ivhy IWO ECONOMIC ASSISTANCE Integration of Japanese Aid and Trade Policies 6 llllllllllll Ill 141650 ~-“- . . ,,,_, ,_ .,...,.C..-,..- _,.,..., ,_,. (;AO/NSIAI)-!)0-1,1!, United States General Accounting Office Washington, D.C. 20648 National Security and International Affairs Division B-239036 May 24,199O The Honorable David R. Obey Chairman, Subcommittee on Economic Resources and Competitiveness Joint Economic Committee Congress of the United States Dear Mr. Chairman: This report responds to your request that we review Japanese foreign economic assistance and trade policies and determine the extent to which Japan integrates these policies. You expressed concern that U.S. foreign assistance programs are not integrated with U.S. international trade policies. Therefore, we also present information on U.S. programs and policies, We limited our review to economic assistance programs, and thus excluded military assistance and Export-Import Bank lending. Historically, promoting trade interests has been an important motivating factor behind Japanese assistance, producing a program that provides comparatively great commercial benefits due to its sectoral and geo- graphic concentration. Japanese economic assistance is heavily oriented toward infrastructure projects. Such projects can provide significant commercial benefits, as they tend to require procurement of high value added goods with subsequent need for maintenance and repair, and can open new markets for donor country firms. Also, Japanese assistance is provided primarily to Asian countries, where it reinforces existing Japa- nese trade relationships. Japan requires recipients to procure significant portions of assistance-financed goods and services in Japan. Certain other aspects of the Japanese system also help to ensure that commer- cial benefits will accrue to Japan, primarily through a relatively high degree of private sector involvement in development assistance project planning and administration. Japanese economic assistance funding has greatly expanded in recent years, largely as a means for Japan to make a contribution to responsi- bility sharing among leading western industrialized countries, commen- surate with its status as an economic power. Japan has taken a series of actions to liberalize procurement requirements and to expand the pro- gram’s geographic and sectoral focus, Nonetheless, the program largely Page 1 GAO/NSIAD-90-149 Economic Assistance B-239036 T’ retains its traditional focus and so continues to be more commercially oriented than U.S. assistance. The United States also requires recipients to utilize a significant portion of assistance funds to procure goods and services from U.S. firms. How- ever, U.S. economic assistance has a different focus, which results in less of a direct commercial orientation. Trade promotion has not been a prominent consideration in U.S. assistance efforts. U.S. assistance is intended to advance several goals, including support for basic human needs and economic restructuring. The United States concentrates its economic assistance in countries of particular security and political interest with which the United States does not necessarily conduct a great volume of trade. The United States provides comparatively little support for projects in areas, such as transportation, construction, and telecommunications, that can provide substantial commercial opportuni- ties. U.S. emphasis on economic restructuring may provide trade and investment benefits in the long term, as recipient economies improve and open up to foreign private investment. The United States could increase the commercial orientation of its for- eign assistance programs by emphasizing projects that provide greater trade opportunities and by assigning greater weight to U.S. foreign trade patterns in allocating funds among recipient countries. However, such changes would clearly require difficult choices among the numerous competing demands on the U.S. program, especially in light of federal spending limitations. U.S. assistance could also be more closely tied to procurement in the United States. However, this would have a limited trade impact without a corresponding shift in the sectoral focus of U.S. assistance. Also, reducing linkages between foreign assistance and trade promotion for all donor countries has been a long-standing U.S. policy objective. Further information on the results of our review are in appendix I. Appendix II presents details on the tying of U.S. assistance to procure- ment in the United States. Appendix III provides additional information on disbursement of U.S. assistance funds to U.S. and non-U.S. sources. Our scope and methodology are in appendix IV. We did not obtain written agency comments on this report. However, we discussed it with officials of the Department of State and the Agency for International Development, and their comments have been incorporated in the report where appropriate. Page 2 GAO/NSIAD-90-149 Economic Assistance * B-239036 As arranged with your office, unless you publicly announce its contents earlier, no further distribution of this report will be made until 30 days from its issue date. At that time, copies of this report will be sent to the appropriate congressional committees; the Administrator of the Agency for International Development; the Secretary of State; and other inter- ested