The current U.S. foreign aid program has outlived its time. The developing world has changed drastically since the principles for the present program were formulated, beginning in the 1950s. As currently structured, the American aid program is no longer congruent with the multiplicity of interests that the United States has in the countries of the Third World.

The ongoing debate over the budget deficit and the spending ceilings of the Gramm-Rudman deficit reduction legislation has sharpened conflict among decision-makers over the grab bag of programs in the international affairs account of the federal budget. Cuts in some specific aid programs ranging from 10 to 50 percent have already been made in an effort to enforce spending ceilings. The question is whether these continuing budgetary pressures will force Congress and the Reagan Administration to take a serious look at how American interests in the developing countries have changed, and how these interests can be advanced in a time when resources are scarce.

Such an examination is long overdue. The foreign aid programs that dominate the international affairs budget had their origins in the desire to blunt Soviet expansionism while promoting American economic interests abroad and improving the well-being of the world’s poor majority. These goals have existed in uneasy partnership, receiving varying priority through successive administrations. Beginning in the late 1960s however, increasing disagreement over the goals of the aid program resulted in frequent political stalemate. In recent years, Congress and the executive branch have repeatedly failed to agree on programs, and ad hoc funding of U.S. aid through continuing resolutions rather than new legislation has become common.

These trends have been accentuated under the Reagan Administration, which has had a clear vision of how it wishes to use the aid program. Capitalizing on a renewed concern about Soviet activities in the developing world, the Administration managed to increase the foreign aid budget from $9.6 billion in fiscal year 1980 to a peak of $20.2 billion in FY 1985, before the Gramm-Rudman budget-cutting began. (Even the reduced FY 1987 level of $12.9 billion represents a 26-percent increase over the FY 1980 budget.) All of that growth, moreover, has been in the area of security and military assistance. Bilateral and multilateral economic assistance for development has actually declined since 1980 in nominal as well as real terms. As a result, the current program is dominated by military and short-term security concerns, focused heavily on the Middle East and Central America.

As long as the budgetary "pie" was expanding, it was possible to put together a large enough coalition in Congress to pass at least a continuing resolution supporting the diverse programs funded through the aid budget. But in the current political climate the pie is not expanding. Congress slashed the Administration’s FY 1987 aid request by 23 percent last year, and resources for at least the next few years are unlikely to be significantly more plentiful. Consensus is no longer possible if it can only be achieved through an escalating aid budget.

II

We believe that the current imbalance within the international affairs budget represents a misallocation of scarce resources which the United States can no longer afford. In our view, U.S. interests in the developing countries do not, by and large, stem from concerns about military security; rather they are largely economic, political and humanitarian. It is toward these goals that resources in the foreign aid budget should be applied.

Significant changes, which have taken place over the 1970s and, particularly, in the last few years, mark a watershed; as a result, economics are now more important to U.S. interests in the developing world than are issues of military security:

—The United States has been transformed from a creditor to a major debtor country.

—The position of the United States in the global trading system has also shifted dramatically. The U.S. trade deficit approached $170 billion in 1986, and the reduced value of the dollar is only very slowly having an impact on the deficit’s decline.

—The commercial banking system is now internationalized; the health of U.S. banks is linked in good part to the ability of foreigners to repay loans made during the last decade, which is in turn closely related to their ability to export goods to the United States and other developed countries.

—The political stake of this country in broad-based growth and development in key countries such as Mexico, Brazil, Argentina and the Philippines is increasing as these countries liberalize both their economic and political systems. But the liberalizing trend is not likely to be sustained if these countries cannot manage their economies in a manner that will allow them to meet pent-up demand for greater social progress and equity.

In this new environment the importance to the United States of the developing countries looms large. There is no single, overarching U.S. interest in the Third World; rather there is a multiplicity of interests—complex, overlapping, often even conflicting. Given its changed position in the international economy, the United States is overdue in developing a broad definition of those interests—one that encompasses and balances its own political, security, economic and humanitarian objectives and is sensitive to those of other nations.

In recent decades the developing countries have assumed far greater importance in the global economy, and many are now major participants in the international economic system and important sources of global demand. Benefiting from the rapid expansion in world trade in the 1960s and 1970s, a number of developing countries became important exporters, not only of traditional primary products, but of sophisticated manufactured goods as well. Today Brazil exports commuter airplanes to the United States and armored cars to the Third World; South Korea is marketing an automobile in the United States that is capturing the low-price end of the market; and India is doing a thriving business designing software for Americans’ personal computers. During the same period, the developing countries emerged as major export markets for the United States. Buoyed by their own rapid growth and by expanded commercial financing, the developing countries were purchasing 40 percent of American exports by the end of the 1970s, and their purchases were increasing at a faster rate than U.S. exports to the industrial countries. Today half of the United States’ top 20 trading partners are developing countries.

