital for investment purposes is difficult because of
the already low *per capita* income ($50 for 1.2 billion people), population
pressure and desires for increased consumer consumption. All of these
generate requirements for a relatively high percentage of consumption of
available resources and result in a low rate of savings.

Even where savings are relatively high, many factors hamper the
mobilization of capital. In some cases there is little understanding of
the uses to which capital can be put and moneyed interests (when they do

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not send their funds abroad for safe-keeping) engage in money-lending or
invest in real estate as distinct from developmental projects. In many
areas fiscal and financial institutions are rudimentary or non-existent.
This makes difficult not only the mobilization of capital but also the sale
of goods and services. In addition, inexperienced or incompetent
personnel frequently adopt inflationary or confiscatory policies which in-
hibit the introduction of foreign capital or have a regressive effect on
domestic enterprise.

Important in this respect is the attitude of many of the governments.
In some cases, such as Thailand, the ruling clique derives its revenues
from state-operated or monopolistic enterprises; in others, such as Burma
and Brazil, there is a reluctance to permit the introduction of foreign
capital except under strict state control and primarily for the further de-
velopment of state-supported institutions. Moreover, there is
a general feeling against "economic imperialism" which causes restrictions
to be placed on capital importation, transfer of funds, etc.

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Governments on the whole are relatively inefficient and provide
only rudimentary services to the people. In many cases government or its
institutions (as with the Iranian gendarmerie) are looked upon as parasites
or oppressors. Honesty in government is virtually unknown and a corrupt
bureaucracy generates resentments which are exploited by extreme
political factions, discontented intelligentsia, etc.

The impact of the West has either broken or breached the previously
cohesive life and social structure of the underdeveloped countries. Old
values have been shattered and new ones not yet formed. Urbanization
has increased restlessness, discontent, and a feeling of "not belonging".
While social unrest is not in all cases widespread, it provides a
sufficiently numerous, emotional, and influential group to cause extreme
political instability.

As a corollary to many of the factors cited above, modern education
does not exist for the mass of the people. The relatively few who are

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educated through the middle school and college level are woefully incapable
of meeting the needs of these countries for administrators, teachers, doctors,
engineers, production managers, in part because they have tended to go
into "prestige" professions such as law and government, in part because
many of them are psychologically unwilling to work with their hands or to
undertake tasks which they consider "demeaning".

To summarize, the backward areas are confronted with pressures to
develop their economies at a rate which they cannot hope to attain unaided
and in a direction which, whatever its long-run advantages, may
immediately cause increased political and social unrest. They lack not
only the facilities for such economic development but also for even
minimally honest and efficient administration. Even in those cases where
leaders desire increased social justice, their efforts are hampered by
corrupt and inefficient subordinates and by counter-pressures from groups
such as landowners and money-lenders.

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8. Foreign Aid

In the long run, as we have seen, there is a possibility that some of the underdeveloped countries may be able to derive most of their capital requirements from increased trade with the West, as is now the case with Iran, Iraq, Saudi Arabia and Venezuela. However, it should be recognized that, even in the long run, many countries such as Korea, Laos and South Vietnam (which lack exportable products, export surpluses, or both), will not benefit so materially from expanded trade as to come near supplying their foreseeable capital requirements. Moreover, the triple pressure to increase production and productivity, expand social welfare services and institutions, and provide for the growing wants of an increasing population, will generate demands on resources, financial, human and material, which cannot easily be met, if at all.

In addition, certain of the countries concerned are maintaining, with U.S. assistance, military forces far beyond their unaided capabilities, and

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even where this does not, because of the magnitude of U.S. aid, constitute a direct drain on their economies, it has the effect of utilizing scarce skills and resources.

In connection with this latter point, it has been frequently argued that the maintenance of such indigenous forces is undesirable for a variety of reasons; the forces are unnecessary (or too large) because there is no threat of war; they constitute a drain on available domestic resources, thereby inhibiting economic development; they consume too large a portion of available U.S. aid, or, as in the case of Pakistan, they actually contribute to instability through upsetting the regional balance of power among non-Communist states. Despite the elements of validity in these arguments, there are three items which are usually not considered:

First, it is essential that countries directly or imminently exposed to Communist military power have a sufficient sense of political, psychological and military security to resist Communist threats and to resolutely

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pursue their own courses. Or, to put it differently, peoples and countries must have the protection of that "shield of deterrence" which is as essential against the possible use of Communist power as against its actuality.

