U.S. Department of State
FRUS, 1961-63, Vol. IX: Foreign Economic Policy
Office of the Historian

[Section 9 of 18]

158. Memorandum From the President's Deputy Special Assistant for National Security Affairs (Kaysen) to the President's Special Assistant (Dungan)

//Source: Kennedy Library, National Security Files, Kaysen Series, Foreign Aid, Clay Report. Confidential. A copy was sent to McGeorge Bundy.

Washington, March 5, 1963.

SUBJECT

Dave Bell on the Clay Committee/1/

/1/Regarding the Clay Committee, see Document 161. Although not a member of the Clay Committee, Bell sat in on its sessions.

Dave seems to accept the fundamental premise of the Clay Committee: both military and economic aid ought to be concentrated in the countries which are able to use it effectively and in which visible good results will be achieved in a short span of time. All other countries should be removed from the list as fast as possible.

I think this is basically an incorrect view. I don't quarrel with the proposition that the bulk of our aid ought so to be used. However, the needs of maintaining our position as a world power, and continuing to offer an effective alternative to communism all over the world, require that we maintain some active presence in a great many countries. Aid activity, military or economic or both, is usually the most effective way to do this. I recognize that in many of these countries the activities will produce little visible return, and in some of them it will be continuously difficult to justify because of the political behavior of the recipient governments, e.g., Cambodia or Algeria. Nonetheless, our continued presence is worthwhile. It gives us the only effective channel of influence to these governments. A judicious mixture of military and economic aid is a way of carrying on a continuing relation with two groups that are powerful and important in nearly every underdeveloped country: the would-be economic planners and the military. In every case it is much more difficult and costly to move in on a crisis if we have had no previous contacts than to expand our activity to meet a crisis, when in our judgment this is desirable or necessary.

The conclusion of this line of argument is that if we are both to concentrate on successful and well-performing clients and maintain some continuing aid relation with as many countries in the underdeveloped world as we can, especially the countries who are not our allies and who are tempted to swing strongly against us, we may need a somewhat bigger rather than a smaller total aid budget. This might mean $600 million rather than $250 million in the contingency fund. This may appear to vitiate the argument, since it is asking for the moon. On the contrary, I think it states the facts to which the Congress, however reluctantly, must ultimately be persuaded.

There is an alternative policy more consistent with the Clay Committee's outlook, but politically much less palatable. This is the policy which accepts the proposition that many countries will, in fact, get strong military and economic assistance from the Soviets, or even some from the Chinese, that they will be loudly leftist and even more loudly anti- Western and that we can safely accept the situation. I think this alternative position is, in any long-term context, even less realistic politically, although perhaps fundamentally sounder.

C.K./2/

/2/Printed from a copy that bears these typed initials.

159. Memorandum From the Under Secretary of State for Political Affairs (McGhee) to Secretary of State Rusk

//Source: Department of State, Central Files, AID 1. Confidential. The source text, which was also addressed to Under Secretary Ball, was transmitted through S/S. A handwritten notation reads: "Secretary saw."

Washington, March 15, 1963.

SUBJECT

Economic Aid: Diffusion vs Concentration of AID Programs

At your Staff Meeting of January 21,/1/ you expressed concern with the diffusion of our aid potential and asked that I study possibilities of further concentrating available resources on key countries or regions in concert with other DAC donor countries.

/1/No record of this staff meeting has been found.

The regional bureaus, INR and AID have participated with me in this study. Because of difficulties in obtaining statistics, the inquiry was restricted to economic aid (normally defined as excluding 1 - 5 year commercial credits) and broken into two parts: 1) Motivations of the DAC countries (excluding US) in extending aid, together with patterns thereof and possibilities of augmentation and greater concentration; and 2) attitudes of the recipient countries toward bilateral and multilateral aid, together with possibilities of developing a greater accent on "spheres of primary aid responsibility".

The attached memorandum (Tab A) summarizes the available data and the responses of the bureaus and AID and draws conclusions and certain operational implications.

The summary of conclusions reached are that the present pattern of diffusion and bilateralism generally serves US (DAC) interests, although strict US interests might in some countries (particularly the emergent African states) be served adequately by smaller US aid programs and decreased administrative costs; that although there is a tendency toward diffusion on the part of the new aid donor countries with the most rapid rate of aid expansion (Germany and Japan), possibilities of increasing and concentrating aid outlays by these and other DAC countries (excluding US) exist within available mechanisms and can be exploited where a strong case of advancing national interests is established; that the coordinating group and consortia approaches of the DAC - OECD - IBRD are the preferred ones to critical key countries; and that there are no new or promising "spheres of dominant aid responsibility" other than those which now exist (e.g., the dominant roles of the present and former metropoles in Africa and the remaining colonial areas, and of the United States in Latin America and certain of the peripheral states of the Far East, Middle East and South Asia).

Recommendations:

1. That no drastic change be made in present aid policy affecting the diffusion of aid among recipient countries.

2. That a more effective concentration of aid should be sought through a continuing and closer analysis of US security and developmental priorities among countries and projects, and the correlation between AID programs and these priorities, rather than through eliminating programs in certain countries to augment programs in others.

3. That in countries where no high priority interests exist, AID programs be carefully screened toward possible reduction but not necessarily elimination.

4. That increased administrative savings be sought in the administration of minor aid programs through the consolidation of aid missions in delegated posts, as is now done with 10 countries in Africa.

5. That we continue to urge other members of DAC to adopt policies consistent with ours and respect to diffusion, insofar as this is practical in the light of their national interests and capabilities.

6. That the attached memorandum be discussed, against the backdrop of these recommendations, at an early meeting chaired by you or the Under Secretary./2/

/2/Secretary Rusk initialed on the "Approve" line and drew an arrow to recommendation 6. Attached to the source text is a March 24 note from P.W. Kriebel (S/S - S) to U. Alexis Johnson, indicating that McGhee had asked the Secretary to call a meeting of "interested Department officers" on March 25 at 5 p.m. to discuss the question of diffusion vs. concentration of AID programs. The meeting, which took place in the Department of State on March 25 beginning at 5:13 p.m., was attended by McGhee, Johnson, and officers from INR, AF, and AID. Although not included on the attendance list, Secretary Rusk presumably also attended. (Johnson Library, Rusk Appointment Books) No further record of this meeting has been found.

Attachment

THE DISTRIBUTION OF DAC AID:DIFFUSION versus CONCENTRATION

Overall Conclusions

1. The principal considerations bearing on the US (DAC) distribution pattern of economic assistance are:

a) Effect on maximization of aid extended by others;

b) Effectiveness of aid extended in achieving high priority US security and developmental objectives;

c) Impact on such contributory factors as more efficient planning, use and decreased administrative costs;

d) Immediate and longer-range political effects including encouragement of regionalism, improved relations between developed and undeveloped countries, and the non-Communist "community of free nations" (the North- South axis).

The overriding consideration is to assure allocation of scarce aid resources, both by ourselves and others, in a pattern designed to maximize returns through greatest possible concentration on high priority countries and projects.

2. Aid on an extensive scale ($200 million annually or more) is restricted to five Free World countries: The US, France, Germany, the UK and Japan (in that order of magnitude). Although the US aid effort is tending to level out, the Western European and Japanese efforts are increasing and now constitute almost half of total DAC aid.

We should continue to encourage further increases and reduce our aid correspondingly where this is possible. We must exert what influence we can on the distribution of aid extended by others so as to relieve or complement ours and assure maximum returns. We will be limited, however, in our ability to so influence others and must not press so far as to discourage their efforts or disrupt the existing generally satisfactory DAC procedures. Germany and Japan, which are increasing their aid on the largest scale, are trending toward distributing their aid widely for commercial reasons, just as our aid has in the past been widely distributed for a variety of reasons deemed to be in the national interest.

3. Except in Africa, the trend of aid in recipient countries is away from predominance by one donor country or metropole. Even if we wished to, we are doubtless powerless to reverse this trend. The remaining dominant "spheres of foreign aid responsibilities" among the donor nations appear to be relatively fixed for the foreseeable future. No donor nation is seeking or would appear willing to accept new "spheres of responsibility" or to relieve others of dominant aid responsibilities. It is therefore difficult to foresee how major aid responsibilities which the US now carries can be shifted to other donor countries or groupings in any significant magnitude, although this conclusion may be subject to reexamination as the EEC prospers and Continental Europe integrates politically.

4. Bilateral aid has proven to be a valuable instrumentality of US diplomacy and a primary leverage in influencing countries toward cooperative activities and sound development programs. Although we must encourage others to share our burden, we must take care to assure that this does not result in undue sacrifice in effectiveness or dilute the advantages of our bilateral approaches. There are also advantages to our continuing small US aid presences and programs in areas, such as the former colonial areas, since modest diffusions of aid in these areas make it easier politically for the recipient country to continue to accept aid under self-help criteria from a dominant donor. Similarly, multinational mechanisms may for the same reason assist us in pressing our objectives in areas of primary US aid responsibility, i.e., Latin America.

5. Regionalism among recipient countries can probably be accelerated more by diffusion of aid than by its concentration, whether from one or multiple sources, on an individual country. The position of a dominant donor in a particular country tends to isolate it from others in the region which receive less aid from the dominant donor.

6. Only the US is adversely affected through probable increased administrative costs involved in aid proliferation, although even in our case this can be minimized through regional missions, as is now done in Africa. Aid given by other donor countries normally does not entail costly aid missions.

7. A widely diffused US aid pattern probably serves broad US long range objectives of creating a "community of free nations" more effectively than would concentration on key countries. A persuasive case can be made for broader proliferation by other donor nations and an aid presence by donors in any country where there is a natural or potential basis for ties of an enduring and beneficial character, the sum total of which build toward greater interdependence among a community of free nations. The search for new markets and sources of raw materials, as well as political and strategic considerations, lead naturally to diffusion rather than concentration of aid.

8. The trend and emphasis of DAC aid will in the future undoubtedly be in the direction of wider distribution rather than concentration on exclusive or dominant spheres of influence. The consortium is a useful way of promoting such diffusion. Insofar as the consortium results in a group of donors' exerting leverages for better planning and developmental continuity, this mechanism provides some of the advantages of a dominant donor and none of the disadvantages. Further, through the consortium approach, small nations with specializations (i.e., Norway, fishing; Netherlands, flood control) can weld what might otherwise be scattered bilateral approaches into the continuum of a coordinated development program.

9. In future US studies of diffusion vs. concentration or "spheres of aid influence", it is believed the point of departure should be to preserve the advantages of a wide distribution of aid through smaller and more efficient programs and missions (or regional missions) rather than to proceed on an assumption that US interests will be served by sharply curtailing existing US aid presences, thereby leaving vacuums for others (including the Bloc) to fill.

10. In actuality, there exists a purposeful concentration of DAC (including US) aid in that somewhat more than 70 percent of the total is disbursed to some 20 countries and areas (see pp. 7 - 8). The problem of aid diffusion is therefore narrowed to somewhat less than 30 percent of all DAC contributions and the problem of its effectiveness revolves not on the question of the desirability of aid proliferation but on whether the pattern of aid diffusion effected by donor countries advances national interests sought to be advanced through aid programs, large or small.

[Here follows extensive analysis of two major subjects: I. The Aid Effort of DAC Countries, and II. The Recipient Countries (Areas).]

160. Memorandum From the Administrator of the Agency for International Development (Bell) to President Kennedy

//Source: Kennedy Library, National Security Files, Meetings and Memoranda Series, NSAM No. 159. Secret.

Washington, March 15, 1963.

SUBJECT

Clay Committee Report and FY 1964 Foreign Aid Request

The Clay Committee met yesterday and agreed on their first report, subject to a few textual changes./1/ Tentative plans are for the report to be transmitted to the President on March 21, with its public release shortly thereafter, for the President's foreign aid message to follow about a week later (say March 28th), and for testimony to begin the following week (say April 2nd).

/1/Reference presumably is to a draft of March 15. (Washington National Records Center, RG 286, AID Administrator Files: FRC 67 A 1530, Clay Committee, FY 1963, Folder #1)

The present report of the Committee is a substantially improved document from last week's version. It contains most of the same critical and restrictive comments, but they are far better balanced by positive support for properly conceived and administration foreign aid programs.

