Billions or Bargains

by JONATHAN B. BINGHAM

IN RECENT years a number of distinguished American liberals who believed that private enterprise would not be able to meet the capital needs of the underdeveloped areas have been calling for the United Stales government to embark on a mullibillion-dollar aid program.

The figures proposed have ranged from about $3 billion a year, as recommended by the United Nations Committee of Experts in 1951, to more than $10 billion a year, as suggested by the late Senator Brien McMahon and Walter Reuther in 1950.

Perhaps it is unfair to say that none of these proposals contained any specific indication as to how such sums could be expended wisely and with lasting good effects. When you are attempting to open the eyes of the apathetic to their danger and exhorting them to take bold and drastic action, you do not call attention to all the obstacles in the way of making your program a success. On the other hand, there is no evidence that those who call for multibillion-dollar programs have any real notion themselves as to what the difficulties are. Significantly, most of America’s shirt-sleeve diplomats, who are on the firing line in the battle for world development, don’t take the “big-money boys” very seriously. So far as I know, no one who has actually worked at the job of trying to help an underdeveloped country help itself has ever come out for a program in ten figures.

Buying inflation with our dollars

Perhaps the most generally overlooked fact about the capital shortage of the underdeveloped areas is that it is not so much dollars that are needed as, say, rupees or rials or cruzeiros. Major development projects like dams, irrigation canals, highways, and construction work of all kinds cost a lot of money, but most of the bills must be paid in local currencies.

Dollars can be used to pay American personnel and to buy supplies and machinery in the United States, but they cannot be used as such to pay laborers in Nepal or Paraguay, or to buy local materials like cement. The American traveler who has found dollar bills accepted all over the world will challenge this; and to the extent that only a small amount of dollars are involved, he is right. But when a large number of dollars are pumped into a country’s economy and changed into local currency, without any extra imports being brought in, the result is inflation. A lot more money has been put into the hands of the people to spend, but there are no new commodities for them to spend it on.

To visualize the problem in its simplest terms, think of a hundred thousand laborers working on a big earth dam in Iran. At the day’s end, they are paid in dollar bills; they promptly go to the local bank to change their dollars for rials; to meet this unprecedented demand for rials, the government has to print extra currency; the laborers spend the rials on food, clothing, and other goods; but the supply of food, clothing, and other goods has not been increased; so prices go up and inflation is on.

The only way this inflationary process can be prevented is for the dollars to be used to buy consumers’ goods from abroad. But as we well know in this country, there is a limit to the amount a country can import; the rest of the world is begging us to import more, and we have plenty of money to buy imports with, but still we don’t do it.

THE inflationary effect of dollar aid has plagued the administrators of our big aid programs from the beginning. The Economic Cooperation Administration and later the Mutual Security Administration used the technique of shipping in commodities (instead of dollars) in the first instance, so that these commodities could be sold to produce the needed local currency (called “counterpart”). The Technical Cooperation Administration did the same thing in Iran. But there is very definitely a limit to the use of this technique. If the amount of dollar aid is less than a country’s normal imports, the technique works all right as long as those commodities that the country would normally import are shipped in (which means that the program administrator cannot be too fussy about what he ships in, whether it be perfume, whiskey, or opium). But once the amount of the aid goes over the level of normal imports, as it would in many cases under a multibillion-dollar program, you have trouble; the administrator will find himself with commodities on his hands which can’t be sold.

Copyright 1953, by Jonathan B. Bingham

The difficulty can, of course, be avoided to the extent that the aid provided is in the form of capital goods, such as machine tools, textile machinery, rolling stock, electrical equipment. But imports of this character can almost never be put to use unless substantial local expenditures are made, in the construction of factory buildings, roads, dams, and the like, which the recipient government may or may not be able to afford. Outside of the realm of straight industrial development, which is generally considered susceptible of private or at least loan financing, it is a rare project in which the larger share of the cost is not in local currency. In an undertaking such as India’s community development plan, the ratio is about ten to one.