Second, the creation of modern military forces in the underdeveloped countries is a difficult and costly task. Even if the technicians, the specialists, the trained and capable leaders can be developed (and this in itself is a long-term task closely related to improvements in political, social and economic circumstances), virtually all equipment must come from abroad. The costs of providing the additional equipment needed, and the even greater costs of replacing obsolete equipment (such as in Korea and Vietnam) are going to rise if present force levels are maintained and modernized.

Third, the U.S., which provides the essential elements of both the deterrent and striking forces, has shown a continued reluctance to become involved militarily in the peripheral areas of Southeast Asia and the

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Middle East and has steadily decreased its capabilities to take quick military action of the nature required to cope with, say, a Viet Minh uprising in South Vietnam, supported by "volunteers" from across the 17th Parallel.

Under these circumstances, both the political pressures from, and the military requirements for, effective indigenous forces are likely to remain high. This, in turn, means continuing large-scale requirements for military aid, for defense support, and for economic assistance for the maintenance of military forces, a point which will be further discussed.

## 9. Objectives of Foreign Aid Programs

Foreign aid is not an end in itself, but like other measures proposed, a means to an end. Some of the ways in which it might be important are:

In maintaining forces required to deter or check Communist aggression. To this end we are currently devoting 75% to 80% of our current $4 billion annual expenditure on various governmental aid programs.

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Funds of this type may be needed either to improve military forces, through the provision of modern equipment, or to support these forces, through the provision of essential funds or commodities. In either event, it should be recognized that these large sums, while appropriate and desirable instruments of policy, do not constitute and should not be confused with genuine economic aid.

In securing political advantages or, as this has been frequently described, in "buying allies". The *additional* use of aid funds for political purposes has been both a recognized, and to some extent a successful objective of our aid program, as in the case of the Italo-Yugoslav agreement on Trieste. However, there is some question as to whether basic motivations, as distinct from short-term interests on specific issues, can be markedly affected through the overtly political use of aid funds. To a certain extent, any such program is self-defeating, since it tends to generate increasing demands to "prove" U.S. friendship by further grants

generates increasing demands to "browo" U.S. friendship by further draws
certain extent, any and how program is self-delegating, since it tends to
be markedly affected through the overly political use of aid funds. To a
motivations, as distinct from short-term interests on specific issues, can
ment on these. However, there is some question as to whether basic
opposition of our aid program, as in the case of the Israeli-Yemeni agree-
budgets has been part a recognized, and to some extent a successful
described, in "pursue of allies". The initial use of aid funds for political
in assuming political advantages or, as this has been repeatedly
genuine economic aid.

ments of policy, do not constitute and should not be confused with
recognized that these large annua, while adequate and desirable in nature,
provision of essential funds or commodities. In either event, it should be
the provision of modern equipment, or to assure these forces, through
funds of this type may be needed either to improve military forces, through

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of assistance, and may in fact lead to resentment when additional aid is
not forthcoming.

In promoting economic development. This is a recognized objective
of our present aid programs, although the end allegedly sought is an economy
capable of bearing the necessary military burden rather than one which
provides better facilities for, or an increased standard of living to, its
citizens. Whether economic development <u>pér se</u> is an answer to problems
of political stability may, in the short-run, be questioned. However, aid
for this purpose (and in increased magnitude) is frequently urged.

In stimulating U.S. exports and maintaining a more stable world
economy. There is no question that aid serves as a means of stimulating
exports which might not otherwise take place, thereby maintaining a higher
level of economic activity in some fields than would otherwise occur. Also,
economic assistance helps maintain a more stable world economy by
protecting the grantees to some extent from dollar imbalances and from

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fluctuations in, or sinkings of, their own economies. However, it may well
be asked whether these are of sufficient worth and value in themselves to
justify the continuation of economic assistance.

