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FACULTY WORKING PAPERS
College of Commerce and Business Administration
University of Illinois at Urbana - Champaign

October 8, 1971

THE GRANT COMPONENTS IN OFFICIAL
UNITED STATES ECONOMIC AID TO
LESS-DEVELOPED COUNTRIES, 1953-1969

Janos Horvath, Patrick Yeung

and Carl J. Gahwiler
University of Illinois

No, 31

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‘THE GRANT COMPONENTS IN OFFICIAL UNITED STATES
ECONOMIC AID TO LESS-DEVELOPED COUNTRIES, 1953-1959

Janos Horvath, Patrick Yeung, Carl J. Gahwiler

I. INTRODUCTION

With the recent development of grants. economics, the veal transfers
involved in economic aid by advanced countries to less developed ones
can be assessed on a quantitative subsidy basis. The purpose of this
paper is to measure and anelyse the grant component in official? united
States economic aid to less-developed countries from 1953 to 1969. The
United States is chosen, not only pecahae of the availability of rele-
vant statistical data, but because she merits special study as contribu-
tor of over half of net global foreign aid.

This paper is organized as follows: Section II lays out the conceptual
framework for analysing. the grant component in foreign aid; section III
describes the official United States foreign assistance programs in con-
junction with the empirical analysis; and section IV presents the sum-

mary of our findings and conclusions.

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II. CONCEPTUAL FRAMEWORK

Economic Aid

Our definition of economic aid in this paper follows the 0.E.C.D.
(Organization for Economic Cooperation and Development). It consists
of "all flows to less-developed countries and multilateral institu-
| iene ela ans official agencies," which meee the oMcw ene tests:
rte) their prime objective is to promote economic welfare and
development in less-developed countries; and

(ob) their financial terms are intended to be concessional.

Grants

“Grants economics identifies que paateray exchange versus the uni-
lateral transfer components in the varying admixture of market and non-
market economic activity."9 A grant in this context is an outright gift
for which no repayment or favor is directly expected in the sense of an
exchangeable quid pro quo. Certain portions of U.S. aid are 100 percent grant
(eens Corps expenditures, contributions to multinational organiza-
tions, surplus food donations, etc.). In addition, there, are significant
grant elements in development and Eximbank? loans, due to their varying
concessionary terms. A loan at (or above) the prevailing market rate
of interest and without concessions in repayment terms cont&ins zero (or
negative) percent grant. As the loan perme “soften” from this point,
the proportion of grant increases, speoanhate 100 percent (though never
reeching it as long as repayment of some. kind, regardless of how conces-

sional. or "soft," is due). Our task in this research is to identify

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~aeonon wor ‘to eae Lincagars cSbha oes: ‘to. sagen o4 anol an |

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the grant components (from 0 to 100 percent) in various official U.S.

foreign economic aid programs.

The Grant Component of Economic Aid

| The grant (subsidy) component of an economic aid program may be
measured in absolute value, called "grant equivalent," or in relative
terms, called "grant ratio." The latter is the ratio of the grant equi-
Satene to the oe of the aid committment. If the grant eeivalene

is equal in value to the aid committment, the grant ratio is 1. The
grant ratio therefore varies between the extremes of 0 and l.

Since the nominal or face value of the aid committment constitutes
the base from which the grant ete or the grant ratio is computed,
neither measure of the grant component presents a complete accounting
of the net cost or sacrifice of the aid program to the donor or its
total impact (positive or negative benefit) on iuecencimiene: This is
a& limitation of the Magent Pate of grants economics for which much
additional research is needed. On the empirical level, the effects of
grants have not been successfully cast within a completely specified
cost-benefit framework. Understandably, this is due in large measure
to the difficulty in measuring all secondary effects or repercussions
of economic aia.® We shall therefore rely on the conventional "pure"
measures of the grant component in economic aid, that is, on what may
be called the "contract terms basis" which will become clear as we pro-

ceed. !

Concessionary Factors
in attempting to measure the grant equivalent embodied in foreign
economic aid loans, concessionary factors are crucial. At the outset,

the contract terms of the loan to be considerered are the interest

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Yates, years of maturity, and moratorium (grace) periods. Goran Ohlin's

8 This

pioneering formula may be used to yield the familiar grant ratio.
formula calculates the discounted present value of the loan principal ©
and interest repayments. These repayments are deducted from the face
value of the loan, the difference being the grant equivalent of the
loan. The grant equivalent can be considered as the value of the re-
sources sacrificed by the donor country because of its aid .loan at com-
paratively "soft" terms as against the return which could presumably be
Neeened if invested for commercial profit (the opportunity cost) in de-
veloping countries.

During the grace years, only interest is repaid. Interest and prin-
cipal repayments are made during the remainder of the loan period un-
til maturity. The interest during the grace and non-grace years may
differ.

Following Ohlin,? the present value of the grace years interest

repayments is given by:

_{™M =a 4c 2 “y -qM
P_ = OC =e oe =
al f* ib © Q A ) (1)

and that of the non-grace years principal and interest payments is: |

{fs L , t — M | ~qt
Po chi ireg + fh (2 - BSH) CS | enn

a at = -9T
Cea -qM Bi (et - eV)
= it = Eee
4 cae en oe became anny) » (2)

where
L face value of loan
P present value
iy, interest during grace years

ip interest during nongrace years

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7 a ; ae P i
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(s)

tetas

q comparative rate of discount (opportunity cost)
~ maturity of loan (in years)
t+ individual years within the loan maturity
M grace period (in years) i.e., moratoriun
4 pase of natural logarithm, 2.718
The grant ratio, g, is given as;
peat Cina Se. (3)

L

Inserting the P,; and P, values and simplifying,

2

i i i -M -qf
M -qM By -qM AG e -e
cox ae rag mn ge ae ce

For a "typical" example, a loan which has a 10-year grace period at 2% in-
terest and a total maturity of 40 years at 3% interest (the 3% interest
is applied to the last 30 years of the loan), and using a comparative dis-

count rate (q) of 10%, gives,

FAG 1) 70 ae 1)40

hal rie ey

~
tt

1- << (qee7( 220) 5 208 gn (-2)20 4

0.6816 ( or 68.16% grant). (5)

‘
i}

Trading Factors

Our formulation of the grant ratio in this research goes beyond that
of Ohlin's to include the recent expanded considerations of Janos ateats
to which he refers as "trading factors" as distinct from concessionary
tactors,)° These trading factors include: (1) tied aid; (2) loans repay-

able in local (recipient country's) currency; and (3) surplus commodities.

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(1) Tied aid: The tying of aid to purchases in the donor country
tends to reduce the aid value to the recipient. This results if the
prices paid for equipment or commodities in the donor country are higher
than world market prices, or if such equipment is designed inappropriately
for the recipient country's utilization. To the extent that the reci-
pient country is restricted from importing from the cheapest source, the
extra cost clearly reduces the grant element of the aid transfer.-=

The computation of the tied aid adjustment factor, designated as By» is

made according to the formula:??

SSS Satta ond wet ep!