parties. This report was prepared under the direction of Harold J. Johnson, Director, Foreign Economic Assistance Issues, who may be reached on (202) 275-5790 if you or your staff have any questions. Other major contributors are listed in appendix V. Sincerely yours, Frank C. Conahan f Assistant Comptroller General Page 3 GAO/NSLWMO-149 Economic Assistance I Contents Letter 1 Appendix I 6 AID and Trade Policy Commercial Orientation of Japanese Assistance 7 Linking Assistance With Domestic Procurement 9 Integration Substantial Procurement From Donor Countries 11 Japanese Administrative Practices Help Ensure 11 Commercial Benefits Japanese Efforts to Untie Assistance 13 Japan’s Continuing Commercial Orientation 14 Appendix II 17 Tying of U.S. Assistance Appendix III 19 Disbursements to U.S. and Non-US. Sources Appendix IV 20 Scopeand Methodology Appendix V 21 Major Contributors to National Security and International Affairs Division, 21 Washington, DC. This Report Page 4 GAO/NSIAD-90-149 Economic Assistance , . 1 Contents Tables Table I. 1: Comparison of U.S. and Japanese Net Economic 6 Assistance Volume, 2-Year Averages Table 1.2: Tying Status of Japanese Bilateral Economic 9 Assistance, 1987, Gross Disbursements Table 1.3: Major Bilateral Aid Uses, 1986-1987, 15 Percentages of Commitments Table 11.1:Tying Status of U.S. Bilateral Economic 17 Assistance, 1987, Actual Obligations Table 111.1:U.S. Bilateral Economic Assistance 19 Disbursements to US. and Non-US. Sources, 1987 Abbreviations AID Agency for International Development DA Development Assistance ESF Economic Support Fund Page 5 GAO/NSIAD-99-149 Economic Assistance Appendix I AID and Trade Policy Integration Japan now ranks with the United States as one of the world’s two largest source countries for foreign economic assistance. In the early 1970s Japan disbursed about one-third as much assistance as the United States. However, as shown in table 1.1, Japanese economic assistance has increased rapidly since then, while U.S. spending has remained com- paratively level. Table 1.1:Comparison of U.S. and Japanese Net Economic Arslrtance Dollars in millions _- -__- Volume, 2-Year Averageaa 1970-71 1975-76 1980-81 1987-88 United States $8,006 $7,997 $8,480 $9,201 Japan 2,677 3,062 5,463 7,756 aAmounts are expressed in constant 1987 dollars and exchange rates. Repayments on earlier loans are taken into account in producing this table of net amounts. Both Japan and the United States have large loan volumes outstanding. Source: Organization for Economic Co-operation and Development, Development Assistance Committee. In 1988, Japan’s net disbursements for economic assistance amounted to about $9.1 billion, while net U.S. disbursements were about $9.8 billion.’ Expressed as a percentage of Gross National Product, Japanese assis- tance rose from .23 to .32 percent between 1970 and 1988, while the U.S. commitment declined from .31 to .20 percent. Both countries pro- vide substantial portions of this assistance through multilateral organi- zations-about 25 percent of total commitments for Japan in 1987 and about 21 percent for the United States. Subsidized loans make up the largest portion of bilateral Japanese assis- tance. They accounted for about 60 percent of disbursements to recipi- ents in 1987. Most of the remainder was divided between grants for development projects and programs (about 19 percent) and technical assistance (about 16 percent). Two agencies created specifically for such purposes implement most of this assistance-the Overseas Economic Cooperation Fund for loans, and the Japan International Cooperation Agency for most grants. Most U.S. bilateral economic assistance obligations are made under three programs, administered primarily by the Agency for International ’ IJnited States military assistance, commonly included in congressional deliberations on US. foreign assistance, is excluded from this review. In recent years, military assistance has made up slightly more than one-third of total U.S. foreign assistance. In 1989, for example, including these funds would raise the U.S. total from $9.7 to $16.1 billion. Page 6 GAO/NSIAD-90-149 Economic Assistance 7 . Appendix I AID and Trade Policy Integration Development (AID)-Development Assistance (DA), the Economic Sup- port Fund (ESF), and Food for Peace. About 27 percent of the 1987 bilat- eral obligations were made under DA, which supports projects in various areas, ranging from agriculture to science and technology. About 47 per- cent of the 1987 obligations were made under FSF, which provides pro- ject support, cash transfers, and support for commodity imports to address economic, structural and development problems in countries of particular security and political interest to the United States.” About 18 percent were made through Food for Peace, which provides food aid through grants and loans for procurement of U.S. agricultural commodi- ties.” With the exception of Food for Peace loans, nearly all of this assis- tance is provided as grants.” Japan’s economic assistance system has been more heavily influenced Commercial by commercial considerations than has the U.S. system. Japanese assis- Orientation of tance programs have their origins in post-World War II war reparations JapaneseAssistance efforts. However, export promotion was clearly a primary consideration in these programs’ early