With respect to appropriations, the report is not very clear. It says essentially that under the Committee's recommendations, they believe that "ongoing programs" could be carried on for $500 million less than is now the case. Recognizing present commitments, the Committee does not consider that this much could be cut at once from present fund levels. Furthermore, they recognize that sound programs now under consideration and future program needs will add to the cost of the program.

However, the statement is ambiguous enough to give rise to the danger that, either from an oversimplification in press reports or from further comments by Committee members, the $500 million figure in the report will be related to this year's appropriation of $3.9 billion. In that event, the figure of $3.4 billion may assume an unwarranted currency, with the danger of this indicating what next year's appropriation should be.

The Committee report in fact expresses no specific views on the FY 1964 appropriation request. The Committee has in effect authorized General Clay to testify on its behalf, applying its general views to the specific conditions of the coming year. General Clay has not thus far given any firm indication of his views on the FY 1964 appropriation level. It is my impression that he may consider that an appropriation in the neighborhood of $4 billion might be a proper level--compared to $4.9 billion dollars in the Budget.

The problem before us now is what specific figure the President should recommend to the Congress in his foreign aid message. There is general agreement that the recommendation should be reduced from the budget figure to reflect some expected carryover of unused lending authority. Together with some recent program changes, this would indicate a figure of $4,756 million (compared with $4,945 million in the Budget).

The question in my opinion is not whether, but when, to propose a further reduction in response to the Clay Committee's views. There are two principal alternatives.

1. To recommend a lower figure in the President's message, in direct response to the Clay report, and justified as putting into effect the recommendations in the report so far as the President considers it feasible and desirable to do so at present. I recommend that this be done, and that the President propose a figure of $4,514 million--$75 million off MAP and $167 million off economic aid, compared to the present (reduced) budget figure. (Attached is a table showing the comparison in more detail.)/2/

/2/Not printed.

The advantage of this course is to give a direct and forthright response to the Clay report.

The disadvantage is that it might result in a lower final appropriation.

If this course is adopted, I recommend that you telephone General Clay before your message goes to Congress, in order to make clear your expectation that he will support a strong foreign aid program--and an appropriation as close to your figure as possible.

2. To transmit in the President's message the present (reduced) budget figure ($4,756 million), but to say in the message that the President has not had an opportunity to weigh the Clay report fully, and will communicate with Congress on the subject later. Then, when the Administration witnesses begin to testify, the President could send up his modified figure.

The advantage of this course would be to permit more time to consider the significance of the Clay recommendations. Furthermore it would start the Congressional legislative process with a higher figure, and let the President's reduction in response to the Clay Committee appear to be part of the Congressional process. Since the process would start with a higher figure, Congress could take credit for a larger reduction.

The disadvantages of this course would be that it might appear rather artificial and hesitant, and that the President's reduction in response to the Clay report, when it came, might seem rather small ($240 million).

The Secretary of State, the Secretary of Defense, and the Director of the Bureau of the Budget join in recommending the first alternative.

We need to decide between these two courses quickly since our "presentation books" must go to print within the next few days in order to be ready for the beginning of testimony the first week in April.

David E. Bell/3/

/3/Printed from a copy that indicates Bell signed the original.

161. Editorial Note

When Fowler Hamilton resigned as AID Administrator (see footnote 1, Document 154), he recommended that President Kennedy create a permanent advisory group of private citizens on foreign assistance, which would make an ongoing study of the Agency for International Development and suggest steps to revive public support for its programs. The President followed through with the establishment of the Committee To Strengthen the Security of the Free World, headed by General Lucius D. Clay. President Kennedy's letter to Clay, December 6, outlining the terms of reference of this Committee, is in the Washington National Records Center, RG 286, AID Administrator Files: FRC 67 A 1530, FY 1963, Folder #1. Other members of the Clay Committee, as it was commonly called, were Robert B. Anderson, Eugene R. Black, Clifford Hardin, Robert A. Lovett, Edward S. Mason, L. F. McCollum, George Meany, Herman Phleger, and Howard A. Rusk. For text of the White House announcement of the creation of this Committee on December 10, see Department of State Bulletin December 31, 1962, page 1007. White House announcements of January 29 and March 1, 1963, summarizing the first and second series of meetings of the Committee, are ibid., March 4, 1963, page 329, and March 25, 1963, page 431, respectively. For comments on drafts of the Clay Committee's work, see Document 160. See also Forrestal's March 11 memorandum to McGeorge Bundy and Dungan, Komer's March 14 memorandum to Dungan, and Forrestal's March 19 memorandum to Kaysen, all in the Supplement.

The Committee's 25-page report was entitled The Scope and Distribution of United States Military and Economic Assistance Programs: Report to the President of the United States from The Committee To Strengthen the Security of the Free World, March 20, 1963 (Washington, 1963). An extract from the report is also printed in American Foreign Policy: Current Documents, 1963, pages 1148 - 1163. George Meany dissented on the report. He conveyed his views in a March 19 letter to President Kennedy. (Washington National Records Center, RG 286, AID Administrator Files: FRC 67 A 1530, George Meany) For text of the President's March 22 letter to General Clay, thanking the Committee for its "intensive and searching review" of foreign assistance programs and its recommendations, "including greater selectivity, stricter self-help standards, greater participation by the developed countries in aid efforts and continued improvements in administration," see Public Papers of the Presidents of the United States: John F. Kennedy, 1963, page 288.

The Clay Committee was allowed to terminate without public announcement at the end of 1963. Background on the termination is in Clay's letter to Robert B. Anderson, December 3, 1963, and Bell's memorandum to President Johnson, January 6, 1964. (Both in Washington National Records Center, RG 286, AID Administrator Files: FRC 67 A 1530, Clay Committee, FY 1963, Folder #2)

Documentation on the Clay Committee's work, including stenographic transcripts of its meetings, is ibid., Lucius Clay; and Kennedy Library, National Security Files, Subjects Series, Foreign Aid, Clay Committee.

162. Memorandum From the Director of the Office of Food for Peace (Reuter) to the Director of the Bureau of the Budget (Gordon)

//Source: Kennedy Library, National Security Files, Kaysen Series, Balance of Payments, Cabinet Committee, 3/63#7/63. Official Use Only. A copy was sent to Kaysen.

Washington, March 26, 1963.

Few subjects have been more frequently considered, reviewed, and evaluated than that of local currencies generated as a result of the sales of agricultural commodities under Title I of Public Law 480./1/ Because these sales run from $1 billion to $1-1/2 billion equivalent per year, and account for better than two-thirds of the Food For Peace volume, this subject of the use of local currencies is of major significance in terms of the value of the Food For Peace program.

/1/Title I of P.L. 480 permitted foreign countries to use their own currencies to purchase U.S. agricultural products.

I am firmly convinced that we are using and can use food in place of dollars advantageously in enough instances to make this an item of importance in the solution of our balance of payments problem.

Nevertheless, a negative attitude stemming from the "disposal of surplus" psychology still persists and, it seems to me, restricts our view as to the value of these currencies. It was discouraging to me to see for the first time this morning the section on PL 480 in the preliminary draft of the current study on balance of payments./2/ I believe the approach here again reflects a basically negative attitude. The implication is that PL 480 hurts normal commercial sales and hence adversely affects our dollar position. From our experience over the last eight years, I do not think this is a justified position.

/2/Reference presumably is to the study by the Cabinet Committee on Balance of Payments. See Document 10.

The savings indicated in the current study would be something over $50 million. With a more imaginative approach to the balance of payments issue, I believe we can significantly increase this saving.

Specifically, we are using food in place of dollars to generate local currency for U.S. needs. Last year we "saved" more than $150 million by using these currencies in place of appropriated dollars. By deliberately "selling" food in countries where we have currency needs we should be able to double this figure within a year.

In addition there are indirect savings. "Cooley" loans/3/ which can use almost $100 million equivalent a year do in fact cut off some dollar outflow by the private sector without stopping our overseas expansion. Economic development loans and military support items, to some degree, are also factors that can and do minimize dollar use while maintaining approved programs. There are distinct limitations but we have not yet reached these limitations.

/3/Reference is to the so-called Cooley Amendment to P.L. 480 (P.L. 85 - 128, approved August 13, 1957; 71 Stat. 345), which provided that up to 25 percent of local currency proceeds would be made available for loans through the Export-Import Bank to U.S. private firms for business development and trade expansion and for activities increasing the consumption of U.S. farm products.

Actually, the overall use of food in place of the dollars that would otherwise be spent overseas could total at least a half billion a year. Our staff is working with Ed Fox,/4/ Treasury people and Agriculture on this question now. Before the end of the week, I will send you a more detailed report and breakdown./5/ We are talking of potentially big figures and this, it seems to us, justifies further study.

/4/Not further identified.

/5/No further report from Reuter to Gordon has been found, but Reuter forwarded a more detailed report and breakdown in a memorandum to Freeman, April 2; see the Supplement.

Since the establishment of P.L. 480, we have generated almost $6 billion equivalent in some 44 different currencies, and have disbursed, through last June 30, somewhat over $3 billion equivalent. A quick review of current reports indicates that at the present time, we have in the U.S. Treasury the equivalent of more than $2 billion in unexpended local currencies. A new approach we are presently studying may have a short- run dollar saving of some significance. While those Treasury local currency holdings are allocated, many of the funds (i.e., Reserves for program adjustments, market development funds, etc.) may not be dispersed for one or more years. We might consider "borrowing" these local currencies where U.S.-use amounts are not adequate for present U.S. needs. Paraguay, Greece and Chile are three countries that immediately come to mind where such action would save dollars immediately. Careful programming could replace many of these allocations with newly-generated local currencies which would then mean a permanent saving of the dollars.

Because of your meeting on this question this afternoon, I did wish to send this preliminary memorandum quickly as a follow-up on our conversation./6/

Richard W. Reuter/7/

/6/Neither the meeting nor the earlier conversation has been further identified.

/7/Printed from a copy that bears this typed signature.

163. Letter From Secretary of State Rusk to the Chairman of the Senate Foreign Relations Committee (Fulbright)

//Source: Department of State, Central Files, FT (EX) US. No classification marking. Drafted by H.H. Barger and D.J. James on March 19 and cleared by eight Department of State officers and AID/LA.

Washington, March 27, 1963.

Dear Senator Fulbright: I want to thank you very much for your very thoughtful letter of February 11/1/ in which you expressed concern-- using Czechoslovakian economic penetration into Bolivia as an example-- about Communist bloc economic offensives in less developed countries. The Department has carefully examined the proposal that the United States take measures to forestall the communist countries from providing, on an aid basis, consumer goods to less developed countries. The dangers of penetration through such offensives, which you very correctly point out, are not, unfortunately, presently recognized by some of the less developed countries. Until that recognition exists we will not be able to forestall the acceptance of aid from the Communist bloc and if the attempt were made as suggested, we would be put in the position of reacting to every communist initiative.

/1/Not found. A March 14 memorandum from G. Griffith Johnson to Secretary Rusk, attached to the source text, indicates that Fulbright wrote in reaction to an INR memorandum of January 9, "Soviet Bloc Economic Overtures to Bolivia," which he enclosed with his letter. This INR memorandum has not been found.

We have consistently pointed out to the developing countries the "hidden strings" which are invariably attached to bloc offers. Unless the governments of the less developed countries can be convinced of the dangers of subversion resulting from an acceptance of bloc aid, any increases in United States aid which are aimed at precluding bloc economic penetration would instead act merely as supplements to bloc aid and would not eliminate the problems.

We believe that our approach, together with the unfortunate experience that some developing nations have had with bloc trade and assist-ance, is paying dividends. In Africa, for example, the launching of our aid program has helped to convince the Sekou Toure Government of Guinea that there is a successful alternative to dependence upon Soviet bloc aid. In Latin America, there is increasing evidence that the goals of the Alliance for Progress are gaining acceptance and genuine understanding is growing of the fact that the United States is sincerely interested in the problems of her neighbors to the South. Despite Bolivia's past acceptance of Czech aid, there is resistance to the acceptance of future offers.