Py = the price index on the world market
Puig. the U.S. price index
Tied aid contains a "negative grant." It is acceptable to recipient

countries because "tied aid is better than no aia.24

There may be cases
in which the direct costs from aid tying not only reduce but even offset
the concessionary benefit of the loan terms. The U.S. inititated aid
tying policies in 1959 with the intention to ease balance of payment pres-
sures. The balance of payments gain from tied aid, however,,is less than
the face value of the aid because, even if aid were offered untied, it is
likely that at least a few commodities would be purchased in the donor
country. The true gain in trade expansion is the difference between the
export under the regime of tied aid and those exports attributable to an

Throughout this analysis we assume that

equivalent amount of untied aia?
forty percent of aid amounts would be spent in the ‘United States even with-
out tying; this appears to be a conservative estimate because, during 1959,

before aid-tying restrictions were imposed, the percentage of U.S. aid-

Aa

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financed commodities purchased domestically was 47.41 percent and similer fig-
ures prevailed for earlier years.
(2) Loan revayment in local currency: In the 1950's and early
60's, local currency loans comprised the major portion of U.S. develop-
ment assistance and, after 1962, were gradually converted to dollar
values, Since 1967, virtually all development loans were on dollar
repayment terms 26
As local currency loan arrangements prevent the conversion of
the repayments to U.S, dollars (or any other currency), their monies
eventually return to the recipient country. Specifically, the U.S.
retains part of the proceeds for its own uses within the recipient
country (e.g., for payment of embassy personnel, scholar exchange acti-
vities, etc.), and returns the remainder in the form of loans and out-
right grants. For this reason, the O.E.C.D. treats local currency
loens as grant-like-flows which is technically inaccurate. John Pincus
estimated them as 80 percent grant and 20 percent toan,27 To identify
precisely the Pincus estimate, local currency loans are analyzed by
the following procedure:
Initially they are submitted to the grant ratio formula described

apove. From the "

exchange equivalent" (the grant equivalent complement),
;

the funds designated for U.S.-use are deducted. »Of the remaining exchange

equivalent, the portion designated for grants is valued as 100% grant,

and the loan portion is submitted to the grant ratio formula a second

time. The second exchange equivalent is subject to one final meénipu-

lation to arrive at the local currency re-loan factor, designated as

Bos Tne repayment funds are blocked except for U.S,-use in the recipi-

ent country. "The trick is to value the blocked local currency at its

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tisighoes ots adbistw away ae ag WF, abes ie | seis 28 duaq
rer sgiatioxe ~ptnites fe sano exe saws te deen ony xt vat
ni bas anol "bo orx6s aiid hag ‘vobisbatio’ at serena ba) dite

yanastue Loo atone +0,9.0.0 add ‘sine ete 799 ee =

“eat sutton! ‘yadonuooant hiss stand at ou ewe awk, Cee:

ad oP uM fn gasox 29 of ‘ive diaty, Sesotse of ee oat bose
Vit Semglane axa aceol noanre nero ago eontendis shal saat ead los i _

| i ll | it mn sericoaranii patente
_ fedtiaen elverto’ iin oe ule act oe mode bd am eit oe.
Xinanicepiird teemshen fates a we wits), “naga 2 oyationsa htt: monet
auiintors’ wiabane ast $0» sbotcutbob out sity 2.0 x0 batoac ct
ta _ iOoL 28 budgie 4 acuity wt ed amps ap keiog eae ee
Dndosa 2 a hutirs0'2 ‘obien si elit on yo tdintire ‘et amaeaig anol. it) Bi
sarge: aaah O00 OF: soapduw af sahoitops madame bnogox scr a

ee , basangiead smd 2% Pema k youere4 tates wt te Seat 0
akgicox tid a Nii Bi; a at tqvex betoote om aa te rm , “a
‘hd tes cone reD: Last tanith oat ow Loy Slataat = t

true worth to the donor country by use of what is called a ‘shadow’
rate of exchange, as opposed to the nominal rate; in other words,
the rate at which the donor would be willing to buy the blocked bal-
pueest The calculation of this "shadow exchange rate" index is
presented in the Appendix, Table B. The index is multiplied by the
percent of total aid which the blocked local currency loans represent.
The product reflects the official (higher) exchange rate versus the
market rate and, therefore, indicates an additional grant component.
Due to occasional currency depreciation, the Bo trading factor's grant
ratio is raised 15.4 mercehe. 7 The factor is raised an additional
50 percent to account for waivers on installments and interest in con-
nection with their particular Cone

(3) Surplus commodities:

For the third trading factor, Horvath provides a generalized for-
mula to reduce the domestic, government supported price of surplus agri-
cultural commodities to export market values. However, as the agricul-

ee

tural aid data were obtained in terms of export market values,“~ the °

third trading factor formula needs no elaboration here =

Comprehensive Grant Ratio

From the preceding discussion, the appropriate final grant ratio

ret Soe Sy ey 2h
formula which adjusts for the trading factorsis
tes ~

g' = g + (-g,+ g,) (7)
where

peas the comprehensive grant ratio

g the conventional grant ratio (a la Ohlin)
the tied aid factor

Eo the local currency factor,

wala a tiie pk Pi hi: Aoigale: ge (etn och ob 08 arn
ghhtoie waito al paca Cnc kat ait. Oe bichon | eqrmdnies 2 .
ed beled AT Ot oe Lette sib balbiy te out ere a
at Kehal "OH ouiaions wonsahiay nie ha avtteTuotng act ie:

a)

ais w bench das at xk ‘ae i P | abe: pRZGSATA oft aby

seaexget anabl eaeweioe ‘tao Sado iy aut ebitu his Lado A

edd auaney atat Spoetons (ontats) Sato eae sett sonia o som =

demtecsen 2m Sans taba a ve ith orotesodg end oder |

2 eee OAL \ ar

tomy rerer,' gab 2 ont (noktadewigm yori us Lssohaae2e ¢
falead ates ai Bovakors wh apseury” eb PE dewense bee: Souter ag

a

~ROD ae Seecesal Kou aseomiLavont We ace qo ducts ‘ot ‘deiot
Bat Nl ese

os ionibasces me eedtvoie ianaeettt oteat “gatbines mend ae
com aataitie ta sola patrogesrs Cae tihnn | ‘ateasan fad tes 0
“nhobage ond wa carrot eockley toa THES ae nvls2oetins, £ |
eS) 8 ecole gates pecs 40 earon Me: biatar do ozo ‘nbs hea o

_

Paced 0 apis eestnte ‘oat anon, auaso swioat gales ig

ohter thaty Leath stabyoupga vcd eons ao lt 9

eb brats patsens tt Popa

a

or

TIT. EMPIRICAL ANALYSIS

The period chosen for this study is 1953-1969, because during
the post-World War II years prior to 1953, U.S. foreign aid was direct-
ed principally toward European recovery under the Marshall Plan, and
was not extended on a world-wide basis until 1953. Direct military
aid is excluded from our scope of consideration. Currently, U.S.
foreign aid is administered through four channels: the Agency for
International Development (A.I.D.), the Peace Corps, the Export-Import

Bank (Eximbank), and the Food for Peace program (P.L. 480).

Program Evolution

From 1948 to 1952, the Economic Cooperation Administration (E.C.A.)
administered U.S. foreign aid. The Mutual Security Act was passed in
1951 and reported on aid transactions through 1953.. The Foreign Oper-
ations Administration (F.0.A.) was the official agency from 1953 to
1955. Thence, the International Cooperation Acute eration (I.C.A) was
organized and operated until 1961. The Development Loan Fund was estab-
lished and operated concurrently from 1957 to 1961. In 1961, all pre-
decessor agency functions were taken over by the present Agency for In-
ternational Development (A.1I.D.).

Public Law 480, the Agricultural Trade Development and Assistance
Act, was passed in 1954, and administered surplus agricultural commo-
Gities under the Food for Freedom program. In 1966, Public Law 808 was
passed, giving ee the Food for Peace Act. (The program is still
commonly referred to as P.L. 480 in spite of the legislative change.)

The Peace Corps was created in 1961.

The Export-Import Bank has existed since 1934. This institution,

= un acs ae.

“sem oilegad 5 cae rested! at ose woah hod
Be tain Rew te mate’ ee ‘teat os aay ior 4 “alt ea
Bic att Basan sit aehesg nepaoon in og | |
| bates toate Stet tan bad a a
pe oy wetnoratd actinic ato bd spe ett ee 2 to
- Aainn call setosneso itt 3 obey ay

he ed fae

*

“ sanavenat baa Sesame tv ohe a eat va, ea otteut

Ree 808 vec sen eK at amen sapien: aati
“ite bis mayor | ail 4a Coad it — «pe ms :

10

to promote U.S. exports, is not financed by the Federal budget. Al-
though Eximbank has the possibility of borrowing on favorable terms
from the U.S. Treasury, its resources are obtained mainly through

loan repayments.