development. Ensuring access to vital raw materials and creating a favorable climate for investment overseas have also been important influences on Japanese aid policy. These concerns prompted concentration of Japanese funds in Asian countries where Japan has had historically close economic and political ties. Commercial considerations have also been a factor in Japan’s focus on improving recipient country economic infrastructure. These considera- tions have reinforced the Japanese conviction that adequate infrastruc- ture provides the basis for real private sector-led growth and, therefore, should be the focus of economic assistance efforts. Compared with other types of development work, economic infrastruc- ture projects provide relatively greater opportunities for Japanese firms to realize commercial benefits. These projects tend to be capital inten- sive and require procurement of large amounts of high value added goods that can be provided by donor countries, such as construction, transportation, and telecommunications equipment. Follow-on economic ‘About 64 percent of the 1987 obligations made through the DA and J3SFprograms supported specific projects; about 41 percent was distributed as ESF cash transfers; and about 5 percent went for ESF commodity import programs. “The remaining 8 percent was comprised of a variety of programs, including migration and refugee assistance, the Peace Corps, and international narcotics control. ‘Loans constituted about 6 percent of non-food aid disbursements in 1987. Page 7 GAO/NSIAD-90-149 Economic Assistance Appendix I AID and Trade Policy Integration benefits can be realized by providing maintenance services and replace- ment parts. Of potentially greater importance, substantial market entry opportuni- . ties may be achieved through provision of goods that establish donor country firms in recipient country markets in such areas as transporta- tion or telecommunications. Infrastructure work also provides the means necessary for Japan to obtain needed raw materials from recip- ient countries. As Japan’s economy has grown, it has identified economic assistance as a non-military vehicle through which it can make a larger contribution to responsibility sharing among leading industrialized countries. Japan has no basic foreign aid law, its legislature (the Diet) provides little policy guidance, and no single ministry is in charge of economic assis- tance. Decisions are made by negotiation among several government agencies, notably the Ministries of Foreign Affairs, Finance, and Inter- national Trade and Industry, each with its own interests and objectives. The orientation of the program is continuously shaped by these discus- sions. Narrowly defined commercial benefits continue to be a factor, but the aid program is now regarded as a means for Japan to play a larger positive role in the international community. International pressure from the United States and other countries has been a leading considera- tion in the recent funding increase. Raising assistance spending is regarded as an appropriate means for Japan to act in a non-military manner to take on greater global responsibilities commensurate with its economic strength. Until the early 197Os, a large portion of US. economic assistance was devoted to infrastructure projects. However, a major re-evaluation of the U.S. program resulted in “New Directions” legislation instructing AID to emphasize basic human needs activities. Infrastructure work, and associated opportunities for capital goods exports, have declined greatly since then. U.S. economic assistance has many officially designated goals but, with the exception of the Food for Peace program, direct trade promotion is not a prominent consideration.” In fact, reducing donor country linkages between foreign assistance and trade promotion has been a U.S. policy objective since the mid-1970s. U.S. policy has emphasized addressing ‘Developing export markets for U.S. agricultural commodities is a primary objective for the Food for Peace program, which is authorized under the Agricultural Trade and Development Act of 1964. Page 8 GAO/NSIAD-99-149 Economic Assistance Appendix I AID and Trade Policy Integration basic human needs and integrating developing economies into the inter- national economic system. The ESF is oriented toward advancing such goals in the interest of stability and security in countries of strategic/ political importance to the IJnited States. Congressional earmarking, mainly for specific countries, but also for functional programs, controls the allocation of nearly all ESF funds and about half of DA funds, limiting AID'S ability to fund infrastructure projects in most countries. Sufficient amounts are currently allocated to permit capital projects in the larger non-cash transfer recipients of ESF assistance (e.g., Egypt, Pakistan, the Philippines, and certain Central American countries). AID officials estimate that because of prior Agency commitments, only about 15 percent of new DA funds, in any given year, could be made available for new priorities such as infrastructure projects. Both Japan and the United States require recipients to procure a portion Linking Assistance of goods and services obtained with assistance funds from donor With Domestic country firms. According to the Japanese government, about 19 percent Procurement of gross Japanese bilateral disbursements in 1987 were tied to procure- ment from Japanese firms. (See table 1.2.) About 28 percent of Japanese disbursements were awarded on a partially untied basis, allowing devel- oping country firms to compete with Japanese companies. The remaining 52 percent was untied, or open to procurement from any country.