What this all boils down to is that, in a world economy where currencies are not freely exchangeable, the transfer of capital resources from one country to others is not a simple process. The fact is that, in the last analysis, a country can use dollars only to pay for imports of commodities or talent, and there is a limit to the amount of either it can usefully import at any given time.

Grants versus loans

Another problem facing the administrators of a really big aid program is that of deciding whether to emphasize loans or grants. Each course has its disadvantages.

The difficulty about loans is that they are supposed to be repaid. Both the International Bank for Reconstruction and Development and the United States Export-Import Bank have taken this notion quite seriously, with the result that they have uncommitted funds and are actually scratching around for business. Any country’s “debt-servicing capacity” is limited. While projects directly productive of increased exports add to that capacity, such projects are exceptional. Accordingly, the number of businesslike loans that a country can absorb is sharply limited, and there is no need whatever for a big new development agency to make sound loans.

On the other hand, if grants are to be the order of the day for all kinds of projects, there is a very great danger that private enterprise will be discouraged, rather than encouraged, and that the banks will be virtually put out of business.

The availability of a small amount of grant aid, falling far short of a country’s capital needs, usually has a stimulating effect both on private investment and on loan operations. By providing money for those capital needs which cannot be met either by loans or by private capital, such a limited grant program contributes to a balanced development which strengthens the country’s economy, enables it to borrow more money by increasing its capacity to service the debt, and improves the climate for private investment.

If the amount of grant aid available were very large, however, and were to approach the level of capital needs, the effect would be quite the opposite. Loans would become unattractive when grant aid could be had instead. Private investment would not be encouraged by the recipient countries, since capital obtained from private sources has its price just as public loan capital does: interest and profits have to be paid out, thus using up precious foreign exchange, and eventually the capital may have to be repaid. Moreover, with plenty of grant aid available for industrialization, the natural tendency of some governments toward a socialist type of enterprise would be given full sway.

There is a constant search in Washington and elsewhere for a technique of aid falling somewhere between a loan and a grant, but the magic formula has yet to be discovered.

How much control?

Assuming that the administrators of a large aid program could somehow solve the dollar problem and the loan-grant problem, they could still have a lot of trouble spending their money at the expected rate. They could do so, of course, if they were willing to turn over commodities or currency credits to the recipient governments in accordance with their requests, without attempting to pass on the projects which the countries proposed to carry out, or to supervise the operations themselves. But this method would receive little serious support (except perhaps from some of the recipient nations), since only a small proportion of the funds would achieve any lasting benefits for the masses of the people: the temptation to spend money on flashy and politically popular short-range benefits, to say nothing of the temptation to corruption, would be too great.

The opposite extreme would be for the development agency to maintain complete control, not only over choice of projects, but over project operations as well. The agency would itself carry out all construction work, for example, and would turn over the completed product to the local government. Such a procedure would have the advantage of efficiency, and a fair amount of speed, but it might well be unacceptable to the host government for political reasons. Even if it were not, it would have overwhelming drawbacks: bearing all the earmarks of charity, it would be destructive of the self-respect and pride of the recipient peoples; it would do nothing to strengthen local institutions so as to enable them to carry on the development work effectively; in short, it would violate the self-help principle of aid programs, which is universally recognized as essential.

The obvious answer would be to steer a middle course between simply turning over cash and retaining complete control — by organizing servicios, joint funds, and other forms of partnership operations, and by encouraging local governments to do as much as possible to help themselves; yet experience indicates that by this method the money will not get spent very fast. But if the development agency were too impatient to get its money spent, its bargaining power to insist on the observance of desirable criteria would be correspondingly less.