Under our present foreign aid legislation American suppliers can sell their products to importers in aid-receiving countries with the United States Government paying the American exporter in dollars and, in the case of grant assistance, the foreign government depositing local currencies received from importers to a counterpart account. The commodities made available through our various programs include surplus agricultural commodities, a wide range of industrial goods, and at times a limited amount of consumer-type goods. We are, in this sense, already doing part of what you suggest./2/

/2/For text of a joint AID/State Circular A - 241, February 14, which provided policy guidelines for AID administration in countries receiving Communist bloc aid, see the Supplement.

Present legislation, however, does not permit the United States Government to use aid funds solely to meet or out-bid the Soviet bloc in a commercial trade offensive by matching or bettering bloc trade offers. There are obvious dangers to engaging in such a policy, both from an aid point of view as well as for commercial policy reasons. It would permit the bloc to blackmail the United States into increased aid and probably involve the United States in programs for which there would be little or no sound economic rationale. Some less developed countries might seek to increase United States aid offers by threatening to accept bloc offers. Additionally, to permit the commercial sale of United States goods at a fraction of their domestic price would subject the United States to accusation of dumping, or subsidizing exports--practices which we deplore when done by others.

In view of the complexities of this subject, I would suggest, providing that you agree, that Mr. G. Griffith Johnson, Assistant Secretary for Economic Affairs, call at your office to discuss this problem in greater detail at your convenience.

Sincerely yours,

Dean Rusk/3/

/3/Printed from a copy that indicates Rusk signed the original.

164. Summary Minutes of Meeting of the Interdepartmental Committee of Under Secretaries on Foreign Economic Policy

//Source: Department of State, E Files: Lot 64 D 452, Economic Affairs (General), Interdepartmental Committee of Under Secretaries on Foreign Economic Policy. Official Use Only. Presumably drafted by Ruth Donahue, who is listed as Recording Secretary, on April 19.

Washington, April 11, 1963.

PROBLEMS OF FOREIGN AID: ALTERNATIVE MEANSOF HELPING NATIONS TO ACHIEVE SELF-RELIANCE

[Here follows Section I, a list of participants (21).]

II. Problems of Foreign Aid: Alternative Means of Helping Nations to Achieve Self-reliance

Under Secretary Harriman, presiding, asked AID Administrator Bell to make whatever statement he wanted before discussion of the paper AID had submitted for the meeting "Some Elements of AID Programs of Particular Relevance to the Interdepartmental Committee of Under Secretaries on Foreign Economic Policy."/1/

/1/Dated April 3; for text, see the Supplement.

Aid Legislation

Mr. Bell reported on the legislation for the mutual assistance programs for 1964. The President's message and firm recommendations went up April 2/2/ and the House Committee on Foreign Affairs has held four days of open hearings, with Secretaries Rusk and McNamara, Bell, and General Clay as witnesses./3/ The Committee will resume on April 23 after the Easter holidays in executive session and hearings will continue until the bill is completed.

/2/For text of this special message to Congress, see Public Papers of the Presidents of the United States: John F. Kennedy, 1963, pp. 294 - 303.

/3/This testimony, which took place on April 5, 8, 9, and 10, is in Foreign Assistance Act of 1963: Hearings Before the Committee on Foreign Affairs, House of Representatives, Eighty-eighth Congress, First Session (Washington, 1963), Part 1.

Appropriation Request. The President reduced his budget projection for the aid program from $4.945 billion as set forth in the January budget to $4.525 billion. The reduction reflects the recommendations of the Clay Committee and Bell's own recommendations after sitting with the Clay Committee and reviewing the country programs, as well as the President's estimate of the likely progress of legislation in the Congress.

When asked by the Committee what his views were on the amount of funds that should be appropriated, General Clay refused to comment in open session. He will be recalled to closed session, and Mr. Bell thought that the General would say $4 billion or thereabouts, or possibly might say a range of $4 billion to $4.2 or $4.3. Mr. Bell thinks we can assume that the House Foreign Affairs Committee will report out a bill authorizing about what the General recommends and that for the remainder of this session of Congress we will be trying to get an appropriation of about that level.

The Clay Committee's recommendations are essentially to the effect that the foreign aid program should be continued on somewhat sharper lines, that the interests of the US in various countries should be kept more in mind, and that somewhat stronger emphasis be placed on self-help measures. With these objectives, the President, the Secretary, and Mr. Bell have expressed agreement. Mr. Bell is not aware of any substantial differences between the Administration and the Clay Committee although the language of the report may give this impression. In many cases, the report is worded more negatively than conversations of the Committee indicated, especially with respect to India, Indonesia, Africa, and Latin America. AID finds no basic difficulty with the essential thrust of the Clay proposals. The Committee was unhappy over the existence of some of the commitments, such as a costly road in Burma, but it recognized that we must fulfill commitments. The Committee would like to see military aid reduced somewhat more rapidly than Secretary McNamara thinks it can be. This, however, is a difference in timing rather than a difference of attitude.

Classification of Countries. There are no surprises, no unusual recommendations, in our proposals to Congress this year, Mr. Bell said. We are stressing the classification of countries, as reflected on pages 6 - 7 of the "Proposed Mutual Defense and Assistance Programs-- FY1964"./4/

/4/This 75-page undated, preliminary report is in Department of State, E Files: Lot 65 D 68, ICFEP, April 11, 1963. The printed version, submitted to Congress in May, is Proposed Mutual Defense and Assistance Programs FY 1964: Summary Presentation to the Congress--Economic: A.I.D., Military: Department of Defense (Washington, 1963).

There are about 30 countries in which there are good prospects for achieving self-sustaining growth. A half dozen of those have reached the point of not needing economic assistance of soft terms. Others--India, Pakistan, Colombia, and Nigeria--have not yet achieved that status but are moving in that direction and are making substantial progress. There are another 12 or 15 countries (Chile and Brazil are examples) which have the potential for moving forward but there is a question whether governmental leadership is strong enough and clearly enough committed to economic programs to anticipate very rapid forward movement. In those cases the programs that go to Congress are essentially on a contingent basis. If these countries move forward, we would be prepared to help; if they do not, we would leave such funds uncommitted.

Mr. Bell said that we do not expect to argue that there is a particular figure for the aid appropriation below which our national interests would be threatened. In Latin America, for example, we are asking for lending authority of $600 million. We will state to the Committee that we are not at all sure we will make loans up to that amount. If the Latin Americans conduct themselves as we would like to see them, there will be very effective uses for the $600 million and that is why we would like to have the authority. We are talking about the power to make loans, not about a specific program of accomplishment on which United States security would stand or fall. That is why Mr. Bell hopes that General Clay will express the need for a range of figures within which we can work.

There is another group of countries which are essentially dominated by short-run external or internal security problems. Korea, Viet Nam, Laos, and Jordan fall into this classification. AID does not claim that these countries are in a position to make steady progress toward economic growth but it hopes they will move into that position in not too long a period. This is not impossible, as we can see in the case of Greece and Turkey.

Finally, there is a third group of countries in which US participation is limited and secondary. Many African countries fall into this class, and a number of Asian countries. We are not in the process of establishing permanent economic programs in these countries. By and large, our aid simply augments that of other major donor countries and in most cases is confined to technical assistance. Sometimes we merely want to establish a US presence. Sometimes our efforts may forestall Bloc enterprises. In other cases, we may be able to acquire strategic facilities.

In our legislative presentation, Mr. Bell said that stress was being given to self-help, the use of private resources (business, unions, cooperatives, farm organizations, etc.), and to increased participation by Western Europe and Japan in aid programs to the less-developed countries.

More Effective Promotion ofUS Private Investment in LDC's

Most of the discussion at the meeting centered around the first item posed in the AID paper--more effective promotion of US private investment in the less-developed countries. It was recalled that when this Committee discussed foreign aid two years ago,/5/ three points had been made about the private sector: a) this phase of the aid program should have high priority; b) targets for US investment should be identified in country programs; and c) the need for centralization of this function in the US Government. How much progress had been made on these points?

/5/See Document 126.

Importance of the Private Sector. Mr. Bell said there had been a good deal of change in the last two years. There is a substantially increased sense of the importance of using the private sector, although this may not be applied evenly by everyone in the aid business--State, Commerce, AID, and the Missions abroad.

Organizational Arrangements. Also, there is much greater organizational unification than in the past. AID has underway an internal study of the organizational problems. In AID there are four main doors of assistance for American businessmen who want to make investments abroad and who are seeking government help: a) sharing the cost of investment surveys; b) investment guarantees; c) Cooley amendment loans; and d) AID can make dollar loans on such terms and conditions as it considers appropriate. Within AID, these functions are decentralized to the four regional offices on the theory that the Director for the aid program in a region should also be responsible for the private sector operations in that region. Moscoso has a deputy for private enterprise in Latin America. Also, centralized thinking and policy in this field is provided through Seymour Peyser, Assistant Administrator of AID for Private Enterprises.

Private Enterprise Targets in Country Plans. As to identifying targets for private enterprise in country programs, essentially this relates to the attitudes of the various countries and doesn't yield readily to American initiatives. Where the attitude is skeptical of the good will of American investment, it doesn't change over night, and we have to keep plugging away. AID would like to see a tailored program for each country and a series of approach actions set up with consideration of priorities. It may be, for example, that we could have spent our time and effort more fruitfully in some countries than in pressing so hard for investment guarantee bilaterals.

The secret to promotion of the private sector is to get it linked to a part of the country plan in which the government has a great interest; unless this is done, the countries don't regard private investment as a contribution to the plan.

Mr. Bell thought the point of bringing the private sector into development planning was very important, and said that he would check on this.

Development Banks. One mechanism that gets around some of the difficulties in programming for the private sector is the Development Bank, and it was suggested that this be looked into carefully. Use of Development Banks removes from our people the onus and responsibility for direct judgment on particular investments. The difficulty is that Development Banks have a tendency to move only on the cream of the investments and are negative as far as small businesses or risk investments are concerned. There is no realization that a sure-thing approach to lending is not necessarily a good way to move into economic growth.

Commerce Activities. Commerce's efforts to promote closer working relations between American business communities in the developing countries and the Governments were outlined. These include establishment of investment promotion centers, production centers, and other mechanisms. Commerce has been talking to businessmen and to COMAP and is in hopes that a series of standing committees can be established to work up recommendations on specific problems, such as the use of local currencies, guarantees, aid to exports. The Commerce Department is also in a position to give more technical assistance in helping these countries devise ways to expand their exports.

Multilateral Guarantee. We now have proposed to Congress that there be a new tax incentive for private investment in developing countries, and we have expanded guarantee authority for US investments. A question was asked as whether it wouldn't be well to have authority for a multilateral guarantee for foreign investments which would show concern for private investors other than Americans. A Treasury official present at the meeting thought the waters might be muddied if this were put forward now as a legislative proposal and that it would be better to try to make progress on movements that are already underway in the OECD on a multilateral guarantee and in the IBRD on arbitration.

European Investment in Latin America. Senator Javits's idea for getting the Europeans to invest in Latin America was mentioned./6/ He would like to have Mr. Katz/7/ give six months to this effort. One thing being considered is the establishment of a Committee with well-known names from all over the world. Some concern was expressed that the latter would just result in the cream of the investment being skimmed.

/6/In December 1962, Senator Javits, Chairman of the Economic Committee of the NATO Parliamentarians, successfully urged the NATO Parliamentarians to approve European multilateral funding of foreign assistance to Latin America, supplementary to the Alliance for Progress, with a Latin American equivalent of the OEEC to administer the funds.

/7/Presumably S. Stanley Katz, an AID loan officer.

Getting the Private Sector to Come Alive. Mr. Rostow gave some reflections coming out of the talks he had in India./8/

/8/Rostow visited India and Pakistan April 1 - 7.

The whole basis of our aid program is government-to-government, but when that gets the economy moving, the private sector should come alive. We should encourage and help the private sector to expand rapidly as only when a country has its own private sector does it feel able to have private investment from abroad.

