This dissertation has been microfilmed exactly as received 68-2959

BRYSON, Phillip James, 1939- THE INTERNATIONAL COST-SHARING ROLE OF WEST GERMAN DEVELOPMENT ASSISTANCE.

The Ohio State University, Ph.D., 1967 Economics, general

University Microfilms, Inc., Ann Arbor, Michigan ©Copyright by

Phillip James Bryson

1968 THE INTERNATIONAL COST-SHARING ROLE OF

TOST GERMAN DEVELOPMENT ASSISTANCE

DISSERTATION

Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University

By

Phillip James Bryson, B.A.

******

The Ohio State University 1967

Approved by

I Adviser / Department of Economics ACKNOWLEDGMENTS

This dissertation is the product of the kindness and generosity of a number of individuals. Especially deserving of thanks is my adviser,

Professor Richard U. Sherman, Jr., for suggesting the topic and pro­ viding guidance and encouragement throughout the study. Professor

Richard A. Tybout was a consistent provider of valuable insights and constructive suggestions. His patient and willing helpfulness are

deeply appreciated. Professor David M. Harrison graciously provided valuable assistance and Professor Walther P. Michael read the first

four chapters and offered numerous helpful comments.

Financial support was granted by the Mershon Social Science Pro­

gram of The Ohio State University, and to the memory of former

director} Professor Edgar S. Furniss, Jr., I owe a debt of gratitude.

Mrs. Georgialee Furniss gave extremely capable editorial assistance

and constant encouragement. The entire Mershon staff was congenial

and helpful.

Finally, my wife deserves gratitude for unfailing support. If

the final product has merit, then it is because all these individuals

contributed. For the inadequacies that remain, I alone am responsible.

ii VITA

October 11, 1939 Born - Salt Lake City, Utah

1964 ...... B. A., University of Utah, Salt Lake City, Utah

1964-1965 ...... Mershon Fellow, The Ohio State University, Columbus, Ohio

1965-1966 ...... Teaching Assistant, Department of Economics, The Ohio State University, Columbus, Ohio

1966-1967 ...... Mershon Doctoral Fellow, The Ohio State University, Columbus, Ohio

1967 ...... Assistant Professor of Economics The University of Arizona, Tucson, Arizona

FIELDS OF STUDY

Major Field; Economics

Areas of Specialization Economic Planning and Comparative Economic Systems Economic History National Security Economics Economic Theory and The History of Economic Thought

Secondary Field: Political Science

Areas of Specialization International Relations National Security Policy

iii TABLE OF CONTENTS

Page ACKNOWLEDGMENTS...... ii

VITA ...... ill

TABLE OF CONTENTS...... iv

LIST OF TABLES ...... vii

LIST OF FIGURES ...... x

GLOSSARY ...... xi

CHAPTER

I INTRODUCTION ...... 1

Germany as the Focus of the Investigation ...... 2 Approach and Scope of the Investigation ...... 5 Cost-Sharing and the World Demand for Aid ...... 8 The Politics of Cost-Sharing...... 13

II BURDEN-SHARING THEORY: THE STATE OF THE A R T ...... 18

The Principles of Burden-Sharing ...... 19 Some Estimates of Cost-Sharing Performance: The Principles Applied ...... 27 A Brief History of Burden-Sharing ...... 39 The Role of International Negotiations in Cost-Sharing ...... 43 The "Relevant Considerations of Cost-Sharing ...... 54

III ANALYSIS OF THE GERMAN CONTRIBUTION IN A COMPARATIVE FRAMEWORK ...... 60

Contemporary Theory of Foreign Assistance Costs and Benefits...... 60 The Loans vs. Grants D e b a t e ...... 60 The Donor C o s t ...... 63 The Donor B e n e f i t ...... 65 The Actual and Declared C o s t s ...... 67 ^ Aid in a Comparative Framework ...... 74

IV GERMAN POLICY TOWARD TRADE AND A I D ...... 79

Trade Needs of Developing Countries ...... 79

iv V

TABLE OF CONTENTS"-Continued CHAPTER Page

The Relationship Between Trade and Foreign Assistance Programs 83 The German Postwar Record ...... 88 Foreign Trade and the Short-Run Optimization of German Interests ...... 94 The Trade Model ...... 97 Prospective Long-Term Gains of Trade in De­ veloping Markets ...... 100 German Trade and its Benefits for the L D C ' s ...... 106 Toward an Integration of the Trade-Aid M o d e l ...... 110 German Trade and the Future of the Developing Countries ...... 112

V DEFENSE BURDENS AND AID CONTRIBUTIONS: THE TRADE-OFFS FOR GERMANY ...... 121

Defense as a Cost-Sharing Problem: The NATO E x p e r i e n c e ...... 122 The German Contribution to the Alliance ...... 132 The Substitute Relationship Between Aid and Defense ...... 146 Toward an Integration of the Aid-Defense Model .... 162 Cost-Sharing and the Future of the Alliance ...... 165 A Note on the Role of International Negotiations in Defense Cost-Sharing ...... 173

VI GERMAN CONTRIBUTIVE CAPACITY ...... 178

The Reestablishment of German Economic Power ..... 178 The Social Market Economy Today ...... 183 Investment: The Foundation of the Miracle ...... 186 Consumption: An Offering to the Miracle ...... 189 Economic Policies and Performance: The Miracle Makers ...... 192 Contributive Capacity and the Investment Deduction ...... 204 Aid and the German Economy: The Complete Model .... 211 Contributive Capacity and the Public Opinion Constraint ...... 217 Some Final Considerations of Contributive Capacity ...... 221

VII RECENT FOREIGN ASSISTANCE TRENDS OF THE FEDERAL REPUBLIC ...... 225

German Attitudes and Motivations ...... 226 Recent Aid Performance' and the "New Look" in the Ministry of Cooperation ...... 227 Getting More Magnanimity per Mark ...... 233 vi

TABLE OF CONTENTS--Continued CHAPTER Page

VIII SUMMARY AND CONCLUSIONS...... 242

The Principles of Burden-Sharing ...... 243 Objectives of German Aid ...... 245 The Role of Bargaining in the Cost-Sharing Operation...... • ...... 246 The German Contributiy.e Effort ...... 247 International Trade as a "Relevant Consideration" . . . 249 The Defense Deduction ...... 250 Contributive Capacity and the Investment Deduction...... 253 Recent German Aid T r e n d s ...... * 255

APPENDIXES ...... 257

BIBLIOGRAPHY 283 LIST OF TABLES

Table Page

1. Sharing the Burden of A i d ...... 29

2. Cost Shares for Ten Countries, Various Methods of Assessment ...... 30

3. Relative Contributions to International Government, to Underdeveloped Countries, and to Defense, 1960 . 33

4. Distribution of Economic Aid Contributions, DAC Countries, 1960 ...... 35

5. DAC Contributions, 1960 ...... 36

6. DAC Aid Commitments Compared to GNP, 1961 and 1962...... 37

7. Relative DAC Aid Shares Compared to Relative GNP, 1961 and 1962 ...... 37

8. Discounted Aid Shares, 1961 and 1962, Compared with Real GNP, 1961 38

9. Contrasts in German Development Aid ...... 68

10. Development Credits of the Federal Republic, 1961-1964 .... 70

11. Terms of Trade for the Federal Republic, 1961-1964...... 72

12. The Grant Element of German Loans, 1961-1964 73

13* Comparative Aid Contributions of the FRG, US, UK, and France, 1954-1965 ...... 76

14. The Foreign Trade of the Federal Republic, 1951-1965 93

15. The Significance of Trade to the FRG, US, UK, and France, 1954-1965 ...... 95

16. Principle German Exports to Developing Countries, 1964 .... 107

17. German Trade with Developing Countries, 1951-1965 ...... 108

18. The Trade-Aid Model ...... 113

vii viii

LIST OF TABLES— Continued

Table Page

19. The Patterns of Defense Outlays, 1954-1965 ...... 137

20. The Patterns of International Contributions, 1954-1965 • • • • 152

21. Aid Expenditures as a Percentage of Defense Expenditures, 1954-1965 154

22. The Defense Deduction and Total "Fair" Aid Outlays ...... 159

23. The Expanded Model: Trade, Aid, and Defense ...... 163

24. Origin and Use of the National Product of the Federal Republic of Germany, 1950-1964 181

25. GNP Yearly Growth Rate of the FRG ...... 182

26. Investment as a Percentage of GNP for the FRG, US, UK, and France, 1954-1965 ...... 187

27. German Net Savings ••.•.••••...... 189

28. The Summation of Investment Plus Defense as a Percentage of G N P ...... 207

29. "Fair" Aid Shares with Defense and Investment Deductions . . • 210

30. The Integrated Model ...... 212

31. Net Contributions of the Federal Republic of Germany to Developing Countries, 1950-1966 ...... 228

32. The Federal Republic of Germany, Underlying Data ...... 258

33. The United States, Underlying D a t a ...... 259

34. The United Kingdom, Underlying Data ...... 260

35. France, Underlying Data ...... 261

36. The Foreign Aid — National Income Relationship 264

37. The Foreign Aid -- Government Expenditures Relationship . . . 265

38. The Aid -- Defense Relationship (Per Capita Basis) ...... 266 ix

LIST OF TABLES— Continued

Table Page

39. Foreign Aid, Investment and Defense ...... 267

40. German Foreign Aid, Income and Taxation ...... 268

41. The Aid — Defense Relationship ...... 271

42. The Defense — National Budget Relationship (Per Capita Basis) •••••••...... 272

43. The Defense — National Budget Relationship .••....••• 273

44. The Defense — National Income Relationship ..... 274

45. The International Contribution — Income Relationship . . • . . 275

46. The International Contribution -- National Budget Relationship ...... 276

47. The International Contribution -- National Budget Relationship (Per Capita Basis) 277

48. The Aid — Investment Relationship 278

49. The Defense — Investment Relationship...... 279

50. The International Contribution — Investment Relationship . . . 280

51. Aid, Defense and Investment ...... 281

52. The Aid -- Investment and Defense Relationship ...... 282 LIST OF FIGURES Figure _ Page

1* Industrial Production and Prices in West Germany ...... 91

2. FRG Exports and Imports to and from LDC's as a Percentage of Total FRG Exports and Imports, 1951-1965 109

3. The Patterns of International Contributions, 1954-1965, Aid Plus Defense as a Percentage of G N P ...... 153

4. Aid— Defense Substitution ...... 155

5. Investment Plus Defense as a Percentage of GNP, 1954-1965 208

x GLOSSARY

Bundeswehr - The German army.

CDU/CSU - Christian Democratic Union (Christlich-Demokratische Union), the majority party in the German parliament.

DAC - Development Assistance Committee o£ the OECD.

DM - German Marks (Deutsche Mark. $1 = 4 DM).

EEC - The European Economic Community (Common Market).

FRG - Federal Republic of Germany.

GNP - Gross national product.

Golden Year Fair Share - the donor nation’s annual aid contribution which in some period was (as a percentage of national income) most generous.

LDC'S - Less-developed countries.

Maerket von Morgen - The "markets of tomorrow" (future foreign trade markets).

NATO - North Atlantic Treaty Organization.

OECD - Organization for Economic Cooperation and Development. Formerly OEEC, Organization for European Economic Cooperation.

SPD - Social Democrat Party (Sozialdemokratische Partei Deutschlands).

UNCTAD - United Nations Conference on Trade and Development.

UNRRA - United Nations Relief and Rehabilitation Administration.

Wirtschaftswunder - The German "economic miracle."

xi CHAPTER I

INTRODUCTION

With the end of World War II, global responsibility was for the first time thrust upon the United States. The economic cost was heavy

Not only were its own defense outlays continuing to mount, but both

America*s allies and the developing countries were in great need of economic assistance.

For political and also for humanitarian reasons the Marshall

Plan was devised to offer relief to a devastated Europe. Soon the peoples and leaders of Europe and the United States "became condition­ ed to accept it as normal and right that the United States should

take upon itself practically the whole of the financial burden" of

dispensing assistance internationally.^ Even after reconstruction was well under way, other economically advanced countries made no

more than token contributions. The exiguity of their participation was inconsistent with simultaneously growing domestic welfare programs

and also with a rather well-developed popular sentiment in most of

the advanced countries that a "very important moral element of every

scheme for redistributing income, national as well as international, 2 should be that the burden be shared in a just and equitable manner."

^Gunnar Myrdal, Beyond the Welfare State. (New Haven, Connec­ ticut: Yale University Press, 1960), pp. 252-253.

2Ibid. 2

Germany as the Focus of the Investigation

The Federal Republic of Germany (FRG), together with other donor countries, has been responsive to the attempts of U.S. policymakers to elicit greater equality of contributive effort in the administra­ tion of development assistance. The growing aid program of the FRG has been notable, but the question is still often asked (of Germany perhaps more than of other countries) whether she has yet accepted a "fair share" and how much more of the burden she might possibly assume. One might propose a number of reasons why the Federal Republic might ac­ cept greater responsibilities and why that country is to be the focus of this study. Three of them should be mentioned at this point; a more exhaustive analysis of each will follow in later chapters.

First, the FRG has become a foremost economic power. The well- known "economic miracle" has endowed the country with industrial power that renders it capable of significant contribution. The fact that she has increasing stocks and flows of wealth has generated the widespread belief that West Germany could play a leading role among

the creditor nations of the world.

Second, the postwar years have seen West Germany become a great

trading nation and the second largest exporter of industrial goods.

Henry C. Wallich, in fact, though denying the accuracy of the term "mira­

cle" with regard to the reconstruction effort, counts the vigorous expan­

sion of demand for German goods in the world market as one of the prin­

cipal "mainsprings" of revival and claims that the "low level of imports and the consequent balance-of-payments surplus are really the most miraculous phase of the German miracle.”^ Indeed, there was in

1966 a mild feeling of relief that a trade surplus (which proved con­ ducive to full employment and growth in the fifties but threatening to price stability by the mid-sixties) had been "overcome.” A related point that will be of considerable concern to this study is that it is not only within the capacity of the Germans, but also in their in­ terest to exploit development assistance as the key to fostering and expanding foreign trade markets.

Finally, low defense outlays have represented a minimal burden on the national budget of the FRG. Though defense expenditures have increased since the Berlin crisis in 1961 and are likely to increase

somewhat in the future, it will be seen below that Germany has been

less burdened in the defense areas than some other NATO countries.

The fact that Germany has no economic drains in the form of

former colonies introduces an interesting consideration. As long as

Bonn has no political ties and no formal obligations to developing

countries, her aid is in appearance more humanitarian, less political.

This could prove to be a psychological asset to the West. If Ger­

many's aid program grows (especially in the context of some multila­

teral agency with which the U.S. is also associated), it is another

indication to impartial peoples that the economic assistance of the

entire West is not a product of strictly selfish motives.

Henry C. Wallich, Mainsprings of the German Revival, (New Haven: Yale University Press, 1955), p. 8. On the other hand, a less utopian view is both possible and rea­

sonable. There is no guarantee that the Federal Republic may not at

some time begin to tie significant political considerations to aid

disbursements. Nor has it been inclined to ignore the viewpoint of

the growing number who believe the "no strings" doctrine is a myth.

George Liska's astute analysis of the political implications of aid

has pointed out that in the U.S.

the very thought of conditional aid has come to be considered immoral and its official expression is taboo. All nations are equal, but recipient nations are more equal than the donor nations; they get but need not give in return. The propaganda has achieved at least verbal acceptance of the "no-strings-attached" ideolo­ gy by United States spokesmen.

The "no strings" propaganda is not generally observable in the

German aid literature. There has been a frank and unembarrassed in­

sistence that aid recipients accept the Hallstein doctrine and support

German reunification.

The notion that aid involves both costs and benefits for donor as well as recipient countries, accepted in German thinking, will be ac­

cepted by this study. Although there appears to be no ready means of

measuring political "goodwill" engendered by development assistance,

it will be seen below that it is possible to attempt to account for

commercial benefits associated with German aid.

George Liska, The New Statecraft. (Chicago: University of Chi­ cago Press, 1960), p. 34. A final, though scarcely academic, reason for focusing this study on Germany is merely one of personal interest. To see a nation once branded as a "race of warmongers" and as a mob of unmitigated racists assume a humanitarian donor country role is to experience at first hand an interesting turn of history.

Approach and Scope of the Investigation

The central objective of this study is, briefly stated, to de­ termine Germany's "fair" aid contribution to the developing countries.

When the problem is put in these terms, however, one discovers that a simple formulation does not necessarily permit a simple solution.

Wrapped up in the word "fair" are implications that require extensive technical and philosophical investigation. And there are other diffi­ culties. On the one hand, for example, the American admonishes the

German to greater aid efforts "because you have been burdened with much smaller defense expenditures." On the other hand, the German claims that "the best aid is trade," and he points to a substantial volume of trade with the developing countries. How, then, should one define the aid "contribution"?

