China Is Not Ten Feet Tall
How Alarmism Undermines American Strategy
In the great debate as to the obligations of the highly industrialized nations to the less developed countries (L.D.C.s), it is not always easy to find relevant and consistent information on the actual amounts of foreign aid provided by the United States. This is so chiefly because of the variety of American aid programs and the variety of ways in which their activities are recorded. The reduction of this diversity to a relatively few figures means some loss of precision but is justified by the need for some kind of straightforward measurement. While a considerable body of informed opinion, in the United States and abroad, holds that the growing gap between the rich nations and the poor nations may lead to disaster, this view appears to be moving against the current of public and Congressional opinion. To meet this issue it may be useful to have in one place an annotated set of figures on U.S. Government aid as well as a summary of total world aid to the L.D.C.s in the decade 1956-65.
The most striking facts revealed by the data can be summarized in eleven points:
1. Official economic aid to all L.D.C.s from all sources (including communist countries) averaged $6.7 billion a year between 1961 and 1965.
2. During the 1956-65 decade, member countries of the Development Assistance Committee (DAC), which account for about 90 percent of all economic aid, provided over $50 billion of official economic assistance for L.D.C.s. The U.S. share was 58 percent of this total.
3. The net flow from all DAC countries was 45 percent higher in the second quinquennium than in the first.
4. U.S. commitments of economic assistance rose 60 percent between the first and second halves of the decade-from $2.5 billion to $4.0 billion a year. But the rising trend in annual commitments ended in 1962.
5. U.S. commitments of economic assistance to L.D.C.s and multilateral agencies rose from 0.54 percent to 0.68 percent of G.N.P. between 1956-60 and 1961-65. But from a 1962 high of 0.76 percent, they fell steadily to 0.60 percent of G.N.P. in 1965.
6. Net U.S. bilateral economic assistance expenditures for L.D.C.s rose more than 50 percent between the two halves of the decade-from an average of $2.1 billion a year to $3.2 billion a year.
7. U.S. military aid to L.D.C.s averaged $1.3 billion a year in both halves of the decade.
8. Between the first and second halves, U.S. economic aid to East Asia declined in absolute amounts. The proportions and amounts going to Africa, Latin America and to non-regional funds rose.
9. Large countries have tended to rank high in total aid but low in per capita aid.
L.D.C.s-Less developed countries, which include:
NEAR EAST AND SOUTH ASIA. Afghanistan, Pakistan, India, Nepal, Ceylon ; Cyprus, Greece, Turkey; Egypt, Iran, Iraq, Israel, Jordan, Lebanon, Saudi Arabia, Syria, Yemen.
EAST ASIA. All countries in the region (except Japan and Mainland China), plus the Trust Territories of the Pacific Islands.
AFRICA. All countries except Egypt and the Republic of South Africa.
LATIN AMERICA. All countries in the region.
In addition to the L.D.C.s covered in U.S. aid statistics, DAC aid figures include Malta, Spain and Jugoslavia.
DAC-Development Assistance Committee. Members: Australia, Austria, Belgium, Canada, Denmark, France, West Germany, Italy, Japan, Netherlands, Norway, Portugal, Sweden, the United Kingdom and the United States. An agency of the O.E.C.D. (Organization for Economic Coöperation and Development).
NET FLOWS-Disbursements of economic grants and loans (maturity of one year or more) to L.D.C.s and to multilateral agencies, minus repayments of principal. Data are on a calendar-year basis.
G.N.P.-Gross National Product.
P.L. 480-The Public Law establishing the program now called "Food for Peace."
From the jumble of terms that are used to describe the U.S. aid-giving process, two have been chosen-"commitments" because they are an indicator of intentions, and "expenditures" because they measure the amounts used by recipients.