India is now trying to increase the investment rate and this means radical expansion of capacity. In some sectors--steel and chemical fertilizers--the Indians have some organizational talent for such expansion. In other fields they don't have the kind of know-how that it takes for radical expansion of plant--the training of men and programming ahead of materials, orders, etc. These fields are in the private sector, and the Indians are looking for ways to organize technical assistance in the whole process of expanding plant. This probably means bringing in American management know-how on a contract basis. And this relates to getting to know the country's ambitions or plans for expansion. As other countries progress, we will run into this problem more and more.

Where there are stabilization programs in order to get inflation under control through IMF procedures, we sometimes produce a general deflation in the private sector. This produces some very curious developments which we haven't thought through. Before a sensible policy is devised, we must have a notion of which private sectors need expansion and we must give more attention to the problem of "marrying" stabilization and development programs.

The most fundamental thing, Mr. Rostow said, is to get movement in the private sector. The second most fundamental thing is to improve the climate for private investment.

Statement of Policy on Private Investment. Asked whether there was a written statement of private investment policy, Mr. Bell doubted that anything exists which deals with the whole problem. AID has a booklet "Memo to Businessmen", and there is a statement in the AID presentation to Congress. Probably Mr. Peyser's testimony, in two or three weeks, will be the most comprehensive statement.

More Effective Utilization of All Available Resources in Supplying Technical Assistance Personnel

Turning to the second item in the AID paper, Mr. Bell said that AID has begun to do a better job of working with the agencies in the government and with various elements of the private sector in supplying technical assistance personnel. AID was asked whether this referred to agencies which have traditionally been in the technical assistance field or also encompassed other agencies. Mr. Bell replied that AID is working not only with Agriculture, Labor and Interior but with such agencies as the Home Loan Board. A survey of resources was made by Jack Ohley./9/ Some representatives present opined that other agencies still aren't being used enough, such as Labor and Interior.

/9/Presumably John H. Ohly (AID). Ohly's name is not included on the list of participants at the meeting.

As far as the tax area is concerned, Treasury had doubts about the US furnishing technical assistance with respect to tax policy as this is a very sensitive area, but can furnish technical assistance for tax administration. Mr. Bell thought there was an understanding that Latin American countries would go to the OAS for technical assistance on tax policy, although they could come to us for tax administration.

The Budget Bureau asked about evaluation of the technical assist-ance rendered. There should be an evaluation of the competence and contribution and whether AID is getting the optimum for the price. Is this evaluation to be done by AID or by the agencies furnishing technical assistance? Mr. Bell said he couldn't give an answer on this.

Other Donor CountriesThe DAC Forum

Turning to the question of other donor countries, Mr. Bell said that some progress was made at the last DAC meeting./10/ General agreement was achieved that terms of aid should be adapted more to the balance-of- payments prospects of the countries being assisted, that donors should make their aid available on somewhat more comparable terms, and that the harder lenders should soften their loan terms. While we cannot look for very rapid changes growing out of this, the US will use the agreement as leverage in consortium meetings in the future to try to get the European countries to soften their aid terms.

/10/See Document 157.

A real problem about terms of aid will center about the question of supplier credits. The European countries and the US are all becoming more sophisticated and enthusiastic about trying to guarantee or finance their exports. The French are an example. Their foreign aid is very soft--much of it in grants. But then they press ahead on terms like the loan just completed with Mexico, which is really a supplier credit. Mexico is in good shape and can stand it, but lots of other countries can't. If they sign up for more than they can handle, we may be called upon to bail them out.

As to the quantities of aid from other countries, Mr. Bell said we don't have so much of a case, especially with the French and not much with the British. We do argue with the Germans that their contribution should be more. Canada and Italy are the worst offenders, and we may get them to do a little more, but not much.

Future Meetings

At the close of the meeting, the Chairman said he thought this group should consider how to mobilize the Departments so as to get the whole Administration effectively behind the foreign aid legislation. Mr. Bell agreed that this should have high priority. It was left that probably the first ten minutes of the next meeting would be devoted to that./11/ In the meantime, agencies were asked to give this some thought.

/11/The minutes of later Committee meetings contain no discussion of the foreign aid legislation.

On April 25, the Committee will discuss Export Opportunities for the Manufactured Products of Less Developed Countries, with the State Department taking the lead in the discussion./12/

/12/This meeting was postponed until May 23.

On May 9, we plan to discuss United States Interests and Objectives in the United Nations Conference on Trade and Development.

The Chairman asked members of the Committee to consider subjects they would like to have aired in this forum. Suggestions should be sent to him.

C.W. Nichols/13/

Executive Secretary

/13/Printed from a copy that bears this typed signature.

165. Current Economic Developments

//Source: Washington National Records Center, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments. Confidential. The source text comprises pp. 14 - 17 of the issue.

Issue No. 673 Washington, April 16, 1963.

[Here follow articles on unrelated matters.]

DAC ADOPTS RESOLUTION ONTERMS AND CONDITIONS OF AID

The OECD Development Assistance Committee (DAC) moved forward at its high-level meeting April 2 - 3 on a subject which the US has long been pressing--terms of aid./1/ A resolution was adopted which recommends, in light of the increasing problem of the debt service burden of the less- developed countries, that DAC members move toward liberalization of their terms and seek a greater degree of comparability of such terms. A further discussion of tied aid, which some members wanted at this meeting, will take place probably at the next high-level meeting by which time the working party may have completed its study.

/1/The meeting was held in Paris.

This was the first DAC meeting to be presided over by the new Chairman, Willard L. Thorp of the US, formerly Assistant Secretary of State for Economic Affairs. All DAC members were represented: Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Norway, Portugal, UK, US, and the Commission of the EEC. The US was represented by AID Administrator David Bell. Representatives of the International Bank, the International Monetary Fund, and the Inter-American Development Bank also participated in the meetings.

Terms of Aid Resolution

The resolution on terms of aid, based on an interim report prepared by the working party,/2/ was not published although the communique reported in general terms on the DAC discussion and the substance of the agreement./3/

/2/Neither the resolution nor the interim report has been found, but the recommendations in the resolution are summarized in this article.

/3/For text of the communique, April 3, see American Foreign Policy: Current Documents, 1963, pp. 393 - 394.

Specifically, the resolution recommended to the members of the Development Assistance Committee the following:

That they relate the terms of aid on a case-by-case basis to the circumstances of each underdeveloped country or group of countries.

Where aid is on a project basis and where the terms appropriate to the project differ from the terms appropriate to the country, that they should consider whether they can apply one of the following methods: to provide an appropriate "mix" of hard loans and soft loans or grants; to lend under a "two-step procedure" providing for soft loans to governments and lending on hard terms to projects; to lend projects on hard terms and provide separate financial aid for balance-of-payments relief.

That they make it their objective in principle to secure a significant degree of comparability in the terms and conditions of their aid, and so far as possible to eliminate or reduce discrepancies between them. While this would not necessarily entail standard terms and conditions from all donors, it would involve a liberalization of the terms adopted by some members, whether in their individual aid programs or in concerted aid operations.

For the purpose of implementing the above recommendations, the DAC agreed to the following:

1. It should be open to any DAC members or the Chairman to seek an exchange of information and views within the DAC framework, on a confidential basis, concerning any individual, underdeveloped country where it appears of particular importance or urgency to review the country's external debt position.

2. Concerted action will be undertaken to reduce disparities in the terms and conditions of aid.

3. The methods that the Committee will adopt in order to achieve such concerted action should be based on the following understanding:

a) The recommendation would apply both to aid programs as a whole and to consortia and other particular aid operations.

b) It would embrace not only the terms of aid but also the conditions of aid.

c) Progress toward the agreed objective would be assessed as a part of the annual aid review, so far as concerns aid programs as a whole.

d) In concerted aid operations covered by consortia and similar arrangements, the terms and conditions of aid would be for discussion and consultation among the donor countries in the light of this understanding, and in the light of the terms and conditions of their overall aid effort.

e) This understanding would not necessarily involve standard terms and conditions from all donors, in view of their varying capacities and institutional backgrounds, but donors would be expected to seek any necessary legislative or budgetary provisions to implement the understanding.

f) The efforts of the recipient country to play its full part in any such arrangements by adjusting its policies and planning arrangements to the extent necessary and possible to correct the situation would be given importance in the consideration of concerted arrangements for alleviation of its debt service problem.

g) It would be open to any DAC member or to the Chairman to initiate consultation on these lines in further appropriate cases which are not at present covered by specific coordinating arrangements.

h) In comparison of terms of finance effected in consortia, coordinating groups, etc., note should be taken of the amounts of guaranteed private export credits as well as public loans and grants.

The working party was instructed to make a further study of the probable future trend in the annual debt service of the under-developed countries, and of the problem which this may present. Included in the study should be consideration of a paper to be prepared by the staff of the International Bank discussing the factors which determine a country's debt servicing capacity.

Discussion

The discussion of terms and conditions of aid was opened by AID Administrator Bell who endorsed fully the conclusions of the interim report of the working party, especially the gravity of the growing problem of the debt burden, the incompatibility of hard terms provided by some lenders with a recipient country's debt service capacity, and the need for greater comparability of terms through liberalization. Bell also argued for recognition of the two-step procedure as the preferred method to reconcile project and country requirements but, in light of majority preference, he agreed to the more permissive language incorporated in the resolution. He further supported use of consortia and consultative groups to discuss the problem of indebtedness, need for legislative and budgetary provisions allowing soft terms, and inclusion of the export credit problem in coordinated aid efforts.

The most significant and welcome statement by others came from the UK, which gave full recognition to the debt servicing problem and expressed determination to ease terms. Specifically, the British representative indicated UK terms could be lengthened beyond the present customary 25 years and described several possibilities which the UK is considering to reduce the burden of interest charges, where such relief is needed. The Germans, who it was hoped would announce further steps towards liberalization of aid terms, failed to do so, although accepting the resolution. The French questioned the seriousness of increasing the debt-service burden of less-developed countries and noted that creating short-term indebtedness has the advantage of bringing the LDC frequently before such international forums as the IMF and Paris Club/4/ to justify their policies. The French were effectively rebutted by the British and Belgians. The Netherlands, Canada, France and Portugal accepted the resolution only ad referendum.

/4/Under the IMF's General Agreements to Borrow, founded in 1962, the Finance Ministers of the 10 wealthiest industrial IMF countries pledged to lend their currencies to the IMF up to specified amounts when supplementary resources were needed. The Paris Club is also known as the Group of 10.

Tied Aid

Prior to the meeting, the US had opposed introduction of new tied aid proposals at this meeting for two reasons. We felt there was a danger that the important and carefully worked out agreement on terms of aid which seemed virtually assured might be upset by introduction of new and separate issues on the subject of tied aid which the working party had not had adequate time to discuss thoroughly. We also felt that proposals on tied aid should have the same kind of careful analysis and consideration by the working party as did the terms of aid proposals. We agreed, however, to a preliminary discussion of the tied aid problem.

At the April 2 - 3 meeting, the Dutch and Belgians put great emphasis on the importance of moving rapidly ahead with the study on tied aid. They argued that tying may be damaging in the long run to donors in balance- of-payments difficulties because it supports noncompetitive industries. Van Lennep of the Netherlands/5/ made suggestions in the direction of a concerted movement toward untying aid and he even tried to link acceptance of the terms of aid report to progress on tied aid.

/5/Emile van Lennep, Treasurer-General in the Netherlands Finance Ministry and Chairman, EEC Monetary Committee.

The EEC had announced on March 4 a new untied aid policy, which the US has welcomed as evidence Community desire for liberal orientation of Europe./6/ The EEC confirmed its adherence to this new policy at the DAC meeting and Mr. Bell emphasized the importance which the US attributed to its being put into effective operation.

/6/Busec 411 to Brussels, March 21, stated in part that the Department of State was "encouraged by EEC announcement of new untied aid policy. Announcement representative of initiatives Commission can take to assert its leadership in Community and to develop liberal and outward-looking Community policies." (Department of State, Central Files, ECIN 1 EEC)

The US restated its position of strong support for the principle of untied aid but recognition of the reality that economic conditions sometimes necessitate tying. The long US record of untied aid prior to the recent balance-of-payments difficulties was cited. Our representative stated US willingness to cooperate in the working party study, but voiced doubts on the feasibility of concluding the work by the July DAC meeting. Representatives of the other major donor nations cautioned against any optimism regarding agreement which would bind countries to untie their aid.

