106. Memorandum From President Nixon to Secretary of State Rogers/1/

Washington, February 13, 1969.

The International Private Investment Advisory Council has proposed the creation of a federally chartered corporation for the purpose of promoting private capital investment in the developing nations. (See item XVIII-2 in the report from Arthur Burns' group)/2/

I will need your analysis of this proposal by March 12, 1969. In preparing your report, you should consult Mr. Kennedy regarding the budgetary and balance-of-payments implications of the plan.

When you submit your report to me, please send a copy to Arthur Burns.

RN

During the course of the campaign you urged that "we ought to turn our foreign aid programs more in the direction of stimulating private enterprise, less in the direction of financing government enterprise." One possible means of accomplishing this has just been suggested by the International Private Investment Advisory Council./4 /This Council was created under the terms of the Foreign Assistance Act of 1966 to advise the Agency for International Development.

The Council has proposed a new federally-chartered corporation for the purpose of promoting private capital investment in the less developed countries. Newspaper accounts indicate that a number of Republican legislators are favorably inclined toward the proposal, and it thus seems likely that you will be asked to support it.

The proposed corporation would take over AID's present investment-guarantee program, which insures investors in developing countries against loss from certain risks of a political and business nature. Besides its investment-guarantee activities, the corporation would have authority to make loans to private parties either in dollars or in local currencies. The corporation could issue its own securities with principle and interest guaranteed by the U.S. government, and it would also have the right to borrow directly from the Treasury.

Some features of the proposal are soundly conceived. Importantly, the principle of co-insurance is honored and safeguards are provided against direct loans that would compete with wholly private financing. There are numerous features which need to be clarified, however, and it would seem advisable for you to ask the Secretary of the Treasury and the new head of the Agency for International Development to explore the proposal.

Whatever its technical merits, there are both budgetary and balance-of-payments reasons for moving cautiously toward the establishment of the proposed corporation.

The proposal does not contemplate a substitution of private capital investment in underdeveloped countries for present government-to-government foreign aid. Instead, the new corporation would complement foreign-aid programs, and it would be specifically aimed at an expansion of total private investment activities. This would not be a desirable development at a time such as the present, when the resources available for use in this country are under strain and when our balance-of-payments position is precarious. Moreover, the corporation's authority to borrow directly from the Treasury may constitute an additional burden on the Federal budget.

Washington, March 12, 1969.

Dear Mr. Secretary:

The President has asked me to transmit to you this Department's views on the proposal for a Federally-chartered private enterprise corporation to promote private investment in the developing countries.

I have accordingly asked my staff to review the proposal presented in the Report of the International Private Investment Advisory Council (IPIAC) entitled "The Case for a U.S. Overseas Private Enterprise Development Corporation."/2/ I understand that the IPIAC proposal is essentially the same as the one advanced by Senator Javits and included in the draft proposal for creating a Department of Peace./3/ I am transmitting a copy of the staff review with this letter and hope you will find it of interest./4/

My preliminary judgment is that there is scant evidence that the proposed corporation will help significantly to stimulate new private activity in the developing countries or impart a new direction to U.S. foreign assistance programs. These objectives, I believe, are paramount in any consideration of a change in U.S. foreign assistance machinery.

Moreover, I can foresee some possible disadvantages in creating an independent corporation to carry on some current assistance activities. Present coordination of relevant Government programs in the commercial and balance of payments areas, necessary to help meet broader national objectives, might be lost by the proposed change. I would also expect some adverse repercussions from any attempt to set up a new entity outside usual budgetary controls and to invest it with borrowing authority.

On balance and given the weight of other relevant considerations, I would not favor creation of a private enterprise corporation on the basis of the case made in the IPIAC proposal. I would, however, want to state clearly that I am in favor of a fresh, private enterprise approach to meeting developing country problems and would support a U.S. private development corporation that would overcome the problems and objections outlined above.

Sincerely yours,
Maurice H. Stans

Washington, March 25, 1969.

SUBJECT
Proposal for Corporation to Promote Private Investment in Developing Nations

In response to your memorandum of February 13 to Secretary Rogers,/2/ there is enclosed the State/AID analysis of the International Private Investment Advisory Council proposal to establish a specialized U.S. Government Corporation to promote U.S. private investment in the growth of private enterprise in developing nations./3/

Our conclusions are that adopting the IPIAC proposal, modified to provide for more effective policy coordination and to limit balance-of-payments and budgetary costs, accompanied by a strong new emphasis in official aid programs on developing local private enterprise, has several strong advantages:

--The concept of such a corporation is strongly supported by prominent business interests and members of Congress, including both supporters and critics of foreign aid.

--A corporation could operate investment insurance, guaranty and promotion programs in a more business-like way than is possible under present arrangements.

These advantages could largely be realized even if, for balance-of-payments and budgetary reasons, the corporation were not now given significant new authority to provide financial assistance to investors.

Against these advantages you will have to weigh the following disadvantages:

--The possibility that a more visible U.S. investment promotion effort, even though accompanied by a new emphasis in official aid on local private enterprise will increase host country fears of economic domination by the U.S., adversely affecting our political relations (particularly with Latin America).

--The risk that the Congress and the public will conclude--wrongly--that doing more for private investment means we can now do less in development aid.

--A balance-of-payments cost, up to $40 million annually.

We have consulted with the Treasury Department regarding the budgetary and balance-of-payments implications of the proposal and Secretary Kennedy believes these considerations can be adequately taken care of if it is decided to go forward with such a corporation.

There is enclosed an outline of the proposal prepared by AID, which has been revised to reflect the modifications which we believe to be desirable./4/

Your final decision can best be made in the context of your decisions on the aid program in general, following the overall review of aid policy now being prepared for the National Security Council. Dr. Hannah and Secretary Rogers will have recommendations for you at that time. Secretary Kennedy may have broader comments as well.

Elliot L. Richardson

Washington, April 12, 1969.

Dear Bill:

I believe we need to give very serious and careful thought to our relation to countries in the developing world. I do not believe we understand very clearly how our aid programs and our policies, in general, actually affect the political and economic development of these countries and their orientation on foreign policy matters of concern to us.

A study of the impact of our aid programs in an effort to develop a clearer understanding of what they can and cannot accomplish is needed and we are issuing terms of reference for this study./2/ In the meantime, I wanted you and your colleagues to understand my basic approach on this question.

I do not believe we should put ourselves in the position of being blackmailed by countries which threaten to go Communist, or even to increase their economic ties with Communist countries, if we do not provide them with the level of economic or military assistance that they think they require. I doubt very much that any country will deliberately subordinate itself to the Soviet Union or to Communist China simply because they are dissatisfied with our policy. Moreover, the record of the last decade does not, I believe, lead to the conclusion that greater economic intercourse with the Soviet Union or China leads a developing country necessarily to change either its domestic policies or its foreign policy. Obviously, we must be concerned about Soviet-Chinese actions which may affect our security, but we need to examine each case on its own merits and not permit ourselves to be forced into actions which are undesirable or expensive simply because we are told that otherwise the countries will move into the Soviet or Chinese sphere of influence. It would seem to me axiomatic that we must not be put into the position where a government can pretend that it is worse for us than for it if it goes Communist or pro-Communist.

We need to understand much better than we do what, in fact, increases the appeal of Communism in particular countries and what drives nations closer to the Soviet Union or Communist China.

I am also concerned about the tendency of our aid programs and, indeed, of the activities of our personnel overseas, in general, to draw us into a deep involvement in the domestic politics of developing countries. Our concern, I believe, should be primarily with their foreign policies, insofar as they affect our own interests. We should be concerned with the domestic affairs of other countries only as they may affect their foreign policies in ways of critical importance to us, or as they affect the way in which the recipients are likely to use assistance which we give them.

Sincerely,
RN

Washington, April 17, 1969.

SUBJECT
President's Letter to Secretary Rogers on Criteria for US Foreign Aid Policy

I am disturbed by certain implications in the President's letter, which I saw for the first time today (copy attached)./2/

There can obviously be no quarrel with the dictum that we need to examine each case on its own merits, although I trust that those "merits" will not be artificially confined to the one country concerned. Plainly, what we do or do not do with respect to a particular country can have impact on others as well. The "merits" we examine would, I hope, continue to fit into a broad conception of our interests.

More baffling, however, is the proposition that we should not "permit ourselves to be forced into actions which are undesirable . . . simply because we are told that otherwise the countries will move into the Soviet or Chinese sphere . . ." Of course much depends on who is "we" and who does the "telling." Surely, there must be cases where our government tells itself that unless we take a certain course of action there is palpable risk of a shift in the orientation of a country. There may even be cases where "simply" that kind of a conclusion is all that is required to dictate action on our part. I agree of course that we should "not permit ourselves to be forced" into "undesirable" actions. But even a government as capably staffed as ours may sometimes find events creating certain imperatives. And what criteria govern what is "undesirable" when we perceive a vital interest at stake?

Nor, says the letter, should we be forced into "expensive" actions simply because a country may go Communist. Do we really want to make expense the overriding criterion in these cases? Obviously not--viz. our recent assurances to the Europeans that our expensive troops are there solely for security reasons. Presumably, this means that they are there "simply because we are told that otherwise the countries will move into the Soviet sphere of influence." At least I can think of no other security reason than that one.

Then there is the "axiom" that we must not be put into a position where a government "can pretend that it is worse for us than for it if it goes Communist or pro-Communist." Let us leave aside whether governments can "pretend" that sort of thing in 1969; and let us also for the moment not argue whether at this late date we can or need be put in any position at all by what some other government "pretends." But is it really so axiomatic that just because a country may suffer more than we because it gets taken over by Communists our interests may not also be adversely affected? No doubt it would have been "worse for" France, or Italy, or Greece or Turkey, or Iran 20 years ago if they had "gone" Communist than it would have been for us. But are you really arguing that we should not on that account have taken "expensive" or perhaps even otherwise "undesirable" actions to prevent it, or that we should not do so now in similar circumstances? If on the other hand the burden of that sentence in the letter is to be carried wholly by the word "pretend," then I think you are stating an "axiom" that is a straw man.

And then there is the notion that governments "go Communist" of their own volition. Admittedly, one or two have turned that trick (e.g., Castro's self-proclaimed transformation). Usually, however, the problem is that a government may be replaced by Communists, including by the use of force. Thus, a government may make its plea for aid not on the grounds that it will change colors but that others of a different color will displace it. I would hope that that is the risk we will consider in determining our commitments rather than the possibility (remote in most cases at present) that one and the same government will one morning call itself Communist. The same point applies to the earlier portion of the letter which warns against our being blackmailed by countries which threaten to go Communist. "Threaten" has a transitive and an intransitive meaning. What if there is a threat that a country will "go Communist?" That does rather confront us with a choice of some magnitude in certain cases--whether you call the situation one of "blackmail" or not.

