Foreign Assistance in an Era of Fiscal Austerity: Whither the Development Banks?

FOREIGN ASSISTANCE IN AN ERA OF FISCAL AUSTERITY: WHITHER THE DEVELOPMENT BANKS? Bruce Benton A major dilemma faced by the Reagan administration is how to fashion a foreign assistance program that will meet several varied and seemingly conflicting objectives: continuing the development progress ofthe last two decades, contributing to the maintenance ofinternational economic stability, and enhancing national security, while at the same time minimizing budgetary outlays. The trend since the early 1970s has been in the direction of greater reliance upon the multilateral development banks (MDBs)—the World Bank Group, the Inter-American Development Bank, the Asian Development Bank, and the African Development Fund—for U.S. foreign assistance, in part, because of their cost-effectiveness. However, the Carter administration, despite notable success in securing passage of legislation crucial to MDB programs in 1977-1978, was thwarted by congressional opposition during its last two years. When the Reagan administration took office, it found itself at a crossroads with regard to the development banks. The Carter administration left a huge backlog of legislation required to authorize U.S. participation in major new MDB programs, including a substantial replenishment ofthe World Bank's concessional fund, the International Development Association; a doubling of the capital of the World Bank; U.S. membership in the African Development Bank; and U.S. finalizaBruce Benton is currently a Congressional Fellow and foreign policy/economics adviser to Representative Silvio O. Conte. He is former Deputy Director ofthe Office ofMultilateral Development Banks, Department ofthe Treasury, and has served on U.S. delegations to a number oftrade and commodity negotiations. The views expressed in this article are entirely those ofthe author and are not intended to reflect those of the Department of the Treasury. 161 162 SAIS REVIEW tion of agreements negotiated in 1978 to replenish the capital of the Inter-American Development Bank and the Asian Development Fund. Furthermore, the United States is $1 billion overdue on contributions to earlier agreements which it negotiated and which have been authorized by Congress. The Reagan administration must decide whether to undertake a substantial effort to secure congressional passage ofthe largest legislative agenda for the development banks ever to face an administration in a single year or to allow U.S. support for these institutions to wither, with the major foreign policy repercussions that would entail. The recommendation for an eventual phase-out of U.S. participation in the regional MDBs by Office of Management and Budget Director David Stockman shortly after the inauguration, strongly suggests the administration's preferred course. Reinforcing that position are the Republican conservatives in Congress, a group that has been vocal in its opposition to the MDBs largely because it views the United States as lacking control over foreign assistance allocation through those institutions. In the final analysis, however, the Reagan administration, like its predecessors since President Truman, may come around to the view that the development banks are worthy of continued substantial U.S. support . Once a thorough review has been completed, it probably will be perceived that those institutions offer unique advantages whereby substantial, cost-effective, global development programs can be undertaken which enhance U.S. national security and promote cooperative burden-sharing among the Western Allies, yet cost the United States next to nothing in net budgetary terms. These are objectives broadly consistent with positions articulated by President Reagan during the election campaign. There has been an understandable, but disturbing, inconsistency in opinion polls showing that most Americans favor budget cuts in foreign economic assistance, yet oppose cuts in defense spending, presumably because of national security concerns. However, there remains a cadre in the administration—particulary at State and Treasury—who, along with some in Congress, believe that a substantial reduction in U.S. economic assistance to developing countries around the world, particularly at this time, could threaten U.S. security interests. It would deplete the U.S. "arsenal of influence," as former Secretary of State Muskie described it, resulting in a weakness as pernicious as a loss in military might. About one-halfofU.S. economic assistance is now provided through the multilateral development banks. U.S. security interests are so farreaching that long-term defense of those interests may not be feasible...