The DAC instructed the working party to continue its consideration of the study of the problems of aid tying which had been prepared by the OECD Secretariat,/7/ taking account of the views and proposals put forward in the preliminary discussion at the April 2 - 3 meeting, with the purpose of submitting findings and, if possible, recommendations on the subject to the next high-level DAC meeting, tentatively scheduled for July.

/7/This study has not been further identified.

[Here follow articles on unrelated matters.]

166. Memorandum From the Administrator of the Agency for International Development (Bell) to President Kennedy

//Source: Kennedy Library, National Security Files, Departments and Agencies Series, AID, 4/63 - 9/63. Confidential. Attached to the source text is a memorandum from Easum to Lawrence F. O'Brien, April 22, noting that Secretary Rusk was given a copy of Bell's memorandum that morning, had reviewed it briefly, and may have discussed it with the President at the NSC meeting. The summary record of the NSC meeting contains no discussion of Bell's memorandum. (Kennedy Library, National Security Files, Meetings and Memoranda Series, NSC Meetings, 513th Meeting) Easum added that the President should read the memorandum prior to the leadership breakfast the next day.

Washington, April 22, 1963.

SUBJECT

Congressional Presentation Strategy on the FY 1964 Aid Bill and its Relation to the Clay Report

This memorandum seeks Presidential guidance on further handling of the Clay committee report in relation to the successful presentation to Congress of the President's FY 1964 aid bill.

Thus far, following the President's lead, I have minimized our differences with the Clay report and stressed the area of agreement between the Administration and the Clay committee. I have indicated agreement on the "main points" or general thrust of the report and have pointed out that the reduction of the President's request from $4.9 billion to $4.5 billion was in large part a response to the Clay committee's recommendations. General Clay has expressed publicly the gratification of his committee for the President's action in reducing the budget request and implementing the committee's suggestions. Members of the House Foreign Affairs Committee and press comment across the country have expressed pleasure with the Administration's response to the report and the apparent general agreement between the Administration and the report on the future nature of U.S. aid.

We do, of course, have certain differences with the report and will face still other problems arising from it. They are principally the following:

1. There are differences on specific areas and countries, some of which are primarily matters of wording in the Clay committee report, with no practical adverse implications (e.g., comments on Africa), and some of which are real and worth disagreeing on. I believe the number of differences in this latter category are few, such as cutting our dollar aid to Nepal, military and economic aid to Iran, and military assistance to Burma.

2. While we are not clear on the precise application of the report's statement that U.S. aid should not go to state-owned enterprises which compete with private endeavors, we have stated our general agreement on this point. The Indian steel mill is the main object of the Committee's recommendation, and this issue will have to be faced soon; thus far, we are replying to questions by saying that the survey report has just come in and is being studied.

3. We would oppose any attempt to make the signing of an investment guarantee agreement a legislative requirement for U.S. aid to any country. This problem has been raised by the Clay report, but the committee is on our side of this argument.

4. We would wish to oppose any strict limitation on, or prohibition of, voluntary U.S. contributions to United Nations aid organizations. The Clay report's comment on this subject can be accepted as a general guideline, and we will get some support from the committee for our position.

I propose the following future course of action concerning the presentation and the Clay report:

1. that we continue to support strongly the President's revised program and budget, indicating that they have taken the Clay report into consideration and that the Clay committee has expressed gratification and very large agreement with them.

2. that U.S. Government officials publicly should continue to minimize rather than maximize differences with the Clay report.

3. that legitimate differences which we have with the report should be defended where they are important and as they are raised by others before Congressional committees, emphasizing where possible that some differences are largely of timing and degree.

4. that, since General Clay is expected to specify or otherwise indicate next week a figure of at least $4.0 to $4.1 billion as the minimum need for FY 1964 appropriations, we attempt thereafter to focus Congressional and public consideration on the range between his figure and the $4.5 billion requested. The difference in figures should be explained on the grounds that the $4.5 billion figure is our interpretation of what is needed for U.S. and free world security, that we should have funds on hand for increased lending if Latin American nations perform properly and for demonstrating the continuation of serious U.S. commitment to the Alliance, that we can and should be trusted with the Contingency Fund requested, and that there may be a few countries where we propose to do more than the Clay committee might think minimally necessary. We should argue that any cut in the budget request would entail corresponding costs in the total contribution of the program to free world security.

5. that we seek ultimate authorization figures of approximately $4.3 billion from the House Foreign Affairs and Senate Foreign Relations Committees--roughly mid-way between the Administration's and General Clay's figure and possibly at the high end of his figures if he cites a range of $4.1 - $4.3 billion--which allows both Committees to make some cuts. While the course of action beyond that point is now unclear, our intention should be to seek Congressional approval of an appropriation at Clay's bottom figure of $4.0 or $4.1 billion.

If the President agrees with this course of action, I suggest he convey it to the leadership of the House and Senate, perhaps at its April 23 meeting, and to Chairman Morgan and possibly Chairman Fulbright at the same time, either personally or through Mr. O'Brien. This personal assurance to the chairmen of the House Foreign Affairs and Senate Foreign Relations Committees is considered necessary to assure them of the President's strong backing of a $4.3 billion figure from their respective committees. It may well be that the Senate figure will have to be slightly higher than that of the House Foreign Affairs Committee to reach an authorizing figure at this level. Also, there are strong indications that these committees will require assurances that the Administration will fight for a figure no lower than $4.0 - $4.1 billion at the appropriations stage. They regard themselves, rightly or wrongly, as having been somewhat let down by the Administration in the final stages of the appropriations process last year and the year before.

Whether this strategy will obtain the optimum appropriation remains to be seen. No one has proposed a real alternative, though some believe it will result in larger cuts than necessary. They point out that liberal legislators and humanitarian groups are disturbed with the Clay report and want the Administration to fight it. I agree that non-Administration officials and private organizations should not be discouraged from opposing the report if they so desire, since it is useful to have their criticism to balance the comments of others of opposite persuasion. While I agree also that the course of action proposed here would at least temporarily inhibit their support for the program, I believe our relations with these persons and groups will not suffer in the long run.

Finally and concerning General Clay's testimony in executive session on April 25 before the House Foreign Affairs Committee, he has indicated quite clearly that he will abide by his promise to the President of supporting a figure of $4.0 to $4.1 billion. I had planned to speak with him once more before his testimony to urge him to support a range from his rock bottom figure ($4.0 - $4.1 billion) to a higher one ($4.2 or $4.3 billion) which would allow more funds to be on hand for additional Alliance for Progress lending if Latin American nations perform properly, and for the Contingency Fund.

Some argue, however, that the House committee will view Clay as "an Administration witness" and cut under any figure he cites, and therefore Clay should specify no figure and simply state his belief in an appropriation "something under $4.5 billion." While the Committee extracted a promise from Clay at his last appearance to name a figure this time, an attempt could be made to have him avoid a definite figure if the President thought this desirable. The risk obviously is that if this were done, the House Committee might cut more rather than less from the President's request than if Clay named a figure.

If the President believes that Clay's citing a specific figure now is desirable, or unavoidable in the light of his promise to the House committee, I recommend that I talk with him as planned, and that the President not meet with him until after his April 25 testimony. I think General Clay might feel that he was being pressed rather closely if the President reviewed the subject with him before his testimony.

We would appreciate the President's guidance on the matters reviewed in this memorandum.

David E. Bell/1/

/1/Printed from a copy that bears this typed signature.

167. Memorandum From the Administrator of the Agency for International Development (Bell) to President Kennedy

//Source: Kennedy Library, National Security Files, Meetings and Memoranda Series, NSAM No. 159. Secret. Komer's May 16 memorandum to McGeorge Bundy (Document 168) was attached to the source text.

Washington, May 13, 1963.

SUBJECT

Coordination of Military and Economic Programs--NSAM 159, May 31, 1962/1/

/1/Document 141.

As directed in NSAM 159, I am forwarding a second report on the coordination of economic and military aid programs./2/

/2/Apparently the first report, dated May 25, 1962 (Document 140), antedated NSAM No. 159.

The first step in improving coordination has been to establish a programming framework and procedure that will facilitate the making of overall judgments about our military and economic aid programs. Substantial progress has been made in this direction; however, coordination is not just the initiation of improved techniques, although these are important. More basically, it is a different way of thinking-- a fuller recognition that various elements of the total U.S. foreign assistance program are inter-related means to common long-run ends and that there can be a fungibility of resources to achieve these ends.

The so-called "mix studies", discussed more fully below, contributed at least as much toward fuller understanding of this inter-relatedness as toward more specific results.

I. General Improvements in the Planning Process

The greatest improvements in coordination of the economic and military assistance programs should come from the new format that has been established for progressively integrating the planning of military and economic assistance.

The A.I.D. program guidance issued to the field missions last summer emphasized three key aspects of over-all planning: the importance of developing an explicit assistance "strategy" which defines realistic goals and relates proposed actions to these goals; the need to plan for several years ahead; and the importance of basing the assistance strategy on a comprehensive analysis of all aspects of a country's situation--social, political and military as well as economic.

The military assistance guidance provides for continued MAP planning on a five-year basis, identifies more expressly situations where the primary purposes of MAP are in political areas rather than military security, and singles out certain economic considerations to be incorporated in development of military plans. The Country Team submissions of both economic and military programs take the State Department Country Guidelines as the statement of basic U.S. objectives.

The revised program guidance has already had a considerable effect. The Country Assistance Programs submitted to A.I.D. by the field missions have, among other things, provided the basis for developing in Washington concise Country Assistance Strategy Statements. I believe that these provide a sharper focus than we had before in relating means to objectives, including both security and developmental objectives.

Further improvements in planning economic aid are expected both through refinements of subsequent annual Country Assistance Program submissions and through the use of a more penetrating analytical programming document, the Long-Range Assistance Strategy (LAS) for selected key countries. It is expected that these more comprehensive studies will be carried out, with Washington assistance, in Turkey, Pakistan, India, Thailand, and Free China this year, as well as in some other countries where the "mix" question is less important.

The broader, longer term emphasis of A.I.D. programming provides a better framework for considering military and economic programs together. Longer-term A.I.D. planning will facilitate the meshing of economic assistance programs with the Five-Year MAP Plans. More specifically, the total resources approach facilitates consideration of consumable maintenance requirements of commercial-type items, commonly financed under MAP, as a part of total requirements of the economy; examination of the budget as a totality will be encouraged rather than consideration of the military budget as an independent item. Also, the development of overall aid strategies provides a clearer basis for assessing the inter-relationships among different kinds of aid.

Not only the approach but also the timing of A.I.D. programming is being revised to facilitate joint consideration of economic and military assistance programs. The annual updating of the Five-Year Plans has normally been accomplished in the spring while the annual A.I.D. submission has been prepared in late summer or fall. This year I am instructing the A.I.D. Missions, and the Country Teams in major "mix" countries to prepare the general portion of the annual A.I.D. submission for transmittal in June. Next year, we hope to further consolidate the economic and military programming process. This will permit consistency in emphasis and establishment of priorities among assistance activities appropriate to each country situation.

More specific steps to improve the coordination of military and economic and assistance are still needed. Several of the "mix" studies have not yet been completed. Some of these can be combined with the LAS. Other special studies will be needed.

II. Specific Steps for Improved Coordination of Military and Economic Programs

The measures focusing specifically on the optimum balance of military and economic assistance programs have been the "mix" studies directed by NSC 2447./3/ These have had a qualified success over a rather extensive period of time.

/3/Document 130.

1. The visit of the Shah assisted in bringing the "mix" study of Iran to a definitive conclusion./4/ The recommendations included a rather significant reduction in military forces to halt the rise in the Iranian defense budget. This recommendation was accepted at the expense of a commitment to a long-term Military Assistance Program designed to increase the effectiveness of the reduced forces with respect to both internal and external security. The latest reports from the field indicate that the Shah is planning to meet the conditions of force reductions and improved ability to use the new equipment effectively.