And, again, the idea of countries "deliberately subordinating" themselves to the Soviet Union or China. Has there yet been such a case? Why merely "doubt very much" that this might happen. But why not address the real problem: that countries may indeed find themselves drifting gradually, because they cannot stop it by their own means, into a state of subordination to the USSR or China. That, indeed, seems to be the problem you pose at the top of page 2 of the letter. I very much hope that the addressees will come to grips with it, as well as with the implication that lurks beneath much of the letter; that even if that is their fate it may make no difference to us.

But what I find most baffling in a letter apparently intended to get away from a single rationale for our aid programs is that in the end you do no more than ask this one concrete question: what is it that drives countries closer to the Soviet Union or China? (Incidentally, is this synonymous with the "appeal of Communism?") I had thought that what you would want to ask in 1969--and what most people concerned with aid policy in the Executive and the Congress have long since learned to ask--is what factors, apart from the Communist danger, may make it desirable for us to assist or otherwise cooperate with other countries.

Washington, April 21, 1969.

TO
The Secretary of State
The Secretary of Defense
The Secretary of the Treasury
The Secretary of Agriculture
Director of the Bureau of the Budget
Administrator of the Agency for International Development
President of the Export-Import Bank

SUBJECT
U.S. Foreign Aid

The President has directed the preparation of a paper on the objectives of the U.S. economic assistance program and its relationship to overall U.S. foreign policy./2/ The paper should re-examine all of the basic assumptions underlying our aid effort, particularly the relationships among aid, economic development, and political stability. It should analyze the effectiveness of past and present U.S. programs in achieving objectives of interest to the United States, such as: economic development, evolution of democratic and pluralistic societies, attitudes toward the United States, positions on foreign policy issues of concern to us, impact on U.S. national security, commercial gains to the United States. Finally, the paper should explore the implications of its findings for the budget level and organization of our aid effort, and methods of presenting the program publicly. The findings of the paper will represent a major input, along with that of the outside commission being set up at the President's direction, to the final Administration response to the Javits Amendment./3/

The President has directed that the Ad Hoc Working Group created by NSSM 4 and chaired by the Under Secretary of State be responsible for the preparation of this paper./4/

Henry A. Kissinger

Washington, May 22, 1969.

Dear Mr. Volcker:

I am delighted to learn that you have constituted a staff group to review present policies designed to reduce balance-of-payments outflows due to U.S. Government expenditures./2/

We are very anxious to rationalize and relax the stringent additionality measures which have been instituted, over and above aid tying, since 1965. Our economists estimate that these additionality measures, designed to reduce the substitution of aid-financed for commercial U.S. exports, have probably saved an average of only $35 million a year over the last four years. Even if perfect additionality were achieved, the maximum saving would be only $70 million. Our net direct expenditure of dollars outside the U.S. (the gold budget) was down to $178 million in FY 1968, out of total A.I.D. expenditures of about $2.0 billion, and will be less than that in FY 1969. In comparison to this achievement, attributable to aid tying, the additionality savings are pretty small.

To achieve these savings, we have had to apply quite onerous controls on the use of our development loans. These have forced aid recipients to intervene in the free market, contrary to our advice to them on general economic policy, in order to divert trade to the U.S. The restrictions have also reduced the effective amount of aid by making aid-purchased goods more expensive to recipients, and have made it more difficult for recipients to draw down our loans and put the aid resources to use as scheduled. Our additionality policies have become a constant source of irritation between the U.S. and host governments. A.I.D. officials must spend time, energy, and good will negotiating additionality measures, which detracts from their ability to press for better development policies.

Moreover, because additionality measures, by their nature, frequently force recipients to purchase more expensive and less satisfactory U.S. exports, we may be prejudicing our ability to build commercial markets for the longer run. Ultimately, our export prospects in poor countries depend on their accelerated development, which is the basic aim of our aid program.

Our precise proposals for ameliorating additionality policies, and the reasons for them, are explained in the enclosed papers./3/

I hope very much that the enlarged Volcker Group dealing with balance-of-payments issues will be able to consider and make an early response to these proposals, without waiting for consideration of other balance-of-payments policies affecting all government expenditures.

My concern for an early Administration decision is two-fold. First, additionality measures are making it increasingly difficult to administer the aid program. The sooner we can ease these restrictive policies, the further we can stretch our reduced aid budget. Second, in the middle of June we will be discussing aid policies in two important international forums: The Development Assistance Committee's review of the U.S. aid program and the sixth meeting of the Inter-American Economic and Social Council. In both meetings we expect intensive criticism of our additionality policies. If, as I hope, we are going to ameliorate our aid-related balance-of-payments policies, this would be an opportune time to announce it. This step would have important benefits for U.S. relations with the less developed countries./4/

Sincerely yours,
John A. Hannah

Washington, May 28, 1969.

SUBJECT
Application of A.I.D. Country Restrictions to New Overseas Private Investment Corporation

An issue has arisen with reference to the Aid Bill. It is whether all the country prohibitions which now apply to A.I.D.'s own operations should also apply to the proposed Overseas Private Investment Corporation (OPIC). A.I.D. and all other agencies take the position that only the restrictions applying to Communist countries, countries to which the U.S. has no diplomatic relations and the Hickenlooper Amendment should apply to the corporation. (Hannah's memorandum to you on this is at Tab A.)

Arthur Burns feels that all the other restrictions should apply to the corporation as well.

The arguments for limiting the number of prohibitions applying to the OPIC are:

--The major new feature of your aid program for FY 1970 is the Overseas Private Investment Corporation. The main objective of the corporation is to induce increased participation by private enterprise in the development process by reducing government interference and bureaucratic red tape from their activities.

--The application of all of the country restrictions would run directly counter to that objective.

--Under these restrictions, U.S. firms could not be sure that their OPIC guarantees and insurance would not be withdrawn as a result of such (for them) fortuitous events as mob attacks on U.S. embassies, delinquencies of payment of UN dues, and non-repayment of debts owed to the U.S. Government or U.S. private citizens by the government of the country involved. Furthermore, the tightened provisions which prohibit aid to countries trading with Cuba, as well as those shipping to Cuba, could circumscribe seriously the area of potential U.S. private investments.

--At present, application of these restrictions would prohibit extension of guarantees or insurance only to a few relatively minor countries. The main problem is their potential extension to numerous developing countries, such as Guinea (on repayment of A.I.D. loans), Ecuador (on government debts to private citizens) and even Mexico (due to trading with Cuba).

The Burns arguments are (Tab B):/2/

--The OPIC is, in effect, a Government agency with virtually the same lending authority as AID. To exempt the Corporation from the restrictions would be the same as exempting that part of the AID program that will be transferred to the OPIC.

--The political risks that apply to trying to reduce or remove the restrictions on AID in Section 620 would be the same should you decide to remove them from the OPIC.

On balance, I think Hannah is right on this issue.

Apply all country prohibitions to the OPIC/3/
Limit the application of country prohibitions as proposed by AID

Washington, May 28, 1969.

SUBJECT
Exemption of the Overseas Private Investment Corporation from some of the political proscriptions of the Foreign Assistance Act

That the Overseas Private Investment Corporation programs be subject to the provisions of the Foreign Assistance Act requiring withholding or termination of the Corporation's programs in countries which are found in violation of the Hickenlooper Amendment, countries with which we do not have diplomatic relations and Communist countries./5/

That the Overseas Private Investment Corporation programs be exempted from all other proscriptive paragraphs of Section 620 of the Foreign Assistance Act in the same way that programs of the Peace Corps, the Export-Import Bank and the State Department Cultural Exchange programs are exempt./6/

There has been some dispute as to the interpretation of your wishes on this issue because the matter of exemption of the Private Investment Corporation from some of the political proscriptions was not separately posed as an issue in the Budget Director's memorandum which you considered on May 22./7/

It was my understanding, endorsed by some members of your immediate staff, that you agreed with our desire to make the operations and public image of the Private Investment Corporation as "private" as possible and to give the Corporation's management a charter permitting them to enter into long-term undertakings with U.S. private investors.

Consequently, we have concluded that the Corporation (like the Export-Import Bank and Peace Corps) should not be required by law to back off of pending investment guarantees covering joint undertakings of private U.S. and foreign businessmen and banks, when the government of the less developed country concerned commits any of these Section 620 offenses against the U.S. Government:

(1) Fails to prevent ships under its registry from calling at Cuban or North Vietnamese ports or sells any goods to those countries;

(2) Fails to pay government debts to U.S. private citizens;

(3) Attends an international conference planning aggression or subversion;

(4) Is more than six months in default on A.I.D. loans.

The foregoing are the mandatory Section 620 proscriptions from which we propose to exempt the Private Investment Corporation.

The purpose of these proscriptions was to use the threat of withholding U.S. aid to obtain favorable action by governments of less developed countries. We do not believe that U.S. private investment should be used as a tool of political leverage in such cases. To do so subjects a U.S. private investor who has at considerable time and expense worked up a project with local private interests to the risk of loss, uncertainty and embarrassing identification as an instrument of U.S. political policy. One of our concerns in promoting through a government corporation program U.S. private investment in less developed countries has been the vulnerability of such investment to the charge of "dollar imperialism"; these political strings would compound the problem by associating private investment with unrelated U.S. Government policy considerations.

Congressman Adair, starting from the opposite point of view, has come around to our view on this issue.

The minor change in the present law which we propose can be accomplished by adding to Section 638 the underlined words in the following provision:/8/

"Sec. 638. Peace Corps Assistance.--No provision of this Act shall be construed to prohibit assistance to any country pursuant to the Peace Corps Act, as amended; the Mutual Educational and Cultural Exchange Act of 1961, as amended; or the Export-Import Bank Act of 1945, as amended, or with the exception of sections 620(b), (e), (f), and (t), pursuant to Chapter 3, Title II, Part I.

This change also would relieve the Corporation of having to "take into account", in a non-mandatory sense, a variety of other political matters such as the failure of a less developed country government to keep up-to-date on its UN dues or to prevent mob action against U.S. Government property or to respect the 12-mile limit rule on fishing rights.

The Acting Secretary of State concurs in these recommendations.

John A. Hannah

Washington, June 9, 1969.

Dear David:

If anyone had told me a few months ago when I came into this job that I would be writing to the Secretary of Treasury about "additionality," I would have said that such esoteric practices seemed far indeed from what ought to be the concern of an Acting Secretary of State for the foreign policy of the United States. I now find that foreign policy is indeed quite closely and adversely affected by these procedures.

One of the great strengths of our system with its regular, peaceful changes of leadership, is that we are able on occasion to pull policies up by their roots and examine them free from past commitment and bureaucratic position. I know from my own experience that governments often head down particular paths for perfectly good reasons and end up in quite ludicrous situations without knowing quite how to turn back. My brief exposure to the question of "additionality" leads me to believe that this is one deadend from which we should withdraw.