Agency for International Development

A.I.D. administers funds under the following categories:

(a) Development Loans: Loans are offered in both dollars (donor
country's currency) and Local (recipient country's) currency. They
are authorized on the basis of project, program, and sector loans.

(b) Supporting Assistance: This category is granted primarily
to combat economic or political instability in countries engaged in ma-
jor defense efforts, and in the 1950's was termed Defense Support. Ap-~
proximately 10 percent of supporting assistance is termed counterpart
funds .°? This portion, designated for U.S.-use in the recipient country,
constitutes an exchange element and is therefore excluded as grant.

(c) Technical Cooperation (also termed Technical Assistance): This
type of aid is considered 100 percent grant and consists of (i) students,
trainees, experts, and volunteers sent to foreign countries, (ii) the
supply of equipment for research or training, and (iii) the support of
educational programs. (The Peace Corps is considered a special form of
technical assistance. )

(a) Multinational Assistance: Two types of aid are covered by this
category: (i) contributions to the development effort of the United
Nations and its associative organizations, and (ii) capital subscriptions
to multilateral financial institutions. These funds are treated as
full grants.

(e) Contingency Fund: ‘These appropriations are reserved for emer-

}
.

yi viontouoe trelgtost eon? it war. 0 46% padisphenh patecom, ana? es
2 satry a9 Sebutoxd eiotexads et ana seaeots) opiutitas ‘ee watt
‘oictr stosnasabans Lao kritos't Seared on ta) ‘attadagood cantatas (0)

2 to sit Eatobae a bwistinos al ease oonss Sea), toning ‘Dano hs

whos we bersves. us. haa. a ave “epllwgatean boca «ol one ae |

be

‘sl vtogbut Sosebes xt “ sanomy fon thes We
paca suiteribvat ri aateotgeg te: seaey ae tad. Lande

somos) winkion shod (agp poret3q 8 + soba ale. dasa )
eet sa eee taco snseeiae) Aasot bas (pation at te
| * anno s rosoen bas TG donbong 6 Pere “sith ae “poate a ‘ a | “tl
gh ieamne bogamty nb ‘¢deypdes aidy asec: pant rea (ay 4
nba ak boydgas esbatesies at wi iitierand Lapis hte $3. dimanioo anit
~ stiodyse sensted phates Baw ere ail at Bab strate 3 ow <

on

suaqadins baxtet " ponatetsas introggda to acs oreq bi x

” ‘

| «tinea ces) te se chums bua gneig dave coe or bovepxaads ar ‘pha “8°
Ae = ete CER) <aebusarios egtexot a dno eresiaiitoy ficsay cata

to lai il enit (ay hoe Saal ie ged to 0? Sronmaps to"

(eaten fant

| SetkAD add 5. gx0 ate Shomge.29 ova: pte 4 ) \ sqodtastasnee By
phot tgtsp edita tas tees (éx): bas anata 5, antanna ‘see id

26 hodauns arta. abner? + oso Buoyant it Latent

alae

gency situations resulting from economic or political crises. They
are treated as full. grants.
(f) Administrative Expenses: These appropriations, considered

as part of the cost of assistance, are treated as full grants.

Peace Corps

See (c) Technical Cooperation above.

Export-Import Bank

Eximbank is in a sense two institutions: one issues insurance and
guarantees, and the other authorizes various types of loans. The for-
mer transactions are not considered Corben aid. The latter consists
of (i) long term loans, (ii) commodity credits, (iii) exporter credits,
(iv) special foreign trade (emergency) credits, and (v) discount credits.
Within our present pencenc only long term loans and exporter credits
are considered as foreign aid, while the others are Soeeey The distinc-
tion is made because emergency credits are used primarily for direct

military purposes (which is outsi

OQ

e of our scope of consideration) or
for stabilizing local currency crises, with the credits for the latter
usually being cancelled before utilization; commodity credits, desig~
. nated for the exportation of raw cotton, are exchange transactions; so
are discount credits, initiated in 1966, which are made available to

U.S. commercial banks at or near private interest rates against their

holding of export debt obligations.

In 1954, P.L. 480 consisted of three aid categories: Title I
(sales for local currencies), Title II (donations for emergency relief

and economic assistance), and Title III (donations to U.S. voluntary

seats seteet, oe : Ma moan Devos, 208 ‘

| fe

abe

agencies). Title Iv (sales for dollars) was introduced in 1959. In
1966, the earlier programs were replaced by P.L. 808 which provided
two categories: Title I (sales for dollars and local currencies) and
Title II (donations). Barter is also included and consists of the
exchange of agricultural commodities for (i) materials for which the
U.S. is a consistent net importer, (ii) commodities required. for for-
eign aid programs, and (iii) materials or equipment required for off-
re tene tiaciion programs, ;

We treat sales for dollars and local currencies as foreign aid loans,
and all donations as 100 percent grants. AS regards parter, 25.67 per-
cent of all P.L. 480 agreements from 1954 to mid-1969 ae earmarked for
U.S.-use, constituting an exchange element. Deducting this percen-

_ tage, the remainder is treated as full grants."

Computetions

In computing the grant ratios and grant equivalents, the following
stipulations are made:

(a) A comparative (i.e., opportunity) rate of discount 10 percent
is utilized throughout the analysis which represents the rate of return
private investors expect to earn in developing countries. This rate
is also used in 0.F.C.D. calculations and, therefore, provides a basis
for ee

(b) All data are presented on the basis of aid commitments rather
than actual deliveries, for which data are often difficult to come by.
Commitments, defined as firm obligations, are the best means to assess
comparatively donor aid policies and are a useful indication of the
direction the programs may be expected to take.

(c) Prior to 1964, due to the absence of detailed information,

i a WIGL ad fice bow Areas sot ean % ait Coat
. Bebhvor Hats 808. «9 ey henatgon oto" lounges sabanoe 4 ait

“ paa(aetocemes keds te ented mY ventas). soi fans 2
adit 39, urptawan ane bouton. date ab areal | Gnas.

4 $d Rodel, 08% aksbrotat (zy ot sedation ‘ost Luo Fige we
“19% 07 ezbapa as ba thane (a2) pessognt $90 siisgedacwa = |

«tte “ot borhiper sasoniaps 9 atatxoven Ge) one cae a
‘aioe. Bea agent a “4a aolorteicans Lapa beh peaiod, oR, ‘seta tre bs
waeg 19.29" COT alsages eA -eonay Sposa, OL as entoby a0
r0% bodeunary wae Qagt- Dh og ROE sort atnomorye 28 ated, £
santtle ates grivcrbod ~Sasano.ty egnacione rt lout 2tano
ana ’ MR tears, Lint we bateond, oy raha

PA 22a

gatolo® odd nono arbips soony t bast totsai toy otis a ants
f ae ) PE o ‘obaa ren anpte
damon of ¢ tawso ak te stat tra tip soe 08) ondaraggise re ay
Ss seats So. cbacs oats aprenonges Ao bde eleven add Suodtgucrn? k ae! i
ates ebitt veaitaatiog aniigo Lava at ones of Page siseyosilll
ataad a aeoivorg roto ane ‘saokentut te 4.0, 2.0 52 bopd ei

aa ae 8 cat

sodsar atiomt Laso0 ate ‘yo bhbed aay Ag tabanaies oe ab SEA’
| aed tne ot siusntttb mano ann ates doide wR ceodeovhton 2
ansess ot etiom Sted ait ara «sao hagtlda wont a a
oat bo sobesottat be ie a sa oy , oN
Lo) malt ee, fod oe. 9 a

“to nL mn of eh

te <a

13

yearly averages are used for the loan terms applied to the respective
total loan figures.

(a) In local currency P.L. 480 sales and local currency develop-
ment loans, a percentage of the exchange equivalent is designated for
U.S.-use (in the recipient country) with the remainder, termed country-
use funds, returned to the recipient in the form of loans and grants.

The percentage designated for U.S.-use from P.L. 480 sales ‘is applied
for development loans also.°?
The Peete” of our computer-programmed computations are summarized

and presented in Tables 1-3.