In Lebanon in 1952, TCA discovered how dangerous it was to be overeager. The Point Four program there got off to a bad start because the shrewd Lebanese gathered the impression that, if they were uncoöperative, they would get what they wanted, which was a program involving a minimum of technical coöperation and a maximum of straight grant aid. Partly because of TCA’s eagerness to have some progress to talk about before Congressional committees, technicians were sent to Lebanon in response to informal ministry requests, without waiting for project agreements to be properly executed and without adequate assurance from the government as a whole that it would make the necessary effort to support a Point Four program. The problem was complicated by political unrest and several cabinet shifts. Finally, it became necessary to say to the Lebanese that, unless the proper agreements were signed by a certain date, the technicians would be sent elsewhere. In other words, the United States had to assume a more dignified posture— saying in effect: “This is what we have to offer, on these conditions; we don’t really care whether or not you take it. It’s up to you.” Once that was done, good progress began to be made — but still slowly.

Reform versus noninterference

Perhaps the most difficult of all the problems facing a development agency with billions to spend would be what is sometimes called the dilemma of reform versus noninterference. This dilemma confronts all aid program administrators, but it is most acute when there is a program involving large-scale capital grants. To take a simple example, assume that in a particular country there are only two river valleys suitable for development, and that the area to be irrigated in each instance is owned by one or two big landlords. If the government, in which the landlords and their friends may be powerful, declines to undertake any redistribution of the land or otherwise to spread the benefits fairly, what can the agency do but refuse to go ahead? A more difficult case would arise where the government gave every assurance that land reform would be carried out and then, when the work was almost completed, the agreement was repudiated by a new cabinet.

Such questions have no totally satisfactory answers, and reasonable men would differ about how the program should be administered. It seems a fair assumption, however, that those very idealists who are most enthusiastic about a multibillion-dollar program would be the ones who would want to insist most strongly on imposing conditions that would slow down the spending of the money and, in some cases, probably block it completely.

It used to be that dollar worship was practiced by those who believed that making money was the summum bonum, but in the last twenty years a new type of devotee has appeared in the temple. Although liberals are generally nonmaterialistic in their personal lives, they have somehow developed the belief that plenty of government dollars can solve almost any kind of social and economic problem, whether it be in the field of state or national government, or in the field of international affairs.

The truth is that dollars, no matter how many, will not solve the problems of the underdeveloped areas. In the long run a country’s institutions and attitudes will be more important in its development than the amount of wealth it can command. Those institutions and attitudes cannot be bought with dollars, or with any other kind of money; indeed, the availability of too much money may actually be harmful to their growth.

The appeal of a “small" program

At the opposite end of the spectrum from those who urge that the United States embark on a multibillion-dollar program for the underdeveloped areas are those who argue that the job of development can be done at bargain prices.

Many of the Americans who have pushed the idea of a small Point Four program have been connected in one way or another with missionary work. These people have a picture in their minds which they cherish: the picture of a man, or perhaps a couple, going out to a village somewhere and living there, devoting their lives to teaching the village people better agricultural methods, the rudiments of sanitation, and how to read and write. They see Point Four in that image, in effect as an expansion and extension of the kind of work American missions and other private groups have been doing for decades. This type of program is by its nature limited in scope and is long-range in effect.

Perhaps this indicates a fundamental difference between the humanitarian approach to Point Four and the approach of “hard-headed self-interest” which former Secretary of State Acheson talked about. The humanitarian is content to “do what one can,”by the person-to-person approach. The realist is not content with that, because he is aware that it will accomplish such a very little; he is oppressed by the urgency of the world situation, and believes that a way must be found to help more people help themselves faster than can be done by the missionary’s methods.

When Point Four-type programs are under consideration, the economy bloc is always in a strong position. In the case of the Marshall Plan, no one said Europe could be rehabilitated after the war for a few millions of dollars. Nobody expects the military side of our national defense to be inexpensive. But when it comes to the development of the less developed areas, at least some of the experts say it can be done cheap.