I want first to assure you that I and this Department fully share Treasury's genuine concern for our balance of payments problem. The comments I make here are given in full appreciation of the necessity for dealing with our adverse balance. But my review of the "additionality" problem leads me to believe that for practically no balance of payments gain we buy bad policies, bad relations and particularly bad precedents. While recognizing that the reactions I have are strictly those of a layman, let me just briefly summarize my impressions after examining the arguments of experts:

1. On April 4 the President announced in a message steeped in refreshing Republicanism that with respect to capital controls "fundamental economics call for . . . ultimate dismantling of the network of direct controls which may seem useful in the short-run but are self-defeating in the long-run."/2/ I assume that this principle applied to private capital controls ought also to apply to Government operations more generally.

2. In order to improve our balance of payments situation and avoid the replacement of possible direct American exports by our aid shipments, we have instituted an elaborate program of negotiated "additionality" agreements which result in a small gross gain to the balance of payments. And at what cost?

3. Our balance of payments surplus with Latin America amounts to $300 million annually while at the same time the Latin Americans run a good healthy surplus with Europe and Japan. To further improve our balance of payments situation, we negotiate additionality agreements with those countries to further divert their import demand to US suppliers by encouraging those governments to engage in the most illiberal actions:

a. In the case of Colombia, the IMF, the IBRD and AID have all tried to persuade that Government to liberalize its exchange and import regime because we believe this is sound economic sense and will lead to self-sustaining economic growth. We turn around and insist that the Government of Colombia make sure that 39 percent of their commercial imports come from the United States. To accomplish this onerous directive, controls must be imposed. How do we convince Colombian legislators that controls are not good for their economic development but they are good for forcing them to buy what are, by definition, uncompetitive US products?

b. In the case of Chile we not only encourage them to go against all the best economic advice we and others have been giving them but we even go so far as to encourage them to initiate a preferential tariff system--what amounts to a reverse preference. I understand we have argued vehemently that reverse preferences are bad and they should be eliminated entirely from the Common Market/African Yaounde Convention.

c. Bolivia was advised by the IMF to follow a stringent stabilization plan and to institute a series of reform measures. Many of these were adopted by the Bolivian Government. They included reorganization of its customs service, institution of controls over fiscal performance of independent public agencies, cuts in government expenditures, etc. We could not proceed with a loan to back these reforms because of an inability to reach agreement on additionality which would have taken the form of tying AID credits to a positive list of imports to be financed by its free exchange resources.

4. Let me just list some of the other practices we have encouraged besides preferential tariff rates/positive lists--the sale of exchange at preferential exchange rates for AID imports (Indonesia and Costa Rica), reduction of tax surcharges for AID imports (Uruguay), preferential credit and reduced interest for goods coming from America (Ghana), low cash deposits on imports (Chile and Colombia), special exchange guarantees (Brazil), and special payment delays for AID goods (Brazil).

All of these laborious, and--from our economic-system point of view--by definition distasteful negotiations reduce the limited leverage we have to use our assistance to promote sound economic policies in the developing world, to say nothing of their deleterious effect on our foreign relations as such.

There is no reason for me, as a non-expert, to continue long in this vein but I felt that it was important for me to bring to your personal attention the anomalies of this situation to be certain that you had focused on this problem.

John Hannah has previously written a letter to Paul Volcker, and I now see that Paul has replied saying that his committee will indeed look at this problem. I am a little disturbed, however, by the third paragraph in that letter which indicates a certain lack of zeal because it appears to condition our changing this policy on favorable developments in the balance of payments, negotiations for the activation of special drawing rights, and legislation relating to bilateral and multilateral assistance./3/ Why not add, for good measure, a winning streak of ten games for the Washington Senators?

With kindest personal regards,
Sincerely,
Elliot/4/

Washington, June 10, 1969.

SUBJECT
Additionality in Foreign Aid

In its letter of May 22 addressed to you the Agency for International Development has suggested the relaxation of certain policies introduced by the previous Administration to insure that AID financed purchases are additional to normal commercial purchases of U.S. goods./2/ This presents an excellent opportunity for a review of these policies and for the adoption of changes which will increase the efficiency of our foreign aid program. While we cannot vouchsafe for the accuracy of their estimates, AID's suggested changes seem to us to go in the right direction, and we would like them to be considered sympathetically. The U.S. should also be exploring with other developed countries, through the Development Assistance Committee or other appropriate forum, other measures which might be adopted jointly to reduce the economic inefficiencies involved in aid-tying.

While "additionality" has been of some short-run benefit to the U.S. balance of payments, artificial inducements to buy U.S. goods which are not internationally competitive seem at least as likely to damage as to improve our longer-run trade outlook. For one thing, our products are thus given a stigma of undesirability. For another, our long-run export growth, as well as our political interests, can best be advanced by promoting rapid economic growth in the less developed countries. Additionality requirements have necessitated such interferences with sound development policy as the maintenance of exchange controls which might otherwise have been removed, the violation of credit ceilings, and increases in the procurement costs of public corporations. The costs of these interferences have been compounded by major delays in the disbursement of AID funds and by the irritation and resentment caused by our policies, particularly in Latin America. In general insistence on additionality is inconsistent with the liberal image the present Administration hopes to present to the world at large.

Since budgetary stringencies and Congressional pressures do not permit any immediate expansion of our foreign aid program (indeed the latter may impose further reductions), we ought at least to insure that the aid funds we do have available are utilized with maximum efficiency.

Although the structure of our balance of payments still leaves much to be desired, it is important to continue the effort at liberalization which we started in the direct investment program. The idea that we can improve our balance of payments by piling restrictions upon restrictions has by now proved to be illusory.

H.S. Houthakker

Washington, June 13, 1969.

MEMORANDUM FOR
The Secretary of State
Secretary of the Treasury
Administrator of the Agency for International Development

SUBJECT
Additionality

The President is anxious to make a positive gesture toward Latin America during the Inter-American Economic and Social Council meeting next week./2/ He believes that the elimination of additionality requirements from our economic assistance programs would be a very helpful step which we could easily take. To this end, he has directed that such action be taken in time for the decision to be announced at the IA-ECOSOC meeting June 18.

Henry A. Kissinger

As a result of conversations with Colombian President Lleras Restrepo on June 12 and 13, 1969 (see Document 12), President Nixon decided to help finance construction of the last major unfinished section of the Pan American Highway through the Darien Gap in southern Panama and northern Colombia. The President's interest in this highway reflected his personal bias on development projects. He wrote on a May 7 memorandum to him from Henry Kissinger summarizing an AID paper opposing a shift of AID funds from housing to the highway sector: "In all our Latin programs I want to turn away from housing and other welfare handouts--and toward highways, etc.--which produce wealth and where we know our money does something tangible." (National Archives, Nixon Presidential Materials, NSC Files, Country Files--Latin America, Box 797, LA General, Volume I 1-7/69)

The total cost of the Darien Gap road was estimated to be about $150 million, $90 million for the Panamanian section and $60 million for the Colombian portion. The Departments of State, Transportation, and the Treasury, the Bureau of the Budget, and the Export-Import Bank reviewed the issue and offered their views and recommendations. All these Executive agencies saw serious drawbacks in going forward with the project under any financing formula. Nevertheless, Kissinger believed that "it would be desirable on foreign policy grounds for the United States to assist in the completion of the Pan American Highway." (Memorandum from Kissinger to Nixon, October 2; ibid., Volume II Sept-Oct 1969)

On November 24 President Nixon wrote President Lleras informing him that he was seeking legislative authority for the U.S. Government to assist in financing the Darien Gap Highway. In his December 1 response, President Lleras reconfirmed Colombia's readiness to assume one-third of the cost of the Colombia portion and to work with Colombia's neighbors to assure the greatest possible freedom of transit and cooperation on health and customs matters and to provide for adequate maintenance of the highway. (Both letters ibid., RG 59, S/S Files: Lot 72 D 320) In a status report as of July 15, 1972, to President Nixon, John N. Irwin, Chairman of the NSC Under Secretaries' Committee, noted that the U.S. Congress authorized $100 million in grants for the highway in 1970, and appropriated $5 million in FY 1971 and $15 million in FY 1972. (Undated memorandum; ibid., S/S Files: Lot 81 D 309, NSC-U/SM 100E)

On May 6, 1971, Secretary of Transportation John Volpe, Panamanian Minister of Public Works Fabrega, and Colombian Minister of Public Works Duran signed an agreement that would enable the governments "to begin construction of the last major section--the Darien Gap--needed to link together existing sections of the Pan American Highway System." (Public Papers of the Presidents of the United States: Richard Nixon, 1971, pages 622-623) Henry Kissinger followed with National Security Decision Memorandum 109, dated May 25, 1971, to Secretaries Rogers, Laird, and Volpe, indicating that the President had directed that priority attention be given to accelerating construction of the Darien Gap Highway, that the State Department undertake consultations with the Governments of Colombia and Panama to obtain their approval for and cooperation in the accelerated schedule, and that the State and Transportation Departments consult with Congressional Appropriations Committees to obtain their cooperation in expediting action on pending and future appropriations requests for the project. (National Archives, RG 59, S/S Files: Lot 83 D 305, NSDM 109)

In 1971 and 1972 the Nixon administration became increasingly concerned about the possible spread of hoof-and-mouth disease from Colombia northward into Central America with the construction of the Darien Gap Highway. When efforts at the diplomatic and technical levels to get the Colombian Government to adopt an effective control program had failed by the fall of 1972, President Nixon sent a letter to Misael Pastrana Borrero, President of Colombia, on November 7, 1972, indicating that he was instructing Ambassador Saccio "to discuss with you the seriousness with which I view this danger and the measures my Government considers essential to its prevention," and offering to assist with the difficulties and costs in carrying out some of the required measures. (Memorandum from U. Alexis Johnson, Acting Chairman of the NSC Under Secretaries' Committee, to President Nixon, October 23, 1972; ibid., S/S Files: Lot 81 D 309, NSC-U/SM 100G, and letter from President Nixon to President Pastrana; ibid., S/S Files: Lot 73 D 288, USC Miscellaneous Memoranda)

Additional documentation is in the Washington National Records Center, Department of the Treasury, Secretary's Memos/Correspondence: FRC 56 74 A 7.

Washington, June 18, 1969.

SUBJECT
Additionality

Two actions are being taken to implement the President's decision of June 13, 1969 that additionality requirements should be eliminated from our economic assistance programs./2/

1. The Assistant Secretary and U.S. Coordinator of the Alliance for Progress, Mr. Meyer, is making the following statement in his address to the Inter-American Economic and Social Council:/3/

"I should like to announce that we have already decided upon action in one area that happens to be subject to immediate action by the Executive Branch. The President has authorized me to say that, effective immediately, the present practice of applying so-called "additionality" requirements to U.S. economic assistance programs will be discontinued. This action represents the earnest desire of the President and his Administration to improve the effectiveness of our assistance in doing what it is supposed to do: promote development."

2. I have drafted the following Policy Determination to send to all A.I.D. overseas missions announcing the President's decision and defining the specific changes in A.I.D. procedures to put it into effect:

The President has directed that "additionality" requirements be eliminated from our economic assistance programs.