Over the same period many developing countries also became important participants in the international commercial financial system. Primarily as a result of the explosion of commercial bank lending to the Third World, the relative importance of concessional flows, or foreign aid, to the Third World declined rapidly. As a proportion of total financial transfers from industrial to developing countries, concessional aid dropped from nearly 60 percent in the 1960s to 30 percent in 1980. Conversely, bank loans to non-oil-exporting developing countries rose from $10 billion in 1973 to $49 billion in 1980. Foreign direct investment in developing countries also grew steadily, from around $6 billion in the early 1970s to a peak of $14 billion in 1981. (Since 1981 concessional assistance has again risen to represent a larger share of total financial transfers from North to South, not because of aid increases, but because of the contraction in commercial bank lending and direct investment.)

Unfortunately, development progress has virtually halted since 1980. Mounting debt, falling commodity prices and sluggish global trade flows have devastated many Third World economies. Since 1980 the annual growth rates in the developing world as a whole have slowed; not even "best-case" World Bank projections for the next decade show most regions of the Third World resuming the rapid growth rates of the 1960s.

This prolonged sag in the world’s economic performance has been very costly to the United States; between 1980 and 1985 more than half of the decline in U.S. exports resulted from a decrease in purchases by developing countries. The impact on employment in this country has been considerable. Nearly 1.7 million American jobs have been lost due to recession in the Third World, an amount equivalent to 19 percent of official U.S. unemployment in 1985. Among the hardest-hit sectors have been the manufacturers of heavy machinery, transportation equipment, and food and agricultural products. Furthermore, as a result of the debt crisis, the developing countries now have the potential for bringing down the international financial system if they are unable—or unwilling—to continue to service their debts. Third World growth and progress warrants much more policy attention than it is currently receiving, and should claim a considerable share of U.S. aid resources.

The fear of the Soviet Union’s penetration of the developing world, which has dominated the policies of the Reagan Administration, has prevented recognition that the security interests of the United States in most of the Third World are best protected by fostering capable developing-country governments, willing and able to meet the economic and political aspirations of their people. In this regard trends in the developing world are both encouraging and worrisome. Third World governments are generally more stable than in recent decades (Soviet-aided subversion of major Third World states is less likely now) and there is a fortuitous, though fragile, trend toward democratization in Latin America, the Philippines and, with luck, Haiti. Growing political pluralism in these countries, however, is bound to unleash demand for more jobs and social services precisely at a time when their governments are under great pressure to control expenditures in order to pay debts and balance external accounts. If these legitimate popular demands are not met, democratization could be discredited, and unrest and repression could increase. The impact of such an outcome on U.S. security interests would be considerable indeed, and today’s troubles in Central America would appear a mere sideshow in comparison.

Moreover, the current concern about the activities of the Soviet Union in the developing countries needs to be put in perspective. In large parts of the developing world, including the most prosperous and important areas such as Latin America and East and Southeast Asia, the Soviet Union is simply one more player in the game. During the postwar period, the Soviet Union’s willingness to take risks and bear costs in the developing world has been limited to a few client countries; outside of the Middle East, its activities recently have been restricted to very poor and weak countries, such as Ethiopia, Angola and Mozambique.

Few leaders of developing countries still see the Soviet Union as the desired model for their own countries’ development. Since the priority of most developing countries is economic development and modernization, most countries today see a need to tap the benefits of an international economic system that is still dominated by the United States and the other Western industrial powers. Soviet policy toward the developing countries under Gorbachev is not yet clear. The new Soviet leader has visited India and he may travel to Mexico and elsewhere in Latin America. There is also discussion within the Soviet Union of how the country can draw on the lessons of the newly industrializing countries of Asia. But there is no evidence of major new Soviet programs in the Third World except in the currently existing client states, and a number of factors, most notably the need to modernize the Soviet economy, could lead to continued Soviet restraint in the Third World.

Meanwhile, close to one billion people around the world continue to live in absolute poverty, aptly described by Robert McNamara as "a condition of life so degraded by disease, illiteracy, malnutrition, and squalor as to deny its victims basic human necessities." The persistence of human suffering on such a vast and unacceptable scale presents the preeminent moral challenge of the decades ahead.