In furtherance of U.S. interests. It is frequently argued that it is
in our national interest to give both military and economic assistance.
Assuming a continued military threat, the case for the former can be made
with relative ease -- and has been stretched to cover the granting of
economic assistance. However, there is a more subtle, if equally valid,
argument for grant economic assistance. Such aid, in the short-run,
provides not only the capital, the resources, and the technicians needed
by the underdeveloped countries but serves as a means of exerting
pressure upon these countries for political, social and economic reforms.
While there are obvious limits to the extent to which such pressures can
be carried, we certainly can proceed faster through the use of economic
assistance than without it. The long-run objective of U.S. aid policy

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must be the promotion of conditions under which American economic growth
can continue and American values can be diffused and accepted. We must
satisfy the leaders, if not the people. Specifically and pragmatically this
means at least perceptible economic growth, coupled with sufficient
social progress to insure political stability and adherence to democratic
values. In this effort, the latter objective is perhaps even more important
than the former.

10. Requirements for U.S. Assistance

While accurate estimates are unavailable, the capacity of the
underdeveloped countries to absorb and effectively utilize additional
capital is limited. Handicaps are shortages of skilled labor, lack of an
entrepreneurial and managerial class, low levels of labor productivity
(because of low medical, educational and work standards), inefficient
and frequently corrupt governments and state enterprises, and the need
for basic facilities such as schools, roads, public water supply, etc.,

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which must precede or accompany any large-scale investment of industrial
capital.

Present savings in the underdeveloped countries are estimated at
$13 billion annually, not all of which is going into developmental projects,
social or economic. It has been estimated that an additional $2-3 billion
annually of outside capital would both help these countries advance more
rapidly and be within their absorptive capacity. For example, the annual
net deficiency in India's development plan is only $300 million, in Pakistan's
$2-3 billion a year, half a billion dollars annually to those two countries,
over and above present military programs, might make the difference be-
tween a growing and a stagnating economy, particularly in Pakistan.

Ultimately the process of economic growth might well become self-generating,
although this goal is many years from attainment. It should be recognized
that no period can be set to the need for U.S. aid, and that the program,
whatever the system used for funding, is essentially long-term. It would

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be foolish to embark on a program of economic assistance without recognizing
the full implications of its requirements in terms of costs to the U.S., as
well as its potential benefits.

# SECTION IV. CONCEPTS AND PROBLEMS

## 11. Policy Concepts

Although these have already been discussed in part, it might be use-
ful to summarize here certain concepts which might guide U.S. domestic
and foreign economic policy:

The primary purpose of U.S. foreign economic policies is to
support and maintain U.S. interests and to promote democratic
values. As has been noted, these are inextricably interrelated,
since American security and American economic growth alike
depend on the growth and cohesion of the free world. This
means that we should aim ultimately at a world structure which
enables the continuation and growth of free societies, gives

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maximum opportunity for individual development and advance-
ment, and provides for the diffusion and adoption of basically
democratic ideas and ideals. This is a tall order and may
never be reached, but there are intermediate and immediate
steps which can be taken toward this objective.

On the purely economic side, this can be done by a variety of
measures to assist in continued U.S. growth. In general, we should aim
at an orderly framework for private trade and investment on the basis of
worldwide international cooperation. This involves not-only measures
directly taken by or affecting the U.S., including the promotion of private
investment abroad through tax concessions or various forms of insurance
guarantees, the liberalization of our tariff restrictions and import quotas,
but the alteration of certain other domestic policies, such as the Buy
American Act and moves to support the forced sale of agricultural products.
It means also the active promotion of and, where appropriate, adherence

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to regional or international economic organizations, such as the Interna-
tional Trade Organization, in order that we may shape those more easily
in a form suited to our needs and purposes. In this connection, there
should be a renewed attack on the problem of currency inconvertibility,
possibly through further strengthening of the resources of the International
Monetary Fund, arrangements for its systematic use for stabilization
loans or credits, and coordination of its work with that of the Organization
for Trade Cooperation, when the latter is formed. There is also much to
be done by private enterprise in learning how to conduct itself abroad so
as to win recognition of the mutuality of interests between the investor
and the developing country; in this connection it would be helpful to
disseminate more information on successful experiements in joint ventures
in other cooperative private investment activities. Above all, however,
we must obtain recognition of the fact that continued U.S. economic
growth not only implies but demands a substantially larger foreign trade

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and that trade must be promoted despite the impact on some segments of
the domestic economy.

While U.S. economic growth, and certain auxiliary measures in
the field of economic policy, should be relied upon to provide the bulk of
the capital resources needed by the underdeveloped countries, this alone
cannot, will not and should not be expected to meet the requirements of
American policy. Additional concepts which should govern are:

A sound system of military specialization under a collective
security policy will involve the American provision of certain
types of expensive military equipment as long as the cold war
lasts and will, in addition, require economic assistance to
certain of the underdeveloped countries where the necessary
military burden outstrips their economic capabilities. In
fact, if Allied forces are to be maintained and modernized,
military aid requirements will expand rather than contract over
the next decade.