"Additionality" measures are conditions attached to some types of A.I.D. assistance which narrowly restrict commodities eligible for A.I.D.-financing and require imposition of discriminatory or regressive exchange, import or credit arrangements for the purpose of ensuring that A.I.D.-financed exports are without exception additional to U.S. commercial sales.

A.I.D. will henceforth:

1. Make eligible for procurement a broad range of U.S. goods important to the development of the aid-receiving country, in accordance with existing A.I.D. procurement regulations governing commodity eligibility, which will continue in force.

2. Refrain from seeking discriminatory tariff, credit, exchange and import controls, government-controlled procurement, or other special arrangements for the purpose of attaining additionality of exports beyond the requirements and effects of A.I.D.'s regular tying and procurement procedures.

3. Consider adjustment of existing obligations whose additionality requirements are creating serious difficulties.

John A. Hannah

In the President's May 28, 1969, message to Congress transmitting his foreign assistance legislation, he announced his intention to establish a Task Force to review the entire foreign assistance program. The Task Force was to be made up of experts from outside government. Internally, a parallel review process had been set in motion by NSSM 45 (Document 111) to examine the objectives of U.S. economic assistance in relationship to overall U.S. foreign policy. Regarding the President's May 28 message, see footnote 7, Document 8.

On June 18 AID Administrator Hannah, through Secretary of State Rogers, sent President Nixon a memorandum suggesting Terms of Reference for the Task Force and possible lists of candidates for its chairman and members. Hannah and Rogers recommended Pennsylvania Governor Scranton for chairman, with J. Irwin Miller, President of Cummins Engineering, as their alternate choice. William Blackie (Caterpillar) or Walter B. Wriston (First National City Bank) were other possibilities. Rudolph Peterson, President of Bank of America, was one of six persons from the banking sector on their list of candidates for members of the Task Force. They noted that Peterson had been a member of the Perkins Commission, which had reported to President Johnson on foreign assistance in the final months of his administration. (National Archives, RG 59, S/S Files: Lot 80 D 212, NSSM 45) Regarding the Perkins Commission Report, see Document 1.

On June 23 Hannah and Henry Kissinger met with the President to discuss the Task Force, and the President asked for their recommendations on a chairman and other members. As a result Hannah prepared a memorandum to the President on June 26 with, in order of preference, his and Kissinger's recommendations for chairman: Ernest C. Arbuckle, Chairman of Wells Fargo Bank (also on the list of six banking candidates in Hannah's June 19 memorandum); Rudolph Peterson; Arjay Miller, former President of Ford Motor Company and Dean-designate of the Stanford University Graduate School of Business; and J. Irwin Miller of Cummins Engineering. Hannah (and Kissinger) also included two lists of preferred and alternate prospective members and noted that Secretary Rogers concurred in their recommendations. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 193, AID Task Forces on AID)

On July 14 C. Fred Bergsten sent a memorandum to Kissinger to which he attached a memorandum for the President regarding the chairman and members of the Task Force. Bergsten noted that the memorandum reflected a consensus on Gabriel Hauge for chairman worked out with Arthur Burns, Peter Flanigan, the State Department, and AID. Hauge, President of Manufacturers Hanover Trust, had been suggested by Burns. The July 14 memorandum from Bergsten to Kissinger is attached to a July 21 memorandum from Bergsten to Kissinger forwarding for his signature a memorandum to the President regarding the Task Force, "incorporating the changes you instructed this morning. It recommends Hauge for the Chairmanship and Arbuckle as the second choice." (Ibid.)

According to memoranda Bergsten prepared for Kissinger and the President reporting that Rudolph Peterson had accepted the post of Chairman of the Task Force on International Development, Under Secretary Richardson was responsible for recruiting Peterson. (Ibid.) On July 31 Peterson called Richardson from Panama with several questions about the Task Force. Richardson assured him that his membership on the Perkins Commission would not be an obstacle and that the chairman would have a substantial voice in selecting the other members of the Task Force and its staff. Richardson noted that the December 1 due date for the Task Force's report was driven by the preparation of the FY 1971 budget submission and could be flexible; a firmer deadline was the Javits Amendment report due at the end of March. With these assurances, Peterson accepted the chairmanship. A transcript of their conversation is in the Washington National Records Center, Agency for International Development, AID Administrator Files: FRC 286 73 A 518, LEG 6 Presidential Task Force FY69. Richardson wrote Peterson later on July 31, expressing his and Hannah's delight with Peterson's decision, which he was sure the President would share, and providing him with materials, including the interagency Working Group paper prepared for the March 26 NSC meeting on foreign assistance (see footnote 2, Document 4). (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 193, AID Task Forces on Aid)

In an August 5 memorandum to Kissinger, Bergsten reminded Kissinger that the internal aid study needed to be staffed. He reminded him that in the 3 months since NSSM 45 had been issued, Richardson had not convened a meeting despite Bergsten's reminders. In a July 16 memorandum Bergsten had suggested that the "entrenched bureaucracy" was unlikely to produce the kind of study the administration wanted, and AID would be mainly concerned with defending its existence. Bergsten recommended that the Ambassador to Chile, Edward M. Korry, be given the job with the freedom to select officials to work with him to provide him with the flexibility to recommend whatever he wished. Bergsten recommended that Kissinger respond enthusiastically to any State Department proposal to have Korry head up the internal aid study. The objective was to launch the Task Force as soon as possible and to have it readied for announcement when the President met with Peterson in San Clemente. Bergsten indicated his willingness to meet with Peterson, perhaps as early as the next week when he expected to be in San Clemente for a meeting of the Cabinet Committee on Economic Policy. (Ibid.) No record of a private meeting between Bergsten and Peterson in San Clemente has been found, but see Document 120. See also footnote 4, Document 111.

On September 12 Bergsten sent a memorandum to Kissinger informing him that Richardson had "sequestered" Korry for the internal aid study mandated by NSSM 45. Bergsten added that "Korry is a rather unusual ambassador. For example, he explicitly says that neither Chile nor South America as a whole is important to U.S. national security. He is agnostic about the whole State Department line on virtually every conceivable subject, which is one reason why he should be ideal for the aid study." On Bergsten's memorandum, Kissinger noted that he agreed with Bergsten's recommendation to meet with Korry on the aid-foreign policy link.

On September 2 the White House Press Secretary announced that Peterson would be Chairman of the Task Force, and on September 24 the Press Office released the full membership. Peterson wanted Anthony Solomon to be the Executive Director, but Solomon declined. On October 2 Bergsten informed Kissinger that Edward Fried, a career Foreign Service officer, had accepted Peterson's invitation to be Executive Director. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 193, AID Task Forces on AID) In an October 6 memorandum to Peterson, Kissinger noted the high priority the President attached to the Task Force and his direction that agencies cooperate with it and provide requested assistance. (Ibid.) Kissinger agreed to meet with the Task Force during its meeting on October 16; see Document 121.

San Clemente, September 2, 1969, 11:45 a.m.

SUBJECT
President's Task Force on Foreign Aid

PARTICIPANTS
The President
Rudolph Peterson, Chairman of the President's Task Force on International Development
Dr. Henry A. Kissinger, Assistant to the President for National Security Affairs
C. Fred Bergsten, Senior Staff, NSC

The President began the meeting by speaking bluntly about the objectives of the Task Force. It would not be like the earlier Task Forces on aid chaired by General Clay and others./2/ This group must come up with a truly new approach to foreign aid or the U.S. aid program will die.

AID's presentation to the National Security Council was the worst it had had this year. (This is not due to Dr. Hannah, who was new at the time and had not yet been able to effect any changes.) The State Department wants to give aid to every country in the world and the result is lots of "Mickey Mouse programs." The President does not believe in this approach.

Foreign aid is not an abject failure, the President continued. There are numerous success stories. In all of them, however, there were additional key factors beyond aid, such as U.S. military expenditures or impressive natural resources.

Mr. Peterson can expect to hear from the State Department that government-to-government aid is best because State likes to use aid to stroke its clients. They believe in aid to socialist countries and enterprises and are not worried by such events as India's nationalization of the banking system. The President asserted that we need to get away from government-to-government aid and from aiding countries who are headed toward adoption of totalitarian socialist systems. This is not because of ideology. It is because aid simply will not be effective in such environments. The success stories to date have occurred mainly in environments where the private sector played a major role. He had told Mrs. Gandhi, for example, that public aid was not expandable--only private investment was.

Latin America is a disaster, the President continued. State and AID like to provide aid to consumer/social enterprises for purposes such as health and housing. This is wrong. We must help countries help themselves through supporting industries which have multiplier effects throughout the economy. We must help them increase their GNPs so they can build the needed infrastructure themselves. The way to help poor people is to help increase the size of the pie from which they can get a slice./3/

The President stated that there has been no really new thought in the foreign aid field in twenty years. There are always references to "trade and aid" and increasing private investment but we have added nothing really new. Everybody is caught in the Marshall Plan syndrome, which unfortunately could not work outside Europe and Japan.

The President did not pretend to have the answer himself. He did feel, however, that our program was far too fragmented. We do not need to aid every country. For example, some of the former metropoles should bear the responsibility for their ex-colonies. The U.S. should only aid countries where there is a major U.S. interest. We should not attempt to dictate the type of political system maintained in foreign countries, although many of the Task Force members will probably espouse socialist approaches and repeat many of the old tired ideas.

The President concluded that Congress will not provide money to do what is needed in the aid field unless we have a new name and a new approach to the program. He stressed the importance of getting an exceptionally able staff for the Task Force and that the group must not be on the defensive about the aid effort.

Dr. Kissinger, at the President's request, added that the whole U.S. approach to aid has been exceedingly defensive because of the lack of a new concept. The bias has been that foreign aid is good and the only job is to sell it. Another problem is that aid has fallen into the hands of economists, which was all right in Europe where the need was essentially technical and the requisite private energy and political structures existed, but which will not work where political structures do not exist as is the case in many LDCs.

There is no necessary progression from economic growth to political stability, Dr. Kissinger continued. In fact, there must be a political structure or else economic growth will not occur. We therefore need an explicit consideration of the link between political and economic frameworks in particular countries.

Dr. Kissinger added that Mr. Peterson will hear that leftist totalitarian approaches are completely acceptable but that the U.S. should oppose rightist approaches. This is particularly strange because we do not know what democracy means in a less developed country. This is another conceptual problem which must be tackled. He was afraid that his academic colleagues were not very fertile in answering it.

The President suggested that our effort should appear publicly as aid without strings but that in practice it, of course, could not be. On the issue of bilateral versus multilateral aid, he noted that many foreigners prefer bilateral assistance from the U.S. Indonesia, for example, was uneasy about multilateral aid because they felt it let the Japanese get additional leverage through the use of U.S. money--they feel it is not truly multilateral. The President also noted that Indonesia was very high on his list--the State Department disagreed, but the President thought Indonesia was one country which could make it. The President stressed that Japan and Western Europe must increase their aid efforts, however.