IV. FINDINGS AND CONCLUSIONS

An Assessment of the Grant Components

Yearly U.S, aid commitments, respective grant equivalents, and
grant ratios are shown in Table 1. For the period of 1953-1969 the
-total aid commitment is $65.9 billion, the total grant equivalent is
$47.9 billion, and the corresponding weighted average grant ratio is
0.7269. Table 2 reveals the comprehensive erant ratios, The ratios
have been fairly constant with the exception of the last three years
considered. During the full period analyzed, the figures have varied
from a high-of 0.8542 in 1953 to a low of 0.4996 in 1967. The effect
of & (aid tying) has varied from zero in base year 1953 to -9.67% in
1968. This trading factor's effect has been increasing, although fluc-
tuations occurred. The effect of Bo (soft currency loans), with minor
variations, has been relatively negligible; below one-half percent on
the average. The trend of the comprehensive grant ratio has shown a

Slow decline. This can be scen graphically in Graph 1, which also de-

*
i

ertdoogee ane » wae ure abe od we Sona ae t
<<osves, ener feat bn eeu a ct oe wien bao t
“0X boven! bab a pe Lortuph, ingens a te ogbkasonng, a ! sf
“secimie pumred absitaare od tbe coche deakalony hag

~sateg bike sc x iene edt! ink ae stages ety ae Sanrabere ry

Nae
RRM

_Patlne at ‘bo.tag 8H ih, aye ote. 2,0 net ytd gba
f pe ea cei ee. ) | Mai vet Bone Nar

beat ona fasts soensssors- coogi sxi0) 4 atic Luton,

as x iutnstevhapa Soe ovivoagaes: : Bhima tonne at
ed ound te # bolo, ue et, it : & ster ag its desiree’

;
i
}
i ape,
mh
-

etl ae rat aad ‘ohepti sete i vest silt, ‘sate a
_aestteactt, Tee. we tele 48 etary ee eh Sad sCeoce 3
ys 8, ca oF kee oe mga ee i

Li y oy st

en hota ase abr ha

is ~0tt Aalst eee hed a ee aia?

4

picts the increasing trend of total official aid. Official aid reached
an all time peak of $6.191 billion in 1967.

A glance at Graph 1 reveals that major fluctuations in the compre-
hensive grant ratio occurred in four periods: 1955-56, +0.09345 1956-57,
-0.1244; 1959-60, +0.0818; and 1966-67, -0.1382. In the 1955-56 period,
the increase is due primarily to two factors: (a) the Food:for Peace
commitments (having, in general, high grant ratios), increased approxi-
mately three-fold, and (b) Eximbank funds (which have low grant ratios)
decreased by roughly one-third. Eximbank fluctuations are also the
prime influence in the remaining three periods. In the 1956-57 grant
ratio increase, Eximbank funds increased roughly five-fold; in the 1959-60
decrease, Eximbank funds were cut by approximately one-half; and in the
1966-67 decrease, Eximbank funds were decreased by a factor of nearly
two and one-half. Decreases in the comprehensive grant ratio reflect
a@ widening gap between total official aid and the grant equivalent.

Table 3 contains grant ratios of the various types of dollar and
local currency loans. The local currency loans generally have higher
grant ratios than dollar loans. While the terms of repayment usually
are harder in the local currency loans, the majority of their repay-
ments are re-lent or granted back to the recipient country, raising
significantly the grant ratio, Yet, in 1961-1964, the grant ratio
is higher for dollar development loans than for local currency develop-
ment loans. The main factor in this interesting paradox is that, in
these years, U.S.-use funds constitute more than the actual exchange
equivalent recovercd from the local currency loans and even “borrowed”
temporarily 2 portion of the grant equivalent, thus reducing the total

grant equivalent in the original loan terms. The Table 3 also indi-

Apa

dere ‘ ige0 ie de-taes

tedonir ju i. Zs

“mig ‘td nk re: : soi

shone Begees, ‘ond a s
. sane 20% aot id 49), . big ;

3 pe eae sue, » enoisaerout sas et rete Bis

wx

dooce oktan tag avtane fangios 5 at +3 Peicoat ae

. dos Lars Lupe brs ay. ane bea bis Sanpete fo0, nema 09
‘en xAbob $5. some iota Bt ae 40 asta tess eck
gaatgit ana od Charen aanos cyst aout pee | 7
rats a8 eg toes

sebbaarase tromteqen ating ‘ait f ecw ene

ca

Pi, gig <pat i) yet DPI as sai, ee ys i

‘oho pve auth NE

ngotovas voniarain fnaot 0 ae

hag dads at woberad | wane

15

cates the decreasing trend of local currency aevelcpment loans and
local currency P.L. 480 sales, while P.L. 480 dollar sales are
@linbing.-—
chermore, the computed grant ratios reflect the perennial over-
haul of foreign aid policies.- Development loans and surplus commodity

Sales were offered during the 1950's at interest rates slightly over

3%, which was reduced to 0.75% in 1961. From this extremely generous
condition, interest rates slowly have grown harder until the levels of
2% during grace years and 3% during nongrace years were reached in 1969.
Another feature of the reduction in concessionary terms is that from
completely untied aid prior to 1959 (except for Eximbank loans), the
percent of U.S. aid-financed and domestically purchased commodities

reached 98.94% in 1969.

Other Conclusions

Three principal conclusions are drawn from the subject analysis.

1. While total official U.S. aid generally has increased during
the 1953-1969 period, the comprehensive grant ratio has experienced a
Slow decreasing trend. In only three fiscal years during the period
analyzed, 1967, 1968, and 1969, has the ratio dropped below 60 percent.
eee @ Significant point is to be made here. The huge increase of
Eximbank loans is the prime factor in this recent grant ratio decrease.
For exemple, in 1965, the grant ratio is 0.792 oan, im 9G7,. 2b) TsO. 5e0%,

The exclusion of Eximbank loans from the calculations results in grant

8
yu)
cl
f+
ce)
n
fe)

f 0.856 and 0.840, respectively, thus reversing the apparent total

2. The effects of tied aid have been estimated to average approxi-

Sie)

mately 10 to 20 percent, with individual cases as high as 49.3 percent.

Peli otic

<aM0 elaaigs co Bodar saison oe otek: wie wired posers if
int of elaatereD: nig oat . RE, He, | 0: oat encbar nent |
0. misyol nde thtnw sobsad ecg opal eihose near aertoeak 400.
“PERE a ‘Baliates sxow axe0y nopagned, patti RE dete ates, oan: au
ROE Saab ah aerced wrenoksiecads at adhinihors, ot Yo a.
ond \(aneol Ansdmict not tos0x9) eres, ot volay Sha betray |
eeldbomans weerre weal? asia bane beowtsns’ bbe Bt
ae 4 te a aie sabes

4

sabeyiaaa Sostsue edt woz ies axA dapdaut noo ake

: priuch besseroal ” vilexenng bie 24 Intostrte Laped say"

ry ‘Boortarvenns ond ots we see'tyy srianadstigibs ode hobrag adele eRe

Bok eas aig. pakinb RLtoy Epa nit yoni hie ot Borer bagels

| Meo Teg oy woLed £ boob Skgar ante, aad PRE bie BGs Set. 4 jan

‘to. seostont hed ol! \.sted-obks df ag, es thigeg sonccftiyte 2

eanetseh ond aru Sriirty’ sae. alt ad tobost esa alg at ined sci

BBR .0 ok st WDGL aa bas ‘Sef 6 at obtes sabiy oat ee wh pat
“going a baal Lees ‘sao baa tieh toa sit met 2h | tine ie +e
AAS Od ‘Seasagre adit gitereves aut idabbioaaden Qt & r

iota S2at5VA oF pasantsas Heid aed ats, ‘bolt ‘3 |

&

“above G.G8 as Pray beads tasty aa |

| od
ON

The World Export Index (see the Appendix) has shown this figure to
average 10.72% from 1953 through 1969 (14.25% during the last decade).
The eroding effect on the grant ratio during the period analyzed has
averaged -3.69% (-4.59% during the last decade).