Americans care about poverty, and Third World poverty has aroused in them the same strong humanitarian spirit that they have traditionally shown the poor at home. According to a recent survey, a majority of Americans (54 percent) favor providing foreign economic aid. On a per capita basis, private donations by individual Americans for overseas relief and development are among the highest in the world. In 1985, largely in response to the African famine, Americans contributed $1.5 billion through private agencies, an amount almost equal to official U.S. bilateral development assistance for that year.

Much improvement in world living standards has been achieved over the last 40 years, and the possibilities for continuing progress are considerable. UNICEF’s current campaign to reduce by half the number of children who die each year in the Third World is one example; another is the recent successful efforts of the U.S. Agency for International Development, the World Health Organization and various African governments to attack the disease "river blindness" in large areas of West Africa.

In a world still marked by extremes of wealth and poverty, the United States has a considerable interest in the alleviation of poverty. Although not all of the developing world’s economic, political and humanitarian interests can be satisfied by U.S. aid alone, the Third World policy of the United States should engage the full range of aid, trade and finance measures on the bilateral and multilateral agenda. Aid resources directed toward a carefully targeted set of programs can act as a catalyst, mobilizing indigenous resources in developing countries and additional resources—public and private—from the industrial world. Not insignificantly, such programs would serve as a positive political indication to the rest of the world that the United States’ first priority in the Third World is the restoration of economic and social progress.

III

It is within the context of U.S. interests in Third World development that the trends in the U.S. foreign aid budget since 1980 look so alarming. The aid budget increased by 52 percent from FY 1980 to FY 1985, and by 26 percent from FY 1980 to FY 1987, but that increase has gone almost totally into military and security programs. Despite the Gramm-Rudman cuts, security assistance—including military programs and the Economic Support Fund—has risen from $4.4 billion in FY 1980 to $8.5 billion in FY 1987. Over the same period, U.S. bilateral and multilateral development assistance declined from $5.2 billion to $4.4 billion. Security assistance now claims 66 percent of the total aid program. (In comparison, security aid during the Carter Administration peaked at $5 billion in FY 1979, when it comprised 50.7 percent of the total aid program.)

The Economic Support Fund has been one of the most rapidly growing aid programs over the last seven years. Whether ESF is a "security" or "development" program is an often-debated topic, and the category in which one "counts" ESF makes a tremendous difference as to whether one views the total aid effort as tilted toward security or development objectives. ESF cannot be used for military purposes, and Congress has mandated that the program be used in a manner that is consistent with economic development "to the maximum extent feasible." Nonetheless, in this article ESF is included in the security assistance category because—as discussed further on—the funds are largely allocated to U.S. allies on political or strategic grounds (for example, as part of the Camp David accords, or to guarantee U.S. access to bases or other facilities) rather than in support of long-term U.S. economic interests or development objectives.

TABLE I

U.S. FOREIGN AID BUDGET AUTHORITY, 1980-1987a

(in millions of dollars)

1980 1982 1984 1985 1986 1987

DEVELOPMENT

Multilateral

Development Banks 2,308 1,262 1,324 1,548 1,143 949

International

Organizations 260 215 315 359 261 237

AID 1,596 1,847 2,013 2,492 2,026 2,066

PL-480 886 1,000 1,377 1,964 1,243 1,083

Other 483 589 533 612 544 689

Offsetting Receipts -296 -361 -493 -479 -457 -583

Total 5,237 4,552 5,069 6,496 4,760 4,441

SECURITY

Military Assistance

Program 110 179 712 805 798 900

Foreign Military

Salesb 2,095 3,883 4,818 6,623 4,947 4,040

ESFc 1,942 2,919 3,389 6,160 3,762 3,600

Other 291 221 110 214 95 56

Offsetting Receipts -33 -199 -86 -71 -58 -76

Total 4,405 7,003 8,943 13,731 9,544 8,520

GRAND TOTAL 9,642 11,555 14,012 20,227 14,304 12,961

Security Assistance

(as % of total) 46% 61% 64% 68% 67% 66%

a Figures for FY 1980-FY 1986 are actual; FY 1987 are estimates.

b Includes on- and off-budget FMS.

c Some ESF is used to promote development as well as security.

SOURCE: Office of Management and Budget, Budget of the U.S. Government.