The President continued that the U.S. should use its aid for humanitarian purposes in particular circumstances. Furthermore, we should not simply help those who meet our ideas of proper political organization. The key is to help those who follow economic approaches, particularly reliance on the private sector, which we consider feasible in leading to real development. He would not be worried about the politics of the leaders of particular countries but rather about the climate for investment and other major economic approaches.

The President further stressed that population control is a must. He urged Mr. Peterson to read his message to the Congress on population/4/ and to work closely with the White House staff involved in this effort. Population control must go hand in hand with aid. The U.S. has finally bitten the bullet on this issue and made it a top priority national policy.

Trade is another key area, and he urged Mr. Peterson to speak with Ambassador Gilbert, Secretary Stans and others involved in U.S. trade policy. We will probably want to try some new initiatives in this area. Linkage among trade, aid and population control may be the necessary new approach.

On military aid, the President warned that many of the panelists will probably oppose it completely. He agrees that we should not supply exotic weapons to countries which do not need them. However, State/AID is wrong to not want to help Indonesia militarily; they must have sufficient military assistance to maintain internal security. More broadly, the military may be the most stable force in most countries. He would therefore hope that Mr. Peterson would have no preconceptions that the military or rightist leaders are villains. Mr. Peterson agreed that there is a new breed of military men around the world, especially in Latin America.

The President summarized that we should follow an aid approach that will work. Otherwise we should forget it. A banker's approach, especially that of the Bank of America with its record of innovative financing, is good for this problem.

In response to Mr. Peterson's question about the thrust of overall U.S. foreign policy, the President said that Congress will not buy any aid program not directly related to U.S. foreign policy objectives, except perhaps for a few clear humanitarian cases. He felt that our long term foreign policy interests will be well served by broad, generous foreign assistance programs. Because of the growing gulf between our wealth and that of most countries, and the shrinking of the world through modern communications, people in the LDCs will not stand for continuation of the status quo. It will develop like our own urban problems.

For the next five years, however, our efforts will be limited by

budgetary restrictions. We must thus bore in where it really counts with what we have. In the longer term, we must think of broader approaches.

The President stated his strong conviction that aid won't work unless and until recipient countries develop political stability. He agrees with Dr. Kissinger that aid does not necessarily lead to political stability. He would use our limited resources in areas where some stability already exists.

We need some success stories. In the Pakistan/India situation, for example, Pakistan comes out way ahead in terms of likely progress, partly because India is headed down the road toward becoming a socialist state. Latin America is an exceptionally difficult case and we will send Mr. Peterson a copy of the Rockefeller report when it is received.

Dr. Kissinger added that individual success stories in given regions could spread out through the region by galvanizing others into action. We need to move toward greater self-reliance on the part of other countries. This is the thrust of our overall foreign policy--to get others to shoulder a greater share of the burden.

Dr. Kissinger continued that we must get away from abstract notions. Our policy must relate to concrete objectives of mutual interest between the U.S. and other countries. Earlier U.S. aid efforts were relatively easy technical problems. We now have the problem of developing a world order in which the U.S. does not have to carry the entire burden. This means relating individual countries to others in their regions and then relating them to the U.S. We are in for some troubled years ahead, especially in Latin America.

The President reiterated that his foreign policy approach is based on pragmatism. The test of a particular policy is how well it will work. We must get away from ideological battles. In response to a question from Mr. Peterson, he affirmed that he was not terribly concerned with electoral systems in other countries. Dr. Kissinger added that we must look at their foreign policy as it affects us.

Concerning the plethora of small U.S. programs in Africa, the President said he was not impressed by the argument that the Communists will pour in aid if we don't. We need not react every time to such a threat. The question is whether U.S. interests in the particular countries are vital. We must not let other countries shake us down, even though some of our friends are among those who do so.

The President reiterated that we should not pour money down ratholes. We should test a specific program by asking whether it will work. The Task Force should look into all the international lending organizations and the trade area, where we must consider preferential arrangements. In general, the Task Force should take a broad view of its mandate.

Mr. Peterson asked who would be his main point of contact with the Administration. The President replied that Dr. Kissinger, or anyone he might designate, would be that point. The Task Force should of course get input from Dr. Hannah, who is very able and will be developing some new ideas as he gets new people.

The President also noted that we probably have too many Americans abroad, a point on which he probably differs with Dr. Hannah. Point IV was great in its time, but the U.S. generally has the wrong people overseas. We should not assume that the best possible world is one in which many Americans are helping out overseas. In fact, the Task Force must assume that our present aid program is not full of good administrators. Many of our people are dedicated but many are incompetent, partly because AID is short of money and is a resting place for persons nearing retirement.

American businessmen abroad are not so good either, because the best businessmen do not view foreign assignments as the road to success. However, the President suggested that Mr. Peterson seek the views of a thousand U.S. businessmen overseas on our aid program, perhaps through getting the top 25-30 companies to canvass their people and pass their ideas on to us.

The President concluded that Mr. Peterson faced an extremely difficult job. The effort had been tried before and failed. In addition, many people disagreed with the views that the President had been spelling out. What he did know, however, was that the effort of the past will not sell even if it is right. And Dr. Kissinger added that with the loss of purpose in aid the annual appropriation process had become an end in itself.

The President instructed Mr. Peterson to take both a short-term and a long-term look at the problem. What kind of a world do we want in the future? How much can and will others do?

He did not have an answer to these questions. He did know that it was ridiculous to simply compare the percentages of different countries' GNPs which are spent on aid, in view of the burden assumed by the U.S. in the military area. Dr. Kissinger added that it was also irrelevant to compare percentages when the magnitudes differed so sharply. The President also instructed Mr. Peterson to look at the personnel and organization of our aid effort.

Mr. Peterson concluded that his effort must be to decide upon a new approach and also recommend how to implement it. The President concurred and stressed that the whole program must be reorganized.

Washington, October 16, 1969.

PARTICIPANTS
Members and Staff of the Peterson Task Force on Aid
Dr. Henry A. Kissinger
C. Fred Bergsten

SUBJECT
U.S. Foreign Policy and Aid

Dr. Kissinger spoke informally with the Task Force on overall U.S. foreign policy and its possible relationship to the future of our aid program.

He first described the procedures followed by the new Administration on foreign policy. He asked where we wanted to be in four or five years and then worked back to present policy. Dr. Kissinger noted that one of the toughest aspects of this approach is to get Government agencies to submit valid choices to the President rather than only their own preferences. This process was based on a willingness to look at fundamentals. The President's forthcoming speech on Latin America, for example, would reflect such a willingness.

By contrast, Vietnam was not now a major conceptual issue--the problem was whether we should just get out unilaterally or seek a reasonable settlement. All else was demagoguery and there was nothing in present policy to warrant the type of demonstrations seen yesterday. Vietnam takes much less time, for example, than our preparations for strategic arms limitation talks--even though they are not presently taking place. In that case, we have developed building blocks upon which to base a response to any conceivable position taken by the USSR. The same approach has been adopted regarding Latin America: philosophy first with specifics following.

Turning more specifically to foreign aid, Dr. Kissinger commented that we were near the end of the Marshall Plan period in which the rest of the world could be shaped by U.S. programs. During this period, our contribution to progress had been our energy and our detailed proposals.

President Nixon had already begun to express a new direction for aid in his round-the-world trip, particularly in Asia./2/ His thrust was that others should begin to assume an increasing share in shaping their own progress, especially in terms of its intellectual foundations. The United States would certainly contribute where it could help. We would encourage regional groupings. We would seek to reduce the military component of the U.S. role, especially with regard to internal subversion and even with respect to external aggression.

Even in the 1950s, we had the erroneous view that U.S. commitments could be expressed legally. In fact, our policy is determined by U.S. interests based on our perceptions of what is required for international stability. No precise legal framework can catch this. The key to the new approach is the degree of cooperative relationship that can be developed between the U.S. and the LDCs. Both have a stake in world order and organization. It is not necessary or even best to express this relationship legally.

Dr. Kissinger recalled that the President had spoken to Mr. Peterson at great length in San Clemente, far beyond the time budgeted for the meeting./3/ He had noted that groups such as this one often begin on the assumption that foreign aid is good and then seek to justify the present program. This Administration also assumes that foreign assistance is desirable but recognizes that the case for aid made in the 50s and 60s is no longer relevant. Simple comparison of the share of aid in national GNPs is irrelevant, for example, if a majority cannot be persuaded that any aid program is in the national interest.

We thus need a rationale in which we ourselves can believe and thus be able to sell to the Congress. The President feels that the present approach leads only to a rearguard action whose goal is to minimize budget cuts and whose only issue is the tactics used to that end.

Our aid rationale must relate to the U.S. national interest, for example, in a peaceful and developing world. The President has a major interest in this program as he told Mr. Peterson and he plans to meet with the Task Force at an early occasion. His primary objective is to achieve a rationale for aid related to broad U.S. foreign policy goals and to political stability if, in fact, we can define that illusory term. Dr. Kissinger assured the group that the President was a great reader and would address their report with great interest.

Mr. Peterson asked Dr. Kissinger to comment on whether the President was interested in regionalism among developing countries. Dr. Kissinger replied that this relates to the issue of concentrating our aid effort. He noted that our preference is in favor of concentrating and against dribbling out small amounts to many countries without making significant differences in them. We felt that we could let other industrialized countries take care of particular LDCs where they have strong historical interests.

Mr. Fried asked about the multilateral-bilateral issue and whether increased multilateral aid was politically feasible and/or useful. Dr. Kissinger replied that there had been no occasion yet requiring a general decision on this issue. Where specific issues have come up, the President had opted for the multilateral approach in contrast to the entrenched bias in favor of bilateralism. He thought the bias would in general be toward increased multilateralism.

Mr. Countryman asked whether this bias would lead to a reduction in U.S. aid to Latin America. Dr. Kissinger replied that multilateralism was a way to express our interest in Latin America. We would certainly not intend for Latin America to suffer from such a shift. On the contrary, a definite effort was underway to give effect to a special relationship with Latin America. The U.S. interest in the area was definitely ascending.

Mr. Haas asked about the relationship between trade and aid. He observed that protectionism was increasing and that the Administration seemed receptive to such pressure in cases such as textiles and steel. Dr. Kissinger replied that the textile industry had a special history with respect to this Administration. The President had made a firm campaign commitment which put it into a special category./4/ No one should generalize from this case. We wanted to avoid taking on trade issues one at a time and preferred to wrap trade up more generally. He expected modest progress on trade liberalization, saw a good possibility to continue that trend, and noted that we will send up a trade message soon.

Professor Mason noted that the White House had dragged its feet in getting this Task Force underway. There was thus no chance to get out a rounded report to meet its deadline. Would the President be satisfied if the Committee limited itself to specific issues and the analysis of the possibilities for each? Dr. Kissinger replied that the President prefers sharp statements of conflicting views rather than a waffled consensus. He suggested that the group cover the most important issue first. We could then see if the life of the group should be extended. A good statement on the key issues was the most urgent need.