/4/The Shah of Iran met with President Kennedy and other senior U.S. officials in Washington April 11 - 13, 1962.

2. The Korean study has moved through several stages. A first step toward an ultimate 25% reduction in Korean forces has been recommended and has been endorsed by the Ambassador and by the Department of State. The recommended plan is to reduce forces by about 35,000 a year for two years, and to consider similar force reductions for two more years at a later date in light of ensuing developments. The Joint Chiefs of Staff have so far adhered to their position opposing such reductions. Various JCS studies of strategy in the Pacific theater are nearing completion and may affect the views of the Department of Defense. Meanwhile, political developments in Korea have made it inopportune to propose this action immediately.

The Korean force reductions would not of themselves free significant Korean resources for economic development, but they would be a step toward putting a ceiling on Korean defense expenditures and perhaps open the door to further action in this direction. In addition, we propose to reinstate the program of having the Korean economy take over the production of certain items previously supplied by MAP, thus providing work for Korea and reducing the charge on the U.S. to some extent.

3. In Taiwan we expect to initiate shortly a Long-Range Assistance Strategy study which will develop a plan to phase out economic assist- ance. It will be combined with the results of JCS strategic studies in the theater and any review of policy regarding support of GRC forces.

4. A review of our program for the Philippine Republic would also seem desirable in light of strategic and political considerations that may emerge from the current studies.

5. The studies of the balance of military and economic aid in Greece and Turkey have been long in reaching a conclusion. They have demonstrated the highly complex problem of evaluating needs for U.S. bilateral aid to countries which are receiving economic support through OECD consortia and in which the requirement for MAP and local defense budg-ets depend in part on NATO force goals. Practical results have been steps to transfer to the Turkish economy the production of certain items heretofore supplied by the MAP and to reduce support for the military budg-et in Greece. The intensive work within the Executive Branch on these studies has, I believe, resulted in a heightened consciousness of the inter-relationship of military and economic programs. This factor, coupled with the limited availability of military assistance funds, has in effect produced a fairly good balance in our efforts.

Further Aid Mix Studies

Mix problems can be pursued further through two alternative approaches. A high-level inter-departmental working group could be established to review our politico-military strategy on a worldwide basis in light of anticipated developments in the political and weapons fields. The group would need to be at a high level because it would inevitably have to consider the specifics of defense arrangements and war plans, intelligence evaluations, and the most sensitive politico-military matters.

The alternative approach would be intensified consultation between the Department of State and the Secretary of Defense, relying on the latter to provide his judgment as to worldwide defense requirements in relation to U.S. defense plans.

The latter course seems to me to be preferable, and I am proposing a series of discussions between the Secretary of Defense, the Under Secretary of State for Political Affairs, and myself to review these matters insofar as they affect MAP and economic assistance programs. We will then determine the need for further staff studies.

Frank M. Coffin/5/

/5/Printed from a copy that indicates Coffin signed the original above Bell's typed signature.

168. Memorandum From Robert W. Komer of the National Security Council Staff to the President's Special Assistant for National Security Affairs (Bundy)

//Source: Kennedy Library, National Security Files, Meetings and Memoranda Series, NSAM No. 159. Secret.

Washington, May 16, 1963.

McGB--

I propose to sit on attached Memo for the President/1/ until I have got it straightened out as indicated below.

/1/Document 167.

For my part, this is a d-- bald-faced whitewash and Dave should be ashamed to let it get out of AID. When you add up five pages of words they total "no progress" at all.

I have called Coffin and told him I'd sit on this report until he and Dave could concert with me on what kind of response they wanted from the President. I'd like to send back a rocket saying in effect this is simply not sufficient progress toward carrying out the NSC 2447 mandate and that more action is needed.

Note also final page on "alternative approaches" to new mix studies. I'd emphatically opt for a new steering group rather than State/DOD consultation, and have told Frank so./2/

RWK/3/

/2/In a memorandum to all staff who attended the White House staff meetings, May 17, Bromley Smith wrote that McGeorge Bundy proposed to discuss Bell's May 13 memorandum to the President at a staff meeting the following week. (Kennedy Library, National Security Files, Meetings and Memoranda Series, NSAM No. 159) No record of a White House staff meeting discussing Bell's memorandum has been found.

/3/Printed from a copy that bears these typed initials.

169. Memorandum From the Assistant Director of the Bureau of the Budget (Hansen) to Robert W. Komer of the National Security Council Staff

//Source: Washington National Records Center, RG 286, AID Administrator Files: FRC 65 A 481, White House, FY 1962. Secret. Attached to the source text is a May 22 memorandum from Komer to David Bell, which reads:

"Here, with Ken Hansen's OK, is his acid comment on your reply to NSAM 159 (military-economic aid coordination). However politely phrased, the reply seems to add up to saying that not much has been done, nor is contemplated.

"As I told Frank, I don't want to show a report like this to the President without checking tactics with you. Would you want, for example, a fairly tart reply from the President saying in effect `this isn't good enough; let's keep humping.' You could use this to back your hand on next moves."

Washington, May 21, 1963.

SUBJECT

AID Administrator's report on NSAM 159

I believe that, by implication, the May 13 report of the AID Administrator on coordination of economic and military aid overstates the results achieved so far, and understates the basic problems which remain to be solved. It follows naturally that the report does not offer an adequate prescription of further steps to be taken on this front.

First as to achievements:

1. The AID "country strategy" papers represent an advance on the economic side, and may progressively offer some basis for better economic-military coordination, but they do not address the economic- military question in any fundamental way. In most cases, the military aspect is not even mentioned.

2. The new military assistance guidance has singled out some selected areas where MAP serves political objectives--but in so doing it has perhaps further obscured the substantial political content of MAP in other countries. The whole question as to which programs should carry how much freight for specific policy objectives--and the priorities among the objectives themselves--are not resolved or even clarified very much in the new guidance. (And it is no secret that the State Department guidelines papers are very weak reeds on this score.)

3. The meshing of planning cycles for economic and military aid, which will begin to some extent this year, provides greater opportunity for integrated country planning, but does not in itself assure this result-- especially when the planning is done under separate sets of policy guidance which are not based on a unified concept of goals, priorities, and overall program emphasis. Exhortation to the field for integrated planning loses much of its impact when the Washington guidance fails to exemplify this approach.

4. The NSAM 228/1/ exercise speaks for itself on coordination of economic and military aid in Iran.

/1/Entitled "Review of Iran Situation," March 14. (Kennedy Library, National Security Files, Meetings and Memoranda Series, NSAM No. 228)

5. The "aid mix" studies on Korea, Greece and Turkey which were requested by the President almost 16 months ago, and were originally due last July, have not yet been submitted for NSC discussion./2/ The Korea study has produced a general consensus (except in JCS) in favor of a shift in emphasis from military to economic programs, but this consensus is most fragile since it is not based on a solidly-shared appreciation of the basic policy considerations. Thus we do not have any agreed-on policy yardstick for appraising new courses of action as they are proposed in the future. This leaves us improvising tactics without a strategy, at a very crucial point in Korean history. (This is not to argue that immediate steps to implement the overall shift of MAP guidance should be undertaken--obviously the current political situation must be resolved first.)

/2/These studies were called for in NSC Record of Action No. 2447, Document 130. Komer's comments on drafts of studies on these three countries are contained in his memorandum to Coffin, July 30, 1962. (Kennedy Library, National Security Files, Countries Series, Korea)

The outstanding characteristic of the Greek and Turkish studies is that they have not adequately addressed the basic policy conflicts which underly the whole question of aid mix in those countries (NATO goals, etc.). While the report suggests that "a heightened consciousness of the interrelationship of military and economic programs" together with the limitations on MAP funds, have produced "a fairly good balance", we are in fact still skirting the periphery of the substantive questions of aid mix in these countries.

In short, we may in many of these cases be achieving the "right" figures for the wrong reasons or just because we have pressed hard in the budgetary process. Furthermore, the gradual trend toward lower MAP levels, which has been discussed for the "aid mix" countries, is not reflected in the current projections of program level for the next 5 year planning period.

With respect to problems still unsolved:

1. Despite some meshing of time schedules, and increased exhortation to view these programs together, there is little indication of the actual process by which they are to be planned, reviewed or implemented on an integrated basis in the country teams. From the promulgation of policy on through the successive phases of planning, these programs are still running very largely on separate tracks--and are only "joined" if at all, at the point of final annual program determination.

2. Fundamental to this problem is the lack of an agreed framework of policy within which economic and military programs can be jointly planned in both Washington and the field in any meaningful sense. This is a prime area of concern for the AID Administrator, not only in terms of the pending "mix" studies, but in a more general and continuing sense as well.

3. The locus of aid policy and program decisions is one of the major problems of coordination which needs to be considered by the Administrator. The organizational and administrative relationships among State, AID and Defense, and the extent of responsibility each has for different aspects of aid policy, are matters which fall within the purview of NSAM 159. On this front, the Administrator by himself faces overpowering pressures, and the cause of effective coordination would be served by proposals that give the White House an opportunity to strengthen the Administrator's hand.

4. Related and important questions which need to be re-assessed are the key MAP planning role assigned to the Unified Commands, and the structuring of country team work in the total aid field.

While the report admits that "more specific steps to improve coordination . . . are needed", none of these basic problems are even mentioned, and no concrete steps are delineated.

The projected future course of actions is extremely vague and limited. Further consolidation of program processes is of course desirable, but it is hard to visualize at this point, since the basic program planning proc-ess has not been indicated yet. To our knowledge, the review process for this summer and fall in Washington has not even been determined, much less longer range processes. Completion of the aid-mix studies, perhaps in combination with the LAS, and "other special studies" merely suggest some of the work to be done, but not a way of going about it.

Only one real proposal is made, which is for a series of discussions between McNamara, Harriman and Bell instead of using a high level, interdepartmental working group. I would make four points about this proposal:

1. While using other terminology, it actually calls for an interdepartmental working group--the only difference being that it excludes the Executive Office circuit.

2. The subject for discussion is not clear, but by implication it would be fairly narrow in scope--U.S. military requirements as they affect MAP and economic aid programs. From this would flow "further staff studies". But will the whole exercise be founded again on a separate and prior statement of military requirements, as the only real constant in the equation, or will these be subjected to constant challenge as they were in the "MAP-mix" enterprise (almost exclusively by White House/BOB participants).

3. To get a real assessment in which the variables include military as well as economic and political factors, Dave Bell may need all the allies he can get. This despite the Harriman and McNamara records of reasonableness on MAP. The real problem is to focus the dialogue on the fundamentals of the mix question, so that we end up not only with an agreeable set of figures for the moment, but a genuine policy consensus which can sustain a sensible balance in the future--or at least provide a valid yardstick for changing course again if that should become necessary later. Experience would suggest that Executive Office participation would help assure discussion in these basic terms.

4. Inter-agency discussions of the limited nature suggested raise special problems in view of the fact that we still lack basic policy decision on the mix question which the President presumably still wants to review. And since the agency heads are not yet accountable to any real established policy in this field, the settlement of key mix questions without further reference to White House views may not serve the President's interest.

Kenneth R. Hansen/3/

/3/Printed from a copy that indicates Hansen signed the original.

170. Letter From Secretary of Defense McNamara to Secretary of State Rusk

//Source: Department of State, S/S - NSC Files: Lot 72 D 316, NSAM No. 242. Confidential. A copy was sent to McGeorge Bundy. The source text is Tab A to an undated memorandum from U. Alexis Johnson to Secretary Rusk. As summarized in Johnson's memorandum, McNamara's letter was an outgrowth of correspondence on military sales between McNamara and Bell. Bell's June 24 letter to McNamara, McNamara's June 28 reply, and McNamara's June 27 memorandum to William Bundy are Tab C. Tab D is printed as Document 171. U. Alexis Johnson transmitted his memorandum to Rusk (with all its tabs) under cover of an undated memorandum to Bell asking for his concurrence.

Washington, July 9, 1963.

Dear Dean: The following statements by the President were issued as a part of National Security Action Memorandum No. 242, dated 9 May 1963:

"It is essential that we make every effort to prosecute the program of selling U.S. equipment to allies."