What led to this extreme imbalance between security and development assistance? The central factor is the Reagan Administration’s overriding concern, in which Congress, by and large, has acquiesced, that Soviet intervention or influence is the major cause of Third World political instability and regional tensions. The escalating cost of Middle East aid programs (principally for Israel and Egypt) is a second major cause of the rapid budgetary increase in security programs. Security aid to Israel and Egypt rose from $2.7 billion in FY 1980 to $5.1 billion in FY 1987. The increases in security aid to these two countries together account for nearly one half of the total growth in the foreign aid program.

Currently the overall aid program is an amalgam, used for a great number of different purposes: to promote security interests in the Middle East; to bolster regimes in countries where the activities of the Soviet Union or its "surrogates" are seen as a threat to U.S. interests; to compensate countries for agreeing to host U.S. military bases or contingency facilities; to support the World Bank, the other multilateral development banks and the development programs of international institutions such as the United Nations; to provide emergency and disaster relief for refugees and others; to promote, through bilateral assistance, economic and social development in the poorer countries, notably in sub-Saharan Africa; and to meet such disparate foreign policy interests as international narcotics control, landing rights for the space shuttle and security for U.S. embassies abroad. These are ambitious goals for a program that claims less than two percent of the total federal budget.

Given that budgetary pressures are likely to persist for several years, difficult choices are going to have to be made. There is no way to continue the current pattern of dividing the aid budget without doing serious harm to long-term U.S. interests in the Third World. In the short term, policymakers need to identify low-cost ways of supporting U.S. interests in global development. Over the longer term, a more fundamental series of issues needs to be faced:

—How should the priorities of these programs be redefined to recognize the changed role of the developing countries in the world’s political economy?

—How can resources be reallocated from security to economic programs?

—How can available resources be used more effectively to meet U.S. interests?

First, the United States should seek to restore financial stability and equitable economic growth in middle-income countries such as Mexico, Taiwan, Venezuela, Brazil and Nigeria. By and large these countries no longer need traditional concessional aid, but many will need non-concessional financing from both public and private sources to surmount their current debt difficulties and to provide for future productive investment.

The plan announced by U.S. Treasury Secretary James Baker in October 1985 to remedy Third World indebtedness was a welcome initiative. But the success of the Baker Plan depended in large part on significant capital flows to the debtor nations from private sources. Unfortunately, rather than expand their lending, U.S. commercial banks cut their outstanding credits to non-OPEC developing countries by $8 billion and cut lending to the 15 major debtors by $5 billion in the first three quarters of 1986. Clearly in the near future a large increase in public resources will be necessary, primarily from the World Bank and the International Monetary Fund (IMF). Over the longer run, the economic and developmental success of these countries will depend heavily on their ability to implement and sustain efficient domestic policy choices, and on the access they have to world markets and investment capital from both public and private sources.

A second and related priority should be the financing of economic policy reform. The Reagan Administration, along with the multilateral development banks and other bilateral donors, has correctly emphasized the importance of sound macroeconomic policy decisions by developing countries. A growing number of developing-country governments are adopting policy changes which only a few years ago were considered politically impossible. Since the Baker Plan was announced, at least 8 of the 15 major debtors have signed standby agreements with the IMF, and 10 have accepted World Bank conditional loans. Fourteen African countries have substantially raised prices paid to farmers; 11 are reforming or divesting state-owned businesses; at least 10 have devalued their currencies to stimulate foreign trade, and a comparable number have cut back on public services and reduced subsidies on consumer goods.

But the United States and other industrial countries will need to keep their end of the implicit bargain. Even the most well-intentioned debtor governments will hesitate to make tough policy reforms without assurance that external financial support will be available over the long run to ease political, economic and social costs. Currently the risk is high that, having instituted difficult changes, the developing countries will find the financial rug pulled out from under them. If that happens, policy reform in the developing world could be a dead issue for the next decade.

Third, the United States will need to support developing-country efforts toward democratization and social equity. If financing is not available to satisfy pent-up demands, the recent experiments in political liberalization in the developing world may be short-lived. This tension, rather than any Soviet activity, is probably the principal security threat in Latin America.

Support for programs that address poverty in developing countries should be a fourth priority objective for U.S. policy. The alleviation of poverty is not simply a matter to be remedied through specific aid projects. Debt and trade policies can have a major impact on the well-being of poor populations. Donors and recipient countries can encourage policy reforms that not only emphasize macroeconomic goals, but also protect social programs aimed at the poor majority. Although many middle-income countries should be able to deal with their poverty problems once economic growth is restored, concessional aid will still be of major importance to the low-income countries through the end of this century if the worst aspects of poverty are to be eliminated.