COMMITMENTS: (1) Authorization of long-term loans and grants; (2) in the case of agricultural commodities under P.L. 480, the planned uses of the local currencies acquired through sales, the authorization of grants and donations, or the long-term credits for dollar sales; (3) obligation of funds to international organizations and capital subscriptions to the Inter- American Development Bank, the International Development Association and the International Finance Corporation. Commitments are on a fiscal-year basis, July 1 through June 30.
EXPENDITURES: (1) Dollars disbursed by the U.S. Government to the account of a foreign government or entity, or (2) the dollar equivalents of goods shipped or delivered, services rendered or foreign currencies disbursed; not including disbursements by international agencies of funds to which the United States has contributed. Expenditures are on a calendar-year basis.
Commitments will usually exceed expenditures because of (1) time lags, (2) the inclusion of a large part of the annual average of $200 million in commitments for non-regional funds (chiefly contributions to international agencies) that do not appear in expenditures since they are not assignable to L.D.C.s, and (3) the valuation of some items in P.L. 480 aid at higher prices in the commitment figures. Inclusion in expenditures of the net accumulation of foreign currencies, a portion of which is excluded in commitments, reduces the difference between the two measures.
10. Over the decade the terms of U.S. assistance hardened. Aid was increasingly tied to procurement in the United States. Loans rose from 42 per cent to 60 percent of bilateral commitments between the first and second halves of the period. From the middle of the decade loans increasingly became repayable in dollars and interest rates on these loans rose toward the end of the period.
11. During 1963-65 interest and principal repayments amounted to nearly half of U.S. gross bilateral economic aid expenditures in Latin America, and to about 12 percent in the rest of the L.D.C.s.
According to DAC, total world flows (net) to all the L.D.C.s from all official sources-multilateral and bilateral-averaged $6.7 billion a year from 1961 to 1965. In 1965 they reached $7.4 billion.[i] Of the total flow about 90 percent came from fifteen DAC member countries. For these countries data covering the 1956-65 period are shown below.
TABLE I NET FLOW OF OFFICIAL FINANCIAL RESOURCES TO LESS DEVELOPED COUNTRIES AND MULTILATERAL AGENCIES
(in billions of U.S. dollars)
1956-60 1961-65 1956-65
All DAC 21.0 30.5 51.5 United States 11.7 18.1 29.8 All other DAC 9.3 12.4 21.7
In the decade covered, DAC countries provided some $50 billion of economic assistance for the L.D.C.s.[ii] Between 1956-60 and 1961-65 the amounts increased by 45 percent. Although this was a significant improvement in the level of aid, the 1966 DAC Chairman's report cautioned against the presumption that there is a rising trend in the total volume of economic assistance. From several donor countries there were disquieting reports of disenchantment with aid, which may affect budgetary appropriations for both bilateral and multilateral programs. Consequently it is not certain whether the flow of official aid will continue to rise.
As far as official U.S. aid is concerned, commitments of economic assistance increased by 60 percent between 1956-60 and 1961-65, and net expenditures rose 52 percent. Military aid, however, remained the same in the first and second halves of the ten-year period.
TABLE II U.S. ASSISTANCE TO L.D.C.S-ANNUAL AVERAGES
(in billions of dollars)
Commitmentsa Expendituresb Economic Economic Military (gross)c (net)d
1956-60 2.5 2.3 2.1 1.3 1961-65 4.0 3.5 3.2 1.3 Decade 3.3 2.9 2.6 1.3
a Fiscal years; includes non-regional commitments. b Calendar years; excludes non-regional expenditures. c Gross aid, before repayment of principal. d Net aid, after repayment of principal.
In Table IIIA the percentage distribution of economic assistance commitments is shown by broad regions. There were distinct changes between the first and second halves of the decade. Only the Near East and South Asia maintained about the same relative share. The East Asian share fell from 33 percent of the total to 15 percent; it was the only region to experience a decline in the dollar value of commitments-from $4.1 billion to $2.9 billion-owing in large part to the decline in the aid programs for the Philippines and Taiwan. Africa's share increased 116 percent as five newly independent countries received aid for the first time in 1959 and another thirteen for the first time in 1961. Latin America's share rose 40 percent, and the share of non-regional commitments 90 percent. The broad pattern of commitments (above) is reflected in the data on expenditures shown in Tables IIIB and VIII. (Discrepancies are the result of differences in coverage, valuation and timing.)