"Not only will this decrease the net outflow of gold from this country, but it also ties in our military aid to foreign policy."

"Will you please assure that those concerned are properly informed, including appropriate Members of Congress, those concerned in other departments of government, as well as those in the Department of Defense."/1/

/1/The full text of NSAM No. 242 is Tab B to Johnson's undated memorandum to Secretary Rusk. The President issued NSAM No. 242 following receipt of a May 7 memorandum from Nitze, which offered reasons for the Australian Government's purchase of French Mirage airplanes. A copy of Nitze's memorandum is in the Washington National Records Center, RG 286, AID Administrator Files: FRC 67 A 1530, Military Assistance, FY 1964.

I have directed all appropriate elements of the Department of Defense to aggressively pursue the prosecution of such a program.

In keeping with the President's expressed desire, I suggest that you advise appropriate personnel in your Department of the policy contained in the above quoted remarks. I further suggest that you enjoin those concerned to keep this policy clearly in mind as we seek solutions to the many difficult problems involved in prosecuting such a program.

Sincerely,

Bob

171. Letter From Secretary of State Rusk to Secretary of Defense McNamara

//Source: Department of State, S/S - NSC Files: Lot 72 D 316, NSAM No. 242. Confidential. Copies were sent to McGeorge Bundy and Bell. The source text is Tab D to U. Alexis Johnson's undated memorandum to Secretary Rusk; see the source note, Document 170.

Washington, July 26, 1963.

Dear Bob: I refer to your letter of July 9 regarding the importance of the sale of United States military equipment to our allies./1/ I received a copy of NSAM 242 of May 9 and it was circulated to our officers concerned, who have well in mind the President's interest in U.S. military sales programs to allies such as Australia.

/1/Document 170.

Even apart from the President's memorandum, we have of course strongly supported military sales programs which are not inconsistent with other foreign policy considerations. In this connection, I have in mind such questions as the degree to which military sales to any specific country could divert resources from higher priority economic development objectives, particularly where we are extending economic aid to that country, and the degree to which the arms which a country proposes to purchase are compatible with the objective of focusing its military resources on its internal defense as opposed to "arming against its neighbors".

I had not interpreted the President's memorandum as an injunction to disregard all such foreign policy considerations in pursuing these sales and I presume that it was not your intent that we should do so. Thus, in instances in which military sales would be made either for cash or on credit from sources such as the Export-Import Bank, I would expect that we would be given the opportunity to provide political guidance in relating these sales to other foreign policy objectives, while also taking into account NSAM 242.

In other cases, where there is a potential competition for MAP funds between military sales and grant military assistance, I would hope that our two Departments could collaborate fully, taking into account my responsibilities under Section 622(c) of the Foreign Assistance Act of 1961. As you know, I have delegated this authority to the Administrator of AID,/2/ who acts in consultation with the Under Secretary and the Deputy Under Secretary for Political Affairs. I expect, of course, to be brought into these matters directly when this seems called for. I would thus expect that Dave Bell would have the primary role in the coordinated consideration of the issues involved in such cases. The appropriate bureaus of the State Department would, of course, also continue to be involved. I am sure that we can thus continue to collaborate most effectively in pursuing the objectives desired by the President with respect to our military sales and other objectives.

/2/See CA - 11942 to Chiefs of Mission of all AID recipient countries, April 24, 1962, in the Supplement.

With warm regards,

Sincerely,

Dean/3/

/3/Printed from a copy that indicates Rusk signed the original.

172. Current Economic Developments

//Source: Washington National Records Center, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments. Limited Official Use. The source text comprises pp. 14 - 17 of the issue.

Issue No. 681 Washington, August 6, 1963.

[Here follow articles on unrelated matters.]

HIGH-LEVEL DAC MEETING CONSIDERSMAJOR ISSUES IN THE AID FIELD

The second annual aid review of the OECD Development Assist-ance Committee, held at a high-level session July 24 - 25,/1/ was characterized by free, honest discussion of basic issues and was unanimously regarded as being more successful than last year's meeting./2/ There was intensive discussion of major issues in the aid field, including levels, terms, coordination, technical assistance, the role of private enterprise, and measures to improve the effectiveness of aid. US viewpoints were effectively presented by AID Director Bell, who stressed particularly our concern over the increased US share in the total flow of aid and the lack of increase in the over-all volume despite the growing requirements of the less-developed countries.

/1/The session was held in Paris.

/2/For text of an OECD press release issued at the end of the session, see American Foreign Policy: Current Documents, 1963, pp. 418 - 420.

The session resulted in: a) reaffirmation of the London resolution on the common aid effort;/3/ b) determination to examine the pipeline problem and study measures to reduce the increasing lag between commitments and disbursements; c) a rededication to the resolution of last April on the terms of aid;/4/ d) a restatement of the Bonn understanding favoring untied aid to the extent possible but taking into account balance-of-payments considerations;/5/ and e) agreement to arrange a schedule and procedures for more regional meetings.

/3/See Documents 99, 101, and 102.

/4/The DAC communique issued on April 3 reads in part: "the Committee agreed that members should make it their objective in principle to secure a significant degree of comparability in the terms and conditions of their aid, and so far as possible to eliminate or reduce disparities among them. It was clear that in practice, though this would not necessarily entail standard terms and conditions from all donors, it would involve a liberalization of the terms adopted by some members, whether in their individual aid programs or in concerted aid operations." (American Foreign Policy: Current Documents, 1963, p. 394)

/5/An apparent reference to the understandings reached at the meeting of the Development Assistance Group in Bonn July 5 - 7, 1960.

Levels and Adequacy of Aid

The net flow of official financial resources from DAC countries in 1962 was maintained at but did not exceed the level of $6 billion which had been reached in 1961 as the result of an increase of over 20% compared with 1960. Official statements during the aid review suggested that the total this year is likely to be larger than in 1962.

The countries which were most forthcoming to the US plea for a greater effort were the UK and Japan which indicated that the 1963 flow will be substantially higher than 1962. The Canadians also indicated greatly increased disbursements in 1963, estimated at $125 million, although there has been no basic policy review yet. The most pessimistic response came from the Italians who thought little expansion could be expected from them in view of the serious deterioration in their balance-of- payments situation the first half of 1963. Most delegates suggested that figures for any one year may be seriously affected by unusual special circumstances and that trends can be measured only in terms of longer than the annual period.

In a discussion of the pipeline problem, the French called attention to slow drawdowns and lack of projects and suggested focussing attention on assistance in project preparation and planning. The IBRD observer made an effective statement on the Bank's experience with pipelines. He suggested that these are incident to an expanding aid program and imply no reason to diminish aid, and emphasized the Bank's technical assistance efforts in this connection.

Terms of Aid

Terms of aid were discussed in the light of the April resolution which had recommended, in light of the increasing problem of the debt service burden of the less-developed countries, that DAC members moved toward liberalization of their aid terms and seek a greater degree of comparability of such terms. (See page 14, April 16 issue.)/6/

/6/Document 165.

Director Bell vigorously restated the US position. While noting that the US is hardening its terms wherever appropriate, such as Greece and Taiwan, he emphasized our continuing concern about the debt service problem and the need for better comparability of terms.

The British effectively presented their recent liberalization action. The UK has in some cases (notably for Pakistan and India) waived interest payments on new commitments over a seven-year period, cutting effective interest rates nearly in half. The French indicated progress this last year in extending Government loans to non-franc areas for the first time, in combination with exporter credits. Others pointed out improvements, described their limitations, and left the impression that considerable improvement had been made and that there was continued but slower progress toward the goals. The IBRD again made an effective presentation both on the debt service capacity problem and on the proposal now before the IBRD Board to lengthen maximum loan terms and thereby take up previously excluded projects.

Several delegations pointed to possible abuses in the use of exporter credits. The French delegate, supported by others, stressed the responsibility of governments for such credits in view of the guaranties they typically offer, and thus broke ground for major work by the DAC on this matter.

Tied Aid

The meeting had before it a draft resolution on tied aid which contained substantive proposals unacceptable to the US. We felt that the limited progress thus far in the working party/7/ reflected the current attitudes of the major countries and that it would be inadvisable to reach agreement on any tied aid resolution containing proposals which the US and other major members avowedly are unprepared to implement in the foreseeable future.

/7/Documentation on the Economic OECD Policy Committee and its working party meetings is in Department of State, Central File E 3 OECD.

A pre-meeting canvass by our delegation revealed little enthusiasm for the draft resolution but reluctance to take the lead in opposing it. We indicated that if others wished to go forward with a resolution we would concur in it only on condition it was clearly understood that the resolution was not binding on the US in any way in view of our balance- of-payments problems. Bonn had reacted negatively to the draft resolution which appeared pointed principally at the Federal Republic. Thus, in a pre-DAC meeting, the Six apparently agreed that the resolution should not be adopted. At the DAC meeting, the Japanese stated at the outset their inability to accept the full resolution and suggested elimination of some of the specific recommendations aimed at reducing the scope of tying. Citing the inability of the US to untie, the Germans then suggested postponing the resolution, and were joined by Italy, Japan, the UK and France.

Director Bell countered the impact of remarks tending to put the onus of rejection of the resolution on the US by frankly stating that the US believed in the desirability of untied aid, had furnished untied aid in the past, is tying only in the light of its well-known balance-of- payments constraint, and is effectively limiting the adverse effects of tying in the LDC's.

At the suggestion of the Dutch, the resolution was recommitted to the working party for future consideration in light of results of studies the working party is to make of measures aimed at reducing the scope and harmful effect of tied aid.

Coordination

Chairman Thorp raised a number of problems on aid coordination. The French delegate thought that, by and large, coordination needs are being met on a pragmatic basis by consortia, consultative groups, and the Paris Club. He ended by suggesting that there be further consideration of: a) countries with no looming problems, and b) countries with looming difficulties. As examples of what he meant, he referred to the Far East regional meeting and the meeting on Latin America at which Assistant Secretary Martin made a presentation. The French suggested, in the category of countries with no looming problems, that DAC might discuss tropical Africa next winter. The British suggested a review of experience with past coordinating activities, but cautioned about overburdening DAC machinery and overlapping with other organizations.

Director Bell emphasized that although the US has departed from a strict matching formula in consortia, a rising US share of consortia contributions could not be justified and a declining share would often be appropriate. He also endorsed the idea of a review of past and current coordination activities. The Germans, Japanese and Belgians supported a more regular schedule of regional reviews. The consensus was in favor of such meetings, with the Belgians emphasizing "systematic reviews", and the Chairman stressing the necessity of preparatory work to ensure substantive comment. The discussion indicated that reviews would be of value in identifying country problems.

Technical Cooperation

There was a general agreement with Chairman Thorp's statement on the importance of technical cooperation in the development process and the need for more attention to the essentiality of relating technical cooperation more closely to capital assistance. Mr. Bell called for increased attention to potential technical cooperation with specific emphasis on assisting LDC's to improve their development planning and assess long-run manpower needs. Statements of several delegates reflected concurrence on the importance of coordination at the field level, and the significance of the role of the UN resident.

At the meeting of the technical cooperation working group earlier in the month, the US had announced a decision to cease the Third Country Training program. It was generally acknowledged that this was appropriate and that the bilateral programs of other DAC members could absorb the trainees.

Role of Private Capital

Discussion produced general endorsement of statements in the Chairman's report as to the important role of private capital in the development of LDC's and concern about the decline of direct and indirect private investment. Our delegation mentioned the International Bank's work on an arbitration convention and the Bank observer gave some details. The IDB also gave an effective statement of its activities along this line and prospects and discussed parallel financing with the EEC and others.

The Germans reported that a draft law is now before the Federal Republic Parliament designed to encourage private flows. The Dutch urged increased pressure in OECD to push through a convention on protection of private property. They noted that the findings of the report on a multilateral investment guarantee produced no unsurmountable technical or legal difficulties and suggested that the November meeting might be an appropriate time to get a positive reaction thereon. The EEC proposed the IFC as a possible solution to the institutional arrangement. The French endorsed continuation of study of investment guarantees but made clear that the time of decision would find France reluctant, as it is fearful this might involve payment of compensation on old investments in former colonies. Mr. Bell expressed general concurrence in the desirability of a continuing study of a multilateral investment guarantee as one measure of stimulating private flow, but cited other possibilities. The observer from the IBRD said the Bank would be pleased to collaborate with the Secretariat on the study but confessed doubt as to the extent to which discussion of the institutional arrangements could go. The Chairman summed up the discussion by accepting the instruction to continue to search for ways of encouraging private flows.