‘; -- Table 1.2:Tying Status of Japanese Bilateral Economic Assistance, 1987, Dollars in millions ._-- - Gross Disbursements Percent Partially Tied Percent untied Percent Untied Percent Total Loans $29 (1) $1,682” (43) $2,236 (57) $3,947 Grants .--- --~ 1,151 (57) 855 (43) 2,006 Total $1,180 (If4 $1,682 (28) $3,091 (52) $5,953 <?Onpartially untied loans, up to 50 percent of goods may be procured from developed country firms Source: Government of Japan “The Organization for Economic Co-operation and Development’s Development Assistance Committee defines economic assistance as tied when goods and services may be obtained in the donor country or from a limited number of other countries not numerous enough to qualify the assistance as partially untied. Assistance is partially untied when procurement may be from the donor country and substan- tially all developing countries. Untied aid is available for essentially worldwide procurement. Page 9 GAO/NSLW-90-149 Economic Assistance -.- Appendix I AID and Trade Policy Integration Tying provisions vary by program and by project within programs. Almost all of the tied Japanese assistance is delivered as grants, including grant funds devoted to technical assistance.7 All of the funding open to procurement from developing country as well as Japanese firms was through loans. About 43 percent of Japan’s 1987 loan disburse- ments were partially untied while the remaining 57 percent were untied. These figures, however, do not reflect the recent Japanese movement toward greater untying. Loan commitments for 1987, which do not show the carryover effect of prior year tying policies, were only 32 percent partially untied and 68 percent untied. Linkage of U.S. economic assistance with domestic procurement also varies by program, project, and recipient. AID did not have statistics available that would permit an accurate portrayal of U.S. tying. Our review of AID records showed that about 77 percent of overall US. bilat- eral assistance obligated through the three main programs was theoreti- cally tied in 1987, including all commodities provided to recipients as food aid.” However, for two reasons, this figure may overstate the degree to which U.S. assistance is actually tied. First, AID policies on pro- ject and nonproject assistance allow authorization for local cost financing and other waivers to expand the universe of eligible suppliers in the interest of increased project efficiency, among other considera- tions. Nonproject assistance provided through cash transfers and com- modity imports under ESF (nearly one-half of ESF and DA assistance in 1987) is normally tied to procurement in the United States. However, waivers permitting broader procurement are sometimes provided for project grants. Second, AID'S method of estimating local costs in arriving at the overall tying figures may underestimate actual procurement opportunities open to developing country firms. Although AID regulations tie procurement under DA and ESF loans and grants for specific projects to U.S. sources, local cost purchases financed through project assistance may include goods from any developing country. Additional discussion of U.S. tying is in appendix II. Table II.1 shows the statistics we developed, based on 7Procurement provisions for project grants are specified on a case-by-case basis. Procurements from recipient country firms are always permitted, while untying to include third countries is provided in most cases, with no limit on the portion of goods that may be procured from non-Japanese sources, Grant funding for technical assistance, most of which is tied to Japanese sources, made up about 40 percent of all bilateral grant aid. HA portion of the funding for ocean freight costs incurred in transferring food aid to recipients is untied. Page 10 GAO/NSIAD-99-149 Economic Assistance Appendix I AID and Trade Policy Integration information provided by AID, on the allocation of U.S. assistance among the three tying categories. Although precise figures are not available for either country, substantial Substantial portions of both Japanese and US. assistance are used to procure goods Procurement From and services from donor country firms. Donor Countries According to the Japanese government, about 43 percent of procure- ments under economic assistance loans in 1988 went to Japanese firms, while 67 percent went to non-Japanese sources. Official data for grants are not available, although Japanese officials did estimate that about one-third of grant procurement is done in recipient countries. The information that was available from AID shows about 43 percent of gross U.S. aid disbursements under the three main programs in 1987 going to U.S. sources. (See app. III.) This overall figure substantially understates actual procurement of US. goods and services with assistance funds because available AID figures show all FSF cash transfer funds being disbursed to foreign parties. Accounting for these funds in this manner does not provide any infor- mation on who receives these funds from