Attachment
July 13,
1962
SUBJECT
- Galbraith’s Latest on
Aid
1. Stripped of its rhetoric Galbraith’s message contains three proposals:
1. That we cut cash grants and purchases of local currency for
dollars to an absolute minimum.
2. Wherever we still are forced to make such grants or purchases,
we use segregated accounts.
3. That we go beyond tying aid to some form of super-tying or
bilateral clearing. We should insure that any country which
received substantial aid from us spends not only the whole of
the aid but also at least as much of its other foreign exchange
receipts in the U.S. as it did before receiving aid and, if
possible, more than this.
2. Recommendations 1 and 2 are already being followed. As you will
remember in your review with AID,
they are cutting cash grants and local currency purchases down to
the minimum. When it is necessary to give aid in these forms, the
U.S. funds are being put in segregated accounts for expenditures in
the U.S. This is not always possible. The need for cash grants
arises in political bargaining situations in which
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we are trying to help
a government crisis, or situations in which we are paying for a base
or other military facility. We cannot always successfully demand
segregated accounts in these situations, but AID has been instructed to do its best
and is being reminded currently of the importance of continuing to
try.
3. It is the third of Galbraith’s proposals which is novel, and important.
What he is suggesting can be explained in terms of the following
example. Assume that before we gave some country aid, it
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spent $50
million per year in foreign exchange earnings in the U. S. Suppose
we now give it $50 million in aid, increasing its dollar receipts to
$100 million. Then what Galbraith proposes is that we try to secure an
arrangement which will result in the recipient country’s spending
the whole of $100 million in the U.S. What can and does happen now
is that all of the $50 million in aid, being tied, is spent in the
U. S., but some of it is used to buy imports which were previously
paid for out of the free earnings of $50 million. Thus, after the
aid grant, perhaps $70 million is spent in the U.S. and $30 million
in Europe. It is this substitution of aid for other dollar earnings
that Galbraith wishes to
avoid. This appears a desirable goal; how feasible is it, and what
would it cost to achieve it?
4. An attempt to persuade the governments that receive aid from us to
enter into bilateral clearing arrangements—insuring that all their
receipts from the United States were spent in the United
States—would run directly counter to our whole trade policy, which
is to widen the area of free multilateral trade. This is not only a
matter of principle, it is a matter of practical import as well,
since we have a large surplus of exports over imports. Thus, the
path of bilateralism would ultimately be painful to us if others
followed it as well. There is no doubt that if we pressed hard in
the direction that Galbraith
suggests we would provoke retaliation. While the Europeans cannot
readily retaliate in India, because they already sell more than they
buy there, they could retaliate elsewhere. Further, the
repercussions would go beyond direct retaliation. We are pressing
the Europeans to loosen their bilateral arrangements with Africa and
other arrangements which exclude Japanese and Latin American
production from their markets. To the extent that we ourselves
resorted to extensive bilateralism, it would be less easy for us to
go on doing so, with the result that we would suffer from the fact
that these areas, which trade so heavily with us, could not increase
their total foreign exchange earnings and thus their imports from
the U.S.
In addition to these indirect repercussions, there would almost
certainly be some direct repercussions in the aid receiving
countries. In India itself, an attempt on our part to force the
Indians
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to shift trade away from the European countries toward the United
States would
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hardly be consistent with our effort to get
the Europeans to contribute more in the Indian Consortium. The next
meeting of the Consortium is 30 July, 1962. We are trying to get the
Europeans to increase their pledges by more than $100 million. It is
the judgment of Bill Gaud that any attempt to explore with the
Indians at this time the bilateral arrangements that Galbraith suggests would be
damaging to the prospects of the Consortium.
5. Finally, there is a broad political argument against substantial
bilateral tying. Engaging in it would give substance in the
neutralist and underdeveloped world to the Communist charges that
our aid is an instrument of neo-imperialism and neo-colonialism.
Thus, we would be undermining the very political purposes it is the
goal of the aid program to achieve.