Effectiveness of Aid

There was a general consensus that in considering effectiveness of aid more attention would be needed to standards of evaluation, and it was agreed that more should be done by DAC on this topic. The German representative suggested a two-pronged approach to evaluation: a) exchange of donor impressions in consortia, and b) establishment of a working group to study ways of setting standards for measuring effectiveness. The Chairman indicated that consideration would be given to the desirability of a working party on evaluation, and cited also the resources of the OECD Development Center.

[Here follow articles on unrelated matters.]

173. Letter From the Under Secretary of State (Ball) to Secretary of the Treasury Dillon

//Source: Department of State, Central Files, DEF 19 - 3. Confidential. Forwarded to Under Secretary Ball for his signature under cover of an August 5 memorandum from U. Alexis Johnson to Ball. The August 23 date was later stamped on the source text when it was sent to Secretary Dillon.

Washington, August 23, 1963.

Dear Doug: In connection with your letter of July 24,/1/ I believe you will find the Department's reply to Secretary McNamara's letter of July 9,/2/ which is attached for your information, useful in explaining our views on the promotion of military sales.

/1/In this letter to Secretary Rusk, also attached to the source text and Johnson's memorandum, Dillon advised that the Department should send a circular containing the key paragraphs of NSAM No. 242 to the attention of some Country Teams abroad (including some MAAGs) because these teams could provide the "most direct help, both to the governments to which they are accredited and to U.S. defense industry representatives, in promoting sales opportunities."

/2/Documents 170 and 171. A copy of the Secretary's July 26 letter to McNamara is also attached to the source text.

To ensure that the objectives desired by the President are fully understood by posts abroad where this policy is to be applied, we are in the process of coordinating with AID and Defense a circular instruction to the field. I will be pleased to forward a copy of it to you when it is ready for transmittal./3/

With warm personal regards,

Sincerely,

George/4/

/3/Text in CA - 2258, August 26; see the Supplement.

/4/Printed from a copy that indicates Ball signed the original.

174. Editorial Note

Under Secretary of State George W. Ball visited Europe November 9 - 20, 1963, to discuss foreign economic subjects with European leaders. He was in Paris November 9 - 10, Bonn November 10 - 13, London November 13 - 15, and Paris November 15 - 20. His meetings with British, French, and West German Foreign and Finance Ministers included consultations on foreign assistance and international development. Documentation on these talks is in Department of State, Conference Files: Lot 65 D 533, CF 2338 - 2339.

Ball's bilateral discussions were preliminary to the meeting of the Ministerial Council of the Organization for Economic Cooperation and Development (OECD), which was held in Paris November 19 - 20, 1963. Ball headed the U.S. Delegation, and Ambassador John Leddy served as Alternate Head. Among other matters, the Ministers discussed the importance of maintaining foreign assistance at a high level to meet the increasing needs of developing countries and stressed the coordination of such aid to make it more effective. The Ministers also discussed preparations for the upcoming U.N. Conference on Trade and Development (UNCTAD). Documentation on U.S. preparations for the UNCTAD conference is scheduled for publication in volume XXV. A summary of this OECD meeting is in Current Economic Developments, Issue No. 689, November 26, 1963, pages 9 - 13. (Washington National Records Center, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments) For text of the communique, November 20, see Department of State Bulletin, December 16, 1963, pages 948 - 949. Documentation on U.S. participation in this Ministerial Meeting is in Department of State, Conference Files: Lot 65 D 533, CF 2340 - 2340A.

175. Editorial Note

During 1963, Congress strongly resisted the Kennedy administration's proposals for military and economic assistance. For background of these proposals, see Document 164. At his news conference on August 20, President Kennedy remarked that the House of Representatives had already cut his request for $4.5 billion by $850 million, but he was somewhat heartened that the bill appeared to have bipartisan support for a $4.1 billion authorization. For the transcript, see Public Papers of the Presidents of the United States: John F. Kennedy, 1963, pages 629 - 630. Subsequently, however, the House of Representatives approved only $2.8 billion in foreign assistance, or $1.7 billion below President Kennedy's earlier request, and the Senate version called for about $3.3 billion. After Congress authorized only $3.0 billion in new funding, President Johnson issued a statement on December 14 urging Congress to increase the funding levels. For text of the President's statement, see Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1963 - 64, pages 55 - 56.

Documentation on the Agency for International Development's efforts to defend and promote the foreign assistance program in Congress is in Washington National Records Center, RG 286, AID Administrator Files: FRC 67 A 1530, Foreign Assistance Legislation, FY 1964.

On December 16, President Lyndon B. Johnson signed the Foreign Assistance Act of 1963 (P.L. 88 - 205; 77 Stat. 379). He claimed in a signing statement that the $3 billion authorized in the legislation "reflects a dangerous reduction in funds and a consequent dangerous reduction in our security." He also indicated that he had asked AID Administrator Bell "to put our foreign operations on a sounder basis--to insist on maximum effort by aid recipients--and to intensify our efforts to eliminate excess or ineffective personnel. We will resist reorganization for reorganization's sake--but we do intend to present to the Congress next year a more effective, efficient aid program." For text of the statement, see Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1963 - 64, pages 58 - 59.

On the same day, President Johnson called for the creation of an Executive branch committee under the chairmanship of Acting Secretary of State Ball to examine the foreign assistance program. Formally known as the President's Committee To Examine the Foreign Assistance Program, this group was asked to develop recommendations for the President by January 15, 1964. Documentation on the work of this committee is in Department of State, Central File AID (US) 1, and ibid., S/S Briefing Books: Lot 66 D 219, Executive Branch Committee on Foreign Aid.

With the appointment of this interagency committee, final reports on military and economic aid planning, which had been mandated in NSC Record of Action No. 2447 (Document 130) and NSAM No. 159 (Document 141) and were still in preparation, were taken over by the interagency committee. This action was requested in a memorandum from Benjamin H. Read to McGeorge Bundy, January 7, 1964. Notations on the memorandum confirmed White House approval of the request. (Washington National Records Center, RG 286, AID Administrator Files: FRC 67 A 1530, National Security Council)

176. National Security Action Memorandum No. 276

//Source: Department of State, S/S - NSC Files: Lot 72 D 316, NSAM No. 276. Secret. A copy was sent to the Director of the Bureau of the Budget.

Washington, December 26, 1963.

MEMORANDUM FOR

The Secretary of State

The Secretary of Defense

The Administrator, Agency for International Development

SUBJECT

Distribution of Foreign Aid Cuts

The President will wish to review the program changes proposed in the FY 1964 foreign aid program as a result of Congressional action this year,/1/ since the way in which these cuts are distributed may involve important foreign policy decisions.

/1/See Document 175.

Therefore, AID and the Department of Defense should outline briefly the major changes proposed from the $4.5 billion FY 1964 presentation figure, with a brief recapitulation of the reasons for each. Any forced reductions in commitments or implied commitments should also be appropriately mentioned. I suggest that individual mention need be made only of changes over $10 million, e.g. a cut in a country program, lumping the remainder together in appropriate categories. The Department of State might submit any alternative recommendations with respect to these program changes which it feels required from the foreign policy point of view.

I would like to be able to show these reports to the President by 7 January.

McGeorge Bundy

177. Letter From the Deputy Assistant Secretary of Defense for International Security Affairs (Bundy) to the Under Secretary of State (Ball)

//Source: Department of State, S/S Briefing Books, 1962 - 1966: Lot 66 D 219, Executive Branch Committee on Foreign Aid. Personal and Confidential. An undated note in the Secretary's handwriting to Ball, attached to the source text, reads: "A good statement of this point. DR"

Washington, December 30, 1963.

Dear George: I am writing this private letter to amplify my thinking about State Department policy control of the foreign aid program.

You know the history of this. The coordination resided in Doug Dillon when he was Under Secretary for Economic Affairs, and moved up with him when he took your present job. Thereafter, Jack Bell and his people handled the matter under you (the so-called BFAC) and it was rather petering out by the fall of 1962 and tending to move somewhat into Jeff Kitchen's hands. Then, when Dave Bell took over from Fowler, the Executive Order specifically lodged the coordination authority in him/1/ and it has been exercised by a group under the leadership of Hollis Chenery, with Joe Wolf acting on the military side.

/1/Reference is to Executive Order 10973, November 3, 1961.

What I would say about this arrangement does not in any way reflect on the tremendous competence and national-mindedness of Dave Bell. But the plain fact is that there have been what seemed to be two substantial difficulties:

a. Putting the military under a whole group of economic-minded people has meant that we have not had nearly as strong a political input as used to be the case when the coordination was in the State Department itself. A specific example, now out of date, would be the continuing pressures on us to sanction transfers from the military account to economic aid. More recently, and still true, we have found it very difficult to get proper clearance of credit sales activities even after these had the policy approval of the relevant Assistant Secretaries in the State Department, with Dave's people taking the position that they had a veto right down to the last million dollars of where money should be applied. Moreover, despite what Dave says about any failure in State Department influence being due to the Assistant Secretaries not doing their job, the fact is that any system that forces them to work through AID in order to reach our program inevitably tends to inhibit their influence and indeed their degree of knowledge and participation in the Military Assistance Program. I do not mean to suggest that one should lightly yield to the constant fears of an Ambassador or an Assistant Secretary, but there have been political factors that might well have affected the size and composition of specific programs more than has in fact been the case. I think we in ISA fairly well represent the State Department's position, but this is really no substitute for hearing it strongly expressed from the Department itself. I would even go so far as to say that the budget requests in the last two years might have been slightly higher had the Department's voice been heard loudly, although I say this believing that Bob McNamara would probably not agree.

b. While I am not a full judge of what has gone on before the Committees on the Hill, my people who follow them closely confirm my impression that the economic program particularly has suffered through not having the hard-headed political interest and policy of the US constantly expressed. After Dean's opening blast, usually restricted by its being an open hearing, the matter devolves solely to the Assistant Secretaries and on occasion lower still. The kind of constant shepherding and personal intervention that I believe Doug Dillon used to provide in 1958 - 61 has simply not been present, and all the last-minute cannonades in the world cannot make up for that lack. Although Dave himself has always been thoroughly familiar with the Department's policy and positions, he is necessarily identified as predominantly economic in approach, and this has tended to obscure the often completely persuasive Realpolitik of particular programs.

Thus, both conceptually and because of the practical difficulties stated above, I myself would be highly sympathetic to the creation of what might be called an "Under Secretary for Programs" within the Department. I prefer this title to Henry Owen's "Under Secretary for Economic Affairs" because the responsibility of the position should extend deeply into the military field and might well embrace a few other odds and ends of a non-economic character as well (science?).

But the question is also one of personalities. When Dave got his present coordination authority in 1962, Alex Johnson was swamped and George McGhee would have been badly miscast in the coordination role. Now that you have Averell carrying a real share of the top load, I would myself think that Alex Johnson, with a lot of support from Jeff Kitchen and his people, could do this job admirably. It would, of course, mean that as a practical matter Dave Bell would move to No. 5 instead of No. 4 in the Department's pecking order, but this I would regard as virtually inevitable in the circumstances. The point is that Alex has the necessary force and knowledge to bring home the specific national interest of the country and the vital effect on foreign policy of cuts to the important swing Congressmen. I need hardly say that we would have utmost confidence in him from the standpoint of wise and effective policy guidance on the military assistance side, and this part would fit particularly naturally into the hitherto somewhat uneasy charter that Jeff Kitchen has had.

This letter is obviously what we used to call in the War a "burn before reading" note. It really is not for me to suggest ways of reorganizing the Department, and I don't want to sound at all critical of Dave--who I think would actually benefit from having his hands freed to run the economic show alone and not have to worry his head constantly about the miscellaneous coordination problems.

Yours ever,

Bill

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[End of Section 9]

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