recipient governments, In fiscal year 1987, ESF cash transfer funds were largely tied to U.S. pro- curement. During fiscal years 1987 and 1988, AID issued formal guidance to establish a closer relationship between cash transfers and procure- ment in the United States. ESF cash transfers can have an additional ’ trade benefit, in that they are sometimes used by private sector firms in recipient countries to procure U.S. goods, thereby encouraging develop- ment of U.S. links to recipient country firms. In addition to overall tying requirements, several aspects of the Japa- Japanese nese administrative system further help to ensure commercial benefits Administrative for Japan, These include relying on recipient requests to determine allo- Practices Help Ensure cation of funds, tying funds used for project planning and administra- tion, and prearranging goods to be procured with commodity loans. Commercial Benefits Since beginning its aid program following World War II, Japan has relied on recipient requests to determine how funding will be distributed. Japan has a relatively small foreign assistance administrative structure Page 11 GAO/NSIAD-90-149 Fkonomic Assistance Appendix I AID and Trade Policy Integration which does not permit substantial efforts in assisting developing coun- tries to identify projects or plan development strategies.!’ This system satisfies Japan’s desire to avoid being seen as intruding into the internal affairs of recipient countries, as it theoretically allows recipients to make their own decisions on development priorities. In reality, however, requirements for official requests can be so compli- cated that recipient countries may not have the expertise to develop and submit requests independently. The practical effect of the system has been to permit the Japanese private sector considerable influence over the development of proposals. Companies involved in such work will naturally invest their time in project ideas that will provide themselves or affiliated companies with substantial follow-on contracts. Tying funds used for project planning and administration helps ensure that much of the contracting for project execution will go to Japanese firms. Many of the individuals we interviewed informed us that when Japanese companies design projects, procurement specifications natu- rally tend to be such that Japanese companies are best suited to fulfill them. Also, many of the interviewees believe the integrated nature of Japanese commercial networks makes it quite likely that firms related to those performing planning or administrative tasks, through official affiliation or long-standing professional association, will be in a good position to submit bids by having advance information, This will have an effect on contract awards, even though international competitive bid- ding procedures are officially used to solicit bids. Japanese assistance supports private sector input on project planning through technical assistance grant funding devoted to development surveys and through tied engineering services on loans. The Japan Inter- national Cooperation Agency’s technical assistance funding supports the work of Japanese consulting engineers undertaking a variety of studies, from broad regional development plans to feasibility studies on specific projects. Support for such activity was the Agency’s largest single cate- gory of expenditure in 1987. Until recently, all members of teams per- forming such studies had to be Japanese citizens. Components of Overseas Economic Cooperation Fund loans devoted to consulting engineer services, including project design, are partially “In 1987 the total number of staff in the relevant bureau of the Ministry of Foreign Affairs, economic cooperation staff in diplomatic missions, the Japan International Cooperation Agency and the Over- seas Economic Cooperation Fund was 1,396. In contrast, AID had 4,616 staff in Washington DC., and in overseas missions as of April 1990. Page 12 GAO/NSIAD-90-149 Economic Assistance Appendix 1 AID and Trade Policy Integration untied for most recipients. Japanese firms, therefore, have a competitive advantage in obtaining contracts for such services, although firms from newly industrialized countries like Korea and Taiwan have had some success. The United States also ties engineering and professional ser- vices on capital projects. However, this provision has minimal effect because of the low level of US. support for work in the infrastructure area. The Japan International Cooperation Agency and the Overseas Eco- nomic Cooperation Fund do not have sufficient staff to administer the projects they fund. They rely on the private sector to perform needed technical and administrative tasks. Prime contractors on grant-funded projects must be Japanese. Partial untying for consulting services on loans to most countries places Japanese companies in a very competitive position for obtaining this business. Procurements under commodity loans, which made up about 20 percent of all lending in 1987, are untied. However, lists of goods to be pur- chased with loan funds must be agreed upon in advance with Japanese authorities. Japanese policy concerning such loans directs procurement toward support for infrastructure development, with associated trade benefits for Japan. In contrast, the United States specifies the goods, such as arms, that cannot