The first matter of concern, to which Chapter II is addressed, will be to review the basic principles and quantitative contributions of cost-sharing analysis. This will provide the background and the conceptual framework for the remainder of the study. It will then be possible to draw some meaningful conclusions about principles by which a "fair share" can be determined. 6

The next step will be to establish what in fact the German aid contri­ bution has been. It is, of course, interesting to take account of such statements as the following by the former Minister of Economic

Cooperation, Walter Scheel:

Even if we take an impartial look at ourselves, we can say that the principles and the administration of German development assistance stand up well when compared with those of other countries. That, of course, is not to say that we are completely satisfied with our past performance.

The analysis undertaken by this study must, however, be a good deal more concrete than such statements as policymakers are wont to make. Fortunately, precise quantitative appraisals will usually be possible. Chapter III will be devoted to a discussion not only of the nature of past aid, but of the relationship of aid to other im­ portant economic variables as well.

Chapters IV and V will explore the relationship of aid and cost-

sharing to two central issues, viz., trade and defense. The costs and benefits of Germany's commercial relationships with developing nations must be taken into consideration in the establishment of cost-sharing

criteria relative to development aid. Furthermore, Western donor

countries are not inclined to plan national aid and defense budgets in

complete isolation from each other. Like foreign assistance, defense

expenditures are also usually considered, to greater of lesser extent,

a drain on domestic resources for the benefit not only of the donor

^Walter Scheel, "Entwicklungspolitik," Deutsche Politik 1964. Bonn, 1965, p. 3. 7 country, but for the entire alliance community as well. Defense out­ lays are, and should be, given some consideration when development as­ sistance is rendered.

The next task will be to test an important assumption mentioned above, i.e., that the German economy can support a major aid effort.

Chapter Vi will be devoted to the task of analyzing Germany's aid- giving capacity. In his first major address as head of the new coa­ lition government of the Federal Republic, Chancellor Kiesinger said:

Perhaps in past years in our relations with the United States we have sometimes placed too much stress on our own worries, needs and concerns. Indeed, every weaker and hard-pressed partner is inclined to do this, and thus overlook the fact that a great power like the United States also has worries and problems for which it expects the understanding and, where possible, support of its allies....we must consider how we can play our part more decisively than up until now in sharing responsibility for maintaining world peace.

Almost in the same breath, however, he made it clear that future Ger­ man assistance would have to be — in just what fashion he failed to make clear — something other than financial, since all outlays for the international effort would have to be cut back in deference to domestic needs' arising from the current economic situation of the

FRG.

A short time ago there was a flurry of articles in recent German and U.S. publications discussing the unhappy termination of the

"economic miracle." The question was repeatedly asked whether the

^The New York Times. December, 14, 1966, p. 18. West German economy was losing its expansive dynamism. Obviously, the first burden-sharing consideration must be whether a nation is eco­ nomically capable of assuming a share of cold war international expense.

This aspect of the study, therefore, assumes particular importance. It will also be necessary, of course, to investigate other constraints on the participation of the FRG in the aid effort.

After having examined these issues and facts, it will be the pur­ pose of Chapter VII to evaluate the recent aid history of the FRG and to discuss German development policy in the light of cost-sharing considerations established in earlier chapters. Finally, Chapter VIII will draw the conclusions to which the investigation has led, and it will be possible to evaluate Germany's contributive effort.

Cost-Sharing and the World Demand for Aid

To provide all the development aid which the emerging countries need and also to serve as guardian against perceived threats around the world obviously would be economically unfeasible for the United

States. For this reason, as the era of reconstruction drew to a close, the United States made broad appeals for greater assistance from other prospering economies to supplement American contributions, which, though substantial could not by themselves meet the growing demands of the emerging nations.

It is an underlying assumption of this study that larger aid allotments are indeed necessary. Although the problem of capital re­

quirements for development has generated some controversy, a good number of authorities confirm the desirability of more assistance. 9

It may be inferred, for example, from a recent article by Hollis B.

Chenery and Alan M. Strout1 that they would favor a fairly extensive aid effort. Their calculations indicate that an average growth rate of 4.4 per cent could be sustained in the developing countries by a total contribution of $7.7 billion per year. A somewhat greater growth rate of 5.8 per cent could be achieved by a yearly contribution of $13 2 billion. A large contribution is found to be preferable because:

The achievement of a high rate of growth, even if it has to be initially supported by large amounts of external capital, is likely to be the most im­ portant element in the long-term effectiveness of assistance. The substantial increases in internal savings ratios that have been achieved in a decade of strong growth— from 7 per cent to 12 per cent in the Philippines, 11 per cent to 16 per cent in Twaiwan, 6 per cent to 14 per cent in Greece, and 9 per cent to 12 per cent in Israel— demonstrate the speed with which aid-sustained growth can be transformed into self-sustained growth once rapid development has taken hold.

A recent and rather comprehensive RAND cost-sharing study by

John Pincus concludes that

underdeveloped countries want aid for a variety of reasons, but the basic justification is that in­ creased foreign-exchange availability is often a necessary condition for economic growth at poli­ tically acceptable rates. None of the other sources of foreign exchange— export of goods and services, private investment, and import substi­ tution— are likely to compensate fully for foreign exchange shortages. The historical evidence shows

Hollis B. Chenery and Alan M. Strout, "Foreign Assistance and Economic Development," American Economic Review. Vol. LVI, No. 4, (September, 1966), pp. 679-733. 2 Ibid., p. 719.

3Ibid.. p. 725. 10

that economic growth is virtually always asso­ ciated with growth of imports, and very often with persistent trade deficits. Underdeveloped countries1 possibilities for growth of exports and of private investment are circumscribed. Import substitution— already pushed to extremes in many countries— itself creates substantial import requirements. The demand for foreign aid therefore appears as the natural successor to the bond issues that financed national development in the nine­ teenth century.

Goran Ohlin has also expressed the belief that regardless of how requirements are estimated, they are "considerable and will remain so 2 for a long time." He points out that lend-lease and Marshall Flan aid took the form of grants so the U.S. could avoid the inevitable 3 "complications of the transfer of repayments." If the West is to display similar wisdom in the field of financing economic develop­ ment and demonstrate that its policies are designed not to take usury but to aid development, a readiness "to shoulder a real burden" must become a good deal greater than it is today.

If the Clay Committee Report on foreign assistance is to be believed, Americans have for some time felt strongly about the need for other prosperous, developed countries to "assume much more of the 4 foreign aid burden than they are now carrying." The public has

^John Pincus, Economic Aid and International Cost-sharing. (Baltimore: The Johns Hopkins Press, 1965), pp. 186-187. 2 Goran Ohlin, Foreign Aid Policy Reconsidered. (Paris: Organi­ zation for Economic Cooperation and Development, 1966), p. 90

3Ibid.. p. 91. 4 Clay Committee Report, "The Future Conduct of Foreign Assistance Programs," in The United States and the Developing Economies, ed. by Gustav Ranis, (New York: W. W. Norton & Company, Inc., 1964), p.72. 11 noticed the problem, but it has become a real preoccupation with policy­ makers* Some mention of the inequitable share of the burden borne by the United States is nearly inevitable in official declarations on for­ eign aid. Since the successful conclusion of the Marshall Plan and the consistent downward trend of U.S. foreign aid in the last decade or so, the argument has somewhat shifted ground. Because our effort, relative to that of some European countries, has become less than spec­ tacular, the tendency has been to speak of the combination of aid and defense burdens, recognizing that the two types of activities are mu­ tual supplements. President Johnson, for example, in a recent message to Congress on foreign aid made the following observation:

The combined value of our economic and food aid is less than seven tenths of 1 per cent of our nation­ al income, only slightly more than the average for all advanced countries. We devote smaller shares to foreign assistance than such countries as France and Belgium.

But these figures do not tell the whole story. Our defense expenditures far exceed those of all other free nations combined and serve the common interest. This burden too must be counted in the balance.

Thus, we must redouble our efforts tj get other donors to enlarge their commitments.

As has been observed above, United States policymakers have not been alone in their "wider sharing" crusade. Nor has wider sharing been viewed as merely a convenient solution to the problem of equity.

The Development Assistance Committee (DAC) of the Organization for

Economic Cooperation and Development (OECD) has also championed the

-

The New York Times. February 10, 1967, p. 16. 12 cause, and its motivation for so doing extends beyond the question of equity to that of greater capability. In the Fifth High-Level Meeting of the DAC in July of 1966, "large and expanding requirements" for development assistance were recognized and a commitment to continued efforts to elicit greater contributions was expressed by the committee.

The OECD Observer reports that the DAC:

agreed to continue to examine the questions involved in securing an equitable sharing of the aid burden. Several members emphasized the importance of this question foj the achievement of an increased common aid effort.

Thus, the DAC logically equates the achievement of more equita­ ble sharing to the achievement of a greater volume of assistance to

the developing nations.

Another argument for better sharing has been suggested by Gunnar

Myrdal. Many have observed that it would be desirable to channel more

of the world's foreign aid through an international agency. Myrdal

notes, however, that to do so would be "almost preposterous" as long

as a single country pays nearly all the costs. He sees a fairer dis-

/ tribution of the burden as a precondition for transferring more than

symbolic amounts of aid through "an institutional framework which is 2 multilateral and truly international." An international agency fi­

nanced largely by a single country may well be subject to the suspi­

cion that it is, in effect, a captive agent of the policies of that

^The OECD Observer, "Special Issue on Development Aid," Paris, September, 1966, p. 5. 2 Gunnar Myrdal, op. cit., p. 254. 13 country. This study will not be concerned with the question of multi­ lateral aid channels per se, but it is worthwhile to point out that the issue does provide another motivation for studying the problem of cost-sharing.

The Politics of Cost-Sharing

In spite of the fact that cost-sharing can be considered a worth­ while exercise from economic and philosophical standpoints, the fact remains that it is also a political exercise. Aid is dispensed by national parliaments, and it represents a cost that can be measured in

tangible terms. Regardless of the merit of philosophical or economic

arguments, the politician is likely to be hesitant about allocating extensive quantities of scarce national resources to an international

effort whose immediate benefits are at best very intangible.

In the United States the principal Congressional defenders of

aid generally consider it to be an integral part of what is, interest­

ingly enough, designated "mutual-security" policy. Benefits attached

to granting aid to developing countries can be measured only in terms

of how well it s erves to strengthen that policy. To their thinking, the question of reasonable cost-sharing includes both foreign military aid and domestic defense outlays. In addition, equitable participation demands "a sharing of a conception of the means relevant to the pursuit „1 of mutual security as well as a sharing of the costs."

^E. S. Mason, Foreign Aid and Foreign Policy, (New York: Harper & Row, 1964), p. 54. That is to say that allies are expected to share not only our burdens

but also our policies. It must be borne in mind that because foreign

assistance is in fact a political problem, the resolution of which

will be an output of international negotiations, U.S. policymakers

will go to the bargaining table prepared to act on the basis of this viewpoint.

The spokesmen of other advanced, primarily European economies, will, however, represent a markedly different outlook on cost-sharing

problems. Whereas these countries have s h o w considerable willing­

ness to allocate resources to development assistance, their attitude

toward lumping large defense outlays into a mutual security policy

is not nearly as positive. Henry Kissinger has repeatedly contended

that the preconceptions of our policymakers have led to no swift

unity of thought in the Atlantic Community. Vigorous and indiscrim­

inate appeals to Europe for massive resource outlays in support of

U.S. development and defense (mutual security) policies need not ne­

cessarily lead to outcomes regarded by U.S. policymakers as optimal.

Kissinger contends that even within Europe

burden-sharing provides an incentive for re­ sponsible policy only when two conditions are met: (1) our Allies must have the same view of the political environment as we, at least as it affects Europe and (2) they must believe that unless they play a greater role the United States will reduce its contribution (not its commitment). Neither condition is met today. Indeed our over-eager, importuning attitude with respect to the second point defeats our objective with respect to the first.

Henry A. Kissinger, "What About the Future?" The Atlantic Community Quarterly, Vol. 4, No. 3 (Fall, 1966), p. 323. 15

If Kissinger is right and we intend to continue our demands that

fellow citizens in the community of developed states share our burdens, we may find it necessary to rethink our position in relation to them.

European nations may not accept more than token cost shares unless

they share our interests and are granted participation in major poli­

cy decisions.

This study has no intention of investigating in depth the poli­

tical problem of development aid. However, in constructing cost-

sharing concepts it is important to recognize the political element

which precludes fitting a rigidly defined sharing standard into a me­

chanical formula.

Since the question of cost-sharing is important to the economic

theoretician and also to the policymaker, one should not ignore the

problems of either. The recent political demise of West Germany’s

Chancellor Erhard demonstrates (as did his political ascent) that there

can seldom be a meaningful separation of that which has political and

that which has economic significance.

The Germans have for some years purchased American weapons as an

offset to the cost incurred by the U.S. in maintaining troops in Ger­

many. There is no question that this "balance-of-payments-assistance"

(Devisenhilfe) must enter into any discussion of burden-sharing. As

the German export boom temporarily faltered in 1966 and a moderate

recession promised to be accompanied by a large budget deficit, the

burden of Germany's commitment to the U.S. began to appear unmanageably

great. 16

The United States policy has been to insist on a complete offset for total expense of stationing troops in the Federal Republic. The

Germans complain, however, that they also purchase weapons from other countries, with resulting ill effects on the German budget and balance of payments. Erhard, hoping to compensate for these other purchases, sought to whittle down the U.S. demand for 2.7 billion DM per year to an annual compensation of 1.4 billion DM. His failure to do so con­ tributed significantly to his downfall.

At the close of 1966 the coalition government succeding Erhard paid 1.8 billion DM to Washington and was committed to another 2.5 billion DM to be paid by the middle of 1967.*" The Frankfurter Allge- meine observed that "the German government takes the position that balance-of-payments assistance cannot be continued at their current high level."2

It is the opinion of many German political analysts that the via­ bility of the new coalition government will depend at least in part on how much it can improve on the Erhard bargaining performance. The

Allgemeine makes the claim that "it would not be possible to purchase defense goods worth 2.7 billion DM in the United States even if Germany were to abstain completely from her own production of defense goods and concentrate all overseas procurement in the United States."

^Frankfurter Allgemeine. December 31, 1966, p. 1.

2Ibid.

3Ibid. 17

It will be interesting to watch forthcoming developments with re­ gard to German's balance-of-payments assistance to the U.S. Whether the Kiesinger administration will stand firm is yet to be seen. In the new chancellor's first address before the Bundestag, a program of fi­ nancial austerity was outlined in which both defense and development assistance outlays were mentioned as areas where any expansion would have to be strictly "scaled to the financial situation of the federa­ tion." According to the Chancellor: "Neither will future commitments to offset foreign currency spending for troops stationed in the federal area be undertaken without considering our financial situation."^

Support for troop maintenance will be made on the basis of the coali- 2 tion government's ability to pay. It appears that the coalition government will be rather firmly determined to avoid acceptance of

U.S. formulae for cost-sharing assistance, at least in this area. In

any case it is evident that the matter of cost-sharing is a complex

one in which simple answers usually prove impossible. Where simple

solutions might be conceptually developed, it is doubtful that poli­

tical consensus could readily be achieved on the international level.

^The New York Times, December 14, 1966, p. 18.

2Ibid.. p. 1. CHAPTER II

BURDEN-SHARING THEORY: THE STATE OF THE ART

In relatively recent decades, as technological interdependencies among nations have grown more comprehensive and complex, it has be­ come economically expedient to undertake various international endeav­ ors requiring a sharing of expenses by participant nations. Though nationalism remains strong, there is no indication that nations will revert to exclusively intrastate preoccupations, and the need for understanding international financial problems is great.

It remains true, of course, that nations have little enthusiasm for allocating national resources to international endeavors, the bene­ fits of which are often rather intangible. Nevertheless, as Pincus has indicated, nations are willing to accept a common budget (1) when an international task favorable to the interests of the donor country could not be carried out by that nation alone, or could be carried out alone only at prohibitive cost, (2) when joint finance yields greater political advantage than individual action, and (3) when the required outlays prove to be "insignificant in relation to national budgets or

incomes,"

With regard to foreign aid, each individual and each nation will

evaluate the benefits of a given program in terms of a particular

i John Pincus, op, cit., p. 53.