Finally, U.S. exports to and investment in the developing countries must be expanded. American exports to the developing countries have declined under the impact of Third World recession and financial stringency, American jobs have been lost and returns on investments in the developing countries have declined. In a competitive world, export financing and promotion, investment guarantees and insurance will be important, particularly as the United States assumes the dubious mantle of the world’s largest debtor.

IV

Achieving these objectives necessarily requires a reallocation of scarce foreign aid funds, most importantly from security-oriented programs to economic ones. There is no doubt that the United States will continue to have security interests in certain developing countries, and that these interests will call for the use of short-term military or political aid. The unresolved issues are, first, determining those countries in which the United States actually has security interests and, second, deciding whether those interests are best promoted through security aid.

The countries in which U.S. interests face serious military security threats are arguably few in number. It is worth mentioning that military and security aid is presently being provided to 102 countries—ranging from major programs, such as those in the Middle East, to small military training programs in countries such as Austria, Finland and Algeria—as compared to only 43 countries in 1980 and 45 countries in 1975. Among the current recipients of security assistance are Botswana, Senegal, Zaïre, Jamaica, Bangladesh and Fiji; U.S. security interests in these and many other countries are difficult to perceive.

The United States can no longer afford an indiscriminate use of dollars for purposes that are not clearly defined. Little assessment has been undertaken as to the efficacy of security and political assistance; the interests being addressed and the benefits to the United States seem to be accepted without question. Too often these programs have become a de facto form of entitlement, with the current year’s funding level often taken as the base from which to calculate the next year’s increase.

This lack of evaluation of benefits is particularly marked in the case of direct military assistance, foreign military sales and training, and aid to compensate for American military bases. These programs have little or nothing to do with either development or the now-dominant U.S. economic interests in the Third World, and should be transferred to the defense budget. Such a transfer would not necessarily free resources for economic programs (an unrealistic hope given the short-term budgetary pressures, no matter how desirable over the longer run), but it would permit Congress and the Administration to make intelligent judgments about allocating resources among programs that seek to maintain this country’s security. For instance, U.S. allies in NATO, or other base-rights countries, might be asked to help pick up the cost of U.S. military facilities in those countries, which exist at least theoretically as much for their defense as for that of the United States.

U.S. nonmilitary security assistance is provided through ESF, until 1978 known as Security Supporting Assistance. About one third of the program’s funds, which now total $3.6 billion, are used in projects much like those supported through development assistance. In many cases, however, these projects are designed to be quickly disbursable and immediately visible. Economic development or poverty alleviation are secondary goals in project design and implementation. The remaining two thirds of ESF monies are provided through direct cash payments or the Commodity Import Program (CIP), which can, for example, render balance-of-payments support to debt-burdened developing countries. When delivered through CIP or as cash transfers, however, ESF also frees up domestic resources, which have been used for military purposes by some countries.

A further problem relates to where the monies are allocated. The program is largely skewed toward middle- and high-income countries. Only ten percent of the ESF budget for FY 1987—around $367 million—is targeted toward low-income nations.

Finally, while some ESF program support may foster policy dialogue between the United States and the recipient country, the primary determinant of ESF allocation is short-term political interest, not economic reform. Americans like to believe they can get multiple returns for the same dollars; they like to think that aid provided for security purposes can also be used to promote economic reform or political pluralism. But if the United States were seriously interested in using aid to promote economic or political change the ultimate sanction would be to withdraw support. The irony of a politically determined aid program is that, where the aid program is large enough to make a difference to the country in question, funds are not likely to be withheld for any reason, as such action might threaten perceived political or strategic interests.

Clearly there is a tremendous need for program support for economic reform and recovery in the Third World. But ESF as currently structured is not the best way to meet this need. The World Bank, through its sectoral and structural adjustment loans, is increasingly involved in program lending; its technical expertise and the resources at its disposal make it the most appropriate actor for this kind of program. U.S. bilateral aid can play a complementary role in many countries, but this should be achieved by expanding the availability of development assistance in program form, not by continued reliance on the more politicized ESF program.

In those few countries where the United States does have clear security interests, a great deal more support should be provided in direct payments, rather than project aid. (Israel is now the only country whose entire aid program is delivered in this fashion.) Project aid in these cases has a number of drawbacks. It is necessarily more expensive to administer, and under current patterns of management requires large, visible in-country American staffs. It also often leads to political frictions with the country involved, with endless discussions of how to reconcile AID’s development mandate and the understandable feeling on the part of recipient governments that the funds are being provided in return for a series of mutual commitments. (Most base-rights countries feel with some justification that the aid is de facto rent.) A shift to a limited, time-bound security aid program should also be accompanied by the institution of annual reviews with the objective of ending aid payments when policy goals have been met or circumstances have changed.