be procured with commodity import funds. Largely in response to criticism from other donor countries, including JapaneseEfforts to the United States, Japan announced an official policy of gradual untying Untie Assistance for economic assistance lending in 1978, and since then has eliminated nearly all fully tied lending.1o Partially tied lending remains significant, though Japan is gradually moving toward untying for goods on a country-by-country basis. Beyond changing the official tying status, some specific steps have been taken to alter the administrative features that provide Japanese firms an advantage. A minor concession has been made on grants, in that the Japan International Cooperation Agency now permits up to 25 percent of survey teams to be made up of non-Japanese nationals. The Agency has also engaged foreign firms to administer some grant programs, including a $500-million program for Sub-Saharan Africa. As for loans, engineering consultant services have been untied for a few recipients, “‘In 1978, about 13 percent of Japanese economic assistance loans were fully tied. Page 13 GAO/NSIAD90-149 Economic Assistance Appendix I AID and Trade Policy Integration such as Malaysia and Brazil, and untying for additional countries is under consideration. Beyond those provisions concerning procurement, Japan’s assistance Japan’s Continuing continues to be allocated to countries and to purposes that provide it Commercial with a more commercial orientation than U.S. programs. Japanese assis- Orientation tance remains concentrated in Asia, where it works to reinforce and fur- ther develop close economic relations with developing nations in which Japan would, in any case, have a high level of economic interest. Japan has expanded the geographic scope of its program, particularly by increasing assistance for Africa. However, during the 1980s Japan has provided more than two-thirds of its bilateral assistance to Asian recipients. Much of this has gone to countries where Japan has substan- tial trade relations. In 1987, Japan disbursed about 54 percent of its net bilateral assistance to seven Asian countriesI , where it conducted about one-third of its total trade with all developing countries. Overall, the volume of trade Japan conducts with these countries is 7 to 9 times greater than the flow of assistance, depending on whether exports or imports are used to make the comparison. Given Japanese concern with assuring access to critical raw materials, it is significant to note that some of these recipient countries are substan- tial suppliers of such products to Japan. For example, Japan imported about $6.3 billion in oil and gas products from Indonesia in 1987 (about 75 percent of all its imports from that country) and more than $3.8 bil- lion in oil, gas, and wood products from Malaysia (about 81 percent of all Japanese imports from Malaysia.) The United States, in contrast, concentrates its economic assistance in countries of particular security and political interest, most prominently in the Middle East and Central America, with which the United States does not conduct a great volume of trade. Seven strategically important countries’:! accounted for about 45 percent of gross U.S. bilateral assis- tance obligations in the three main programs in 1987-Egypt and Israel alone accounted for about 27 percent of the total. The volume of trade that the United States conducts with these countries is about double the ’ ’ Indonesia, China, the Philippines, Bangladesh, India, Thailand, and Malaysia. “Israel, Egypt, Pakistan, the Philippines, El Salvador, Costa Rica, and Honduras. Page 14 GAO/NSIAD90-149 Economic Assistance Appendix I AID and Trade Policy Integration level of assistance provided, but represents less than 10 percent of U.S. trade with developing countries. Also relevant to the greater commercial orientation of Japan’s program is the fact that Japan continues to emphasize improving recipient country economic infrastructure through projects and commodity loans. The United States, on the other hand, places greater emphasis on pro- gram assistance in support of economic restructuring and basic human needs, These comparisons are shown in table 1.3. Table 1.3: Major Bilateral Aid Uses, 1986- 1967, Percentages of Commitments Donor Use -____ Japan United____ States Economic Infrastructure 44 -- 4 lndustrv 8 1 Program Assistance 22 51 Social Infrastructure 15 20 Food Aid __ 1 14 Agriculture --___ 10 -- 10 100 - 100 Source: Organization for Economic Co-operation and Development, Development Assistance CommIttee As shown in table 1.3, during 1986-87, about 52 percent of Japanese bilateral assistance was devoted to economic infrastructure and indus- trial development, as compared to about 5 percent of U.S. assistance. Transportation and energy projects accounted for the largest part of this assistance. For Japan, the 52 percent represents a decline of about 6 percentage points devoted to such projects since the mid-1970st:’ Because infrastructure loans and grants tend to require commitment of relatively large amounts of money at a time, they are a good mechanism for Japan to distribute its growing economic assistance budget, while maintaining relatively low staffing levels. The United States provided about one-half of its economic assistance as program assistance. The largest portion of this was ESF cash transfers and commodity import programs designed to assist strategically impor- tant countries like Israel and Pakistan to meet balance-of-payment and “‘Some perspective on the focus of Japanese assistance can be obtained by citing a few examples from major recipient countries. Nearly one-half of all lending to China in 1987 was provided for railway expansion and electrification. Other major projects included expansion of port facilities, tele- communications improvements, and a hydroelectric power plant. The largest single loan-financed pro- ject in the Philippines in 1987 was the development of a coal-fired power plant; the largest in Thailand was the expansion of the Thai telephone network. Page 16 GAO/NSLAD-99-149 Economic Assistance I_--.