Ex-Congressman Curtis raised the issue of lack of coordination of aid-related programs, both in the Administration and in Congress. Dr. Kissinger fully agreed with the need to pull aid-related programs together. He thought it was important for the Task Force to call attention to this issue. It would be desirable for the group to evaluate each program although it might not have time to do so in view of its deadline. He also noted that the NSC staff was, for the first time anywhere in the Government, putting together program budgets for key countries to try to effect just such coordination of programs.

Professor Huntington asked whether the group should focus on economic development, which would imply consideration of more than just AID-type programs, or whether it should focus on the U.S. foreign assistance program, which would include military assistance in addition to economic assistance. Dr. Kissinger leaned toward the latter. As he saw it, the question was one of balance between our various types of assistance activities. What was the purpose of our various development programs: stability, pliability, pure development?

Mr. Fried asked to what extent the President looked toward this report for next year as opposed to the decade ahead. Dr. Kissinger replied that ideally it should be ready for next year's program although the old approach could stagger through one more time. If a choice must be made, the report should be geared to the next five years. It should provide a charter for the middle run future.

Mr. Peterson asked Dr. Kissinger whether we should extend aid to countries which have political stability or whether our aid should seek to create political stability. Dr. Kissinger replied that the President would like to have an answer to that question. Perhaps we should help where it exists and try to create it if, in fact, we can define stability.

Dr. Kissinger concluded that the group might wish to agree on two or three different basic approaches which would then affect specific decisions in different ways. We do not need a presentation of complete opposites and there is no need to include an option of a complete abolition of our aid effort.

During the first months of his administration, President Nixon devoted considerable attention to Latin American issues, including development assistance. As early as January 22, 1969, Henry Kissinger sent President Nixon a memorandum reporting that on January 21, at the President's request, he had phoned Nelson A. Rockefeller, Governor of New York, to ask him to visit Latin America as the President's special representative. Rockefeller reportedly was interested. (National Archives, Nixon Presidential Materials, NSC Files, Country Files-Latin America, Box 797, LA General, Volume I 1-7/69)

President Nixon spoke on the telephone with Governor Rockefeller at 5:40 p.m. on January 22, and Governor Rockefeller called on the President from 3 to 3:40 p.m. on February 12. (Ibid., White House Central Files, President's Daily Diary) On February 17 the President announced the Rockefeller Mission to Latin America, a series of trips to develop joint programs to accelerate the pace of economic and social development in the hemisphere. See Public Papers of the Presidents of the United States: Richard Nixon, 1969, pages 106-107.

On February 3 Kissinger sent National Security Study Memorandum 15, requesting a review of U.S. policy toward Latin America, to the Secretaries of State, Defense, and Treasury; the AID Administrator; and the Director of Central Intelligence. NSSM 15 requested five papers, including an assessment of regional security requirements and "the purpose and nature of military assistance programs in the light thereof; Development assistance strategy, the Alliance for Progress and the U.S. role in it; [and] Trade and Investment Policy [and] regional economic integration." The NSC Interdepartmental Group for Latin America was to prepare those papers by March 31, to be followed by an overall statement of U.S. policy toward Latin America by May 15. (National Archives, RG 59, S/S Files: Lot 80 D 212, NSSM 15)

The National Security Council met on July 9. (Ibid., Nixon Presidential Materials, White House Central Files, President's Daily Diary) According to an undated briefing memorandum for the President, Kissinger noted that the meeting would be an opportunity for "NSC members to brief themselves on the current situation and problems in Latin America and to discuss some of the major conceptual choices that face us. This will be useful preparation and backdrop for later consideration of Governor Rockefeller's report." He added that since the meeting would not make decisions on the issues, he had not included decision recommendations. (National Security Council, Secretariat, Box 84, 7/9/69 NSC Meeting on Latin America) No record of the July 9 meeting has been found.

Although the report of the Rockefeller Mission would not be formally released until November 10, copies of the report were circulated internally under cover of a September 17 memorandum from Kissinger to the Vice President, Secretaries of State and Defense, and the Director of the Office of Emergency Preparedness (with copies to many other agency heads), indicating that it, NSSM 15, and other related materials would be the documentation for an NSC review of U.S. policy toward Latin America, tentatively scheduled for a Review Group meeting and a National Security Council meeting. (National Archives, RG 59, S/S Files: Lot 73 D 288, NSC/Misc.) The agenda for the NSC meeting on October 15 began: "The NSC Meeting on Latin America is intended to consider major lines of policy toward the region. To provide some manageable structure to this wide-ranging topic, it is proposed to concentrate on a few specific issues, drawn from the Rockefeller Report and the position being developed for the IA-ECOSOC meetings." Item I dealt with Trade and the specific issue of tariff preferences. Item II dealt with Development Assistance and had three components: A. Sharing responsibility with others in the Hemisphere for planning, allocating and administering US-provided assistance; B. Untying of Aid; and C. Debt Rescheduling. Items III and IV dealt with political/diplomatic and security/military issues, respectively. (National Security Council, Secretariat, Box 119, NSC Meetings, 10/15/69 NSC Meeting on Latin America)

According to the transcript of the October 15 NSC meeting, the President wanted to offer something of substance to the Latin American nations in an upcoming speech scheduled for October 31. (Ibid.) Regarding the discussion at this NSC meeting on recommendations of the Rockefeller Report on military assistance and debt service, see Document 12.

Following the NSC meeting, Kissinger sent Secretary of State Rogers an October 22 memorandum requesting the views of the State Department and other agencies on 13 of the Rockefeller Report recommendations. Three were requested by October 29 for the President's October 31 speech, and the remainder by November 15. (National Archives, RG 59, S/S Files: Lot 80 D 212, NSSM 15) Secretary Rogers responded in memoranda of October 31 and November 22. (Both ibid.)

At Camp David on September 27 President Nixon had met with Governor Rockefeller, Kissinger, Assistant Secretary Charles Meyer, and NSC Staff Member Peter Vaky. (Ibid., Nixon Presidential Materials, White House Central Files, President's Daily Diary) No record of their discussions has been found, but according to an October 21 memorandum from Vaky to Kissinger, which refers to the President's remarks at Camp David, President Nixon wanted, among other things, to create a new Under Secretary of State for Western Hemisphere Affairs, which would upgrade the Assistant Secretary position and oversee Canadian affairs as well. (Ibid., NSC Files, Agency Files, Box 280, State, Volume IV) On October 27 the President signed a memorandum to Secretary Rogers mandating the new Under Secretary position, and on the same day Kissinger sent a memorandum to Secretary Rogers, Robert Mayo, and John Hannah requesting a Bureau of the Budget memorandum by October 29 on the advantages and disadvantages of a new organization, separate from AID, to administer U.S. Development Assistance in the Western Hemisphere. (Ibid.)

In his address to the Inter-American Press Association in Washington on October 31, the President announced changes in his administration's approach to economic development in the hemisphere. He also indicated his intention to seek legislation to create the new Under Secretary position and mentioned the possibility of a new agency to administer development assistance in Latin America. See Public Papers of the Presidents of the United States: Richard Nixon, 1969, pages 893-901.

NSSM 45 (Document 111) directed a study of the objectives of the U.S. economic assistance program and its relationship to overall U.S. foreign policy. On September 19, 1969, Under Secretary of State Richardson had informed members of the Under Secretaries Committee that Edward Korry, Ambassador to Chile, would assist him with the study. Oliver Troxel, Ambassador to Zambia, also joined the study.

On December 8, 1969, Korry met with Henry Kissinger, and Fred Bergsten followed up on December 9 with a memorandum to Kissinger providing him with a second draft of the summary to Korry's report (Document 124). Bergsten told Kissinger that Richardson had been so impressed with the work to date that he had circulated copies within the State Department and elsewhere in the government to begin moving toward a government-wide position on foreign assistance rationale. (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 324, President's Foreign Aid Program)

On January 15, 1970, Treasury Assistant Secretary Petty sent a letter to Arthur Hartman, Deputy Director of the Planning and Coordination Staff at the State Department, providing Treasury's comments on a December 17 draft of the Korry Report. Treasury saw many positive elements in the draft. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 A 15, AID)

Following completion of the December draft, Ambassador Korry returned to Santiago, but he and Ambassador Troxel returned to Washington in mid-January and, following a meeting with Rogers, continued drafting their report under Nathaniel Samuels' direction. No final Korry Report in response to NSSM 45 has been found.

On January 29 Bergsten sent a memorandum to Kissinger informing him of a major feud within the State Department on reform of foreign aid that included a strong disagreement between Rogers and Richardson. Bergsten said the "donnybrook" arose when Rogers learned that Korry proposed that development lending be administered by a government corporation outside the Department of State. Reportedly, Rogers had already held two 2-hour meetings to work out a State position and another was scheduled that afternoon. Rogers reportedly had committed to two principles: "aid is wholly an arm of U.S. foreign policy, and that foreign policy must therefore be an operational responsibility of the State Department." Bergsten reported that Rogers had "thrown out" Korry's organizational approach and reminded Kissinger that Korry's paper was prepared at Richardson's request and that Richardson had approved its contents and authorized its transmittal to the Peterson Task Force, "which specifically displeased the Secretary." (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 338, HAK/ELR Meetings 1/70-3/70)

On March 8, the same day the Peterson Task Force Report was released in Key Biscayne (see Documents 128 and 129), a front-page story in The New York Times, with the headline "Report to Rogers Terms Aid Policy Self-Defeating," dealt with the Korry Report, printing extensive excerpts. The Times reported that the report had so angered Secretary Rogers that he had ordered its major conclusions to be ignored.

On March 9 Ambassador Korry sent an Eyes Only telegram to Secretary Rogers expressing his distress over the Times article, which he had learned of from telegraphic press inquiries. Korry was distressed "that disclosure of a comparatively insignificant and incomplete document" might embarrass Rogers and the Department and was angered that "a maliciously timed and phrased article" would give an inaccurate and unfair account of his assignment and its status. Korry said he had discussed his project with no one outside government and with only very few outside the State Department. Korry closed by repeating his distress that "a first draft" had been used to embarrass State and sabotage the Peterson group. (Telegram 885 from Santiago; National Archives, RG 59, Central Files 1970-73, AID (US) 1)

Washington, undated.

SUMMARY

1. We have worked out a redefinition of the national interest in foreign aid, have developed some broad operational criteria for foreign economic policy toward the less developed world, and recommend organizational changes to match.

2. We arrived at our recommendations after examining and rejecting five lingering myths about development:

--That the U.S. has essentially the same development objectives in all LDCs.

--That if the U.S. provides the right kind of resources, we can develop almost any country in a reasonable time.

--That development assistance provided directly by the U.S. should secure political support for the U.S. on current issues.

--That economic development is almost exclusively the concern of aid agencies and international financial institutions.