Thus, the contest is an unequal one. A small Point Four program has everything: it appeals to all kinds; it gives even the most isolationist legislators something to talk about in the foreign affairs field which makes them sound like internationallyminded statesmen. As a result, it isn’t even controversial any more. But a $200 million program for India, say, no matter what its content, no matter how much it may be based on the self-help principle, immediately looks like a “giveaway”; it becomes intensely controversial. Although most of the Congress are agreed on the importance of keeping India in the free world, it takes courage for a politician to say that the job will take a lot of effort and money when others are saying it can be done painlessly.

Advice is not enough

At this point the question “Why won’t a small program do the job?” demands an answer.

First, it is necessary to be a little more specific about what we mean by the word “small.”There is one group, especially on Capitol Hill, which wants a program costing less than $50 million a year and consisting exclusively of straight technical assistance without program funds or supporting supplies and equipment in any quantity — a program in the image of those carried on by the United Nations and its specialized agencies. This is the extreme view, and the basic flaw in it is that the technician in the field is in the position of a bystander giving advice. Often, he can only submit reports and recommendations, and the reports and recommendations simply get filed away. Sometimes he can establish a close, continuing relationship with the local authorities. But fundamentally he is in the position of a kibitzer; he is not himself playing any cards. The trouble with this kind of technical assistance is that sooner or later the kibitzee gets fed up and decides he doesn’t need any more advice. I believe the time is coming when the governments of the underdeveloped countries will have had enough of programs which offer only advice.

This is not to deny that, on many occasions, advice can be extraordinarily valuable, especially when it is given on the basis of on-the-spot research. Indeed, some of Point Four’s most spectacular accomplishments have been in this category. Moreover, in all kinds of developmental programs, advice will always be an invaluable factor. But its role is limited. It cannot ordinarily provide the leverage that is needed to get joint activities under way. It lacks the trigger quality of “seed money.”

Many, perhaps most, of the advocates of “pure Point Four” concede the necessity of providing program funds or supplies and equipment to give the technicians something to work with. They are in favor of a program ranging perhaps from $100 million to $150 million a year for all the underdeveloped areas. But they are either indifferent, or actively opposed, to making grants which would extend the scope of the program beyond the concept of training and demonstration.

In discussing the problems of the underdeveloped areas, these purists are always inclined to slide over the knotty question of where the crucially needed capital is going to come from. They will concede that technical coöperation alone cannot promote international development except at a painfully slow pace, and that capital is a necessity, even for the effective communication of knowledge and skills to millions of people. But they insist that private investment will provide most of the capital, and that any gap can be filled in through the use of loans. If you point out that up to now these two sources have failed to meet the need — by an appalling margin — they back away, muttering that we could do more than we have done along those two lines.

There is no doubt that we could — within limits. Nevertheless there are many worthy projects, such as the construction of schools, health centers, and highways, which are not self-liquidating. Moreover, those projects which may be self-liquidating in terms of local currency often will not produce any additional foreign exchange. Thus, even when everything conceivable has been done to step up the rate of private investment and of international loans, there will remain a series of acute needs which can be met only through the use of grants in one form or another.

Economic aid crucial in Iran

Consider the case of Iran, for example. Although we were not in sympathy with the way the Mossadegh government handled the oil dispute, we could not stand idly by and watch the country slide over the brink. This is not to say that financial aid should be provided to a government to enable it to meet its operating deficits, even though it may threaten to commit national suicide by turning to the Soviets for help if we do not. That would be a kind of blackmail operation to which there would be no end. But the people of Iran cannot safely be left with the feeling that they have been utterly abandoned by the West and that they have no hope of making any progress except through moving in the direction of Communism.

The usual kind of technical coöperation program is not adequate for this kind of situation. For one thing, the Iranian government has been so desperately short of revenue that it could not make substantial contributions to the Point Four work, and the U.S. government has had to put up most of the money for the necessary local currency expenses of the program in Iran, as well as for the dollar costs.