“-- Appendix I AID and Trade Policy Integration --- budget requirements. Food aid constitutes a large share of the remainder, while DA funds are most heavily invested in areas such as agriculture, health and education .‘.I Where substantial ESF project funding has been available, AID has undertaken infrastructure work. In Egypt, for example, AID has committed more than $2 billion since the mid-1970s to water and wastewater projects, and to development of electric power capacity. ’ ‘Of the various functional accounts within the DA program, the largest amount obligated in 1987 (about $687 million) waq for projects in agriculture, rural development, and nutrition. Projects in the areas of population planning, health, child survival, and education and human resources development accounted for about $673 million. Page 16 GAO/NSIAD-90-149 Economic Assistance Appendix II T$ng of U.S. Assistance Table 11.1:lying Status of U.S. Bilateral Economic Awl$tance, 1987, Actual Dollars in millions---._-.- -_____-_ Obligations Percent Partially _.--_._--_-__------ Tied Percent untied Percent Untied Percent Total DA and--.--...- .~ ESF: _...---- proiects $1,988 033 ~$940 (31) $80 (3) $3,008 cash transfers” --.-- -..__-. 1,762 (76)____- 115 (5) 444 (19) 2,321 commodity imports -~--.-___-__._--- 288 (100) -~ ___-..- 288 Subtotal $4,038 (72) $1,055 (19) $524 -(9) $5,817 Food for Peaceb .-_I____-- 1,592 (94) ----._______- 103 (6) 1,895 Total $5,830 (77) $1,055 (14) $827 (9) $7,312 aESF cash transfers are made to further balance-of-payments relief and policy reform in recipient coun- tries Therefore, no specific procurement is the object of these transfers. In 1987, however, AID intro- duced a requirement for recipient countries to maintain ESF transfers in specific dollar accounts and these funds are now frequently tied to either procurement from the United States, or debt repayment to the United States, or to a multilateral institution. We reviewed AID documentation and allocated funds among the three tying categories to reflect the actual circumstances surrounding each transfer. “Statistics.on the Food for Peace program include obligations made under section 416(b) of the Agricul- tural Act of 1949. Source: Agency for International Development As briefly discussed in appendix I, the statistics on US. assistance that we,developed from AID data may, for two reasons, overstate the portion of assistance that is actually tied to US. sources. First, the universe of eligible countries is often expanded through individual project waivers and, second, local costs may be underestimated. For DA and ESF funding, AID practices allow for expansion of the universe of countries from which goods and services may be procured through waivers to a project’s assigned geographical code (e.g., United States only, developing countries, or free world countries, including industrial- ized countries). Waivers are infrequently granted for commodity imports. Agency officials stated that waivers are usually not necessary in this area because recipients have great latitude in choosing the prod- ucts that they will purchase with provided funds. Because projects require specific goods and services, waivers are sometimes provided for procurement of the needed items. However, comprehensive data on the portions of grants and loans for which non-US. procurement is permitted is not available. Our data could not take into account the use of waivers at the project authoriza- tion stage because this information is not aggregated beyond the level of Page 17 GAO/NSIAD-99-149 Economic Assistance Appendix II Tying of U.S. Assistance individual projects. AID regional bureaus have been directed to aggregate information on their use of waivers in missions for which they are responsible. However, this information is incomplete. We incorporated in our analysis the information that was available on waivers granted in fiscal year 1987. While DA grants and IBF loans and grants for specific projects are, in principle, tied to procurement in the United States, local cost purchases are made on a partially untied basis. Local costs are expenditures that are met by exchanging appropriated U.S. funding for local currencies. The level of local costs met by the United States is determined on a case- by-case basis, and can vary a great deal. Such funding is always awarded on a partially untied basis; it may be used to procure items originating in other developing countries, in addition to the recipient and the United States. In submitting statistics to the Organization for Eco- nomic Co-operation and Development’s Development Assistance Com- mittee, AID estimates