--That the key relationship in development is between the donor and recipient nation.

3. We found, nevertheless, that there are good reasons for the U.S. and other developed nations to transfer some of their resources to less developed countries (LDCs). We distinguish three broad purposes for doing so, and suggest appropriate techniques and tools for each.

--First, we argue that there is a particular national interest in promoting economic development in certain circumstances, where it can produce a thrust toward self-sustaining growth. In sufficient quantity, and applied judiciously, resources can help to strengthen--even create--economic and eventually political structures compatible with our own society and with the kind of world order the U.S. is trying to establish.

--Second, we recognize the need to devote some resources as well to countries not yet ready for a major development effort, and we suggest ways to assist them to work their way toward creating the conditions for growth and a decent life--perhaps for a major development effort at a later date.

--Third, we also see the need for aid to achieve specific political ends, but we are persuaded that U.S. resources can be employed most effectively if there is a clear division between political purposes and development activities, and the resources devoted to each.

4. We discuss the first purpose at greatest length, since there are some novel elements in the argumentation. It takes its premise from our conviction that the economic structure most compatible with the world we seek, and historically most conducive to human freedom, is one that relies on incentives rather than coercion, on some form of market system rather than on prices determined by political authority, and on decentralized decision-making rather than centralized control. In the course of this study, an interesting phenomenon came to light. A statistical analysis was made of the relationship between foreign exchange position and private investment in ten major LDCs for which data were available. There was a significant correlation between improvements in reserves and increases in fixed private investment. This tends to confirm the judgment of experience as to the important role of resources in maintaining, or developing, economic pluralism.

5. We propose a set of standards, both political and economic, to be met before we decide to participate in a major economic development program in an LDC. While these standards would restrict the number of countries in which we make a major effort, it would also, we feel, substantially improve efficiency in the use of funds. Moreover, it would permit us to rely much more heavily on the LDC for both planning and performance. We are impressed with the arguments used by the Pearson Commission/2/ and others as to the desirability of using international institutions to set up economic criteria for aid and to check on performance, and we propose some steps in that direction.

6. We found that the development process in the LDCs encompasses political, social, and cultural changes that are inseparable from economic performance. We conclude that a major development effort should be undertaken only after a clear-minded assessment is made of the actual and potential resources available to and in the country, and of the capacity and determination of its political leadership.

7. We found, too, that the scope and pace of development is to a very large extent dependent upon relationships among industrialized countries. These determine trade opportunities, money rates, liquidity, investment flows, the terms of debt rescheduling, and other economic factors that, cumulatively, at least equal in impact the inputs of aid. We are persuaded that the complexity of internal and external factors affecting LDCs calls for a continuing effort to bring greater coherence to these relationships and to the international institutions that embody them.

8. The task is thus not only to set up an improved framework for economic assistance but to create a new pattern of foreign economic relations that is consistent with our foreign policy objectives. These objectives, in the last analysis, are world-wide, as befits the U.S. as the one truly universal power. Our economic objectives must similarly be world-wide, having as their ultimate goal a world of shared interests and responsibilities, in which no nation or group of nations is the exclusive preoccupation of any other. A world without client states, for example, is a world without trade preferences. We recognize that many industrialized countries, including our own, will continue for many years to have special interests and concerns deriving from history and geography. But we also use the Latin American example to show the possibilities for new economic links that are more consistent with our national interest in the world of the future.

9. This task calls for a number of organizational innovations, both U.S. and international. We do not find within the U.S. Government at present the means to think through the myriad of interrelated problems in our foreign economic relations, to work out the guidance required, and to coordinate action. Yet we face a new polycentricity in the world, an increasing diversity in our interests, and the growth of many novel economic instruments--SDRs, the Eurodollar, the multinational corporation, and specialized arrangements on commodities and satellite communications, to name only a few. By their very nature, they force new functional responsibilities on many departments and many independent agencies.

10. We recommend, therefore, a reorganization of the U.S. Government along the following lines:

--An Office (or a Council or a Coordinator) for Foreign Economic Relations, with broad powers over all those policy areas that relate to the less developed world. Its placement and, to some extent, its role might be analogous to that of the Council of Economic Advisors. The Office would have no operational responsibilities but would be charged with developing and coordinating the policies and reviewing the activities of the following entities:

--An Overseas Development Bank or Fund, capitalized by the Congress, operating in accordance with criteria that we detail. It would be authorized to loan or grant funds to LDCs or to international institutions for development purpose. It would, for the most part, operate without field missions. We assume that Congress would retain direct appropriating authority for replenishing IDA and for subscriptions to international or regional banks. This successor to AID would serve as the U.S. agent for the transfer of financial resources for development purposes, and for dealings with the World Bank Group and other development institutions.

--An autonomous Technical Assistance Foundation, perhaps also capitalized by the Congress, whose principal tasks would be to identify and enroll U.S. experts, negotiate the terms of their contracts with foreign countries, serve as liaison with other contributors of technical personnel, and provide a repository for information concerning both U.S. and foreign technical assistance.

--An Office, probably located in the Department of State, whose charge would be to allocate resources, be they of a military, economic, technical assistance, or security nature, for the purpose of achieving political ends. Resources for these activities would be requested annually of the Congress.

--An Overseas Private Investment Corporation along the lines already approved by the House of Representatives.

--An Office of the Special Trade Representative, with substantially the same functions as the present entity.

--Other agencies and offices to the extent that their decisions and activities affect development in the LDCs.

Similarly, international institutions have lagged organizationally behind the demands of the modern world, except where there has been a critical requirement (as for liquidity) or a particular need to coordinate aid activities in an individual country. We are persuaded by the arguments for moving toward providing a larger proportion of our development assistance through multilateral institutions, and we propose that the U.S. urge the World Bank Group to build on its experience with consortia and consultative groups to deal with other countries, regions, and even functional problems. We urge that the U.S. press for setting up an International Advisory Council on Development under the aegis of the World Bank, and making use of the World Bank staff. We make some recommendations as to the composition and structure of the Council, and we suggest some specific areas in which it could work toward developing common standards and norms.

12. The foreign policy implications of these proposals include:

a. By providing a conceptual bridge heretofore lacking between certain of our political and our economic foreign policy goals, the proposals could facilitate decision-making in foreign policy generally.

b. By demonstrating more clearly that the traditional American humanitarian desire to build a better world for everyone also creates an environment of greater security for the U.S., they could provide a new dimension to our foreign policy.

c. By proposing to tie aid, trade, foreign investment, and other foreign economic activities much more closely together, they could make them mutually reinforcing in our negotiations and operations abroad.

d. By setting up specific foreign policy objectives for the U.S. with respect to international development institutions, the proposals could encourage these institutions to contribute more effectively to our long-range goals.

e. By giving international institutions a greater role, both in the process of consultation and in checking development performance, they would provide a basis for striking a new balance in the use of multilateral institutions in pursuit of U.S. foreign policy objectives.

f. By moving our relationships with other developed nations toward a sounder basis of shared responsibility with respect to the LDCs, they could improve the prospects for sharing the burden equitably.

g. By requiring that LDCs receiving major development assistance meet certain minimum standards as to political leadership and the availability of resources, and by placing much more reliance on them for performance, the proposals would make it much easier for the U.S. to avoid involving itself in their domestic political concerns--an involvement that flies in the face of contemporary trends throughout the world and is counter-productive in terms of encouraging economic self-reliance.

h. In that connection, by recognizing that the long-range prospects for human freedom and a sound world order are best served by plural economic institutions, and working in that direction, they could enable the U.S. to take a more relaxed attitude toward the political systems of the LDCs.

i. By maintaining a posture of reduced involvement in the domestic affairs of the LDCs, they could lead to a significant reduction in the number of Americans in our aid missions abroad--and in backstopping them at home.

j. By removing our major economic development effort from the political arena, they could enable us to avoid laying ourselves open to blackmail.

k. By insisting on economic criteria for a major development effort, they could reduce the political embarrassment of aroused expectations, help keep our relations on a business-like basis and speed our responses to LDC needs.

l. By separating the longer-term development objectives from our shorter-term politico-military requirements in the LDCs, the costs of foreign policy tasks can be calculated more precisely and thus compete more rationally in the allocation of total USG resources.

m. By employing a consistent theme--the theme of shared responsibility we are adopting in our national life--they would enable the U.S. to project a more coherent image to the world at large.

Washington, February 11, 1970.

SUBJECT
Status Report of Peterson Task Force on International Development

PARTICIPANTS
The President
Rudolph A. Peterson, Chairman of the President's Task Force on International Development
Edward R. Fried, Executive Director of the Task Force
Henry A. Kissinger
C. Fred Bergsten

At the President's invitation, Mr. Peterson began the meeting by describing where the Task Force stood at the present time. They had met with a wide cross-section of the American people, including--they hoped--all groups in the country which had a serious interest in foreign aid. They had spent considerable time on the Hill to get Congressional views. Many experts had furnished helpful papers and thoughtful suggestions.

The Task Force had now had several two-day sessions. They were still some distance away from their final conclusions, but sufficiently advanced that Mr. Peterson welcomed the opportunity to outline to the President the direction in which they were headed.

On the objectives of the US aid program, they had taken their cue from some of the President's own statements. We sought a stable world in which we share both the benefits and the responsibilities of international cooperation. We will not live in the kind of world which we want in 10-15 years unless we are prepared to take action now. A collective world effort is needed to deal with pollution, the reduction of poverty, and increases in standards of living. These problems are not limited by national boundaries. And it is inconceivable that the United States, given its role in the world, would not share a portion of its wealth in these activities.

Our aid effort today must be conceived much differently than it was even ten years ago, let alone the period of the Marshall Plan. We need a completely different approach to the effort.

The US has had three different aid programs: security assistance, including military assistance and supporting assistance; humanitarian assistance, to meet emergency situations; and long-term development assistance, through loans and technical assistance. The three have been rolled together, but their objectives are quite different. Security assistance is an integral part of foreign policy, with shorter term objectives. The humanitarian programs, by their nature, meet short term needs. These both contrast with the long-term implications of development lending.

It is apparent that there is wide support in the country--and despite some reports to the contrary, in Congress--for increasing our emphasis on multilateralization of aid. This view is generally shared by the members of the Task Force and should represent a major thrust of our policy in extending our longer-term forms of aid. (He did not refer here to security or humanitarian assistance, which must remain bilateral.)

Mr. Peterson added that he saw a very important role for multilateralization of our bilateral program almost immediately. The international financial institutions had developed a high degree of competence, especially in the World Bank group. They can make critical analyses of countries better than can bilateral donors. The institutions have made clear to him their willingness to accelerate their capabilities and to play a rather broad role in the development process.

On the US bilateral program, security assistance should remain organizationally about where it is now, in State and DOD. The Task Force may recommend a different focus for military assistance, however. They feel that history plays too big a role in MAP levels. Perhaps we should seek a phase-out of MAP, assisting countries toward that objective rather than objectives which are beyond the reach of the LDCs themselves or which commit us to help them in perpetuity.