V

How can available resources be used more effectively to meet the interests of the United States and the needs of the Third World? A major challenge is to ensure that available concessionary resources are concentrated in poorer countries and areas with little access to trade, investment and commercial credit. These are predominantly countries in South Asia and sub-Saharan Africa, as well as parts of the Caribbean.

Such a concentration would involve considerable redirection of U.S. aid. Currently, less than one quarter (some $1.3 billion) of total U.S. bilateral development assistance, economic support funds and food aid is programmed for the low-income countries; lower-middle-income countries receive around $2.8 billion, and upper-middle-income countries some $1.4 billion. In per capita terms, this means that the low-income countries receive about 54¢ of U.S. aid, while lower-middle-income countries and upper-middle-income countries receive $4 and $1.84 per capita, respectively. A considerable shift of scarce budgetary resources away from the better-off developing countries is warranted.

Of course, there are middle-income and even high-income countries of sufficient importance to U.S. interests as to have a claim on scarce concessional assistance. But these should be the exception to the rule, and justified on a case-by-case basis. The more advanced middle-income countries should increasingly be able to finance their own development through trade, multilateral development bank or commercial bank borrowing, and private investment—already more important sources of financing for most of these countries than concessional aid. Thus, non-aid measures will be of much greater importance for middle-income countries. For instance, reducing U.S. trade barriers against textiles, sugar or beef would do more for many developing countries than any feasible amount of aid. Industrial-country trade barriers against sugar and beef alone could amount to lost export earnings equal to one third of all industrial-country aid to the Third World. The World Bank has estimated that liberalization of world agricultural trade in grains, meat and dairy products would raise developing countries’ national incomes by $18 billion annually (while industrial countries would gain $46 billion). The United States has already taken some steps on this front for countries that have been assigned security importance, such as negotiating a free trade agreement with Israel and providing special trade and investment preferences through the Caribbean Basin Initiative. But much more can be done for other countries in this regard with little budgetary cost (although not without domestic political cost).

TABLE II

MAJOR RECIPIENTS OF U.S. ECONOMIC AID, 1980, 1984 AND 1987a

(in millions of dollars)

1980 1984 1987

Egypt 1,183 Egypt 1,013 Israel 1,200

Israel 786 Israel 910 Egypt 1,004

India 232 El Salvador 326 Pakistan 347

Turkey 198 Pakistan 278 El Salvador 304

Indonesia 197 India 203 Philippines 277

Bangladesh 175 Sudan 191 Bangladesh 137

Sudan 97 Costa Rica 176 India 137

Philippines 85 Honduras 174 Honduras 134

Pakistan 73 Bangladesh 162 Costa Rica 120

Jordan 70 Dominican Rep. 145 Guatemala 120

a Includes development assistance, PL-480, and Economic Support Funds.

SOURCE: AID, Congressional Presentation.

Finally, there is no escaping the issue of aid levels in the Middle East. Currently Egypt and Israel combined receive $6.1 billion in total military and development aid, or 49 percent of the total U.S. aid budget, an amount justified on the grounds that it serves to advance the peace process and support Israel as a security bulwark in the Middle East. There is no doubt that support for Israel is very important to the United States and that peace in the Middle East is worth a significant investment. But few questions are raised about the level of aid to the region, the conditions under which it is provided and whether over the long run it is healthy for Israel and Egypt (or for that matter any developing country) to be so financially dependent on the United States. Despite Israel’s strategic importance to the United States, it is debatable whether that country should receive any concessional resources, given its advanced state of development. Israeli per capita income is $5,060; the United States provides Israel with military and security assistance equivalent to $750 per capita. We believe that concessional aid to Israel should be gradually replaced with lending on terms closer to market rates, complemented by a series of economic agreements, such as the U.S.-Israeli free trade arrangement, that will enable Israel to reduce its financial dependence on the U.S. government.