TABLE IIIA DISTRIBUTION OF U.S. ECONOMIC ASSISTANCE TO L.D.C.S
(commitments expressed in percentages)
1956-60 1961-65 1956-65
Near East and South Asia 40.4 42.1 41.5 East Asia 32.7 14.5 21.4 Africa 4.9 10.6 8.5 Latin America 17.7 24.8 22.1 Non-regional and multilateral 4.2 8.0 6.5 Total-in billions of dollars 12.4 20.2 32.6
Table I. O.E.C.D., Development Assistance Committee, "Development Assistance Efforts and Policies, 1966 Review," Report by Willard L. Thorp, Chairman (Paris, 1966), p. 148.
Footnotes 1 and 3. Same, p. 30 and 160.
Tables II, IIIA, IIIB, IV, V and VIII. U.S. Agency for International Development, "U.S. Overseas Loans and Grants and Assistance from International Organizations: Obligations and Loan Authorizations, July 1, 1945-June 30, 1965" (1966), and the Agency's 1963 report covering the period July 1, 1945-June 30, 1962; U.S. Department of Commerce, Foreign Grants and Credits by the United States Government, December issues; U.S. National Advisory Council on International Monetary and Financial Problems, semiannual reports to the Congress and the President; U.S. Foreign Claims Settlement Commission, semiannual reports to the Congress. Population estimates from the U.N.
Table VI. U.S. Agency for International Development. Figures are for A.I.D. expenditures in all countries, including a few not here considered as L.D.C.S.
Table VII. U.S. Department of Commerce, Survey of Current Business, June 1966.
TABLE IIIB DISTRIBUTION OF U.S. ASSISTANCE TO L.D.C.Sa
(expenditures in billions of dollars)
Economic Military Total 1956-60 1961-65 1956-65 1956-65 1956-65
Near East and South Asia 4.6 8.4 13.0 4.2 17.2 East Asia 4.1 3.6 7.7 7.8 15.5 Africa 0.5 1.7 2.2 0.2 2.4 Latin America 2.2 4.0 6.2 0.8 7.0
Total 11.5 17.7 29.2 13.0 42.2
a Gross aid, before repayment of principal; excluding expenditures by international agencies.
Between the first and second halves of the 1956-65 decade there was a definite shift in the sources of U.S. economic aid. As shown in Table IV, the Agency for International Development and its predecessors and the Export-Import Bank declined in relative importance, while P.L. 480 (Food for Peace) and others increased. The substantial rise in "other" commitments mainly reflects growing contributions to multilateral agencies.
TABLE IV SOURCE OF U.S. ECONOMIC ASSISTANCE COMMITMENTS TO L.D.C.S
1956-60 1961-65 1956-65 $ bill. % $ bill. % $ bill. %
A.I.D. 7.2 58 9.7 48 16.9 52 Export-Import Bank 1.6 13 1.8 9 3.4 11 P.L. 480 3.0 24 6.3 31 9.2 28 Other 0.6 5 2.4 12 3.1 10
Total 12.4 20.2 32.6
In Table V twenty countries are listed in order of the total amount of U.S. economic assistance received between 1956-65. These nations accounted for 80 percent of U.S. economic aid expenditures in L.D.C.s during the decade. The table shows both total and per capita expenditures for the ten years and for the entire post-World War II period. Figures in parentheses are rankings.