Our humanitarian assistance, which obviously must meet day-to-day assistance, is alright in the State Department.

Our long term development lending is not as large in dollar amounts as these other categories at present. It could become as important, however, if placed in a position to stand on its own feet. To do so, a completely new approach is needed.

Our development lending should be put under an independent Government corporation. It might be called a "fund" or "corporation", and would have its own board of directors and management. It would function as a bank, judging the worthiness of the recipients of benefits. It should be staffed by competent judges of investment, many of whom would hopefully come from the private sector, who know where to seek advice as well as how to give it themselves. We could dismantle our overseas missions. The institution needs continuity, ˆ la the Export-Import Bank, since it will be developing long term programs. Its role might some day be taken over completely by the international lending institutions.

Mr. Peterson sees a tremendous role for another new Government corporation, this one functioning as a foundation. It would focus on research on development problems, including research in the LDCs themselves. It would be run by top professionals and seek multiplier effects, especially through using residents of LDCs themselves in a major role. This institution would probably never outlive its usefulness, especially on such issues as population control. Its creation would be a major step and could have a tremendous impact on the world, which we could develop into something of tremendous national pride.

Thirdly, we already have the Overseas Private Investment Corporation to assist the private sector. The Task Force has ideas for expanding its role, beyond what is now envisaged, to engage the private sector in an even greater role.

Mr. Peterson then noted that the $64 question was the great need for much greater coordination of all US overseas economic activities. (The President amended that this was the $64 billion question.) These three new institutions must be coordinated, along with other aid-related programs, and he would suggest a "Chairman of Overseas Development" to run a board comprised of the heads of all relevant agencies and institutions. The chairman should sit in the White House and report directly to the President.

The President asked whether military assistance should be included in the board. Mr. Peterson replied that he would leave it out, since the board would coordinate our long term development assistance activities and not our short term security programs. The President assumed that it would also leave the humanitarian assistance out, although if high-quality people were available in the new institution, it might be good to use them on an ad hoc basis. The President added that he was intrigued by the concept of such a chairman and asked Mr. Peterson to proceed.

Mr. Peterson added that the chairman would have a vital role in representing the President on developmental matters. With that stature, he could accomplish a great deal by coordinating all of our assistance efforts, including trade, Export-Import Bank, etc. (Mr. Fried added that PL 480 would also be so coordinated.) He would naturally keep in close touch with the key operating agencies.

Mr. Peterson saw a lack of focus to all these related activities at pres-ent. There are needless frictions; perhaps they cannot be eliminated, but they can be reduced. With a board sitting around the table regularly, you could get understanding and policy direction as we have never had before.

The President replied that these ideas were very good. He asked about timing and Mr. Peterson indicated that he hoped to present the report by mid-March. The President noted that the Task Force would find it difficult to get agreement in this area. They would get screams from State, Treasury and all the other vested interests, as had occurred on some of the other Government reorganization measures which are under consideration. The difference here is that it is a question of life or death for the US economic role in the world. We will simply not get adequate support for our program unless it is completely new. He was in no position to judge the merits of specific corporations or the board, at this time, but did know that we must get rid of our present annual aid exercises.

The President noted that most earlier task forces had simply said that we should do better what we were already doing. This task force must do better than that. It was hard to say whether State or Treasury would raise the most difficulties, to which Mr. Peterson replied that State was more active at present.

Dr. Kissinger indicated that State wants to use aid as an arm of foreign policy, whereas Mr. Peterson wants to put it on a long term basis and reduce its susceptibility to short term tactical considerations. We must abolish AID, whose personnel are simply too weak. (The President firmly agreed.)

The President noted that he had always been a strong supporter of aid. One of his most frustrating experiences, in his numerous foreign travels, was to see how AID or its predecessors operate abroad. This is partly because they have always been on a temporary basis and therefore cannot get good people. He would hope Mr. Peterson would move in the direction of more, rather than less, revolutionary proposals.

The President added that several things proposed by Mr. Peterson appealed to him. The issue of central coordination is tricky. The State Department would oppose any such institution, as a rival, but it is definitely needed and would work in view of the new NSC system. The bank makes all sorts of sense. The foundation, which he assumed would handle technical assistance-type operations, would work; it should be put on a career basis and get the Point IV program onto the basis where it should always have been.

Dr. Kissinger noted that he was greatly impressed by the work of the Task Force. (He later told Mr. Peterson that it was the most imaginative task force report he had yet seen.) It tries to move away from day-to-day foreign policy concerns. A foundation would not be expected to make foreign policy judgments, so the LDCs could accept advice or help from it. As long as aid is given on a political level, we are merely trading favors for political reasons. The proposed program would help the State Department over the long term.

The President agreed that the State Department should buy the approach. Otherwise foreign aid is dead; he anticipated trouble this year even in getting modest appropriations. On the issue of coordination, the President agreed that it should be in the White House since it was so close to foreign policy. Dr. Kissinger noted that this could cause problems; the coordinator could be set up autonomously, and run through the NSC system, but it was clear that the coordinator could not be a departmental figure. The President agreed, since the coordinator would then be fighting with the other departments; he must be more than one among equals.

Dr. Kissinger reaffirmed that this was a very imaginative approach. It was the only way to save foreign aid. He could approve the proposals, since he had nothing to do with their formulation.

The President asked what to do next to implement the ideas. The key problem was the competence of people, though this organizational approach would help solve it. The President asked about the competence of the staffs at the World Bank and the Export-Import Bank, to which Mr. Peterson replied that the World Bank group had very imaginative people. (Mr. Fried added that IDA would be key to this whole operation.)

The President added that, in addition to clearing up the organizational morass, the key was getting good people. Mr. Peterson replied that a man with professional pride would not go into the present aid organization, given its lack of morale and continuity and the discrediting of the program.

Mr. Fried said that the international institutions could take on major responsibilities. They could work with individual LDCs and take the heat off our bilateral relations. The United States is now in a position to step back and support their activities, which would be a basic change in our world role.

The President cautioned that many countries say they would prefer bilateral aid--since they can put more pressure on us directly. Dr. Kissinger said we would seem to retain the bilateral option under the proposed program. Mr. Peterson agreed, but noted that we could put 2/3 of our development assistance into multilateral channels now. Dr. Kissinger noted that this would take us out of the line of fire, since the international institutions can take criticism more easily. Mr. Fried added that this approach means fewer people, and different kinds of people, in the US program.

Mr. Peterson noted that he had been mindful of the President's warning that his proposals must work. He had therefore disregarded targets for aid based on proportions of GNP. We, along with other donors, should provide whatever money increases are needed to increase the role of international institutions. Beyond that, he would not seek more money now. After a year or two of experience with the new institutions, we can come to Congress with intelligent estimates of the needs.

The President agreed, adding that this report would have been forgotten and derided if it had focused on amounts of aid. Instead, its proposals will fit into our reassessment of our over-all approach to foreign policy and its institutions, many of which were set up over twenty years ago. For the first time, we might be able to set up permanent institutions. AID had been seen for far too long as a temporary institution; Mr. Peterson added that continuity was necessary--the job could not be done in two or three years.

Dr. Kissinger added that AID's presentation to Congress of aid as a percentage of GNP was a disaster. Mr. Peterson's proposals, on the other hand, would provide a framework for a durable assistance program.

The President suggested that Mr. Peterson indicate, early in the report, that he was offering a reform of our institutions; that times have changed, so our programs must change; that he was deliberately not getting into amounts of aid; and that we can make judgments on amounts at a later time when our new institutions are in place. The President directed Dr. Kissinger and Mr. Bergsten to incorporate some of these themes in the appropriate section of his forthcoming Foreign Policy Review.

Finally, Dr. Kissinger urged Mr. Peterson to say what he thinks, rather than what would be bureaucratically acceptable. The President urged him to get out in front. Many will say his approach won't work, but nothing will occur unless the Task Force takes the lead. They should be controversial and then they will attract attention.

Washington, February 17, 1970.

Dear Rudy:

I appreciated your coming in to see me on Tuesday last. Nat Samuels and I were very glad to have an opportunity to talk with you and Ed Fried about certain aspects of aid policy, and we welcomed the opportunity to elaborate further on the views which Secretary Rogers had previously expressed to you. I thought it might be useful briefly to recapitulate our views.

The major task confronting about 70% of mankind and over 100 countries is economic development; therefore, US foreign policy must be directed toward a significant and vigorous assistance to developing countries. The decision on our part to undertake development aid is a political act intended to assist developing countries by economic means to carry through their often painful tasks of nation-building. Development aid is an instrument in our search for an orderly evolution in the world's continuing processes of change, and simultaneously is a manifestation of our own system of moral values. We must persist in it for external reasons and as an expression of our inner moral compulsions. When our people are sometimes excessively critical of aid, it is often a consequence of their impatience with the frustrations of nation-building rather than with aid itself or the means of implementing it.

In carrying out an aid policy, both multilateral and bilateral instrumentalities are important. The World Bank and the IMF dispose of large funds, trained and professional personnel, accumulated experience and international prestige. The same is true of certain other multilateral organizations. We should take maximum advantage of these assets by increasingly directing our assistance through appropriate multilateral channels.

At the same time a bilateral assistance program is an element in US foreign policy. The Secretary of State has the principal responsibility for carrying out the President's foreign policy, of which aid to the less-developed countries is an important element, and thus he must be able to coordinate foreign policy and development assistance. Moreover, our less-developed country relationships are increasingly involved with our developed country relationships as we try to harmonize our trade policy, private capital flows and development policy with those of other industrialized countries.

We agree, however, that the administration of development assistance in a separate, identifiable entity is feasible as long as there is a direct link between the operating entity and the Secretary's policy direction.

Supporting assistance and military assistance programs, as distinct from long-term development aid, have short-term political aims although they often contain elements of long-term economic value. The United States is reducing its overseas military involvements and its political/security presence in developing countries and, in fact, supporting and military assistance programs today pertain largely to South Viet-Nam, South Korea, Laos and Thailand. These programs should be administered separately from the long-term aid entity, with policy direction also in State.

On one other point, that of technical assistance, our AID people are convinced that it is undesirable to separate the administration of technical assistance from capital aid. It is their strong view that the US experience and that of other bilateral donors, and that of the World Bank group and UN assistance systems, lend support to the case for greater, rather than lesser, integration of capital and technical assistance./2/

I hope that the above comments will be useful to you and the task force. We undoubtedly agree on a great deal but probably approach some coordination and organizational concepts somewhat differently. I can assure you that our views are offered after much reflection and derive from the Department's accumulated experience during a quarter of a century with aid policy and its implementation through various organizational forms.

The Secretary and I are both confident that your task force report will be a major contribution to our renewed aid policy. I know that the Secretary hopes to be in touch with you on his return from Africa./3/

With best wishes to you and your colleagues,

Sincerely,

Elliot