The participation of the multilateral development banks would also be crucial in a program designed to channel aid most effectively for development. By now this is almost a standard part of the litany of those who support development, but it bears repeating. The performance of the World Bank and its regional counterparts in Latin America, Asia and, most recently, Africa has not been without error. The World Bank’s earlier prescriptions for Africa were mistaken, as it now admits, and its staff was overly optimistic about the ability of the major debtors to grow out of their problems. But on balance the multilateral development banks have a good track record in promoting and supporting sound, efficient economic programs and policies in the Third World. Certainly in terms of "bang for the buck," no other institutions can leverage U.S. contributions so effectively. Under burden-sharing conventions, one dollar contributed by the United States enables the World Bank to lend $60.

The Reagan Administration entered office skeptical about the Bretton Woods institutions, but was converted to support for the IMF after the 1982 financial crisis, and to support for the World Bank in 1985 as the debt crisis continued. Over the last year and a half—since the introduction of the Baker Plan—the United States has explicitly encouraged the World Bank (and the Inter-American Development Bank) to assume greater responsibility for dealing with the developing countries’ economic crisis.

Meeting this challenge requires the World Bank to expand its structural adjustment programs, both to promote economic reforms and to help leaders sustain politically difficult measures. To protect the poorest segments of the population, the World Bank must also work with interested governments to design policies and programs that ensure that the most vulnerable groups do not bear the bulk of the cost of adjustment. At the same time, the World Bank will need to restore confidence in the international financial system, catalyzing private flows to the Third World. In short, the World Bank faces an enormous task, but one which it is capable of handling, given adequate resources.

There is agreement among the major donors (the United States excepted) that the World Bank needs a large increase in its capital in the near future. (Bank members recently agreed to replenish its soft-loan window, the International Development Association, at a level of $12.4 billion for the next three years, although Congress has yet to provide the required U.S. funds and the United States is still in arrears on previous IDA commitments.) The United States should assign its contributions to the World Bank and the bank’s regional counterparts the highest priority in its budgetary allocations. No other institutions can adequately meet the task ahead in terms of resources, expertise and international political clout.

VI

Does the United States still need a bilateral aid program? The U.S. Agency for International Development, when it was established in 1961, reflected relationships between the United States and the developing countries that now have been radically altered. AID was to be the lead agency for U.S. development policy, a task it no longer fulfills. U.S. policy toward the World Bank and the other multilateral development banks is determined instead by the Treasury (although AID contributes to the decisions), and country allocations of bilateral security aid are largely decided by the Departments of State and Defense. AID does not have the clout to deal with decisions on trade and debt that have great impact on the middle-income countries, and is often too encumbered to work easily at the grass-roots level. Now is the time to incorporate AID into a new agency which more carefully targets development programs to address poverty in low-income countries and in selected middle-income countries.

The new agency would leave to the World Bank those things the bank does best—particularly financing infrastructure, constructing institutions and conducting policy dialogue—while building on AID’s long-standing strengths, most notably a decentralized field staff with a good understanding of developing societies. The central purpose of the new agency should be to support programs that enable poor people to improve their own lives in ways that are economically and, very importantly, environmentally sustainable. One valuable effort would be to assist countries to better utilize science and technology both for human welfare and industrial progress.

Efficiencies in the program would also be possible. In countries where aid is provided for security purposes, large AID missions could be cut back, thereby reducing an American presence that often causes resentment and political frictions (as currently in Egypt and formerly in Iran). India presently receives approximately $130 million in economic aid from the United States; it makes little sense to have an AID mission managing this relatively small amount in a country as well provided with an educated bureaucracy as India. It is also difficult to justify the fact that in Africa there are individual AID missions in 40 different countries, several running programs under $5 million; instead, specific development activities could be managed on a regional or subregional basis, working through African institutions wherever possible.

The new agency, however, would need the capacity to work on development projects in selected middle-income countries of importance to the United States where poverty remains a serious problem. In these countries—and, indeed, in some low-income countries—the new agency could operate rather like a public foundation. A small U.S. staff could handle relations both in Washington and in the field with the World Bank and the regional development banks, and could act as a link to other public and private programs that have a yet-unexploited potential to assist in Third World development. A judicious expansion in the availability of technically trained Peace Corps volunteers would be good for the developing countries and for the United States. (The Peace Corps is now budgeted for only 5,000 volunteers, compared to 15,000 in the 1960s.) The Inter-American and African Development Foundations are other avenues through which the new agency could work effectively with nongovernmental groups in the Third World, as are the American private voluntary organizations.