18 19 utility function. The program's objectives will be differently perceiv­ ed, and, as utility functions differ, varying goals (e.g., social, economic, military, political, humanitarian, etc.) will be given vary­ ing priorities. The aggregate of perceptions, as interpreted by poli­ tical representatives, will differ from nation to nation as each has a different balance of interest. This renders the establishment of a single, multilateral or international development assistance program impossible in the foreseeable future. There nevertheless does seem to be a general, though poorly defined, political consensus among the

Western states. It is that, aside from other objectives, national se­ curity requires, in some mysterious fashion, at least minimal develop­ ment assistance efforts. Furthermore, any national security benefits accruing to the donor country are assumed to be enjoyed by all indus­ trialized nations. This is the assumption that gives rise to the issue of cost-sharing.

The Principles of Burden-Sharing

The first problem to be faced is that of definition. With re­ gard to what is "burdensome,1’ it is apparent that any tax may be so considered, at least to a degree, because of the element of compulsion

involved. There may always be difficulty in measuring the sometimes

intangible value received. Indeed, Pincus has gone so far as to sug­

gest that "it is probably futile to search for simple and clear-cut

ways to measure the costs" against the benefit of promoting "the de­

velopment of free societies" in which "Western values are more likely 20 to prosper.But the resources relinquished represent a very obvious burden, especially when Western economies are rather fully employed and policymakers are keenly aware of the opportunity costs of assistance.

If aid is merely an extension of welfare principles on an internation­ al basis (as, for example, Jan Tinbergen and Gunnar Myrdal hold), one may agree with Edward S. Mason that under these circumstances aid may be considered a burden. More generally, Mason finds than any transfer of resources among countries without a quid pro quo is usually con- 2 sidered burdensome. Naturally, a quid pro quo often subtly enters in, and sometimes the particular benefit redounding to the donor is much more tangible than political goodwill or influence. This is conspicu­ ous in the German case where the aid program, particularly in earlier years, has even been accused of being a rather poorly disguised export drive, and where aid has been seen as endowed with obvious commercial benefits. An extensive examination of this issue will be deferred un­ til the next chapter, where the focus is more directly upon the actual nature of the German aid program. In any case, there is without ques­ tion a distinct transfer element in German aid that yields no apparent quid pro quo and that in this sense may be considered a burden.

The problem of equitably transferring resources is essentially one of taxation. Although no ideal solution is readily apparent, ra­ tional inclination would be to favor a tax which would provide for a precisely equitable sacrifice from the income of each individual in all

John Pincus, oj>. cit., pp. 48-49. 2 E. S. Mason, oj>. cit., p. 59. 21 the donor countries and an equitable per capita distribution of bene­ fits among the people of the developing nations. Difficulty arises, however, from various possible interpretations of the phrase "precisely equitable sacrifice." Tax theory has never been able to conclude peremptorily whether the "benefits received" or the "ability-to-pay" principle should be applied. Since this study, however, is concerned with cost-sharing and a conceptual development assistance "tax," the

"ability-to-pay" criterion will be followed. International cost-shar­ ing experts accept, apparently with unanimity, the value judgment that in this area "ability-to-pay criteria, because they are acknowledged as the basis of domestic taxation systems, offer the most acceptable rudder."

The consensus in the burden-sharing literature as to the desirabil­

ity, at least from an equity viewpoint, of the ability-to-pay principle prevails in spite of the fact that nations are actually more prone to part with scarce resources on a "benefits received" basis. The diffi­

culty arises both in defense and foreign aid in "distinguishing be­

tween a project that contributes to the international welfare and one ,2 that benefits a particular burden-sharing country." But there is also a

John Pincus, op. cit., p. 85. 2 Irving B. Kravis and Michael W. S. Davenport, "The Political Arithmetic of International Burden Sharing," Journal of Political Economy. LXII (August, 1963), p. 313. 22 general belief that even policymakers are not completely unmoved by con­ siderations of equity.

The additional problem of whether taxation should be proportional or progressive between countries is much more sticky than it initially appears. Indeed, Mason has observed that the principal theoretical snare is that 'the literature on this subject has not got much beyond the proposition that those in similar economic situations should bear similar tax burdens. Considerable difficulties are encountered in de­ termining what treatment is equitable when situations are dissimilar."'*'

It is true that a proportional tax, or burden-sharing levy of any sortj is an advantageous approach in terms of the ease with which it can be understood and administered. Indeed, burden-sharing scales have tended to utilize a form of proportional tax, although this has been modified by deductions as well as by minimum and miximum contributions. Putting floors and ceilings on contributions gives the tax structure a regres- 2 sive effect, while deductions render a system progressive.

There is little question about the desirability of progressive rates for international financing arrangements. In spite of the fact that nations may enjoy political equality, at least in theory, there is little to recommend the proportional approach to burden-sharing.

Inequality of wealth is much greater between nations than within those nations which historically have given preponderant support to progres­ sive taxation. If their choice has not been an irrational one, the

-

E. S. Mason, o j j . cit., p. 60. 2 Kravis and Davenport, 0£. cit., p. 317. 23 case for progressivity in international cost-sharing seems appealing.*

The difficulty lies in determining the proper rate of progressi­ vity. Should bargaining progress beyond the relatively easy establish­ ment of the correct rank order of contributions, and an attempt be made to reach a consensus on just how progressive the contributions should be and on the methods of implementation, the intensity of dis­ agreement would probably be formidable. Even though the general notion of a progressive tax is straightforward enough, the various systems within countries are a mass of exemptions and deductions. Obtaining consensus among these nations on this problem of international finance might be akin to "requiring the unanimous consent of the taxpayers for 2 every detail of a national income tax law." After all, internation­ al agreements generally must be unanimous.

Perhaps the least satisfying aspect of progressive taxation, how­ ever, has yet to be mentioned. In the unlikely event that all the in­

terested parties agreed to its adoption and settled on some rate of progressivity the outcome might still be unsatisfactory. There is no way of knowing how a progressive international contributions system

would relate to domestic taxation systems. The difficulty is that the

equity of the former would be dependent upon the incidence of the lat­

ter in any given country. Whether the actual taxes taken from a coun­

try’s citizens accorded with the tax rates used internationally in

*Ibid. The discussion on progressivity here (pp. 316-318) is worthwhile. See also Pincus, pp. 62-65 for a sophisticated treatment. 2 Lincoln Gordon, "Economic Aspects of Coalition Diplomacy - The NATO Experience," International Organization, X (October, 1956), p. 537. 24 determining that country*s contribution would be open to question.

Pincus is very skeptical on this point and believes that "internation­ al and interpersonal equity are distantly related at best."*' He as­ sumes that countries would be inclined to continue using their current tax systems so that the incidence on the individual citizens would be totally unrelated to that implied by the taxation system used in­ ternationally. It is his opinion that domestic taxes

will continue to be based on some blend of social consensus about equity plus certain political com­ promises and certain administrative considerations such as ease of collection. These factors vary greatly among countries. It is unlikely that there could be any effective link between international and national considerations of equity; nor, per­ haps, should there be such a link.2

More will be said about progressivity below when the actual story of burden-sharing performance is discussed. Here it suffices to mention that the existence of this problem merely adds to a long list of conceptual difficulties.

Another important difficulty associated with the ability-to-pay method is that of measurement. The attempt to compute ability to pay has traditionally been by the use of (1) exchange-rate comparisons

(conversion to a common currency by means of prevailing exchange rates) and/or (2) real income equivalents (ratios showing the amounts of other currencies having one dollar*s worth of purchasing power). The latter method gives a better indication of relative purchasing power, and

John Pincus, op. cit., p. 63.

Ibid., p . 65. 25

there is general agreement in the burden-sharing literature that real

income equivalents provide a more realistic estimate of ability to par­

ticipate in cost—sharing*When the exchange-rate comparison is em­ ployed, even a flat rate tends to work in a progressive manner. This

is a result of a discrepancy between real income and the exchange- 2 rate equivalents of real income. Kravis and Davenport estimate that

"the national incomes of Western European countries in some cases may be understated by more than one-third" in the process of converting 3 them into United States dollars by the exchange-rate method.

Although the calculation of real income equivalents is generally preferred for studies of international finance, there has been little

actual work done in this area. The OEEC conducted some real income

equivalents studies in 1955, but covered only eight countries from

Western Europe and the U.S., and obviously the results are now dated.

Pincus holds that a recomputation of purchasing-power equivalents for

international contributions "should have a high priority if burden-

sharing studies are to be pushed any further."^

-

These measuring techniques are well explained by Charles J. Hitch and Roland McKean, The Economics of Defense in the Nuclear Age. (New York: Atheneum, 1965), pp. 85-87. 2 Alan D. Neale, The Flow of Resources from Rich to Poor, Occa­ sional Papers in International Affairs, No. 2, Center for Interna­ tional Affairs, Harvard University, Cambridge^ Mass., November, 1961, cited in John Pincus, op. cit.. p. 67. 3 Kravis and Davenport, oj>. cit., p. 315. 4 John Pincus, op. cit.. p. 67. This statistical lack may be unfortunate, but it need not represent

an insuperable obstacle. If individual countries value their contri­ butions in terms of their own currencies, comparisons can still be made by using intra-country ratios; countries1 contributions would be seen as the ratio of aid to GNP, the ratio of per capita aid to per capita

income, or other such measurement. The guideline to sharing would be

determined by a comparison of one country's ratios with the relevant

ratios of other countries. It must be admitted, of course, that this method is far from perfect, for the techniques and definitions employed by various countries in the compilation of national income statistics

are not uniform. Differences in the advanced countries' computations

are not so great, however, as to render comparisons meaningless. Fur­

thermore, the day may not be too far off when a system of internationally

uniform measurements might be adopted to provide greater uniformity for

these and similar purposes.

There is yet another problem of measurement, although it is of a

different sort. It involves measuring the "actual value" of a contri­

bution in terras of costs to the donor economy. This problem arises

from the fact that contributions may take various forms. A grant, for

example, will include a greater aid element than a loan. Moreover,

different rates of interest, varying grace periods and diverse repay­

ment schedules all represent different costs and benefits to both

donor and recipient countries. The matter is further complicated by

the fact that the rate of return on capital is usually greater in

recipient countries. This means that for any single loan the donor's

cost and the recipient's benefit will usually differ in value. It 27 will be one of the objectives of the next chapter to resolve this pro­ blem of measurement, for it is not possible to assess Germany's aid performance in terms of cost-sharing unless the 'hctual value" of her development assistance program can be established. For the present our purposes are served by merely indicating that this represents an­ other theoretical problem in cost-sharing analysis. Fortunately, it will be found that it is soluble.

Some Estimates of Cost-Sharing Performance: The Principles Applied

The principles discussed in the previous section have been applied in several attempts to evaluate the actual performance of donor coun­ tries and to estimate what contributions might be normatively desirable, given certain assumptions about the difficulties that have been dis­ cussed. One of the first quantitative attempts to assign actual "fair shares" to donor countries was published by Paul N. Rosenstein-Rodan in 1961.^ He proposed that aid contributions could rest on either of two bases: some percentage of national income or assignment of speci- 2 fic shares to meet predetermined requirements. Under the first method, contributions could come from all developed countries (defined as those having a per capita income in excess of $600 per annum), as a given proportion of their GNP. He suggests that real GNP could be computed,

1 Paul N. Rosenstein-Rodan, "International Aid for Underdeveloped Countries," Review of Economics and Statistics, Vol. 43 (May, 1961), pp. 107-138. 2 Ibid., pp. 110-111. 28 since this would be preferable to nominal product, and that the speci­ fic percentage of income contributed might be around one-hal£ of one per cent per year. Under the second method, which, incidentally, Ro- senstein-Rodan prefers, the specific capital requirements of develop­ ing countries would be computed.1- Aid appropriations should, if pos­ sible, "be 33-50 per cent higher than the amount which will probably be disbursed." Then, once a given quantity of resources is determined necessary, it would be raised by requiring each donor country to com­ mit itself to some specific portion of the total. In order to deter­ mine specific contributions, Rosenstein-Rodan proposed to "apply the

United States income tax progression to the number of families of each developed country--counting a family as having four times the country's income per head."^ On the basis of the assumption (among other things) that the rate of progressivity of the United States income tax is in some manner "correct" or "right," he computes the percentage of the total "requirements" that each donor country should contribute. His results appear in Table 1. It will be possible to tell how actual performances compare to these estimates when the Pincus calculations are discussed below.

^For the means by which this is done, see Ibid. p. 117. The reader should be warned that Rosenstein-Rodan1s method for computing capital requirements is not the only one that economists have devel­ oped. As methods differ, "requirements" also differ. The present study looks favorably upon the notion discussed in the introduction (see pp. 2-4) that determining "requirements" has less utility than operating on the assumption that within limits (which donor countries are by no means threatening to surpass currently), "the more the better" approach represents the best policy guideline. But this notion needs to be developed and sophisticated in succeeding chapters. 2 Ibid., p. 311.

3Ibid. 29

TABLE 1

SHARING THE BURDEN OF AIDa

. Nominal GNP "R eal" GNP Contribution b Contribution * by each (% ) by each (% ) GNP per Number o( Tax pet W riithts "Rral" GNP Tax per family families family With Without for "rral" per family family Wilh Without (dollars) (tlious.) (dollars) U.S.S.R. U.S.S.R. GNP , (dollars) (dollars) U.S.S.R. * VJS.S.SL.

Helgium 539* a303.it 495 1.0 1.1 *.23 6632 729 1.2 * 4 C anada 7954 457S-3 1002 4.1 4-3 1.00 7954 1002 3 4 3-7 D enm ark 4774 ii5 * .7 380 0.4 0.4 *•33 6349 676 0.6 0.6 ’ Finland 3573 1128.5 164 0.2 0.2 *44 5*45 449 0 4 0 4 France 4815 11,478.0 389 4.0 ' 4-3 X.20 5778 568 4.8 5.3 \V, Germany 4453 14,073.0 326 4.* 4-3 *•43 6366 679 7.0 7-7 Italy 2491 I3 i38S.7 0 0 0 144 3587 164 *•5 1.6 Luxem burg 603.4 83.0 626 0.04 0.04 *•23 7483 900 0.05 0.06 Netherlands 3815 2910.5 209 0-5 0.6 *•55 59*3 594 *•3 * 4 N orw ay 4895 906.7 398 0.3 0 3 x.39 63*5 670 0 4 0.5 Oceania 4419 4«>33.7 3*7 1.1 1.2 *•33 5877 585 *•7 1.9 Sweden 6338 1889.7 653 1.1 1.2 I.30 8096 *033 * 4 1.6 Switzerland 6232 *343.5 652 0.8 0.8 I.25 7778 944 0.9 1.0 United Kingdom 5383 *3,075.0 493 5-8 6.1 * JO 6998 799 7-7 8 4 U.S.A. 11,161 46,141.5 1728 7*4 75.2 I.00 11,161 1728 58.6 6 4 4 U.S.S.R. 3*74 53,74 3-o n o S3 •• 1.20 3928 227 9.0

a P. N. Rosenstein-Rodan, op. cit.. p. 138. Calculated on, the basis of progressive income tax schedule of the U.S.A. Also assuming GNP per family as a measure of income and a family as consisting of four members. ^May not equal 100 because of rounding.

In 1963, Irving B. Kravis and Michael W. S. Davenport contributed

an interesting attempt to deal with'the problem of computing cost shares.

They arrive at rough estimates of'both fair shares for a "world" of ten

donor countries (Table 2) and the acutal performance of these countries

(Table 3), while at the same time skillfully dealing with the progres­

sivity problem.

Kravis and Davenport, op. cit. 30

An ostensible way to find an appropriate rate of progressivity is to resort to tax structures currently used in given countries, Kravis and Davenport use this technique on the assumption that these struc­ tures have already proved themselves socially acceptable. From their

"world" of ten donor countries they let the most and least progressive structures represent the range of progressivity acceptable. They then compute cost shares for the ten countries comprising their world by converting each tax structure into a series of rates which are levied

I TABLE 2

COST SHARES FOR TEN COUNTRIES, VARIOUS METHODS OF ASSESSMENT3 (Per Cent)

ProgressiveT a x a t io n o f R e a l Incomes PROPORTIONAL T a x a t io n Applied to Individuals Applied to Nations Coiinyhies Assessed

Money Real U.K. German U.S. U.K. German U.S. Income Incomes Rates Rates Rates Rates Rates Rates (0 (2) (3) CO 00 (6) (?) (8)

U n i ti'il S l ; i lc s ...... 6 1 .4 5 5 .0 6 9.2 5 9 .6 6 6.7 70.4 46.1 6 4.5 Uni led Kingdom ,., 8 .5 9 .2 7.4 8 .7 7.3 7.5 11.9 8 .0 G e r m a n y...... 7 .6 8 .S 6.7 S .4 6 ,8 7 .4 11.9 7 .9 F r a n c e...... 6 .5 7.5 5 .6 6.7 5.6 5.8 9.6 6.4 j a p a n...... 4 .7 6 .8 2 .4 5 .4 4 .6 0 .5 5 .6 2.3 C a n a d a...... 3 .9 3.6 4.0 3.9 3.9 3 .8 5.2 3 .7 I l a l y...... 3 .7 4 .8 1.8 3 .6 2.1 1.2 4 .3 3 .5 S w e d e n ...... 1.6 1.6 1.1. . 1 . 3 1.1 1.3 1 .9 1.3 Netherlands...... 1.4 1.9 1.2 1 .6 1.2 1.4 2 .4 1.6 D e n m a r k ...... 0 .7 0 .8 0 .6 0 .8 0 .7 0 .7 1.1 0 .8

T o t a l...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Kravis and Davenport, op. cit., p. 323. Source: Calculated from national income figures and official exchange rates in Monthly Bulletin of Statistics. United Nation, April, 1962; col. (2), the same national income figures were con­ verted into dollar purchasing power parities; cols. (3) - (8), see pp. 318-322. 31 upon the country's mean income and various percentages thereof. One of the difficulties mentioned was that the tax structure of any of the ten countries is "a veritable maze of varying definitions, exemptions, 2 and deductions.11 Although results are consequently somewhat lacking in suitability for specific application, they may still serve as a general guideline to some of the problems and implications of burden- sharing.