3. The grant ratio of local currency development loans and local
currency P.L. 480 sales during 1953-1959 is 0.7611 and 0.7588, respec-
3h

tively. In this connection, Pincus's~ initial estimate of 80 percent

grant and 20 percent loan is substantiated as quite accurate.

40) eae

i

aca |

i
i “f
G =
- ;
i
rn
hes
o fh
{ ~ : f by
i
i a
1 ; :
; A
1 te,
fn i
A i
i i
aw
1 ;
‘ TX
nin |
7 cath
i, { hn
Py y
4 ml ;
s ed ;
f I - H
‘ j : i i
j
7 i :
ae
ial i ui
ant
en
: i
we
Th iv
4
|
i ;
‘
-
{
“
i i
ie f y =e) 4
4 i
)
if i
j
i a
: yee

Table 1

U.S. AID COMMITMENTS AND GRANT ELEMENTS, 1953-1969

Fiscal Total Aid Comnitment Total Grant Equivalent Grant
Year (Millions of Dollars) (Millions of Dollars) Ratio (g)
1969 3,789.2 2,461.5 -6496
1968 5/2950 S319 -6269
1967 6,191.0 3,626.9 5858
1966 5,075.0 3,674.2 7240
1965 AT at ae So05 0 -7920
1964 LP Sasa 7/ = 3,413.0 7821
1963. 4,472.3 BRO 4S 4. 1923
1962 4,649.4 SAP nd/ 7906
1961 4, 206.02 By lyre 1313
1960 3,405.7 ZOU G2 7564
1959 Sa ales Del’) 6746
1958 Souls IAs) 2,384.3 7195
1957 4,256.1 3,045.6 .7156

=. 1956 2,686.2 ZL tSieS -8400
95> Pas PLE BS 1,660,838 7466
1954 1,466.0 L.1BAs3e -8078
1953 2,374.9 2,026.7 -8534
Total 65,901.9 47,903.5 . 1269
Sources:

Agency for International Development, Operations Report, Fiscal Years 1954-1969;

International Cooperation Administration, Operations Report, June 30, 1956-1961,
and November 16, 1955;

Foreign Operations Administration, Monthly Operations Report, July 31, 1954;

Alexis £. Lachman, The Local Currency Proceeds of Foreign Aid (Paris: 0.E.C.D., 1969);
Export-Import Bank of the United States, Fiscal Year 1967-1969 Reports; Washington.
Export-Import Bank of Washington, Report to the Congress, 1960-1966, and June 30, 1959,’

Peace Corps, Seventh Annual Report, June 30, 1968;

U.S. Department of Agriculture, P.L. 480 Congressional Sales, September, 1970;

v.S. Presicent, The Foreign Assistance Program, Annual Report to the Congress,
Fiscal Years 1964-1969, .

eee eT ee ern?
uy VRURRR ENT aa ds ale
ge pe F288 ai eee
Cp eRe Si Noche io ie
eer eeece 0 ye al mca
ne CME ent ie
6,088.1,
| Vo CeaBr Lt ee oa
: = > $880.8 JE) ha
wb Z.f0e, 08 ern ane

arn a,

“> agaer-seer avauY taney 70G58. suotsereg? .somaocavee La ok er
| FOeInaees Of seu, qtzoqed snbsseng? Gries aan nosed a

date tcaet Tnh ra

Tos phOOs (Le eit 2roges gnotaaxe 40 yiaseott potverielateb anotia
fs

lol he

sgeaer. oe D.0.0 Feltet) BIA ap ierst ‘te. nbai non (2 6 i)

inher tarxoght gaeres eSa@l tea¥ fas sat <soaagt bose ots 0 waae on
: ne Hl ih AS rN ; e
" Bees a0 etul bas eee .edozgnad add. o2 saagedt ecigeaes bd ‘saws * 3

wy ; afc it cone

p8aes oe oauk

Table 2

U.S. COMPREHENSIVE GRANT RATIOS, 1953-1969

Fiscal _ Grant Trading Factor Effects Comprehensive
Year Ratio Aid Tying Soft Currency Grant Ratio
)" (eg) (go) (g')
1969 6496 -.0829 +.0008 5675
1968 6269 -.0967 +.0021 .5323
1967 | = 5858 ~ .0866 +0004 4996
1966 «7240 -.0458 +0008 .6790
1965 7920 - .0359 +.0030 7591
1964 7821 -.0260 +,0014 of DTD
1963 7923 -.0264 +,0009 7668
1962 «7906 -.0227 +.0004 «7683
1961 ~7313 ~.0247 -- - 7066
1960 0 1564 -.0116 +.0176 «7624
1959 6746 ~.0237 +,0033 6542
1958 795 ~.0123 +.0080 | afte
1957 7156 -.0097 +0086 ~TA45
1956 .8400 -.0029 +.0082 8453
1955 « TH66 ~.0068 +0043 -Th2L
1954 -8078 -.0030 +0028 8076
1953 8534 -- +.0008 8542
Weighted ~7269 -.0369 ; +.0035 6935
Average

Source: Refer to Table 1,

BS fi) ‘eeaauiescian ; pt aa a)
oles ee me; a Gast re

Waal

: —-Byob, 600.4

a ae )
ae a
{ U>

19

Table 3

GRANT RATIOS OF U.S. FOREIGN AID LOAN PROGRAMS

: : 4 = \
(millions of dollars)

Fiscal Dollar loans Local currency loans

Year Develop- Grant PL 460 Grant Develop- Grant PL 480 Grant
ment ratio ratio ment ratio ratio
1969 2 ee.2- .683) 411.0 .6099 -- -- 337.0 | enfoo
1968 1,044.0 .72kh 306.0 .6099 -- -- 723-0' | 38076
1967 1,108.6 .7234 178.0 .6138 =e wun: | 803.0. 1.27839
1966 Jea0(.6 «7330 181.0 .6138 2h .6 <1927 866.0 | .917
1965 Tte8-0. 27641 158.0 .6138 34.9 sT98T L,ls2.0 | 28517
1964 1.249.0 .8299 46.0 6547 65.7 -f991.2.,056.0 | 78293
1963 459.2 .8LT2 58.0 .6956 128 .8 -799T 1.088.0 .8416
1962 Sit-1 .8i72 19.0 .7366 219.3 -7998 1,030.0 .8181
1961 - 261.8 +8092 ao == ©3927 \ 8001 952.0 ) 368
1960 ATT. «5052 -- -- 343.9 eTlT4, .82h..0: | 268s2
1959: 15.67 «54d -- -- 505.6 “(059 ©T2h.0 baig2T
1958 tae .51oK -- -- 2b .5 -THT 658.0 | 36960
1957 -< —— = == 332.7 -1520 908.0 .6960
1956 8.4 .4904 si 9c 202.4 THUG =6439.0 =. 687
1955 -- -- -- == 209.5 \.7913 73.0: | 26877
1954 -- -- ~- -- 100.0 -7330 -- =--
1953 -- -- -- -- 16.4 afoLy -- --

8,966.4 .7601 es57 0) T6182. 2.8216 -T6LIL1 622.0 -7588

Source: Refer to Table 1.

