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)

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                        Integration of
                        Japanese Aid and
                        Trade Policies

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United States
General Accounting Office
Washington, D.C. 20648

National Security and
International Affairs Division


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

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

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.
Appendix III                                                                                             19
Disbursements to U.S.
and Non-US. Sources
Appendix IV                                                                                              20
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



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


             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

                                   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
                     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

                                       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
Table 1.2:Tying Status of Japanese
Bilateral Economic Assistance, 1987,   Dollars in millions       ._--                                                                       -
Gross Disbursements                                                                      Percent
                                                              Tied      Percent         untied Percent         Untied     Percent       Total
                                       Loans                    $29           (1)        $1,682”         (43) $2,236           (57) $3,947
                                       .--- --~               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

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

                     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____
                                             Economic Infrastructure                                                  44                       --  4
                                             lndustrv                                                                  8                           1
                                             Program Assistance                                                       22                          51
                                             Social Infrastructure                                                    15                          20
                                             Food Aid            __                                                    1                          14
                                             --___                                                                    10                      --  10
                                                                                                                     100 -                       100
                                             Source: Organization for Economic Co-operation and Development, Development Assistance

                                             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
                 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
                                            _.--_._--_-__------         Tied     Percent          untied Percent          Untied     Percent       Total
                                            DA and--.--...-
                                            .~        ESF:            _...----
                                               proiects               $1,988         033           ~$940           (31)        $80           (3) $3,008
                                            --.--           -..__-.     1,762        (76)____-        115           (5)        444          (19) 2,321
                                            -~--.-___-__._---            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

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
                                       -___            Imports
                                                   _I_____-                                  328           (90)           37           (10)     365
                                       -------  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.                                      ,


(472200)                Page 21                               GAO/NSLAD-90-149   Economic   Assistance
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