In Table 2, columns (1) and (2) indicate what the relative shares would be if proportional rates were used on money or on real income, assuming no floors, ceilings or deductions. Each entry in these, as in all other columns, represents the percentage of the total a given country would contribute. The remainder of the columns in Table 1 give the results one would expect if the progressivity of different countries' tax structures were applied to the "world;11 the three given rates being those of the United States, Great Britain and the Federal Republic of

Germany. The German tax structure, it will be noticed, has a markedly lower rate of progressivity. The U.S. system, while intermediate, more closely approximates the rate of progressivity found in Great Bri­ tain's rates. Social consensus could probably be regarded as falling somewhere between the limits indicated by the results of proportional

*Tbid., pp. 320-325. This is done by applying the several tax systems to a discrete international income distribution. The interna­ tional distribution is formulated by fitting a lognormal distribution of the income distribution of individual countries. The original figures were first converted to United States dollars by appropriate purchasing power equivalents. 2 Ibid.. p. 322. 32 taxation of real income and the results of the highly progressive tax rates of the U. K.

The limitations to this technique are numerous and extend from the problems of statistical calculation to the political problems of making the results acceptable to the nations of the "world11 Kravis and

Davenport have defined. The estimates are admittedly rough; the world is restricted to a small number of countries; the range of choice of progressivity is broad and open to much debate in any bargaining situa­ tion; and no decision is made to the correct rate of progressivity or the correct shares. The calculations, in other words, merely define the arena in which the negotiators have yet to do battle; they merely provide ranges within which consensus can hopefully be found.

But from another viewpoint, the weakness of these computations may also be considered their strength. Specifying unique values as fair and equitable would scarcely be realistic or flexible. It has been shown above that simple answers are politically unacceptable, even if theoretically convenient, so it is fitting, perhaps, that only rough guidelines be established and broad ranges of possibility be pointed out. Once these ranges are available, one might examine the relevant considerations, take a flexible, enlightened position, and be more likely to reach meaningful conclusions about a given country as well as actual negotiated accords with that country.

The conclusions arrived at by Kravis and Davenport are provocative.

The data are somewhat dated, but it is doubtful that similar computa­

tions for recent years would yield substantially different results. 33

It may come as a surprise to some that "there seems to be little basis for the feeling the United States is bearing a disproportionate share 1 of the costs of international co-operation."

Table 3 also indicates that, given the more progressive rates of the U.S. and the U.K., the German performance is by no means poor.

However, using the German rate of progressivity (which for application to the German case might seem to be a logical standard, though it does represent the extreme case in the range of progressivity systems in­ vestigated by Kravis and Davenport), the German contribution seems somewhat deficient. This is noticeable in column (6), where figures on

TABLE 3

RELATIVE CONTRIBUTIONS TO INTERNATIONAL GOVERNMENT, TO UNDERDEVELOPED COUNTRIES, AND TO DEFENSE, I 960

I ntkrnationai . G ovf.hnuv .n t A id t o U nuksobvkloi 'KD C o u n t m u s D e ff.n s c

C o iin t b if .!) A ssf. s s e d Universal M ulti­ T otal NATO United OUCD B ilateral P ostal lateral G rants Infra­ N ations { 1962) G rants Union Aiteneics and l.nans structure (1) (2) (3)

Source: Kravis and Davenport, aj>. cit.» p. 325. aExcludes contributions of 42,225 Swiss francs (equiva­ lent to a 7 per cent contribution in the above table) on behalf of territories. ^Excludes contributions of 42,225 Swiss francs (equivalent to a 7 per cent contribution in the above table) on behalf of territories and an equal amount from Algeria. cLess than 0.05 per cent.

T-Ibid., p. 324. 34

"Total Loans and Grants" shows their record less than outstanding. Even worse is German participation in the area of bilateral grants. But again, using different rates of progressivity yields different evalua­ tions. Under more progressive rates there is apparent justification to Walter Scheel's claim that German aid compares favorably with that of other donor countries.^

The 1965 RAND study by Pincus also made extensive efforts to com­ pute cost shares. His conclusions are similar to those of Kravis and

Davenport. Policymakers have long operated on the assumption that the

U.S. was giving more than a fair share in all international undertakings, but Pincus finds that the relative aid share of the United States 2 should be larger. The real burden of U.S. spending for mutual securi­ ty purposes, he claims, comes in the area of definse spending. "By

almost any progressive standard, the United States is spending- more 3 than its 'appropriate* share for military purposes." The primary in­ terest here, however, Is in conclusions related to the German effort.

1 See footnote 1, p. 6. 2 Pincus, op. cit.. p. 79,

3lbid.. p. 83. 35

The Pincus calculations of Table 4 show that the German contri­ bution in 1960 was 7.04 per cent of the DAC total. This does not

TABLE 4

DISTRIBUTION OF ECONOMIC AID CONTRIBUTIONS, DAC COUNTRIES, 1960a (Net official loans and grants)

Per Cent Actual GNP Equivalent Per Cent Country Contributed (S million) ofDACTotal

Helgium 0.82 101 2.07 Canada 0.2t 75 1.54 France 1.50 843 17.30 Germany 0.51 343 7.04 Italy 0.41 127 2.61 Japan 0.40 156 3.20 Netherlands 0.41 41 0.84 Portugal 1.52 34 0.70 U.K.'. 0.56 390 8.00 U.S. 0.55 2764 56.70 Total 4874

Source: John Pincus, op. cit.. p. 81.

compare unfavorably with the requirements computed by Rosenstein-

Rodan in Table 1. Table 5 gives some burden-sharing formulae under various real-income equivalents, and shows that Germany contributed mofe aid In 1961 than considered fair by any of the relevant criteria.

At the same time, the United States was contributing less than the cost shares defined by any of these criteria. 36

TABLE 5

DAC CONTRIBUTIONS, I960a (Real -income basis)

Modified Real GNP U.S. Per Cent UN less 5300 Income of Formula per Capita Tax Rates Real GNP DAC (% of DAC (% of DAC (% of DAC Country (S million) Total total) total) total)

Belgium 14,735 1.59 1.55 1.46 1.45 Canada 35,830 3.86 4.15 3.73 4.22 France 71,569 7.75 7.42 7.09 6.88 Germany 86,881 9.40 9.13 8.66 8.82 Italy 47,967 5.17 4.14 4.05 2.79 Japan 61,870 6.07 4.78 4.13 0.06 Netherlands 17,912 1.93 1.86 1.76 1.71 Portugal 3,365 0.35 0.20 0.08 — U.K. 86,108 9.31 9.10 8.61 8.65 U.S. 504,400 54.59 58.69 60.40 65.40

Source: John Pincus, op. cit., p. 83.

Tables 6 and 7 demonstrate that the German contribution was not substantially changed in the years 1961 and 1962. Germany*s rank standing among DAC countries, it will be noticed in Table 6, was an unimpressive sixth. Moreover, Pincus shows that if one excludes short­

term loans from the definition of foreign aid, the performance is markedly worse. He gives the following figures on German aid for the period.

1961 1962

As a Per Cent of GNP 0.61 0.54 As a Per Cent of DAC Aid 6.30 5.90 Germany drops to rank 9 8 TABLE 6

DAC AID COMMITMENTS COMPARED TO GNP, 1961 AND 1962 (Official exchange rates)

1961 1962 Rank, . Rank, Aid Aid Aid Aid GNP Aid as Per as Per GNP Aid as Per as Pe (S (S ' Cent of Cent of (S (S Cent of Cent Country million)million) GNPGNP million) million) GNP GN1 Canada 34,050 111 0.33 10 37,000 72 0.19 11 France 62,610 990 1.58 2 68,580 1,034 1.51 2 Germany* 77,600 545 0.70 6 84,275 498 0.59 6 Italy® 35,000 217 0.62 8 38,400 137 0.36 9 Japan 47,700 347 0.72 5 52,700 296 0.56 7 Netherlands 12,260 84 0.69 7 13,100 63 0.48 8 Portugal 2,600 70 2.69 1 ‘2,800 60 2.15 1 U.K. 75,000 464 0.62 8 79,115 571 0.72 5 U.S. 518,700 4,770 0.91 3 553,600 4,975 0.90 3 Belgium 12,670 94 0.74 4 13,400 98 0.73 4 Denmark 6,540 7 0.11 12 7,130 10 0.14 12 Norway 4,824 7 0.15 11 5,186 11 0.21 10 Total 889,554 7,706 (0.83) 955,286 7,825(0.81)

TABLE 7

RELATIVE DAC AID SHARES COMPARED TO RELATIVE GNP, 1961 and 1962 (Official exchange rates)

1961 1962 GNP as Aid as GNP as Aid as Per Cent of Per Cent of Per Cent of Per Cent of Country DAC GNP DAC Aid DAC GNP DAC Aid Canada 3.8 1.4 3.9 0.9 France 7.0 12.9 7.2 13.2 Germany 8.7 7.1 8.8 6.4 Italy 3.9 2.8 4.0 1.8 Japan 5.4 4.5 5.5 3.8 Netherlands 1.4 1.1 1.4 0.8 Portugal 0.3 0.9 0.3 0.8 U.K. 8.4 6.0 8.3 7.3 U.S. 58.5 61.9 58.0 63.5 Belgium 1.4 1.2 1.4 1.3 Denmark 0.7 0.1 0.7 0.1 Norway 0.5 0.1 0.5 0.1 38

Still another consideration puts the German contribution in an un­

favorable light. It was mentioned above that a loan has a smaller aid element than a grant. It is possible to discount the value of a loan

to derive the real aid element involved (see Chapter 3). Fincus has

applied a discounting process to the foreign.assistance of the DAC

countries, and Table 8 gives the results for 1961 and 1962.

TABLE 8

DISCOUNTED AID SHARES, 1961 AND 1962, COMPARED WITH REAL GNP. 1961

1961 Share of Share of Share of Real GNP Total Real DAC Aid DAC Aid ($ million DAC GNP, Discounted Discounted Country equivalent)* 1961 (%) 1961 (%) 1962 (%)

Cnnnilrt 36.9 3.85 1.5 1.3 France 78.1 8.14 20.5 19.0 Germany 90.8 9.47 5.6 4.9 Italy 49.8 5.19 1.0 0.6 Japan 72.5 7.56 2.4 2.7 Netherlands IS.3 1.91 1.7 0.8 Portugal 3.5 0.36 0.3 0.1 U.K. 89.3 9.31 6.1 4.4 U.S. 520.1 54.22 58.7 64.0 Total 959.3 Source: John Pincus, op. cit. , p. 139.

It is interesting to compare these results with computations which fail

to discriminate between soft loans, hard loans and grants. Since Ger­

many's aid consists almost exclusively of loans, her relative standing

among contributors became less favorable when the discounting procedure

was applied.

These comparative studies uniformly suggest that the German aid

effort is inadequate relative to that of the United States and some

other donor countries. Before final judgments are made, however, it

should be pointed out that these sharing calculations largely ignore 39 two important considerations: (1) In practice taxation formulae can­ not and should not focus exclusively upon national income. (2) Actual international contributions are not based solely (or even primarily) upon the equity demands of conceptual formulations; they are a function of parliamentary interest perceptions.

These omissions do not detract from the value of the quantitative efforts discussed; they are mentioned only to indicate that an adequate understanding of the cost-sharing implications of international finan­ cial undertakings also requires an historical appreciation of some rather complex considerations. It is to the qualitative historical record of cost-sharing that attention is now turned.

A Brief History Of Burden-Sharing

As early as the establishment of the League of Nations, the mat­ ter of cost-sharing was not without precedents. The arrangement adopt­ ed by the League to meet its financial needs incorporating the principle that member nations should contribute according to the benefits they received from the organization was based on the "benefits received" principle which had already been applied with some success by the Uni- 1 versal Postal Union. Soon, however, this proved unsatisfactory, and the "ability to pay" principle was adopted. Since national income sta­ tistics were at that time still very crude, it was not possible to use

"4?. C. Schelling, "International Cost-Sharing Arrangements," Essays in International Finance. No. 24, Department of Economics, Princeton University, Princeton, New Jersey, 1955, pp. 2-3. Schel- ling's brief cost-sharing history was the source of inspiration for this section. 40 sophisticated methods to determine countries* abilities to provide need­ ed financial aid. Ultimately, each country was classed according to a simple weighted average of (1) the ratio of its governmental expendi­ tures to the total governmental expenditures of all member countries and (2) the ratio of its population to the total population of all League countries. Thomas C. Schelling observes that, in practice, although

India and China were assumed to have a population equal to that of

England in the calculation of burdens, this financial system was actual- 1 ly regressive.

By the time the U.N. was established, the notion of "ability-to- pay" contributions was as acceptable to the international endeavor as it had become in most domestic taxation systems. The almost equally general principle of progressive taxation, however, was not attempted by a variable tax rate. Rather, a system of exemptions was the means by which less favorably endowed countries were spared the burden of providing resources for a strictly proportional share of the interna­

tional agency's financial requirements. The report of the Contributions

Committee of the U.N., assigned in 1946 to research the problem of

fair shares, developed no cost-sharing formula at all, and "nearly

every case was considered individually with only the concept of pro- 2 gressive taxation as a guide." The report mentioned that foreign

1 Ibid. 2 Ibid.. p. 2. This seems to have been an early expression of the belief that good, informed judgment is likely to be more productive of equity and adequacy than rigid formulae. Much more will have to be said about this proposition as the exposition develops. 41 exchange difficulties and "temporary dislocations" arising from war de­ struction were matters of special consideration in the assignment of shares. Later, when a formula was developed, a minimum of 0.04 per cent and a maximum of thirty per cent were set on member contributions.

Also, the Committee allowed for a deduction of fifty per cent from the portion of a country1s national income considered "taxable" if its 1 per capita income were less than $1,000.

In 1945, immediately after the war, when it was apparent that emergency help could not be postponed, the United Nations Relief and

Rehabilitation Administration (UNRRA) discussed a number of alterna­ tive approaches to a sharing formula. Suggestions included per capita income considerations, the volume of trade between a prospective donor country and a prospective recipient, and the prospective donor's foreign exchange reserves. In the end the formula adopted was crude: a flat percentage of national income was to be the determinant of country shares. It was not surprising that in the UNRRA undertaking, where billions of dollars were at stake and the operations dwarfed the financial needs encountered by the U.N., the formula approach was un­ successful. The United States ultimately contributed nearly 75 per cent of the program's resources, knowing that if it did not do so the

^Kravis and Davenport, op. cit., p. 317. The actual formula may be written as follows:

Y i [1 - .5 ($1000 - Yi/$1000)].

■ immm.m ...... « i < ■■■ I Y i [1 - .5 ($1000 - Yi/$1000)] Y ¥ i represents the national income of country i and i represents income per capita. 42 required resources would simply not: be forthcoming. This development, which was an adumbration of the NATO experience to follow, has been described by Schelling:

One can afford to be fair, moral, and logical about a tax system when the total tax is not going to be large; as a matter of fact the im­ mediate foreseeable United Nations budget was small enough to cause some countries to seek larger shares for the added prestige. But when substantial contributions are involved, as in UNRBA, the search for an equitable formula is likely to be a gentlemanly guise for bargain­ ing. While the guise itself affects the out­ come of the bargaining, it must be taken at less than face value.