6. ing | a

| easoon we ropa iis \ a

wn =qolovec | a ,
OFS8% >, devel yk

tag a oe r oted
+, BEST ee aon RG 0.208
~ C608 wy. shee he RE. 0.8TE '
0.088 set, Sls BRB (0iBL | <<
oss Tees. Q.de BELO. Ber —
9.220,f LOR: 7.8 | TRB 0.8
0.000.£ Tet. B-GRE BRR 0.82
(0,080.1 BROT. Ever RET. Get. ST
re See) TRE! fee ia eh
ry ew drity’ ede SS) ee
Oe me eo ee
O.883 TRY, Rd we Re
0.800 OStT. T.SED «+ (= -=
O.ces Sdsp) OOS a
ae eet OR: RE eee Se Se
i a en ee eee ee |
—- \ | iw ae TLET. i.) a oo | Lok - -

joa
0,08

Seer. 0.982, LELBF, 0.£98,8. BBL, ORE 7

20

1)

(
\

AT SUOY,

(quedr3
ey

wo3)

Lue

4
~

oT} CY

°€ pue *g *{T setqe, ‘*a0r1nog

696T Q9GT LOST 996T S96T 496T E9GT SOGT TO6T O96T 656T QS6T LSET 9S6T SS6T HS6T ESET

quaTeATNbY juery

PREV TetotssO TeqoL

OTZeY JUeTO asATsusysmduog

696T-EG6T SOLLVE LNVED AATSNGHAMANON CNV ENGIVALNbA ONVEO "S*A *T UdecO

(StETLOP UotTTEA)

f ay

raat

Appendix: INDEX COMPUTATIONS

Two indices are required in the trading factor relate: one
to measure the relationship of United States versus world market
export prices and the other to reflect the difference between offi-
cial versus market currency exchange rates. The former is used in
the aid tying calculations to indicate the loss of exports had aid
been offered on an untied basis, while the latter is utilized in sha-

dow exchange rate calculations for local currency Loans.

U.S. versus World Export Price Index

The index figures in Table A of this Appendix, which represent the
value of U.S. export prices, are assumed to reflect a "basket of goods"
commodity mix similar to actual aid-financed domestic commodity expendi-
tures. The United Kingdom, France, Germany, Italy, Canada, and Japan
are regarded as the countries which could effectively compete with the
United States for these commodity expenditures. Thus, the U.S, export
price index is compared with the average price index of the competing
countries and the percent difference is shown. This derived ratio re-
flects the loss of exports attributable to foreign aid due to the price

differential had aid been offered untied,-

Orficial versus Market Currency Exchange Rate Index

Due to limited availability of data, three countries, India, Pakis-
tan, and Brazil, are used in the calculation of the shadow exchange rate
index. These countries represent approximately 65% of the 1954-1959
P.L. 460 sales and approximatcly 47% of other local currency sales during

this period. The weighting of these countries, which reflects the flow

beh
Pas

ane ae 2H ra watt 4 weg. a ae
$eune: blyow wit bey petaee ped 24) 9) t zaekia,
“BYto desires sisi RLS adh tea) 8 sas ate tra siookg
vit ‘boew al ourees aR - sete sya oven ie

nai at bead iit a} used oct teste st, pnt. as AG

age A oe so eau {p00 ‘tat swotsalus tan oe .
itt annie cathe cxtbnogah this! Yo & pis wt sags mena
: Naboo to dodaad™ a. soo ted oF homeaa ceed loan: esr Rat
‘nbbisiges {gt hbomaon obtesmos boodant Spin. Lato: “og sobgeke re
sagas faa ,AbMaAY (YLAL ,yuseiod sonnet jeobge ke boshay ste
one Kile ad eqzoo vievibdastn Bives soda tekygando pie ap J 2
drapes, BLU end fiat nore Rion witiminno sendh sit vit si
pated ost 40 xebnk 962 bq specova ene dtiw: alae ici aks ak
set obdon bev ive’ eld? - vo ‘at soar eth Sasso one, vee

Nitty

Bi nt

—

veabel aid ot bu hha utero ort oldaratiasts aptogne 20. seol «
ae fois sesbhe : nod ¢ Biellbes 2

| | obo gaat oui ne oie as oat | eu Sf
— attatt casketauies nants aan to: wrenrinttbies soot of x
adh wees woheds s:it %o selenide ss ae "atid x

| aia détinn yeagyaio Laoat ras to ah ‘eine !
te WORt nit atoaLtor obtate oobi aso to man

ag of

of financial resources in both categories, are: India 65%, Pakistan
21%, and Brazil 14%. The index calculated in Table B of this Appen-
dix is assumed to approximate the data for the remaining countries
in the group. The exchange rate considered tor Gach year is the rate
as of June 30.

To calculate the index, the average local currency units per U.S.

doliar from Table B are utilized in the following manner:

India = a = 0.696 at 65% weighting = 0.452
‘ W4T a tag AO

Pakistan = Car hie 0.523 at 21% weighting = 0.110

Brazil = Teme = 0.477 at 14% weighting = 0.067

100% 0.629

Accordingly, 0.629 reflects the market value of local currency repay-
ments, while its complement (1 - 0.629), 0.371, indicates the grant propor-
ticn which is to be utilized in the shadow exchange rate calculations for

treding factor Bo"

of 08% ont ah; “ain: foie, 0% tin oat ct

7 ott c- potatoe ats $8 estas
Pe ee, ae "ae Mage de ¥
| | Revo oe - akan Me ti ok,
: ; i : we. b. yn i | i “woot Sebi \
: Er estasue snare ye stk: }
| Fair ste ee ascaotint Peay) paler ad apes ot

y
ft

.

nae = eee 9.5157 A EVP) TOQADD Try. Tale ee mine
fsvsendix: Mable A, EX@ORT TRADE TDEX: 1953-= Loo

7952 9 955 1956 Ns Saat 165
Country 195 954 1955 1956 O57 L958 1959

Ne Se A ~ “An 2 A} <7 PA -
United States 100 99 100 L104 O7 105 109
“United Kingdon 100 99 101 105 11 109 109

c
iy)
fs
B
be 4
(oe)
oO
\oO
OV
9
ie)
—~)
\o
a=
Ne)
=

Totel Non-U.S. Index 600 584 582 604 618 607 594

Average Son-U.S. Index 100 97.3 97.0 100.7 103.0 Lote 99.0

a ay his Pag =,0175 _ -.0309 -,0328 .,0388 _~.o47 = .2010

Eleventh Issue (New York, 1950);
ssue (New York, 1966); United
w Verks 970).

Omori. Bio e680, haan Bcd

] *, ’ rs | | : |
as | a , od , | |
a nueva ar mit tee ee
; | ” iy } }
,

oot : — 7 " vite: wd 4

; : a. ws enekt drhewe Lit A 9 “goaden oy t teok : as ee) toot Salah 4
Lay Bold ¢(Q00L , 2x0 vols), aban gee Siuedravad iin Teochene 230 eee
“ atin onal weed a Rar Hert se | :

tr
; ;
and
HA
Oo
i }
4 ‘ | |
(
\

po
Ce

a3) aie) 114 rely g ate) 1238 129 129 122 125
four ob gh 95 98 100 103 102 LOK 105
105 no 1 110 1 13 14 4 112 14
97 93 90 95 98 96 oh oh gl N.A,
105 100 97 97 98 100 103 106 gia 115
05 92 89 88 87 86 Bu. 87 88 92

(a ee ee
603 602 595 602 612 617 627 632 628 551
Gre. (20052 99.2 200.3 HOLE 102.8 104.5 105.3 nla Diag 7 110.2
-.095 -.1178 = 29001167 m.4, 1002 =.1381 . 1483 -.1681 -.2130 ~-.1978

: ; i iy me.

yi ee

)

ak,

Appendix: Table B

OFFICIAL VERSUS MARKET CURRENCY EXCHANGE RATE

(U.S. dollars per unit of foreign currency)

om India (Ruvee) Pakistan (Rupee) Brazil (Cruzeiro)
Officiel® Market? ofricial® Market fficial® Market”

1969 eaSe5 .0900 .2098 MOOD. pie -42498>. 14.0002
1968 - 1326 — .0800 .2089 .1009 .3135° —.0002
1967 1330 .0800 2095 1050 3720° 0003
1966 .1332 .0700 -2095 .1100 .0005 .0004
1965 .2094 .1050 -2096 -1050 .0006 . 0004
1964 -2095 -1300 .209T .1100 .0009 -0006
1963 2101 -1550 2103 -1300 -0017 .0013
1962 . -210T 1300 Pease -1200 .0029 .0021
1961 | -2091 21375 2096 21150 .0040 .0035
D960, -2105 -1400 .2109 1350 20056 ° 0050
1959 yeLLO -1500 -211h .1300 .0070 .0068
1958 -2103 -1950 -2107 AAKSIE IOI .0O77 .0073
1957 .209% .1900 .2098 i «ek300 0145 .01.30
1956 -2099 -2000 -2103 1350 .0125 O05
1955 .2090 wea 3013 ie. 8) sGssoe ena)
195): Bats WG ake 3018 nar 0550 —-.0185
1953 euie gt pase .3043 nat 0550 .0233
Average .1919 51323 2266 BS .0132 .0063
Averase per
U.S. dollar 5.26 eels 4 WD 84d To (oe) Loans
Boureec, Wall Street Journal, Foreign Exchange Listings, 1953-1969.