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At least in the short-run, the underdeveloped countries will need capital beyond their ability to earn or to accrue. In the long-run, the question of whether this is provided by loan or by grant is not financially important, since we cannot expect to receive back the equivalent in constant dollars of our loans.

However, in order to make maximum use of all available resources, whether or not under U.S. control, the following division of assistance is suggested:

First, granted aid might be provided for social capital (such as transportation education and public health) and overhead capital (such as transportation facilities, communications, power and water supplies. Improvements in these areas are essential both for proper development of a balanced economy and as a means of indicating to the people of the country a perceptible improvement in their status. In other

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words, these are the "show case" projects.

Second, developmental assistance might be in the form of long-term, long-term loans, either in convertible currencies or in local funds obtained from the sale of surplus U.S. agricultural products. Repayment of these loans in local currency should be acceptable and might be channelled into a revolving fund for reinvestment in further development projects extending over a very long period. This device would combine the advantage of requiring economic calculations of the productivity of each set of projects (perhaps by bi-lateral negotiation or through joint boards) while at the same time making a long-term investment in the recipient country's development.

Third, efforts should be made to obtain agreement that certain types of industrial and commercial develop-

ment, Third, efforts should be made to obtain agreement

long-term investment in the recipient country's develop-

through joint ventures while at the same time making a
set of projects (perhaps by bi-lateral negotiation or
during economic calculations of the productivity of each
period). This device would combine the advantages of re-

tner development protects extending over a very long
channelled into a revolving fund for reinvestment in fur-
loans in local currency should be acceptable and might be
embargo U.S. agricultural products. Repayment of these
currencies or in local funds obtained from the sale of
form of long-term, long interest loans, either in convertible

Second, developments assistance might be in the

works, these are the "show case" projects.

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ment could and should be reserved for private investment,
either domestic or foreign. To the maximum extent feasible
U.S. investment should be encouraged in accordance with
the developmental plans and should proceed wherever
possible through cooperative or partnership enterprises.

Fourth, technical assistance should in general take the
form of grant aid. Whether or not such assistance should
be given bi-laterally or through regional or international
organizations, such as the United Nations, is something
which cannot be decided in advance for each country. In
general, arrangements should be made to utilize available
personnel from other countries for technical assistance
programs and this may well require greater use of
regional organizations, such as the Colombo Plan, or of
U.N. agencies. The governing factor should be the extent

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to which U.S. influence can and should be exerted by
one or the other forms of technical assistance; for instance,
it perhaps makes little difference whether UNICEF or some
other organization promotes health and sanitation but it
might make considerable difference as to who provided
advisors to govern administration. In any event, the U.S.
should utilize every means, government and private, to in-
sure that its technicians, its managers and its administrators
help to shape the institutions and the ideas of the under-
developed areas. This is the crucial factor in the main-
tenance of American interests and the diffusion of American
values.

12. Problems

It cannot be assumed that policy concepts such as those outlined
above can be easily adopted or automatically implemented. It is essential

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that we understand some of the difficulties which will arise in carrying out
our foreign economic policy. Among these are the isolationist bias on the
part of many elements in the U.S., which leads them to oppose measures for
U.S. involvement abroad and for U.S. assistance to other countries. This
isolationism crops up in such varied forms as emphasis on massive retaliation
from bases in the Western Hemisphere, opposition to aid programs, and
a reluctance or refusal to participate in international bodies such as OTC.
The Bricker Amendment is an excellent illustration of the thinking of some
members of this group.

In addition, various pressure groups in the U.S., while supporting
expanded trade in theory, seek to put obstacles in the way of products
which compete with their own, or even threaten to lower their percentage
of an expanding domestic market. Examples are so numerous as to be
almost unnecessary, but the recent actions of the bicycle industry, the
New England fishing interests, and the producers of turbo-generators and

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dynamos spring immediately to mind. To the ranks of the traditional
protectionists can be added new and powerful elements from the in-
dustrializing South, which seek to protect their comparative advantage
and to maintain, behind a tariff wall if necessary, their rapid industrializa-
tion. Moreover, expanding trade will inevitably have repercussions on
the American economy and can result in the driving from the scene of
inefficient producers, economic dislocation, and unemployment. These
events in turn can be expected to cause domestic political difficulties
which will further hamper a liberal trade program. For both political
and social reasons, consideration must be given to mitigating their
economic impact through such measures as retraining programs for labor,
dislocation allowances, insurance systems, etc.