The subsequent experience of NATO was similar. Investigation of the relationship of defense expenditures to foreign assistance expendi­ tures (to be undertaken below) will reveal that in NATO, where fewer countries had to accept significant expense, an inability to reach agreement limited explicit cost-sharing to a very few aspects of al­

liance costs. Member countries proved unwilling to abide by the de­

cisions of the group regarding the allocations of substantial portions 2 of their national budgets.

That our European allies wished to eschew the burden of cold

war finance during the period of reconstruction is, of course, not

surprising. The United States had emerged from World War II as the

T. C. Schelling, oj>. cit., pp. 5-6. 2 For a more complete discussion of the NATO experience see Kravis and Davenport, op. cit.. as well as the sources cited by Pincus and Schelling. Chapter V of this study will examine the NATO problem in some depth. 43 leading financial power and creditor nation of the world. There was good reason to believe that she should bear the brunt of mutual se­ curity costs during the era of the dollar shortage. With the develop­ ment of an adverse U.S. balance of payments, however, and the recovery of Europe with the concomitant resurgence of its competitiveness in world markets, the United States has attempted to persuade capable countries to accept a greater, more equitable share of the defense and development assistance efforts of the free world. U.S. spokesmen have sought both on bilateral grounds and from within international institu­ tions to convince various countries, and Germany by no means least, to assume their obligations.

As an example of the post-reconstruction attempt by the U.S. to more satisfactorily distribute the foreign aid burden, the position taken in the early sixties at the DAC meetings may be cited. The U.S. suggested that each member country contribute one per cent of its gross national product to the aid effort. There were neither specific eco­ nomic justifications nor carefully calculated equity considerations for the proposal. The amount was purely symbolic and bore the intent of eliciting larger contributions from industrialized economies without 1 imposing an unrealistically increased burden. The suggestion was for

a time the subject of inconclusive debate, which failed to generate

enthusiasm. Although the one per cent formula was eventually adopted

John Fincus, op. cit., p. 56. 44 by the DAC, the OECD countries have never really accepted it in practice.

Generally, as Kravis and Davenport have observed, "the weight given to cost-sharing principles will vary directly with the number of

countries and inversely with the amount of money involved in the bur- den-sharing process."* As we saw above, our allies completely balked at the idea of cost-sharing in the NATO and UNRRA cases. Not only did

they object to the idea of parting with considerable national wealth;

Schelling points out that they were also afraid of setting the wrong kind of precedent.

Note must be taken here of the dual role precedent has played in the development of cost-sharing ar­ rangements. One is to constrain subsequent devel­ opments by the force of prior suggestion or prior commitment as to general principles; the other is to constrain the negotiators themselves through 2 an awareness that precedent is being established.

By way of summary, the history of burden-sharing attempts among

Western nations shows that there has been a willingness to share inter­

national costs and "fair shares" formulations only when countries deem

it in their national interests to do so. The extent of involvement on

the part of an individual country will be limited if the requisite

sacrifice threatens to result in a considerable drain of resources.

Similarly, countries hesitate to grant large sums to an international

effort if such action threatens to have precedent-setting implications.

^Kravis and Davenport, oj». cit., p. 312.

9 T. C. Schelling, 0£. cit., p. 9. 45

The Role of International Negotiations in Cost-Sharing

The sketch of cost-sharing history has been included because it is instructive of some realities that one should bear in mind as the analysis of cost-sharing is developed. If international relations were utopian, aid and defense resources^" would be contributed in a perfectly equitable manner by those who have a relative abundance of such resources in accordance with the "ability to pay" principle.

Possibly the contributions would be collected in the manner of an international tax that would incorporate elements of progressivity and allow for certain deductions of exemptions. Obviously, it would be desirable to have access to a simply applied formula by which a given country's fair and equitable rate of participation in community fi­ nancial matters might be calculated. The inability of nations to develop viable sharing formulae for arrangements requiring massive financial outlays does not alter the fact the such formulae remain at least intuitively attractive. Formulae have the appeal of simplicity and objectivity. When it is possible to isolate the relevant variables understand their interrelationships and meaningfully express them in mathematical form, one has both effective and esthetic power over the problem at hand.______

^International contributions include (1) aid, (2) defense, and (3) contributions to international organizations. However, for the sake of simplicity, this study will generally ignore contributions to international organizations. Sums so allocated are insignificant when compared to aid and defense outlays, so these alone will be considered as a proxy for the "international contribution" of what­ ever donor country is under discussion. This consideration will not be important, though, until the statistical investigation of the next chapter is reached. 46

Although fairly sophisticated conceptual taxation techniques might be developed for application to a utopian international situation, it should not be forgotten that "tax structures are in the final analysis 1 matters of taste and judgment." It has been historically very dif­ ficult to formulate cost-sharing equations that could obtain consensus.

The very precision of a mechanical formula implies that the problem is soluble by pure, deductive logic. Most of the problems of sharing, however, are not susceptible of such solution; they demand "value judg- ments, negotiated compromises, or arbitrary decisions." The set of problems involved in sharing (some of which are embraced and some of which are ignored by formulae) is extremely complicated. Very close agreement among Atlantic Community countries on a considerable number of problematical issues would be required before any tidy solution could be reached. Mason has enumerated some of these issues_ as "mili­ tary strategy, the appropriate levels of defense spending, the purpose of economic assistance, the relation between trade and aid, and what constitutes ’equity' in burden sharing." Writing in 1964, Mason drew the conclusion that we are "very far from close agreement on many matters," although he did find that the progress made might "justify, perhaps, a modest degree of optimism."^ In any case, it is apparent

^Kravis and Davenport, op. cit.. p. 324. 2 T. C. Schelling, op. cit.. p. 10. 3 E. S. Mason, op. cit., p. 71.

^Ibid. 47 that international relations are not utopian, that the international development assistance "tax" is at present nothing more than a con­ ceptual proposition; and that cost-sharing has been and will for some time continue to be a matter of political negotiation among donor nations.

This state of affairs has led Schelling to despair of the use of cost-sharing formulae.

If we drop the idea of a formula, and think rather of the development of "criteria," or even more loosely of "relevant considerations," for the ne­ gotiation of country shares, many of.the theore­ tical problems discussed earlier become, if not "soluble," at least resolvable. While a formula has to be simple and precise, "considerations" can be numerous and less well-defined; and principles can gradually be forged to which exceptions can be made for the cases to which the principles are least applicable.

There is obvious merit in the statement by Schelling, and it will be given further consideration below. This study takes the position, however, that there is still room in international cost-sharing analy­ sis for explicitly developed formulae.

It is true, of course, that the level of a country's contributive largesse will be largely determined by policymakers' perceptions of national interest. These perceptions do not, however, determine a unique point of financial operation; rather, a range of possible con­

tributive values will generally be established. Kenneth Boulding has described this policymaker behavior in terms of acceptability.2

1 T. C. Schelling, op. cit., p. 25. 2 Kenneth E. Boulding, Conflict and Defense: A General Theory (New York: Harper & Row, 1962), pp. 17-18. 48

Where conflict arises between two nations in a matter where the one's

gain will be the other's loss (as on the contract or "conflict" curve

of welfare economics), within limits there is often room for give and

take (movement in either direction on the contract curve). It is the

function of bargaining to determine the unique point of operation

within the more or less flexible limits defined by national interest

perceptions. If negotiations are "effective," the behavior of allies

will indeed be different (in this case, more nearly optimal) from

what it otherwise would have been.

If political integration ever proceeds to the point that mutually

beneficial endeavors are jointly financed by nations, taxation formu­

lae will be needed. Until that time, formulae can be used as a means

of estimating the adequacy of national contributions and as a bargain­

ing tool to facilitate sharing that more closely approximates Pareto

optimality.

There is little question that strong U,S. bargaining in the early

1960's led to general acceptance of the "o ne per cent of GNP for aid" / formula. Although burdens were never perfectly shared, it also led

to marginally improved defense and aid contributions. Thus, diplomacy

did result in an observable tendency toward Pareto optimality in na­

tional allocations of resources for international purposes. If taxa­

tion were indeed international and utopian, the taxation formula

would specifically account for all relevant cost-sharing variables

rather than rely on intuitive notions about "relevant considerations." 49

It would be an elaboration of the general expression

(3-2) A - „ - d 1 i ? * q L ip J where A represents the aid outlays per capita of country i, Yn repre­ sents per capita income and D represents all deductions (and/or "rele- 1 vant considerations") from the tax base. The variables, all in per capita form, are deflated by an appropriate price index, Ip. Since equation (3-2) says that real per capita aid outlays are some propor­ tion, q, of total output minus deductions, a progressive system would set a higher q value for richer countries. This is the essence of pre­ vious work by Rosenstein-Rodan, Kravis and Davenport, and others cited

4 earlier, although they made no systematic attempt to deal with deductions.

Since the world is not an equity-utopia, however, precise justice will not soon replace the interaction of international political ne­ gotiations and national parliamentary perceptions of interest in de­ termining q values. When policymakers confront their counterparts at the international bargaining table, some of the utility and most of the tidiness of the taxation formula disappear.

This form implies that the deductions are perfect substitutes for aid expenditures. Since this obviously does not follow, the equa­ tion would have to be modified. Some deductions and proposed modifi­ cations follow in later chapters.

^Annual reviews of aid policies as conducted by the DAC of the OECD use an implicit version of this formula. The primary measure is Aid/GNP, but since the 1961 meeting of the Development Assistance Group in London, attempts have been made to follow the resolution made at that time that contributions should be equitable, "having regard to the circumstances of each country, including its economic capacity and all other relevant factors." See Goran Ohlin, op. cit., p. 70. 50

Nevertheless, they can provide equity criteria as a basis for dis­ cussion, or as Charles F. Kindleberger puts it, "Economic criteria can help approach the stage where the bargaining gets intense."^ It is his view that formulae can help bring about consensus as to the correct division of aid. "The more that appeals to economic formulae are convincing the more they assist in the political process. But 2 it remains political."

Cost-sharing formulae can also be of assistance in persuading other donors to improve their performance. Pincus conceives of formu­ lae primarily as political weapons deployed in the arena of negotia­ tion, i.e., "a convenient way for a country to 'prove1 that inequalities 3 prevail in a given situation." The willingness of a country to con­ tribute resources to international undertakings will depend not only on the vital interests at stake, but also on the pressures and heat of negotiations and other bargaining considerations. According to

Pincus,

some European countries have shown the greater reluctance toward increasing their economic aid contributions. This may be one argument for promoting a formula approach, which may furnish national governments with stronger arguments for increasing their economic aid contributions, even if self-levied and not paid into an international pool.4

1 Charles P. Kindleberger, Economic Development. (New York: McGraw Hill, 1965), p. 370. 2 Ibid. 3 John Pincus, ojj. cit., p. 55.

4Ibid. 51

Finally, formulae can serve as guidelines for national policy­

makers in order to assure that their own aid performances remain con­

sistent and above reproach from annual review investigators. Lacking

formulae for the standard of performance and instead adopting the

performance of other countries as guidelines, the total aid flow is

likely to be reduced when the feeling arises that relative contribu­

tions are inequitable. "The response of public opinion to each new

appeal in any country is likely to be inhibited if it is felt that

that country is already bearing more than its 'fair share' while 2 others are not pulling their weight."

It is my hypothesis that if a nation were confronted at the

bargaining table not only with pertinent considerations about what

it should be doing from an equity standpoint, but also of what it

has already done at particular times and of what other nations are

doing, ceteris paribus it would be more motivated to commit itself

to better performance. In short, comparative analysis offers a help­ ful supplement to equity analysis.

In terms of the framework previously employed, a "golden year"

fair share could be defined as

i Yn t-x (3) A t-x Ip IP

1Ibid. 2 Alan D. Neale, 0£. cit., p. 33. 52 where x is the number of years that have elapsed since the year in which

the contributive effort (as a percentage of national income) was at a maximum. The q* merely gives that proportion of income which would c represent a "golden year" fair share in any given subsequent year.

It might be appropriate to settle for a constant q for a given

country when the bargaining begins. On the other hand, if policymakers

deemed the performance of some country to be poor, they could use what influence they could to increase that country's q value. In essence

they would be attempting to achieve the following:

(3-4) A* Ynt - > A t-x

" "ip ip Ip where, of course,

(3-5) Yn* D* t-x t-x - t-x • and qt-x ’ t-x IP IP so that the current outlay is at least proportionately as great as

it was in the "golden year." Given the rather irregular performance

of aid-granting countries, it might be very effective to make compari­

sons with a year in which performance was good. The extent of decline

in relative effort that results from even a fairly mild cutback in

absolute aid outlays is much greater than is readily apparent when grow­

ing GNP's and rising price levels are considered. The advantage of the

"golden year" approach is that it equates contributive capacity to

previous generosity. It would be difficult for a country to claim

that a given q value entailed excessive sacrifice if it had already

borne a comparable burden in a previous year. 53

In a similar manner, a "Golden Country" fair share can be speci­

fied. If comparisons are properly chosen, they may have considerable psychological value at negotiating sessions. One might, for example, compare a hypothetically poor German (country 1) effort to a more ambitious French (country 4) effort in year t-2, say, as follows:

Germany's contribution two years ago was

(3-6) k\_z Ynt-2 - Dt-2 <4-2 IP IP

France's contribution two years ago was ,4 4 4 (3-7) A, a 1 s 4 t-2 4 YV 2 “ Dt-2 and qt_2

It would be expected that bargaining representatives would en­ courage West Germany to accept the following larger commitments:

i Ynt+1 " Dt+1 'It+l Ip IP

Another alternative would be to establish an average q for all donor countries, which policymakers would use as a normative standard for those countries contributing less than the mean. For nations ex­ ceeding this mean rate, the other comparisons would be relevant.

The needed data could easily be computed. It does not seem un­ reasonable that bargainers should have such data available for nego­ tiations. Given the nature of diplomacy, it is to be expected that they would use the q standard most favorable to national inter/est and most likely to spur other nations on to better performance. It seems probable on an a priori basis that the "golden year" comparison would be generally most applicable. Its use would provide a practical stop­ gap until nations are genuinely prepared to accept equity taxation 54 formulae for international contributions designed to finance undertak­ ings large and small.

The “Relevant Considerations" of Cost-Sharing

The attempt of this study to incorporate deductions into the cost- sharing formula (thus making it more realistic and acceptable to policy­ makers) does not invalidate Schellings's plea for flexibility in the negotiation of country shares. The deductions to be proposed here will not account for all cost-sharing variables, and the non-quantiftable

"relevant considerations" spoken of by Schelling should also be taken into account.

The "fair" contributive shares specified by cost-sharing equa­ tions should be viewed only as flexible guidelines. Their outcomes will be a reflection of the variables generally held to be most impor­ tant, but special qualifying considerations might still enter into negotiations and modify the formulated cost shares. It is the purpose of this section to discuss some of these (both quantifiable and non- quantifiable) "relevant considerations."

No domestic system has considered the primary variable, income,

to be an adequate, self-contained target for taxation. Deductions from

the taxable base (Schellings's "relevant considerations") are also

generally felt appropriate in the international arena. Mason has ob­

served, for example, that

what a country does in one sphere of burden-sharing affects its ability and disposition to share burdens in others, And it also affects tactics used by the United States 55

or by other countries in attempting to secure a more equitable sharing of the aid burden.

The number of nuances involved in assessing a country's ability to contribute to international endeavors is great, and it would be impos­

sible to account for them all. Several possible exemptions have already been encountered, however, and there are in the remainder of the con­ ceptual set a number of others that will now be considered.

Defense spending is probably the most important potential tax deduction. Convenient though it may be to separate foreign aid from 2 this and other types of burden-sharing, to do so would be difficult,

if not impossible. Pincus feels that defense programs cannot be ig­ nored when foreign aid contributions are being considered in terms of burden-sharing, although he inveighs against an indiscriminate blending of defense and aid contributions. The Pincus argument runs that be­

cause foreign aid and defense expenditures are not perfect substitute

elements in a country's international contribution, "it is illogical

to equate, on a dollar-for-dollar basis, a deficiency in military 3 contribution with a surplus in economic aid."

Another issue which invariably receives a good deal of attention

in aid discussions and burden-sharing negotiations is the relationship

between trade and aid. It is evident that trade policy in rich countries,

when designed to permit greater trade earnings on the part of the

*E. S. Mason, op. cit.. p. 57.

2Ibid. 3 John Pincus, oj>. cit.. p. 86. 56 developing nations, has elements of burden-sharing. It has been cal­ culated that a mere ten per cent fall in the average price of the underdeveloped countries* exports can cancel the whole effect of aid through international transfers. The foreign exchange earnings of developing countries could be bolstered by the industrialized nations through policies fixing the price of exports at an average level high­ er than would be maintained on the free market. It has been noted in the literature that where such commodity agreements are implemented, 1 "there is no doubt that the importing countries are assuming a burden."