TABLE V U.S. ECONOMIC ASSISTANCE EXPENDITURES, BY MAJOR RECIPIENTS
1956-65 1945-65 Total Per capitaa Total Per capitaa ($ mill.) ($) ($mill.) ($)
1. India 5,011 10.29 (19) 5,431 (1) 11.16 (19) 2. Pakistan 2,504 24.34 (13) 2,681 (3) 26.06 (17) 3. Korea 2,473 87.22 (6) 3,881 (2) 136.88 (7) 4. Viet Nam 2,085 129.31 (4) 2,335 (5) 144.82 (6) 5. Brazil 1,746 21.23 (16) 2,389 (4) 29.05 (15) 6. Turkey 1,417 45.14 (9) 1,848 (7) 58.87 (9) 7. Egypt 1,041 35.17 (10) 1,084 (10) 36.62 (11) 8. Taiwan 888 71.45 (7) 2,263 (6) 182.07 (5) 9. Chile 797 93.03 (5) 939 (12) 109.61 ( 8) 10. Israel 640 249.71 (1) 1,044 (11) 407.34 (1) 11. Colombia 571 31.60 (12) 640 (16) 35.42 (12) 12. Iran 568 24.24 (14) 792 (15) 33.81 (14) 13. Indonesia 547 5.23 (20) 805 (14) 7.70 (20) 14. Mexico 529 12.39 (17) 859 (13) 20.12 (18) 15. Argentina 511 22.86 (15) 611 (17) 27.34 (16) 16. Jordan 452 228.74 (2) 483 (18) 244.43 (2) 17 Morocco 435 32.65 (11) 471 (19) 35.35 (13) 18. Greece 424 49.58 (8) 1,760 (8) 205.82 (4) 19. Laos 396 198.00 (3) 435 (20) 217.50 (3) 20. Philippines 373 11.53 (18) 1,268 (9) 39.20 (10)
a Per capita data are based on estimated 1965 population.
There are striking differences between total aid expenditures in a country and assistance per capita. India is first in total but nineteenth in per capita aid among the first twenty recipients. Pakistan and Brazil rank high in total but low in per capita assistance. Conversely, Israel, Jordan and Laos are rather far down the list of total aid but rank first, second and third in aid per capita. Evidently countries with large populations tend to receive more aid, but not nearly in proportion to the number of their inhabitants.
There have also been a few significant changes in the ranking of countries. Compared to their positions over the entire period 1945-65, Chile, Colombia, Egypt and Iran in the last ten years have moved up in the ranking of total aid received, while Greece and the Philippines have gone down.
Over the ten-year period, 1956-65, the terms of U.S. economic assistance have become progressively harder. During the first quinquennium, 42 percent of bilateral economic aid commitments were loans; in the second, 60 percent. Grants accounted for 81 percent of economic aid expenditures in 1956, 64 percent in 1960 and 43 percent in 1965. The grant component of expenditures fell precipitously in the Near East and South Asia from 77 percent in 1956 to 53 percent in 1960 and 27 percent in 1965. Grants were a more stable proportion of expenditures in East Asia, constituting 91-95 percent in the first half of the decade and 83-85 percent in the second half. In Latin America the grant portion was lower throughout the period, and there was no marked trend; grants formed 26 percent of the total for the decade. For Africa, grants averaged 71 percent of economic assistance expenditures for the ten-year period. The proportion rose steadily from 54 percent in 1956 to 78 percent in 1963. In 1965 the proportion fell to the 1956 figure-54 percent.
During the first half of the period principal and interest on most U.S. economic assistance loans were repayable in local currency-except for Export-Import Bank loans which have always been repayable in dollars. In the second half of the decade service on A.I.D. loans became payable in dollars. Since 1962, commodities provided under P.L. 480 have increasingly had to be paid for in dollars and by 1971 the bulk of this kind of assistance will be on dollar terms.
Although average interest rates were lower and grace periods longer on A.I.D. loans made during the second half of the decade, the advantages of this from the point of view of most L.D.C.s were offset by the requirement to repay in dollars. Moreover, within the 1961-65 period interest rates have risen as a result of legislative action. For the softest A.I.D. loan (forty-year maturity) from 1961-63 a charge of 0.75 percent per year was made. In 1964 the rate rose to 1 percent during the ten-year grace period and 2 percent thereafter. In 1965 the rate subsequent to the grace period increased to 2.5 percent.