Perhaps most important, on the domestic side, will be the opposi-
tion to increased spending for foreign assistance programs, as indicated
by the reaction to government requests for FY57. In order to carry out the

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proposals previously discussed, U.S. loans by all agencies would probably have to increase from the present $600-700 million annually to about $2 billion, while technical assistance and grant aid for purposes other than support of military forces, would probably rise to double or treble their present rate of $550 million annually. Taken in conjunction with military aid and related programs, which now run about $3.5 billion annually, this would mean an increase in total programs from just under $5 billion to some $7 billion -- assuming military spending remained static. The difference of $2 billion annually amounts to only 2% of total U.S. governmental expenditures, and less than 1/2 of 1% of our GNP; nevertheless it may be difficult to obtain this increase.

In connection with foreign aid programs, mention must be made of the multiplicity of government agencies involved and of the problem of coordinating their activities. In addition to the organizations with primary operating responsibility, Defense and the International Cooperation

operating responsibility, Defense and the International Cooperation
coordinating their activities. In addition to the organizations with primary
the multiplicity of government agencies involved and the problem of

In connection with foreign aid programs, mention must be made of
difficult to obtain this increase.

of $2 billion annually amounts to only 3% of total U.S. government
expenditures, and less than 1/3 of 1% of our GNP; nevertheless it may be
$1 billion -- assuming military abetting remained static. The difference
would mean an increase in total programs from just under $8 billion to some
aid and related programs, which now run about $3.2 billion annually, this
present rate of $200 million annually. Taken in conjunction with military
support of military forces, would properly rise to double or triple their
$2 billion, while technical assistance and grant aid forCHASE other than
have to increase from the present $600-700 million annually to about
broader previously discussed, U.S. issues by all agencies would properly

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Administration, Agriculture Commerce, Health, Education and Welfare, the Office of Defense Mobilization, the Export-Import Bank, the Treasury Department, the Bureau of the Budget and the Department of State all have either operational responsibilities or voices in policy decisions. While policy coordination is attempted both by the Operations Coordinating Board and the Council on Foreign Economic Policy, this is not always satisfactory, nor does it touch on the equally difficult problem of inter-agency coordination of operations.

Finally, economic nationalism in some foreign countries is perhaps even more rampant than in the U.S. Whether this takes the form of Britain's belief in Commonwealth vs. European markets or its manifested in such ways as the Egyptian nationalization of the Suez Canal, it has a common effect. Nations in general are reluctant to make economic concessions although they eagerly seek comparable advantages. The underdeveloped areas place obstacles in the way of private capital and indeed of any Western

areas place obstacles in the way of private capital and indeed of any Western
society which they eagerly seek comparable advantages. The underdeveloped
effect. Nations in general are reluctant to make economic concessions
such ways as the Egyptian nationalization of the Suez Canal, it has a common
Britain's belief in Commonwealth VA. European markets or iszentated in
even more rampant than in the U.S. Whether trade takes the form of
usually, economic nationalism in some foreign countries is perhaps
the result of operations.

nor does it touch on the equally difficult problem of inter-agency coordination
and the Council on Foreign Economic Policy, this is not always satisfactorily,
policy coordination is attempted both by the Operations Coordinating Board
either operational responsibilities or voices in policy decisions. While
Department, the Bureau of the Budget and the Department of State all have
Office of Defense Mobilization, the Export-Import Bank, the Treasury De-
Administration, Agriculture Commerce, Health, Education and Welfare, the

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efforts which, in their opinion, have "strings" attached. Thus although
economic logic might seem to indicate the desirability of greater economic
freedom, political, emotional and psychological factors generate counter-
trends. These can be overcome, if at all, only by the most skillful
combination of patience and industry.

Trends. These can be overcome, if at all, only by the most skilful
freedom, political, emotional and psychological factors generate counter-
economic forces might seem to indicate the desirability of greater economic
efforts which, in their opinion, have "attractiveness" attached. Thus, although

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