The effect of favorable trade considerations for the developing countries can hardly be overemphasized. Myrdal has indicated that a determined move to form general trade policies more in the interest of the developing countries would be "of a vastly greater consequence to the economic development of these countries than any aid which they .,2 could ever hope to get."

A similar consideration is the question of private capital flows toward the underdeveloped countries. Germany is a good example of a country which prefers to consider private investment as development assistance and would consequently view this, too, as a burden-sharing contribution.

-

E. S. Mason, op. cit., pp. 62-63. 2 Gunnar Myrdal, og. cit.. p. 239. 57

Though theoretical consideration of these trade issues might not be too difficult, their inclusion in cost-sharing discussion gives rise to problems nearly insoluble in practice. Should a country's favorable trade and investment policies be counted as contributions or partial contributions to the mutual aid effort? In any bargaining situation a country whose policies favor the developing countries would doubtless respond in the affirmative. Indeed, the justifications for doing so do not seem illegitimate. Conclusions on this matter, however, must be deferred to Chapter IV, where the trade-aid question will be investigated in a more comprehensive fashion.

Lincoln Gordon has given capable and concise explanation of a number of factors that should be given attention in the assignment of 1 cost shares. He speaks primarily of NATO finance, but his arguments can also be interpreted to apply to development assistance. Some obstacles have already been discussed; others are developed as follows:

(1) Different unemployment levels in various donor economies cause differences in the capacity to expand aid efforts without diverting resources from other uses. (This, of course, is a more significant considera­ tion in defense spending.)

(2) Considerable differences are found in the size of the government sector and in the levels of taxation in various countries. Thus, varying fiscal difficulties are encountered in raising additional taxa­ tion for international endeavors.

(3) Dependence on external trade and vulnera­ bility to balance of payments troubles can arise from expanded aid efforts.

Lincoln Gordon, op. cit., p. 536. 58

(4) The strength of a country’s internal poli­ tical cohesion can have a bearing on whether even a fully convinced government can secure^ the necessary legislation for contributions.

As the list of special considerations continues to lengthen, it becomes increasingly obvious that the assignment of "fair" aid shares to countries is a far more complicated matter than merely expecting that each donor should allocate some flat percentage of its national income to the development assistance or, more broadly, mutual security effort. Many complications defy easy solution.

In addition to the potential international "tax deductions" already discussed, Schelling has described several other possibilities. At various times in the brief history of cost-sharing, some nations have claimed that each of the following situations should be considered suf- 2 ficient cause for allowances and exemptions: (1) Where extensive war damage requires almost exclusive use of national resources for the reconstruction effort. Schelling sees this as an unnecessary considera­ tion, since war damage is already reflected in lower national income and has already resulted in a smaller assigned contribution. (2) Where internal taxation levels are already very high. This, however, may merely mean that citizens are enjoying the consumption of more public

(rather than private) goods and services, or that considerable income redistribution is performed via the tax mechanism. (3) Where a country does not enjoy income growth, even though the level of income may be fairly high. It is easier to Increase governmental revenues through

1Ibid. 2 T. C. Schelling, op. cit., pp. 14-15 taxation where the system's dynamics mean constantly growing incomes.

(4) Where a country's high levels of investment may mean lower levels of consumption for its citizens. Aggregate consumption, rather than national income, should be reckoned as the tax base, and that "inclu- I sion of the invested portion of national income is sort of 'double taxation' of reinvested earnings."*’ This issue will again come to the fore in Chapter VI when Germany's aid-giving capacity becomes the subject of investigation. (5) Where the depletion of natural resources has diminished national wealth. This will have spillover effects in patterns of participation in international trade and, eventually, in national income.

The foregoing discussion of special "relevant considerations" which haunt all efforts to develop precise and tidy contribution formu­ lae should conclusively demonstrate that the matter of levying fair shares requires economic insight, skilled diplomacy and possibly a generous measure of good fortune. CHAPTER III

ANALYSIS OF THE GERMAN CONTRIBUTION IN A COMPARATIVE FRAMEWORK

Contemporary Theory of Foreign Assistance Costs and Benefits

A foundation has been laid in the previous chapter for an investi­ gation of the German contribution, but it is impossible to speak con­ cretely about burdens and cost-sharing in general without first extending

the conceptual framework to include some additional considerations of

foreign aid costs and benefits. First the nature of contemporary cost- benefit theory as it pertains to development assistance in general will be briefly treated, then specific issues relating to the contribution of the

Federal Republic will be enumerated.

The Loans vs. Grants Debate

Although it may be impossible for policymakers to establish the costs

and benefits of any proposed aid project with quantitative precision,

estimates should certainly be as accurate as possible. Alternative projects

need to be weighed not only against one another but also against the option

of leaving scarce resources in the private sector for use in market-oriented

projects.

For the time being, however, it will be assumed that the decision

to donate a given level of resources to foreign aid has already been made.

The policy-maker has then to determine the costs and benefits of alterna­

tive ways of allocating these resources to development. "Analyses" have

60 61 usually amounted to little more than general discussions about the relative merits of credits and grants. The emphasis has been placed upon benefits (especially those accruing to aid recipients), while costs were largely ignored.

Kindleberger, for example, expresses a sentiment currently prevalent in policymaking circles:

The writer sees little merit in grants. Whether or not charity begins at home it has nothing to do with develop­ ment. The sharing of treasure is appropriate to defense, war, and reconstruction from war, and to alleviate human suffering from disaster. Defense, reconstruction, and relief grants are therefore appropriate. Grants may also assist in raising consumption, for which charity is appro­ priate. But development is a business matter.

Esthetic preference aside, the purely economic implication of Kindle- berger's statement seems to be that greater benefits accrue to both donor

and recipient when loans are the mechanism for financing development, on

the theory that they force governments to be more frugal and to use funds more efficiently.

Wilson E. Schmidt believes this notion to be "an illusion." It

assumes that an irrational recipient must be forced by the necessity of

repayment and interest rates to select projects with a high rate of return.

^Charles P. Kindlegerger, op., cit.. p. 368, Horst Zimmermann finds this approach too dogmatic. He favors the use of more purely economic investment criteria for determining credit terms. For a discussion of the continuing debate about the form in which aid should be allocated, see his Oeffenttiche Finanzhilfen and Entwicklungslaender: Gesamtwirt- schaftliche und Politische Massstaebe zur Bestimmung ihrer Form. (Berlin: Duncker and Humblot, 1963). Part II, Chapter I, pp. 37-50. Rosenstein- Rodan also holds that the capacity to pay "should largely determine the method of financing it." He does not, however, worry about the mainte­ nance of development debts arising from capital inflow if kept "within sound limits." Such debt, like national or corporate debt, "need not be amortized to zero in a sound world economy." Op. cit.. p. 109. 62 If a country had intended to undertake a project from its own resources, the loan merely makes it possible to shift these resources to alternative uses. Since these domestic funds are not likely to be subject to interest rates and repayment, the supposed economizing will probably not occur.

As Schmidt says,

The best allocation of a five dollar bill does not depend upon whether it was earned or found on the street, but on the benefits derived from alternative uses of funds. A rational government would be equally careful with loans and grants. But if governments are irrational, it is difficult to generalize about the comparative merits of loans and grants...it is impossible to tie definitely the motive for or type of aid to the end result of the aid.

Recent burden-sharing discussion has attempted to make cost-benefit considerations much more explicit than they are in the loans vs. grants debate and to consider burden-sharing from the standpoint of donor costs rather than from a recipient gain perspective. According to Pincus, much confusion has resulted from a tendency to confuse or combine costs to the donor and gains to the recipient, a confusion leading many to classify investment or hard loans as aid. nSuch conclusion is legitimate enough... if we look on recipients' opportunity costs as the criterion; but burden sharing is normally concerned with allocating donor's costs, not analyz­ ing recipients' alternatives."2 Thus, the analysis involves both time discounts and opportunity costs.

^Wilson E. Schmidt, "The Economics of Charity: Loans:Versus Grants." Journal of Political Economy. Vol. LXXII, No. 4 (August, 1964), p. 388.

2John Pincus, op. cit., 118-119 63 The Donor Cost

It is clear that the sacrifice involved in a loan is less than in­

curred by a grant. Nor is a 12 per cent loan as "burdensome11 to the donor as a 2 per cent loan. The prevalent (and probably best) way of

assessing relative aid burdens associated with loans at different terms is

to compare the discounted present values of future amortization and

interest payments.The "grant element" of a loan (the donor cost) will be greater if the interest rate is lower, maturity and grace periods

longer, and the donor opportunity cost (rate of return on public capital

in optimal employment in the lending country) higher. o Although Ohlin follows Pincus and Schmidt^ in the use of the dis­

counting procedure, he gives an imposing list of some limitations of the

technique:

(1) The discount rate cannot usually be determined

with any great precision.

(2) Whereas well-conceived cost-benefit studies would

use a frequency distribution to account for risk, aid studies

have not taken this approach, nor have they included a risk

premium in the discount rate. The apparent reason is the

complexity of risk determination.

•^Pincus discusses some alternative measures of donor cost, but finds them inadequate or impracticable because they require unavailable data, incur strong computational disadvantages and overlook some im­ portant conceptual considerations. See Ibid., pp. 119-123. 9 Goran Ohlin, op. cit., pp. 71-74. 64 (3) "It has been suggested that the social rate of

return to capital in industrial countries is much higher

than market rates of interest, and rates between 15 and

21 per cent have been advanced for the United States and

Germany."^ If such high rates were used in estimates of the

opportunity cost of foreign aid and investment even the

hardest loans would entail considerable donor sacrifice.

(4) Development loans are first "committed," then

disbursed over a period sometimes as long as several years.

It should not be forgotten that in aid studies the commit­

ment figures rather than the disbursements are usually dis­

counted. This, too, is an unfortunate departure from ortho­

dox cost-benefit techniques, just as would be the use of

budgetary commitments rather than cash flow in domestic fis­

cal policy analysis.

In spite of these technical and conceptual limitations, the present value method is of considerable worth. No formula can account for all the variables which interact in complex social situations, but consider­ able insight can be gained by making the cost analysis as explicitly quantitative as possible, thus narrowing the range of analysis that must be left to other methods.

1Ibid., p. 72. 65 The Donor Benefit

Measurement of the benefits of foreign aid to the donor country is an even more complex matter; indeed, some might contend that quanti­ fication is impossible. A statement by Schmidt provides a starting point for a discussion of the benefits accruing to donor countries. He points out that one of the arguments for loans is that they cost less than grants, or even nothing, because they are repaid. "However, the purpose of an aid program is not to get something back, at least not some­ thing material: if it were, the objective of minimizing costs would be achieved by not giving anything at all."^ If aid is not given merely to get something back, it is apparent that maximizing benefits is not the same as minimizing costs. The resolution of the paradox is at hand when one recognizes that the policymaker must decide, given the willingness to devote some level of resources to aid, how to maximize two different types of benefit.

The primary benefit is, of course, political. Liska, endorsing the

Mbrgenthau doctrine that aid is essentially a bribe, contends that aid gives the donor enlarged "channels of access to the recipient, its govern­ ment, opposition, and public; it may use the access to encourage, warn, O and impress. The full measure of benefit comes when access leads to control or at least significant influence over policymaking in the re­ cipient country. A more moderate view would be that the benefits of aid

^Wilson E. Schmidt, op. cit.. p. 388.

9 ^George Liska, op. cit., p. 22. 66 take the form of greater national security (associated with peaceful progress in the developing areas), and international prestige (associated with membership in the club of donor nations).

The secondary benefit is commercial. If policymakers were indeed maximizers, they would first establish the degree of control, security, and prestige required to justify a given sacrifice of resources. Then the remaining maximization problem would be one of establishing aid terms that would provide for the highest return compatible with the maintenance of control and prestige. If, for example, the grant element of a loan could be held very low and aid could be tied, not only would the political benefits be forthcoming, but the donor would also experience a rise in

foreign demand, an increase of activity in export industries and (assuming

that there are unemployed resources) concomitant multiplier effects

throughout the economy. Kravis and Davenport have pointed out that a number of capital exporting countries

have extended export credits in the course of selling their products to underdeveloped countries. Should these credits count in whole or in part as economic aid to underdeveloped countries or should they be re­ garded merely as intended to benefit the creditor country by stimulating its exports? Precisely this issue was involved in recent U.S. efforts to persuade Germany to increase its contributions to the under­ developed countries. ^

It is for this reason that Rosenstein-Rodan finds that short- or

medium-term loans, like private investment, should not be considered aid.

"They are ’trade not aid.1 Short- and medium-term loans are mostly

selling devices for (tied) exports of equipment goods.Where aid tends

^Ibid., p. 74. O Rosenstein-Rodan op. cit., p. 110. 67 to become trade, the benefits can be estimated. Where a loan is given, the discounting procedure can be applied. What is not "grant element" is "loan element", and if credits are tied and the trade multiplier is known, quantitative statements can be made about the commercial benefits involved.*- Since the required information is available it will be possible below to analyze the costs and benefits associated with German development assistance.

The Actual and Declared Costs

Since any discussion of international cost-sharing has meaning only when costs and benefits are brought into consideration, the attempt will now be made to use the cost-benefit approach. This section will be able to deal with aid costs with some facility. The discussion (in the next chapter) of benefits will, unfortunately, be incapable of achieving the same degree of precision. Moreover, unlike the analysis of costs, bene­ fits will not be treated in a present value context. The reader should be warned in advance, therefore, that the benefit discussion will be assymetrical to the cost discussion with respect to quality.

The following analysis will draw principally from Table 9, which summarizes all official German aid from 1950 through 1963 based on the

German definition of aid. Hence, private aid, government bilateral and government multilateral contributions will all be treated.

Of the 22,871 million DM of aid reported for the period, 9,977 million or 43.63 per cent came from the private sector. As has been

^Long-term trade benefits associated with the opening up of new markets in the recipient countries will be discussed in the next chapter. 68

TABLE 9

CONTRASTS IN GERMAN DEVELOPMENT AID* Multilateral Payments Bilateral Payments (in millions of D-marks) (in millions of D-marks)

1950-55 1956-60 1961 1962 1963 1

Government Payments 62 2,500 1,143 416 98 Government Payments

Contributions to International 2 375 223 349 46 Grants (incl. technical Organizations assistance, losses from — UN Technical Ast. Program — 27 21 30 32 credit guaranties) — UN Specialized Agencies 2 20 22 11 14 Reparations payments — EEC Development Fund — 328 180 308 — (exd. payments to individuals) Subscriptions to International 60 349 72 72 72 Financing Inst. — World Bank (IBRD) 60 283 31 31 31 Credits — International — 15 — — . — over 1 year (gross) Finance Corp. (IFC) Amortization repayments International Development 51 41 41 41 Agency (IDA) Credits (net) Credits to IBRD 1,776 848 —5 —20 (debenture bonds)

Private Payments - 276 -11 - - 3 Private Payments

5*/» D-mark loan — 200 — — — Net increase in guaranteed to IBRD in 1959 export credits Contributions of commercial 76 —11 —3 Non-guaranteed part of banks to IBRD credits, etc. guaranteed export credits

■ Investments (direct investments, re-invested profits etc)

Total 62 2,776 1,132 416 95 Total

Sum Total of Multilateral and Bilateral Aid: 22,871 million D- marks

*German International, "Twelve Years of German Development Aael Heinz Moeller Verlag, 1964), p. 9. 68

TABLE 9

CONTRASTS IN GERMAN DEVELOPMENT AIDa Multilateral Payments Bilateral Payments (in million! of D-marlu) (in millions of D-marks)

1950-55 1956-60 1961 1962 1963 1950-55 1956-60 1961 1962 19

Government Payments 62 2,500 1,143 416 98 Government Payments 1,259 3,405 1,316 1,390 1,21

Contributions to International 2 375 223 349 46 Grants (incl. technical 3 104 109 157 K Organizations assistance, losses from — UN Technical Ast. Program — 2 7. 21 30 32 credit guaranties) — UN Specialized Agencies 2 20 22 11 14 Reparations payments 896 1,477 320 280 25 EEC Development Fund — 328 180 308 (exd. payments to individuals) Subscriptions to International 60 349 72 72 72 Financing Inst. - W o r ld Bank (IBRD) • 60 283 31 . 31 31 Credits — International 15 _ over 1 year (gross) 360 2A54 1,173 1,159 Finance Corp. (IFC) Amortization repayments 630 286 206 International Development 51 41 41 41 Agency (IDA) Credits (net) 360 1,824 887 953 8C Credits to IBRD __ 1,776 848 - 5 - 2 0 (debenture bonds) ■

Private Payments - 276 -11 - - 3 Private Payments 1,215 5,985 888 731 89

5*/a D-mark loan _ 200 _ mmm Net increase in guaranteed 827 3,192 263 129 40 to IBRD in 1959 export credits

Contributions of commercial — 76 -1 1 — - 3 Non-guaranteed part of 207 797 65 32 10 banks to IBRD credits, etc. guaranteed export credits Investments (direct 181 2,086 560 570 39 investments, re-invested profits etc.)