A.I.D. soft loans are made to L.D.C.s whose balance-of-payments positions do not warrant harder terms. To countries that are better able to service debt, A.I.D. tends to use twenty-year loans at 3.5 percent interest. The Export-Import Bank follows commercial interest rates more closely. Its loans for the last several years have averaged thirteen years maturity; interest has been 5.5 percent.
Although in 1965, of all the major DAC aid donors the United States was still giving the best overall loan terms, the gap had narrowed appreciably since 1962. While the weighted average interest rates on U.S. official bilateral loan commitments had risen from 2.5 percent to 3.3 percent, the rate for all DAC member countries was 3.6 in both years.[iii]
A major change in policy came toward the middle of the decade when A.I.D. loans were tied to procurement in the United States. In the second half of the decade vigorous efforts were made to link other A.I.D. expenditures to purchases of U.S. goods and services. As Table VI shows, these policies have resulted in a decline of A.I.D. spending abroad from 60 percent to 20 percent of the total between 1961 and 1965. Naturally this has diminished the direct contribution of aid to deficits in the U.S. balance of payments, but it also has been regarded by recipients as a hardening of the conditions of U.S. aid and undoubtedly has reduced the amount of goods and services that recipients obtain per dollar of aid.
TABLE VI GROSS A.I.D. EXPENDITURES
Fiscal Total Amounts spent abroad year ($ mill.) ($ mill.) %
1961 1,801 1,065 59 1962 1,849 983 53 1963 2,074 799 39 1964 2,022 515 25 1965 2,091 411 20 1966 2,202 503 23
Table VII compares U.S. bilateral economic aid expenditures with principal and interest payments by the L.D.C.s over the last three years of the decade. In Latin America, debt service in recent years has amounted to nearly half of gross U.S. aid expenditures. In other parts of the less developed world service payments have been rising, but still constitute a rather small proportion of gross aid. For the L.D.C.s as a whole, the cost of servicing U.S. loans averaged 19 percent of gross aid from U.S. sources.
TABLE VII U.S. ECONOMIC ASSISTANCE EXPENDITURES AND DEBT SERVICE
Calendar Latin America Asia and Africa year Principal Principal Principal and Principal and Gross and interest Gross and interest expendi- interest as % of expendi- interest as % of tures payments expenditures tures payments expenditures ($ millions) (%) ($ millions) (%)
1963 816 375 46 2,912 275 9 1964 729 405 56 2,840 355 13 1965 856 347 41 2,891 367 13
Total 2,401 1,127 47 8,643 997 I2
Principal and interest in Table VII include payments in local currencies. For most countries these do not constitute as great a burden as dollar payments, but with the shift to loans repayable in dollars, and as the impact of higher interest rates begins to affect payments, the L.D.C.s will be faced with sharply rising dollar obligations. This will reduce the net outflow from the United States, but it necessarily will also reduce the effect of U.S. assistance. If gross loans to L.D.C.s were forthcoming at a constant amount each year on the average terms offered by A.I.D. and the Export-Import Bank in the early 1960s, in five years repayments of principal and interest would amount to about 15 percent of new gross loans, in ten years to about 35 percent and in fifteen years to 60 percent. It is virtually inevitable, therefore, that the United States and other donors will soon be forced to consider the consequences of the mounting burden of the L.D.C.s' debt service.