In addition, in order to have an immediate quantitative effect on the country, it has been necessary to do things on more than a “pilot project" basis. In the highly successful malaria control program of 1952, for example, the United States put up some $2.5 million for DDT and other supplies so that a quarter of Iran’s villages could be protected. One could say that this was “demonstration" in the sense that it was showing the people of Iran how they could be protected from malaria, but certainly the economic aid component was an unusually large one. Similarly, although one might argue that the provision of a water treatment plant for Teheran would “demonstrate" the value of clean water, that project was mainly of value for its psychological effect on the people of the riot-torn capital city. When American dollars were used to make possible the completion of nearly finished industrial plants, the accomplishment per dollar was great, but here again the technical assistance element was minor.

The net result of “beefing up" the Point Four program in Iran has been a set of achievements which were probably more impressive than in any other country, and the impact on the Iranian people has been correspondingly great. In spite of the government’s financial difficulties, tens of thousands of Iranians, especially in the rural areas, have been given a sense of hope for the first time. It is indeed quite conceivable that, had it not been for this program, Iran would have slipped behind the iron curtain by now.

The bitterness of the Arabs

The need for a program comprising a considerable amount of economic aid as a supplement to the work of the technicians is also acute in some of the Arab states. Large amounts of capital are needed for the development of the region’s meager water resources and inadequate transportation system. Although some of this capital can be obtained in the form of loans, and some from the United Nations agency for the relief and resettlement of the refugees from Palestine, these sources will not be enough.

In addition to the economic factors calling for grant aid to the Arab states, there is a compelling political reason. Until one has visited in the Arab world, and has talked, not only to Arabs but to Americans who have long been exposed to the Arab point of view, it is difficult to imagine the depth of bitterness toward the United States because of its part in the establishment of the state of Israel. This bitterness has unfortunately been accentuated by the large sums given to Israel, which have made the programs in the Arab states look puny by comparison and which have been regarded by the Arabs as proof of the fact that we were not, as we claimed, impartial. In spite of the efforts of the U.S. government to make our large contributions to the UN agency for the relief and resettlement of the Arab refugees from Palestine look like a counterbalance to the grants to Israel, the Arabs have refused to regard them as such. Their attitude is: “These 800,000 unfortunates happen to be living within our borders, but they are not our responsibility, they are yours.”Whatever one may think of the reasonableness of this attitude, it exists.

Considering how crucial the Middle Fast is for the security of the free world, the situation is an alarming one. As Moslems, the Arabs tend to be hostile to Communism, but this barrier would scarcely be enough to prevent them from turning for help to the Communist bloc if they once became convinced that they could not expect fair treatment from the West. And the occasional anti-Jewish outbursts among the Communists are well calculated to make the Arabs look upon them as natural allies.

Of course we could mollify the Arabs by withdrawing our support from Israel, but that is unthinkable. Not only are we deeply committed in a moral sense to Israel’s survival, but the crushing of this brave and hopeful new state would be an appalling and wholly intolerable tragedy in human terms. That being the case, the only way we can demonstrate our impartiality is by providing the Arab states also with a certain amount of grant aid to be used for developmental projects.

How much is enough?

No one can say with confidence just how much money the United States should spend to help the underdeveloped countries. In 1950 a careful study was made at the direction of President Truman by an able group headed by Gordon Gray and Edward Mason; they concluded that “a needed, feasible and effective program” of grants for technical assistance and development in the underdeveloped areas “would require funds of up to about 500 million dollars a year for several years, apart from emergency requirements arising from military action.”

The following year the International Development Advisory Board, under the chairmanship of Nelson Rockefeller, confirmed the conclusion of the Gray Report as to the need for about $500 million for U.S. grant aid, and further recommended that the United States subscribe $200 million to the capital of an International Development Authority empowered to make partial grants for public works, and another $150 million to the capital of an International Finance Corporation to encourage private investment.

Whether these figures are precisely correct or not, they indicate an order of magnitude which is commensurate with the problem. My own feeling is that anything over $1 billion a year would be difficult to spend wisely and with lasting results, and that anything much less than $500 million is inadequate to the needs.