Total 62 2,776 1,132 416 95 Total 2,474 9,480 2,204 2,121 2,1

Sum Total of Multilateral and Bilateral Aid: 22,871 million D- marks 5mmiGoman International, Roieardi Dopartm«nl

German International, "Twelve Years of German Development Assistance," (Bonn: Heinz Moeller Verlag, 1964), p. 9. 69 observed above, most economists would consider this contribution "trade11 not aid," since it represents the pursuit of private interest rather than the acceptance of an international burden. The point will be dealt with at greater length in Chapter IV; here it is sufficient to assert that only the 12,894 million DM contributed by the public sector should be considered aid.

When one turns to government bilateral payments, the large share of grant aid devoted to reparations immediately catches attention. Very few would count reparations as development aid contributions. During the period 1950-1963 the German government gave 3,761 million DM of grants, of which only 538 million DM or 11.64 per cent was not in the form of reparations. Looked at another way, reparations represented fourteen per cent of the "sum total" of German aid reported and twenty-five per cent of government aid of all forms. If reparations are deducted from the

12,894 million DM contributed by the German government, the total con­ tribution sinks to 9,671 million DM.

Exclusion of government credits at face value as aid shrinks the total contribution even further. Unfortunately, the data are not in a form which permits application of the present value discounting technique.

It is possible, however, to use the data given by Table 10 to determine the present value of German credits for the years 1961-1964. 70

TABLE 10

I DEVELOPMENT CREDITS OF THE FEDERAL REPUBLIC: 1961-1964a

1961 1962 1963 1964

(1) Loan contract over 5 years (mil DM) 1,106 1,096 2,031 1,133

(2) Of which: (a) Tied credits (o/o) 54 83 42 58 (b) Consolidation/refinance credits (o/o) 32 8 3 (c) Export credits of the Reconstruction Loan Corp. (o/o) 14 8 3 17

(3) Credit terms in weighted averages:

(a) Duration in years 14.5 17 19 18.25

(b) Grace period 4.5 5 4.75 4.5

(c) Interest (o/o) 4.7 4.2 4.3 4.0

aFerdinand Kopp, Unsere Welt ira Umbruch: Entwick- lungspolitik als Aufgabe, Organisation der Entwicklungspolitik, (Bonn: Eichholz Verlag, GMBH, 1965), pp. 49-50.

The discounting formula to be used is Wilson E. Schmidt's, which is as follows:*-

(3-1) L+z - > p L - ^zpL - L - zL (l+y) t (l+y)11 (l+y)n (l+y)n

= L (1- p/y) X [1- (l+y)-n] (1+z)

for a loan, L, at interest rate p for n years, where y is the domestic

rate of return on capital in the benefactor nation and z is the effect

on real income through changes in the terms-of-trade per dollar of

*-For the derivation of Schmidt's discounting formula see Appendix II. Wilson E. Schmidt, op. cit., p. 394. 71 receipt or payments. Table 10 provides all the needed data except z and y. The domestic rate of return for Germany is given by Pincus as six per cent,^ and changes in the terms-of-trade are approximated by Table

11. The inclusion of the terms-of-trade in Schmidt's discount formula is most welcome. Its effect on the present value is significant, for the unfavorable terms-of-trade of 1961 and 1962 reduce the grant element of loans to the developing countries; the grant element was significantly larger in 1963 and 1964 as the terms-of-trade became (at least temporarily) more favorable for Germany's underdeveloped trading partners.

The actual grant element of the loans given at the top of Table 10 came to 10.58 per cent, 15.53 per cent, 22.98 per cent and 35.21 per cent respectively. The results of the discounting procedure are given on Table 12. It would appear that, given the softening of German develop­ ment loans in recent years, it would be more than generous to assume a grant element of thirty per cent for public credits in the period 1950-

1963. Even with this liberal assumption, the total aid contribution shrinks from 9.671 million DM to 6,294 million DM.

The very considerable commercial element in German credits (roughly reckoned here as equal to 3,377 million DM) for the 1950-1963 period has drawn considerable attention in foreign aid discussion and literature.

Ohlin for example, notes that the German government "has frequently been attacked for pursuing a policy of export promotion in the guise of develop­ ment assistance."^

■^John Pincus, op. cit., p. 140.

2Goran Ohlin, op. cit.. p. 38. TABLE 11

TERMS OF TRADE FOR THE FEDERAL REPUBLIC: 1961-1964

1960 1961 1962 1963 1964

(1) Price index for German purchases from developing countries (1958«100) 98.2 94.7 92.1 93.6 96.6

(la) Yearly changes -3.50 -2.60 1.50 3.00

(2) Price indices for the principal goods exported to developing areas (1958*100)

Machinery products 103.2 107.0 110.8 112.9 116.1

Automotive vehicles 98.2 98.6 99.5 99.5 99.8

Electrical products 101.3 102.9 103.5 103.7 105.2

Chemical products 96.0 92.9 89.7 88.9 89.5

(3) Average index for all export goods 100.5 100.3 100.2 100.6 104.2

(3a) Yearly changes (Calculated from average price changes given by indices under (2) and (3).) 0.50 0.46 0.32 1.84

(4) Z, the effect on real income through changes in the terms-of-trade, (3a)/(la) -.143 -.178 .213 .613 vj fo 73 TABLE 12

THE GRANT ELEMENT OF GERMAN LOANS: 1961-1964

1961 1962 1963 1964

Loan Contracts (million DM) 1,106 1,096 2,031 1,113

Grant Element (million DM) 117.079 170.220 467.087 391.922

Grant Element (o/o) 10.58 15.53 22.98 35.21

Commercial Element (million DM) 988.921 925.780 1,563.913 721.078

Commercial Element (o/o) 89.42 84.47 77.02 64.79

When government multilateral aid contributions become the object of close scrutiny, one is struck by the fact that of the 4,219 million

DM total, fully 2,599 million DM or 61.36 per cent was spent on IBRD bonds. At the outset of this decade, when the chronic German trade sur­ plus was becoming a point of embarrassment and the practive of purchasing debenture bonds from the IBRD was at its apex, Alan D. Neale contended that when central banks and other government institutions "use idle funds

to buy International Bank bonds at five and one-half per cent, it is not

easy to see what better they could do with the money from their own point of view."l

Reference to the IBRD Annual Report^ shows that Neale stretched the

point somewhat, for interest rates on the German bond purchases actually

lAlan D. Neale, The Flow of Resources from Rich to Poor. Occasional Papers in International Affairs, No. 2, Center for International Affairs, Harvard University, November, 1961, p. 35.

^International Bank for Reconstruction and Development, Seventeenth Annual Report, 1961-1962, p. 44. 74 ran from 3.5 per cent to 5.0 per cent and approximated 4.0 per cent as an average. Using Schmidt's discounting formula, but ignoring the terms-of- trade, the grant associated with a loan of 2,500 million DM at 4.0 per cent interest with maturity at around ten years would be somewhat less than 300 million DM. Using these generous assumptions, the total grant element of German multilateral payments from 1950-1963 amounted to no more than 1,920 million DM of the 4,219 million DM nominal total. When the

2,299 million DM difference is deducted from the German aid contribution, the sum total contracts to a surprisingly small 3,995 million DM.

In summary, when one deducts (1) private aid, (2) reparations,

(3) the commercial element of loans, and (4) the commercial element of

IBRD bonds, the declared German aid total of 22,871 million DM for the period 1950-1963 shrinks to 3,995 million DM. The declared aid contri­ bution (cost), exceeds the actual contribution (cost) by well over 500 per cent.

The commercial benefit associated with German aid is given by (a) the commercial element of German loans (given for the years 1961-1964 in Table 12) which represents an increase in foreign trade, and (b) the trade multiplier. Since the trade multiplier exceeded 4.5 (See Chapter

IV), the commercial benefit was considerable. This will be considered in greater detail in the following chapter.

Aid in a Comparative Framework

We have seen that, from a burden-sharing standpoint, the actual costs of German aid are very low. Investigation into the development

contributions of other countries would doubtless reveal similar discrep­

ancies between declared and actual costs, although the German preference 75 for rather hard loans puts the Federal Republic in a less favorable com­ parative position.

Even fairly precise knowledge of German aid costs does not enable one to make cost-sharing judgments so long as the actual costs of other nations remain unknown, for cost-sharing analysis is comparative analysis.

Fortunately, this limitation is not insurmountable in the German case. Careful investigation of even declared aid costs shows the German effort to be somewhat inferior to that of other leading industrial nations.

The data of Table 13 compare the official German aid effort from 1954-

1965 to that of the United States, the United Kingdom and France. In

terms of the precentage of gross national product devoted to declared

(not discounted) development assistance, the FRG is well below the other

countries. The percentage of government expenditures devoted to aid

is also lower for the FRG than for the U.S. or France, although it is

slightly higher than for Britain.

The relationship of aid to other specific economic variables is

rather similar in these four countries. In Appendix II the results of

a number of simple regressions appear. A group of hypotheses was tested

statistically and it was found that, as anticipated, development aid

expenditures are correlated with policy and income variables. Since

policymakers would not be likely to have data on actual foreign aid costs,

their decisions to increase, decrease or sustain a constant development

contribution depend primarily on the declared aid figures such as are

reported in individual country statistical yearbooks. These figures were

used for the statistical tests. The correlation between German aid and

the following variables was found to be statistically significant.

(1) Government expenditures (partial correlation, .75). This TABLE 13

COMPARATIVE AID CONTRIBUTIONS OF THE FRG, US, UK, AND FRANCE: 1954-1965*

A s Per capita aid outlays in national currencies (Deutsche Mark, Dollars, Pounds and Francs). B = Aid expenditures as a percentage of gross national products. C a Aid expenditures as a percentage of total government expenditures.

A B C

FRG US UK FR FRG US UKFR FRG US UKFR

1954 9.8 33.9 1.51 28.7 .321 1.51 .38 .77 2.30 8.16 1.68 3.33 1955 13.7 25.4 1.62 32.7 .398 1.06 .40 .82 3.02 6.55 1.73 3.58 1956 12.1 26.3 1.47 73.0 .322 1.06 .35 1.66 2.53 6.70 1.46 6.85 1957 22.1 21.6 1.58 91.3 .548 .84 .37 1.89 4.34 5.38 1.54 7.13 1958 21.5 22.8 2.12 97.4 .505 .89 .50 1.77 3.82 5.58 2.00 7.91 1959 24.8 22.6 2.50 90.8 .543 .83 .57 1.53 4.07 5.01 2.30 6.87 1960 26.7 19.8 3.01 91.6 .498 .71 .66 1.41 3.66 4.68 2.55 6.98 1961 44.0 18.4 3.22 101.0 .758 .65 .69 1.45 5.37 4.15 2.73 6.92 1962 32.8 21.2 3.02 104.0 .526 .71 .65 1.35 3.51 4.51 2.50 6.15 1963 30.2 21.7 2.98 89.4 .461 .70 .62 1.07 2.94 4.43 2.35 4.77 1964 29.0 18.9 3.53 84.8 .408 .58 .70 .94 2.73 3.72 2.62 4.47 1965 31.9 17.1 3.57 76.4 .420 .49 .63 .81 2.70 3.46 2.39 3.81

Mean 24.9 22.5 2.51 80.1 .476 .84 .54 1.29 3.42 5.19 2.15 5.73

aData are taken for the most part from individual countries' statistical yearbooks, see Appendix I. Calculations are my own.

1

O' 77 would Imply that policymakers are not completely oblivious to changes in the size of the total general budget when determining the levels of resources to be contributed to the aid effort.

(2) Per capita personal income (partial correlation, .798).

(3) Per capita personal taxes (partial correlation, .794). Both

(2) and (3) lead to the conclusion that as the individual citizen fares better and is able to provide the government with higher tax revenues, the recipient of development assistance can generally expect to notice the difference in aid flows.

(4) Per capita defense outlays (partial correlation, .697). This merely confirms the belief that the contribution of resources to aid

(often motivated by mutual security considerations) is influenced by the

sacrifice of scarce resources currently demanded by defense needs (primar­

ily determined by mutual security considerations).^

No statistical significant relationship was found between German

Aid and the following:

(1) Investment. Some researchers have hypothesized that defense n and investment expenditures are correlated. Since aid and defense were

found to be correlated, it might be anticipated that aid and investment

would also be related. However, no such relationship was found to exist.

(2) The current trade surplus. Because FRG aid consists largely of

loans, and because these are often tied to procurement within the Federal

Republic, one would expect to find aid allocations positively correlated

•^The full treatment of this relationship is the topic of Chapter V.

^Th^s will be the subject of investigation in Chapter VI. 78 with activity in the current account of the balance of payments (i.e., trade surpluses leading to more generous aid). This did not prove to be the case. It should be noted, however, that if such a relationship does exist, it would probably be a lagged one, and for this no test was made.

In the four countries tested the similarity between the reaction of aid policy to changes in related variables is evident. One is led to the conclusion that with regard to aid German policymakers react: to economic conditions in generally the same manner as other policymakers, but are more parsimonious in actual aid allocations. CHAPTER IV

GERMAN POLICY TOWARD TRADE AND AID

Trade Needs of Developing Countries

If there is any generally acceptable foreign aid doctrine in the con­ temporary community of donors, it is that aid is at best a catalyst. The real effort required for successful development must come from the develop­ ing countries themselves. Nevertheless, there is general agreement that if they are confronted by adverse trade policies the self-help efforts of the developing nations are bound to remain without significant effect.

The foreign trade policies of advanced nations can attempt to opti­ mize: (1) short-run national interest (through discriminatory practices such as tariffs, quotas and export subsidies); (2) long-run national interest (through Kennedy round type endeavors designed to extend free

trade); (3) development prospects for the third world (through preferential measures which in commercial terms are usually more costly than beneficial

to the benefactor nation). Since development requires generous quantities of foreign exchange, elements (2) and (3), must together with foreign aid, play a central role in the process.

German foreign assistance doctrine takes this into account, and aid

is seen as a complement to current trade patterns and as a key to expanded

future trade markets. Thus, German aid literature is copiously supplied with variations on the assertion that "German development aid is not meant

to be an 'act of mercy1 but, rather, a relationship among partners openly 79 80 cooperating with each other under a system of mutual give and take."^

Before World War 1 it might have been reasonable to postulate that trade would in fact serve as a mainspring in the movement of the less developed areas toward take-off into self-sustained economic growth.

Policies introduced in and circumstances associated with the world wars, however, had devastating consequences for such hopes. Import barriers were hastily constructed in the worldwide depression of the thirties, and the subsequent hostilities further constricted trade. Development of industries specializing in import substitutes (e.g., rubber and fibers) was a natural response to the war stimulus, and the consequent loss of markets for the products of less developed countries (LDC's) meant that the "great ascent" would prove to be more difficult. The more intense postwar exploitation of oil in the underdeveloped areas and the simultaneous

shift from coal to oil as the major fuel were favorable developments, but even this was largely offset by an expansion of sugar, meat and cereals production in Western Europe. The upshot was that a rapid rate of growth

of tropical foodstuffs exports to the now more self-sufficient temporate

zone became impossible.

Additionally, since the mid-fifties (especially since 1957), a decline

has occurred in the prices of raw materials exported by the developing

nations. By 1962 the average level of prices was 12 per cent lower than

1 Guenter Grunwald and Johannes Rheinhold, "Germany and the Develop­ ing Countries," in The Politics of Postwar Germany, ed. by Walter Stahl, (New York: Praeger, 1963), p. 436.

^Bela Belassa, Trade Prospects for Developing Countries. (Homewood, 111.: Richard D. Irwin, Inc., 1964), pp. 5-6. 81 in 1954. Meanwhile, the terms-of-trade (the ratio of prices received for exports to the prices paid for imports) declined by 13 per cent for the LDC's and increased by 8 per cent for the developed countries.

From 1950 to 1964, gross world exports increased by 181 per cent, while the exports of the developing areas climbed only 74 per cent. In 1950 they represented nearly one third of gross world exports, whereas they O currently represent only one fifth of the total.

The implication of this trend has not escaped perceptive observers.

As early as 1959, Ragnar Nurkse, in the famous Wicksell Lectures, took a pessimistic position with respect to the role that foreign trade might play in the development effort. Because of the low elasticity of demand for many primary products, he believed that "any exclusive emphasis on the traditional pattern of growth through trade would be out of place, and could be interpreted as a hang-over from bygone days. We should try to understand the need for other patterns of development and the many new problems they involve."^

Since Nurkse enunciated his elasticity argument, a number of other factors have been invoked to demonstrate the difficulties involved in ex­ panding the flows of trade needed for more rapid progress for the LDC's.