‘2 Selling prices for bank transfers in the U.S. for payments abroad.

» Market prices for foreign banknotes.

cS

Since July 6, 1948, the officiel exchange rate was 5.40541 cents
= &

per cruzeiro. On February 13, 1907, new cruzeiros were issued at the

ravio of 1 to 1000 old cruzeiros.

done § :
Not available.

; a i pees " ebro. ahs GERD, - Ti gil" ny 7 ByGG. i Cte he | i ShESa a

i ae R - mn
-berisnys a) theese

a z 4 seta "abort.

"$000 "Bass.
a00g,, “eee.

Oe: | Meet. CAE
SN Sa i a

‘8880. O280..: Nye yu GhOE. ae stint i EES."

ne ren ey a <n Peron nnn rie ete i same

e800, \Se00. a RLS acon ; vga. ny ents ae

Une ey bi nde Pus ie seg i
ty. Bes ape ar Soot ay ha re v " i; ah | ae settel
sepesstieet Han ttahs ale fest ty se R lags ; sa gn vate Mal +
chaos: aiid sor Batt wits ah wok stint toed A nec 8 sahttae *

“hades 4 ote aK wt woneag, ete &

BG

‘nding L820 % amt oo ae actortoiege Tals pithe obs
ete va baveat) ww ey isin

FOOTNOTES

Thanks” are due to the International Development Research Center of
Indiana University for their cooperation and assistance in the production of
this paper.

1. In addition to the official U.S. aid program, the private
sector of the U.S, economy extends export credits and investments,
accounting for approximately one-third of net global financial resource
movements. As these financial flows are in the mainstream of the ex-
change economy, primarily motivated by profit considerations, we have
not included them within the grants economy framework of this study.

2. O.E.C.D., Resources for the Developing World (Paris, 1970),

Ps 323

3. Janos Horvath, “On the Evaluation of International Grants
Policy,” Public Finance, Vol. 26, No. 2 (1971).

4. The grants (or transfer) economy “consists of all one-way trans-
fers of exchangeables. In an act of exchange between two parties, A and
B, A gives something to B and B gives something to A. Ina grant, A
gives something to B and B gives nothing in the way of a clearly iden-
tifiable exchangeable to A. Exchange involves therefore bilateral or
multilateral transfers whereas erants consist of unilateral transfers
of excnangeables. This view of grants does not preclude the possibility
that @ grant from A to B may be accompanied by certain intangible trans-
fers from B to A in the way of prestige or status, and so on, but these
are not usually classified as exchangeables. The distinction between
& grant and an exchange, therefore, is subject to some ambiguity but
the fact that we have a fairly clear concept of an exchangeable makes

the distinction workable; In an exchange of equal values, the net

ae ad's ow 1 sao azehtenon ane y w ataysdon ss -

bua ekde to Suowamtsce veiesoo' area a9 ase aioe
kore cura) binow pete ayes SALE b.d.063,

Se Te) Gaeet Aabiks parrsatat 0, ssteains ate Ho tp ape
s 7 =) he | ’ ’ (7eey $ $ art ae tay —
ae “sora vinvaly. pad to atsbaado". gapRons omen 0), none ott

one A eeeht tag: ont aimoyatdd _oyaasioxs 2 ei ts at 9 deny 9 ee
. A tracy ‘SET oy ont yunkel nto a Sevan 2 bene @. og + gahddanon 3

’, . wai Me ernie & ny ew an at pittaséa ont ff fen) * ‘ph Lae

| to Leuatalid sxoteratt ‘dottaeee gmat oh ol ongnaions

exdtenerd tevndia pa Patenoo aa ‘aonzedw #
seaant + aidtshrtat ibstaeo co tahingtoe 4 ee ri Ce hot

iy

noate ua ste a) we ey 09) eee
om Hat panailey, e009 te cou 4g

worth of the parties is not changed; in a grant, however, the net worth
of the grantor is always diminished and that the the grantee is increased.
A grant or gift, moreover, is sometimes 4 sacrifice to the grantor,"
Martin Pfaff and Anita Pfaff, "The Relationship between the Transfer

and Exchange Sectors of the Economy," American Statistical Associa-

tion 1969 Proceedings, of the Business and Economic Statistics Session
(Washington), pp. 532-3.

De vorteTnnort Bank of the United States.

6. See recent proposals by Andrew M. Kamarck, "The Allocation
of Aid by Multilateral Agencies," in Kenneth E, Boulding, Janos Hor-
vath, and Martin Pfaff (ed.), The Grants Economy in International Per-
spective (Belmont, Calif.; Wadsworth, 1971, forthcoming).

Te Even primary effects often meet with problems of valuation,
leading to the making of certain arbitrary assumptions. For example,
an aid flow consisting of a Public Law 480 (P.L. 480) dollar sale con-
tains the following grant element considerations:

a. The aid cost to the U.S. is valued at supported domestic prices;

ph
Hy
|
ch
bh
n
f
6
@D
ps
i)
cr
©
B
(e}
oO
ct
i
a

ve world market rates, the grant ratio would
be reduced. Also, the surplus goods Sore were not produced for the aid
program originally, but constituted a part of the U.S. exchange economy
during initial economic transactions. Their cost to the government
would therefore be affected. If the surplus commodities merely were
being stored, giving them away to save storage costs might be economi-
cally advantageous if the prospect of domestic usage was quite dim,
resulting in @ grant ratio perhaps close to 0.

b. From a benefit-to-the-recipient standpoint, the surplus com-
modit vies could be valued at the recipient country's prices, thus re-

ducing, or possibly increasing, the grant ratio. A decrease also may

by
ha

Povey bg 8 st vnaves oe 0 ao ke sno hamid

Ky i
he pheno id ins i

bi : . ” hee. +t itis
a re ve alas ao. ‘eae act ‘ha ras peocine
_podsostin a et Mt worth ye os sagt eaest a

ooaee kone, cgadhtuod of stan aa ~f gapioasal Lente

“ek damp toot a gmat gard 2 sot mi ts) tne a
| slanieciirer ATRL soya ee) pale

i qesotsa Skinnaoh, sorroquuy ta Bowne a3 as Ge ¥u ac i cb eto sid
; Bison obtat) jnexa eft ih etn, g extn trom! syseddegaoe, Ja dnitlag.s
‘hha ptt oP pescado, aun orn » toa a) aaah oat: Ween: i

teenrsvoy ‘ond od 2209! athar ssh. sane,
Ly Leni! note Lew ie a i a i nboboians * his

ao sutirsare ids lyaa ce sean
Laat Sear sig « ct daubetons! pate
ae ont aeseronh A, lobsde they ia ;

nh

occur if the recipient is not able to utilize the surplus commodities
in an efficient manner, In addition, the commodities could upset
the balance of the recipient economy's agricultural price structure,
creating a negative "trading factor" effect (considered later).

c. Finally, computing the grant ratio with different arbitrarily
chosen market rates of discount within the range of the interest rate
structure in either the donor or the recipient economy would produce
different magnitudes.

8, Goran Ohlin, Foreign Aid Policies Reconsidered (Paris: 0O.E.C.D.,
1966), pp. 101-4.