TABLE VIII U.S. ECONOMIC AND MILITARY AID EXPENDITURES IN LESS DEVELOPED COUNTRIES, CALENDAR YEARS 1956-1965
(in millions of dollars or dollar equivalents)
Total 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1956-65 ECONOMIC Loans 306 497 802 777 773 1449 1,657 1,844 1,919 2,120 12,144 Grants 1,270 1,276 1,344 1,339 1,399 1,601 1,635 1,648 1,647 1,571 14,730
1,576 1,773 2,146 2,116 2,172 3,050 3,292 3,492 3,566 3,691 26,874 Net accumulation of foreign cur- rency claims 328 426 230 256 453 160 165 236 3 56 2,313
Total, economic 1,904 2,199 2,376 2,372 2,625 3,210 3,457 3,728 3,569 3,747 29,187 Repayment of principal 162 186 189 242 253 285 303 384 469 404 2,877
Economic, net 1,742 2,013 2,187 2,130 2,372 2,925 3,154 3,344 3,100 3,344 26,311
Militarya 960 1,329 1,697 1,099 1,378 1,294 1,263 1,302 1,078 1,568 12,968
TOTAL (bilateral), gross 2,864 3,528 4,073 3,471 4,003 4,504 4,720 5,030 4,647 5,315 42,155 net 2,702 3,342 3,884 3,229 3,750 4,219 4,417 4,646 4,178 4,911 39,278 Multilateral and non-regionalb 96 84 75 88 172 183 340 291 292 503 2,124
a Including transfers of excess stocks. b Commitments of U.S. funds in grant form.
NOTES TO TABLE VIII
N.B. The data on expenditures are taken, for the most part, from annual volumes and hence are not revised figures.
ECONOMIC AID: Programs of the Agency for International Development and its predecessor agencies, the Social Progress Trust Fund, Peace Corps, and "other" programs; Export-Import Bank long-term loans (including credits extended to refinance principal payments, excluding advances by others whether or not guaranteed by the Bank); Food for Peace (P.L. 480) programs- grants and loans, including donations through private welfare agencies and also including some portion of grants of local currency for common defense (Sec. 104c) which, when transferred as cash grants, are considered as economic aid. Economic aid here excludes payment on war damage claims to the Philippines and operations of the U.S. Exchange Stabilization Fund.
Loans are disbursements of new credits. Grants are net grants. Net accumulation of foreign currency claims is the total of the local currencies acquired through sales of agricultural products, less the amounts used for grants and credits to the L.D.C.s and for U.S. purposes. Repayment of principal includes repayment in both dollars and local currencies on dollar and local currency loans. It excludes repayment of lend-lease silver by India and Pakistan.
MILITARY AID. Primarily grants under the Military Assistance Program, but also including small amounts of other military aid. Excess stocks of military equipment (included at their acquisition value) are not charged to MAP funds. Military aid includes the portion of local currency funds acquired through P.L. 480 Title I sales, allocated to Sec. 104c uses (common defense) and used by the United States for purchases of military supplies and services. Military aid excludes credits provided to finance the sale of military supplies and services; these credits are included under economic loans. It also excludes defense support/supporting assistance, which is regarded as economic aid extended for the purpose of meeting political and security objectives.
MULTILATERAL AND NON-REGIONAL AID: Grants and subscriptions to the United Nations and related agencies, to the Inter-American Development Bank, the International Development Association, and the International Finance Corporation, and to non-regional economic programs.
[i] Total net flows of economic aid to L.D.C.s, from non-communist and communist countries, from official and private sources, were estimated by DAC (in billions of dollars):
1960 1961 1962 1963 1964 1965
Total 7.7 90 8.6 94 9.9 11.0 Total, excluding private 4.9 6.0 64 7.0 6.9 74 bilateral flows
[ii] Amounts provided to multilateral agencies go partly to more developed countries. Unlike the data cited in footnote 1, the figures in Table I measure flows to multilateral agencies and not from them to the L.D.C.s.
[iii] Terms for DAC members as a whole became harder in 1965. The 1966 DAC review shows the following history of terms.
LOAN TERMS (weighted averages) 1962 1963 1964 1965
Maturity (in years): DAC total 23.6 24.8 28.4 22.2 United States 28.6 32.5 33.4 28.0 Interest (in percent): DAC total 3.6 34 3.0 3.6 United States 2.5 2.0 2.5 3.3