Finally, a new agency’s efficiency could be measurably increased if Congress were to step back from trying to micro-manage the aid program. AID is currently subject to a host of regulations, including ones that insist that shipping be done on American vessels, place limits on hiring indigenous personnel, require reporting and approval of all changes in projects presented to Congress, and deny any ability to carry over authorized funds from one fiscal year to the next. Many of these requirements were mandated by a Congress distrustful of the executive branch and unwilling to delegate even the most routine authority. If budgetary resources are scarce, this rigid oversight—to which few, if any, other government agencies are subjected—may be a luxury that neither Congress nor the aid program can afford.

This new agency would not, however, respond to the need to knowledgeably orchestrate aid, trade, finance and investment policies toward developing countries. Previous administrations have tried a variety of bureaucratic mechanisms, including White House coordinators and new agencies, all of which have been less than spectacularly effective. The Department of State has abdicated responsibility for international economic policy, leaving to the Treasury Department the task of integrating these programs. For obvious reasons the Treasury has a predominant interest in financial rather than development policy. The lack of an overall "guidance mechanism" for development promotion cannot persist indefinitely without harming the U.S. interest in long-term economic and political progress in the Third World.

VII

In the long run the total amount of American aid must be addressed. The United States now ranks last in official aid as a percentage of GNP among all Organization for Economic Cooperation and Development member countries. The OECD average is now twice that of the United States. Almost all other major OECD countries have expanded their aid programs in this decade, based on judgments about their economic and political interests in Third World development. The United States remains the laggard, thereby holding down the overall level of OECD development assistance.

The embarrassment of this low international ranking will not, unfortunately, be persuasive to congressional and executive branch budget-cutters in the short run. And so the question remains: In the short term, how can U.S. foreign aid programs do more with less?

First, policymakers need to recognize that there are sufficient resources in the total aid budget even after the Gramm-Rudman cuts to meet more adequately the economic, political and humanitarian interests of the United States in the developing countries—but not enough to underwrite both those needs and inflated military and security programs.

There are endless combinations and permutations for redistributing the current aid budget, but one example will suffice. If the FY 1988 requests for total development and security aid to Israel, Egypt, Pakistan, Central America, other high- and middle-income countries, and countries with American bases were cut by 20 percent, over $1.8 billion could be reprogrammed for other needs without increasing the aid budget. This would still leave Israel with $2.4 billion of U.S. aid and Egypt with $1.8 billion, hardly negligible amounts. If the savings were redirected toward health and nutrition programs, expanded World Bank capital or a larger IDA, they could have a considerable impact on U.S. interests in the Third World.

Second, greater use can be made of government guarantees to stimulate private financing. Guarantees have the dual advantage of tapping private capital and reducing pressures on the federal budget. The hard-loan windows of the multilateral development banks are already funded in this manner; they borrow their funds on commercial markets with the guarantee of their member countries, particularly the United States. Only a small percentage of that capital is actually "paid in." Thus a U.S. contribution to a large capital increase for the World Bank would have very little impact on the federal budget.

Third, the United States should encourage other industrial countries to step up their support for development in the Third World. Japan and West Germany, with surplus trade accounts, are the most obvious candidates. Until recently they have been unwilling to expand greatly their assistance to the developing countries, although a number of private proposals have surfaced, and discussions under way at the time of this writing suggest new initiatives are in the offing.

Finally, the availability of concessional funds, upon which the low-income countries are so dependent, must be expanded. Urgent consideration should be given to a single-instance issuance of Special Drawing Rights, which could be allocated to increase the resources of the IMF or the World Bank for use by low-income countries. Such an issuance to finance renewed growth and development in the Third World also could help stimulate U.S. exports and jobs.

Reform of U.S. foreign aid is long overdue. The current amalgam of programs no longer responds to vitally important but changed U.S. interests in the Third World. Nor does it supply funds adequate to support the development needs of recipient countries. The U.S. development program urgently needs a renewed sense of purpose and coherence that would encourage it to meet U.S. interests in the middle-income countries—the locus of American economic interests—and in the poorer countries (which currently are primarily of humanitarian concern).

Until now tough choices have been avoided by expanding the overall aid budget. The current budget crisis provides an opportunity and a catalyst for a major overhaul of the aid program. Policymakers in Congress and the executive branch will need to use scarce resources to stimulate trade and capital flows to those countries which should no longer receive concessional resources, reallocate resources from security to economic programs, decide how to use existing funds more effectively, and identify ways to support development that do not draw heavily on the federal budget. A refocused program, concentrating on global growth (and thus contributing to expanded exports and stepped-up investment) and on the alleviation of poverty and the promotion of social equity, has the potential for attracting support from both those interested in doing well and those interested in doing good.

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