9. Ibid. (An assumption is made that the principal is repaid in
equal installments. )

10. Horvath, op.cit.

Ji. For a more complete discussion of the ramifications of aid
tying, see: I.M.D. Little and J.M. Clifford, International Aid: A
Discussion of the Flow of Public Resources from Rich to Poor Countries,
Chepter VII (Chicago: Aldine Publishing Co., 1966); Clive S. Gary,
Resource Flows to Lene ieyela@ned Countries (New York: Praeger, 1969).

12. The U.N. Conference on Trade and Development Secretariat has
estimated that the reduction in the value of a loan due to tying is at
least 10-20 percent.

BSA - For details in calculating the indexes used in the tied aid
factor, see the Appendix, Table A.

it ey Ohiin. opsci tag De Obs

15. See Bimal Jalan, “Gains to Donor Countries From Tied Aid,”

Finance and Develooment (September, 1959), pp. 14-18.

16. In some cases, the borrover can be a public agency or a pri-
vate enterprise within the recipient country. The loan then may in-

volve repayment by the non-governmental borrcwer to the recipient

f nee :

i a H Re? iv)

ooh ea el 4

nyt, by vis he

vi senda ben ‘eootbiagae pane ay
are en. rt

- soubor: solty: irsad todnga’ styono8 dune “ike

heat Pra eeet ey ee

(rota, awebtanto} tut ack wet ag"

qs

Oy

wisi tn sosanytah city ona aang se
ay Li nh - hy ee i
stan aaivesand edt $ Yo. patra Sond. ‘aula! Serva

ee Ag wh Bid 4 Hy, eRe meh T rm i f

soubor blvow vensoca ‘sanigy ht si 6 Soon
‘ iM,

: hoes 2 ,
e
j iy, i
an Pal Wed. i

. eGo, 2.0 | ss) slag ace ssistie bth i

See eos

1 — - : i ret i i Ra) eae i Mia } Ay ne ac eony ins nt : as al
_ ie ee RN I,

eokamane a. _

ee Sta to nota sot haws atts: 0 aotenrsans: sin

4 - be dawobesicissnt

EARL Wt, a te
er totais nue) ous’ «1 ites! a dost beet eansenuedl phi us Wout sci

F Pig iat

Gein iF WED (Rt 4 509 serie son aacien | onbsbed) 1 a

: Pt cH r me!
beet <xogsert vay eit) Betas. bis 20 roc cusil cas A

oe a wid takpadsnooe taamgo toys be + shut a aot at

aS at goby o OF oeth red » to oi, ay vile at thar ony onal
ae i. ee, otha 08

i}

bia Heid wld mb penis poxebat erty pate i boot ae attates: Or
. ou a a shor Ioorain st aoe

a chika bots mt” 4 hes eygpo sopet ee zat beh

ts j ies Aa eee eiadeeyat) a

in a
uit a0 vaso: pet a bad iad wonesaed te (28
wit Jeet ancl nal on | “exits one

eat aii Oni oot noha tet |
ms ts OP ae ‘A A

country government in local currency. The recipient government, in
turn, repays the U.S. Agency for International Development in dollars.
These loans are termed “two-step loans."

17. John Pincus, "The Cost of Foreign Aid," Review of Economics

VoL. XLV (i)

and Bees iice, \Neverber, 1963), p. 362. See also, Wilson E. Schmidt,
"The Economics of Charity," Journal of Political Economy, Vol. 72
(August 1964), pp. 387-395.

18. Charles P. Kindleberger, Power and Money: The Politics of
International Economics and the Economics of. International Politics
(New York: Basic Books, 1970), p. 135.

19. U.S. Department of Agriculture, P.L. 480 Concessional Sales,
Economic Research Service, Foreign Agricultural Economic Report No. 65,
September, 1970, p. 36. From 1956 to 1969, of $5.2 billion lent, the
purchasing power depreciated by $0.8 billion. The local currency de-
velopment loans are assumed to be reduced by approximately the same
percentage. |

20. Horvath, op.czt.

21. Horvath, op.cit. Also, Janos Horvath, ured America and the
Grants Economy," American Journal of Agricultural Economics, Vol. 53

10

(November 1971, forthcoming).

23. - Pincus, op.cit., p. 363, analyzed surplus agricultural commno~

my

dity aid with three methods: (1) valued at U.S. prices, (2) velued at
export market prices, and (3) valued at world market prices using esti-
mates oz elasticity of demand for U.S. exports.

2, For a thorough mathemitical discussion of additional factors
and refinezents to the comprehensive grant ratio Pera see Janos Hor-

veth andi Donald P, Minassian, "A Mathematical Exposition of Internationil

aptmanook 3d. wabiees 4 pbk preres a0 aed at
nites od soacha inane og ee “ eee a |
| oes — g pe sot
nenmaNe tS o are
if: ban 00 wi moots ou eeu |

aptokes: shin mata Mi) oa > ae iM 1 Stia & ws at ent +
a - aes ft, ‘ever cesoog sted a we

oslo td Lang tensoned 08s d.¢ LE ‘So. doseustagad BL
483 OMe gogo olnpanea fests ugh aylowt blade
lade fam robttke 9.8490 RRL od DASE mow pari
‘ 7 ~oh enous Seool. att: ‘mokethe Bohs panatooaqen 3
amis ‘ads. etobaeriace ve Sisubwi a ube pormisee i a

by nl

ri” Ge A. r i & ;

r Paha | = epee

ve ae Wy

a g z= 7 yeu be SS vw ihe Bw? hn a i

¢

wogemae Lariat Biadeiye aubaete boontace LeBe neg th Ped een

6 euco (s) aonb Od Ys podtatr F Bs bouts oat woilt sates

abdea gates nae ina sas om cd pauley ) toa rote i
| weroger ie 0h an af

res sat

hee i

nantsst, Fiso teen 0 ssqpanoaas "bro
weet Baril one jancelneto ‘abe he mien ee
“tmobturtedex ‘te snob HOS sootisnen ft it Wg )

Ld .
+

ba)
Oo

Grants." Also see; Janos Horvath and Donald P, Minassian, "Grant
Erosion Due to Aid Tying," American Statistical Association 1971
Proceedings , Business and Economic Statistics Section (Washington).

25. Counterpart funds are the local currency proceeds of for-
€ign aid. For more information, see Alexis E. Lachman, The Local

‘Currency Proceeds of Foreign Aid (Paris: 0.E.C.D., 1968), pp. 1-7.

26. Some conflict of definition is inevitable in this connection.
For Ponte. Mexico excludes any Eximbank transaction as foreign aid.
(See I.M.D. little and J.M. Clifford, op.cit., p. 233,)

27. P.L. 480 Concessional Sales, op.cit., p. 32.

28. Pincus, op.cit., p. 361. Pincus also used 5 and 5 3/4 per-
cent to approximate the domestic opportunity cost and the World Bank
lending rate, respectively. The change in grant elements attributable
to the consideration of varying opportunity costs (above in our formla
the comparative rate of discount, q), is the subject of another ongoing
research. This latter also embraces the trade-off coefficients which
result fran the alteration of concessionary terms within the contracts.
Preliminary results are available from the senior author.

29. This procedure is followed because detailed information is
published regarding the country-use of funds from P.L, 480 sales, and
the bulk of countries receiving surplus commodities also receive develop-
ment loans repayable in local currency.

30. Year-by-year and country-by-country computations for 1964-1969
haye also been made, and the results may be obtained from the authors
upon request.

31. By 1971, 211 P.L. 480 sales will be on a dollar basis.

32. For an assessment of policy considerations, see: Lester B.

Robert E. Asher, Foreign Aid: The Postwar Record and Targets for the

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1970's (Washington: Brookings Institution, 1970); Willard L. Thorp,
"Poreign Aid: A Report on the Reports,” Foreicn Affairs Vol. 48
(April 1970) pp. 561-73.

33. Robert M. Stern, “International Financial Issues in Foreign
Economic Assistance to the Less-Developed Countries," in International
Seminar on Problems of Economic Develovment and Structural eee. edited

by 1.G. Stewart (Edinburgh: Edinburgh University Press, 1969), p. 53.

34. Pincus, op.cit., p. 362.

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