that on average, local cost financing makes up 21 percent of project costs.1 We used this figure in calculating local cost allocations and included such costs in the table as partially untied aid, along with other funds which were clearly awarded on a partially untied basis.2 Actual AID-financed local costs may be higher than 21 percent. We requested and received actual local cost allocation figures from five AID missions in countries suggested by AID as a representative sample of U.S. recipients.:’ Overall, local cost allocations accounted for about 31 percent of obligations in these countries. Also, a recent AID study found that for fiscal year 1988, about 64 percent of project procurements in Thailand were designated for local cost support, and hence would be awarded on a partially untied basis. ‘AID uses a a&percent estimate for local cost,financing in least developed countries. “For example, all project obligations in least developed countries are partially untied. %meroon, Indonesia, *Jamaica,Pakistan, Zaire. Page 18 GAO/NSIAD-90-140 Economic Assistance Disbursements to U.S. and Non-U.S.Sources Table III.1 shows statistics that we developed from AID information on the disbursement of funds to firms with U.S. addresses through the main U.S. economic assistance programs. Because AID does not collect detailed information on the distribution of funds to US. and non-U.S. sources, this table is based on AID'S best estimates. As discussed in appendix I, this table substantially understates actual procurement from the United States, because it displays all funds provided in the form of cash transfers as being disbursed to foreign governments, while ESF cash transfers are, in principle, tied to procurement in the United States. It was not feasible to assemble more detailed information on the dis- bursement of ESF cash transfers because of the manner in which AID records have been kept. Beginning during fiscal year 1987 recipients have had to submit records accounting for the expenditure of all funds provided through cash transfers. Prior to this there was generally no such obligation. Also, cash transfer account records are kept by indi- vidual AID missions in recipient countries. Table 111.1:U.S. Bilateral Economic’ Aeslrtance Disbursement8 to U.S. and Dollars in millions Non-US. Sources, 1987 Percent Sourfifi Percent %Y2iEi Percent Total Development Assistance __ $480 (32) $994 (67) $1,474 Economic Support Fund: -______ ._.Projects 206 (32) 441 638) 647 Commodity -___ Imports _I_____- 328 (90) 37 (10) 365 Cash ------- Transfers 3 (0) 2,110 (100) 2,113 Food for Peace” .---- -.-______. 1,689 (97) 58 01,747 Total $2,706 (43) $3,640 (57) $6,346b “Statistics on the Food for Peace program include disbursements made under section 416(b) of the Agricultural Act of 1949. hThe total for U.S. bilateral assistance presented in table II.1 includes only assistance funded by fiscal year 1987 oblrgations. The table III.1 total includes all disbursement occurring in fiscal year 1987, regard- less of the year of obligation. The difference between the two totals stems from this difference between the base periods for obligations and disbursements, Source: Agency for International Development. Page 19 GAO/NSIAD-90-149 Economic Assistance Appendix IV Scopeand Methodology To determine how Japan integrates its foreign assistance and trade poli- cies, we obtained information on its economic assistance programs and, for comparison purposes, we developed similar information on U.S. eco- nomic assistance programs. We conducted work both in the United States and in Japan. We discussed Japanese and U.S. policies and prac- tices with officials of the Department of State and AID, all relevant Japa- nese government agencies, Japanese and American academic experts and representatives of companies involved in development work from both countries. We also traveled to Indonesia to view both donor coun- tries’ assistance operations in the field. We obtained statistical informa- tion on relevant programs from both governments and from the Organization for Economic Co-operation and Development’s Develop- ment Assistance Committee. The report is primarily based on 1987 data. This was the most recent year for which comparable data was available for both countries. Our work was conducted from July 1989 through February 1990 in accordance with generally accepted government auditing standards. Page 20 GAO/NSIAIMO-149 Economic Assistance Major Contributors to This Report David Martin, Assistant Director National Security and Michael McAtee, Evaluator-in-Charge International Affairs Richard Boudreau, Evaluator Division, Washington, ~z~e,~~ ~~n~~~t DC. , Y (472200) Page 21 GAO/NSLAD-90-149 Economic Assistance Itt~ctuests for copies of GAO reports shonld be seut, to: I J.S. General Accounting Office Post Office Box 6015 (Sthersburg, Maryland 20877 ‘l’~?lt~pl~oIle 202-275-6241 The first. f’iw copies of wch report, are free. Additional copies are $2.00 each. ‘I’htw is it 26% discount on orders for 100 or more copies mailed to a single 2tddress. Ordws must, be prepaid by cash or by check or money order made out. to the Superintendent of Documents.
Economic Assistance: Integration of Japanese Aid and Trade Policies
Published by the Government Accountability Office on 1990-05-24.
Below is a raw (and likely hideous) rendition of the original report. (PDF)