Bela Belassa makes specific mention of "the increased share of services

*Erhart Poincilit, "The Role of Trade With Developing Countries," The OECD Observer. September 1966, p. 47.

^Ibid., p . 46.

^Ragnar Nurkse, The Wicksell Lectures, April, 1959. Reprinted in Equilibrium and Growth in the World Economy: Economic Essays by Ragnar Nurkse. eds. Gottfried Haberler and Robert M. Stern, (Cambridge, Harvard University Press, 1961), p. 324. 82 in the consumer's budget, the shift toward less material-intensive products in manufacturing,...and the reduction of input requirements in individual industries."^

This already depressing situation has been worsened by the apparently inate propensity of agriculturalists to attempt to compensate for declining revenues by increasing output, without reference to the fact that the condition of declining revenues may already have been brought about by excess supply. Several factors are involved: (1) the immobility of pro­ ductive resources in the developing countries, (2) the expansion of supplies as a response to the high prices of the Korean period, and (3) the entry of new countries into world markets in the attempt to enlarge their foreign exchange earnings.^

From March to June of 1964, the United Nations Conference on Trade and Development (UNCTAD) met in Geneva to investigate the needs of the LDC's.

The conference actually provided the "South" (the underdeveloped half of the globe) with "a forum to codify its objections to the existing system."3

In the course of this convocation a formula and rationale for increased trade and aid was developed, which consisted of six main elements:

(1) higher prices for commodities,

(2) greater trade access in Northern markets,

(3) payments by the North to developing countries whose export earnings are persistently below some reference level,

^Bela Belassa, op. cit.. p. 3.

^John Pincus, Trade. Aid and Development: The Rich and Poor Nations. (New York: McGraw-Hill Book Company, 1967), pp. 233-234.

3Ibid.. p. 76. 83 (4) preferential treatment in Northern markets for Southern manufactured products,

(5) creation of preferential regional trading systems in the South,

(6) creation of a permanent UNCTAD as the forum for LDC trade and aid demands.1

The Relationship between Trade and Foreign Assistance Programs

From the nature of these demands it is evident that from the stand­ point of the LDC's there is a trade-off between aid and "favorable trade arrangements." As Pincus has observed, "aid and trade are not watertight components. They substitute for each other to a limited extent. They may also act to reinforce or offset each other's effectsi"2

Favorable trade arrangements, such as those recommended in UNCTAD, would contain a considerable element of aid. Ostensibly, if the advanced countries chose to administer aid through trade, extensive help could be given without any aid program at all. As Mason points out, for example,

"If foreign exchange earnings are to be bolstered by commodity agreements

fixing the price of exports at an average level higher than would be attained on the free market, there is no doubt that the importing countries are assuming a burden." On the other hand, as was observed earlier in

this study, even large benefits accruing to the underdeveloped countries via extremely generous assistance programs could be offset by unfavorable

price movements and market conditions.

1Ibid.. p. 178.

2Ibid.. p. 41. q Edward S. Mason, op. cit.. pp. 62-63. From the point of view of the industrialized countries- a trade-off

also exists. On the one hand, although foreign aid represents a burden

under conditions of full employment, more liberal trade, at least in the

long run, holds the promise of welfare gains through the associated im­

provement in the allocation of economic resources. On the other hand,

aid burdens are apparently finding low level equilibria in the face of

low humanitarian demand in Northern societies, and the propaganda bene­

fits associated with rather inexpensive aid programs may have higher

marginal value than those associated with assistance-flavored trade

programs. Besides, the long-term benefits of trade seem obscure to

policymakers who are constantly besieged by the insistent demands of

long-standing protected interests. Indeed, Myrdal believes that if

policymakers succumb to such pressures and "the rich countries persist

in carrying on their ordinary business with the underdeveloped world

on the principle of narrow economic nationalism and adjustments to the

wishes of short-sighted vested interests at home, even generous aid be­ comes nothing more than a paliative."'*'

Pincus, however, has found one qualification to the general propo­

sition that "it is often easier for the North to give away capital than to 2 increase its own welfare through trade concessions." When there is no

unemployment in the economy and inflationary pressures are mounting (the

classical model of non-U.S. postwar capitalism), a "move to increase trade

offers the dual advantage of combating inflation and building up political

capital in the south."3

^Gunnar Myrdal, op. cit.. p. 239. 2 John Pincus, Trade. Aid and Development, p. 362.

3Ibid. 85 The mix of trade-aid assistance prescribed by policymaker utility functions will probably be found to relate to a variety of complex factors -- the economy's dependence on foreign trade, the strength of aid pressures emanating from former colonies or current defense "protectorates," the state of public opinion concerning development assistance, etc. It will become clear as the analysis progresses that the marked proclivity of the Federal Republic official pronouncements is to prefer "helping others to help themselves," a principle usually expressed in "business-like" aid

(loans rather than grants) and anxiety to develop the "markets of tomorrow"

(Maerkte von Morgen) by an expansion of trade with and private investment in developing countries. Thus the sentiment is often expressed that the

"best and, at the same time, 'cheapest' economic assistance for the develop­ ing countries is without doubt a consistently good market in the industrial countries."^

The relevance of trade to burden-sharing issues has now become clear.

The nature and level of a country's trade with the developing world should be considered along with other "relevant considerations" when that country's role as an aid donor is being analyzed. Some have suggested that cost-

sharing measures include a component for changes in the volume of trade

carried on by a donor country with the LDC's. Allowances in the quality of such imports and exports might even be included; in addition, it might be desirable to give extra weight to the importation of additional products

not previously imported in quantity.^

3-Hans Braeker, Probleme der deutschen Entwicklungshilfe. (Bonn: Girardet & Co., 1962), p. 7.

^Pierre Uri, Partnership for Progress. (New York: Harper and Row. 1963), pp. 48-50. A related position has also been taken that "when donors pay more than world market prices for their imports, or charge more for their exports, these differences should be included as additions to and sub­ tractions from aid."*-

The case for excluding quantitative trade considerations from ex­ plicit cost-sharing calculus, however, seems stronger. In the first place, it has been demonstrated that there is no practical way to measure indi­ vidual country contributions, "fundamentally because no costs are involved.'

Mason makes the second point, showing that it is difficult to prove that

trade can be burdensome. For example, "a reduction of trade barriers does not, strictly speaking, mean that a burden is assumed." In the long run,

this merely implies "a shift of resources from less efficient to more ef­

ficient lines of production."^ Since all trade partners benefit, there

are really neither costs nor burdens associated with the introduction of a

more liberal trade policy.

The most potent argument against specific inclusion of trade con­

siderations in cost-sharing calculations, however, is that trade flows

do not force governments to withdraw resources from domestic uses "by

taxing or borrowing from their citizens -- and this is the only 'burden'

there is to share.The private parties who transact such flows must,

*-See Pincus's discussion of Betour-Mosse's proposals, Economic Aid, p. 123.

^Ibid., pp. 50-51.

^Edward S. Mason, op. cit., p. 62.

^Alan D. Neale, op. cit.. p. 34. 87 after all, be pursuing their own interests by engaging in these commercial activities.

A final issue which relates international trade to cost-sharing problems has to do with tying aid to procurement in the donor country.

The argument is that a country's ability to contribute should be reckoned in the light of its balance of payments position. A country with a surplus is temporarily in a better position to pay. OECD countries have agreed in principle that a donor country with a balance of payments deficit may rightfully tie its aid. Some go further and contend that "ways should be sought to enable deficit countries to postpone their contributions and to arrange for the surplus countries to anticipate the payment of theirs."*"

As a short run consideration the argument has some appeal. Nevertheless, it should not be forgotten that when the longer-run burden of aid is divided up among donor countries, a balance-of-payments criterion is wrong.

Kindleberger has given this proposition succinct clarity in stating that:

"In charity, as in taxation, the widespread equitable standard is income, not liguidity."3

With reference, then, to the issue of foreign trade, this study does not consider the level or quality of a donor's commercial relations with the LDC's as an explicit deduction from computations of "fair" aid shares.

This is not to deny that trade flows should be a "relevant consideration" when cost shares are established.

^Kravis and Davenport, op. cit., p. 316. o ASee the arguments of Charles P. Kindleberger, Economic Development (second edition; New York: McGraw-Hill Book Company, 1965), p. 371.%

3Ibid 88 The study also holds that a donor's balance of payments position should have no bearing on the level of contribution a fair development assistance "tax formula" might assign to the country in question. More­ over, tied aid will be considered inappropriate except where a payments imbalance generates extreme pressure for this otherwise undesirable policy measure.

The German Postwar Trade Record

The Federal Republic is the second largest trading nation in the world today. When one examines the economic strength of the country, her great dependence upon foreign markets is conspicuous. Roughly speaking, every fifth mark earned in Germany is through exports. In numerous branches of industry more than 40 per cent of employed manpower is occupied in export production. ^

The postwar history of German reentry into world markets is a story of amazing success. When Marshall Flan aid began to flow to Europe, few people would have predicted that before the program was completed Germany would lift her exports to a level that would make her self-supporting.

Wallich points out that the "world-wide Korea splurge set off some re­ markable fireworks in the German export industries,"^ which specialized in capital equipment and machinery. It was fortunate for Germany that she had excess capacity in these industries in a period when demand was ex­ tremely buoyant.

^Walter Scheel, oj^. cit., p. 13.

^Henry C. Wallich, Mainsprings of the German Revival. (New Haven: Yale University Press, 1953) p.4. 89 Sensing the great opportunities at its grasp, the FRG launched a vigorous program of export promotion.^ It is interesting that German aid in earlier years was often charged with being nothing more than an arm of the export promotion program, an accusation difficult to refute as long as aid was given to the LDC's in the form of credits tied to procurement in Germany. Hans Braeker, a supporter of the official government position, concedes the essential validity of the claim that early aid was indeed designed less to stimulate development in the South than to permit rapid expansion of the export sector of the German economy. After granting that the system of export guarantees and export security (Buergschaft) established in 1949 was originally "a means of classical export promotion such as is found to greater or lesser degree in all highly developed states,11^ he hastens to add that the underlying motivation of the program has since undergone a "significant change." According to this evaluation, the emphasis is no longer on the stimulation of Germany's expanding export industry. Because loans are becoming softer and the German aid program more mature, Braeker feels justified in making the bold claim that "since about 1957 it has especially served (to 90o/o) to promote the growth of the developing countries."^

Foreign commerce legislation has also sought to exploit the strong postwar international demand for German output. Export sales are exempt

*-For Wallich's detailed account of the export promotion program see Ibid., pp. 244-260. The principal methods employed involved the use of (1) credit insurance, (2) export credit, (3) tax subsidies, (4) foreign exchange retention, and (5) bilateral trade agreements. Wallich adds that "import liberalization and conservative monetary-fiscal poli­ cies. ..deserve to be ranked outside this group and on a higher plane." See p. 244.

^Hans Braeker, op., cit., p. 10. 3Ibid. 90 from turnover tax. In addition, as a compensation for turnover taxes levied on export goods at various value-added stages of production, export bonuses of from 0.5 per cent to three per cent of the export price are granted. If a dealer exports products he did not personally process, he may also claim an additional bonus of up to 3.68 per cent of the price of the export.^-

Another factor favorable to German export capacity, especially in o the fifties, was the absence of an arms burden. While other countries found their prices rising (as a natural consequence of defense-stimulated demand pull) and their exports less competetive, Germany suffered little inflation. She was left free to capitalize on increased international demand and reduced competition. Figure 1 shows Germany's favorable price position and, partly because of expansive trade, her rapid rate of growth.

To this point the investigation has been restricted to one side of the balance-of-payments current account coin. Export expansion can be completely offset if the domestic demand for foreign goods is strong. The

German import record, however, is as noteworthy as the export performance, though it has generally been less publicized. In fact, Wallich, who believes the phrase "economic miracle" generally inappropriate, expresses the opinion that the "low level of imports and the consequent balance- of-payments surplus are really the most miraculous phase of the German miracle.

lsteuern und Wirtschaft in Deutschland: Tax and Trade Guide- Germany, Arthur Anderson & Co., 1964, p. 55.

2Henry C. Wallich, op. cit.. p. 217.

^Ibid.. p. 8. 91

w r s r liKUMANY; INI'ENDS OK IM'tt.srHlA) PRODUCTION AND I’ll ICES. I9S0-6*) U'lM’lOO)

Industrial Pro'htrlion

SOURCE: OEEC General Statistic*

1951 1952 1953 1955 1956 1957 1958 1959

AVERAGE ANNUAL RATE OP GROWTH IN HER CAPITA REAL OUTPUT and AVERAGE ANNUAL RATE OF PRICE INCREASE (P M 9 -m d )

10 An A ustralia 9 Re Iiclgium Dr - Rr.ir.il Cn * Canada f a Fr * France o Gr ■ Germany 7 1 - Italy J - J a p a n UK» United Kinpdom US ■ United State*

7 0 9 10 H id 15 16 17 Rote of Price Chonge

FIGURE 1

INDUSTRIAL PRODUCTION AND PRICES IN WEST GERMANY

Source: Lawrence R. Klein and Ronald G. Bodkin, "Empirical Aspects of the Trade-offs Among Three Goals: High-level Employment, Price Stability and Economic Growth," in Commission on Money and Credit, Inflation, Growth and Employment, (Englewood Cliffs, New Jersey: Prentice Hall, 1964), p. 407. 92

He attributes Germany's surprising level of self-sufficiency to five factors:

(1) a rather large volume of imports of comparatively low monetary value has been obtainable because of the decline in the prices of raw materials which followed the Korean conflict; (2) Schachtian autarchic policies left Germany with a legacy of broad manufacturing capacity, and the struc­ ture has required only very limited imports of manufactures; (3) the same autarchic policies also gave Germany a broadened raw materials base;

(4) the German diet has been low grade and food imports have not increased as sharply as one would expect for the large and rapidly growing population;

(5) the output of capital goods has increased relative to total industrial production, while that of consumer goods has decreased.*•

Except for a short period in 1965 the dynamism of German international commerce has continued unabated. At the close of 1966 the current account enjoyed an export surplus of 7.9 billion DM, the greatest surplus since the war. The Frankfurter Allgemeine evaluated the surplus as less a result of the 12.5 per cent increase in exports (to a record level of 80.6 billion

DM) than of the markedly slower 3.2 per cent rate of growth in imports

(to a level of 72.7 billion DM). This was in marked contrast to the situa­ tion in 1965 when imports rapidly climbed 19.5 per cent and exports grew by only 10.4 per cent.^ Table 14 shows that the 1965 record was not in­ dicative of the general trend of the period beginning in 1952. (See column (3).)

By the time 1967 was well underway, exports were reaching unprecedented

1Ibid., pp. 220-224. 2 Frankfurter Allgemeine, January 21, 1967, p. 7. TABLE 14

THE FOREIGN TRADE OF THE FEDERAL REPUBLIC, 1951-1965a

(Million DM)

(1) (2) (3) (4) (5) (6) Total Total Trade Exports Imports LDC exports, imports, balance, to LDC's, from LDC1s, balance, X M X - M Xu Mu Xu - Mu

1951 14,577 14,726 -,149 4,379 5,443 -1,064 1952 16,909 16,203 0,706 5,226 5,667 -0,441 1953 18,526 16,010 2,516 5,825 5,972 -0,147 1954 22,035 19,337 2,698 7,164 7,341 -0,177 1955 25,717 24,472 1,245 8,161 8,686 -0,525 1956 30,861 27,964 2,897 9,619 9,932 -0,313 1957 35,968 31,697 4,271 11,621 10,302 1,319 1958 36,998 31,133 5,865 12,207 10,204 2,003 1959 41,184 35,823 5,361 12,471 11,533 0,938 1960 47,946 42,723 5,223 13,191 12,696 0,495 1961 50,978 44,363 6,615 13,284 12,566 0,718 1962 52,975 49,498 3,477 12,622 13,584 -0,962 1963 58,310 52,277 6,033 13,776 14,360 -0,584 1964 64,920 58,839 6,081 15,473 16,380 -0,907 1965 71,651 70,448 1,203 17,745 18,453 -0,708

aData are taken from Das Statistische Jahrbuch. Computations of trade with the developing countries are my own. Due to the way they were presented in the statistical yearbook, columns (4)> (3) and (6) are somewhat biased in an upward direction. levels. Forecasts of the potential current account surplus for 1967 ranged from 10 to 15 billion DM, and questions were being raised about the possibility that pressure would begin to mount, just as it did in 1961, for a revaluation of the mark. One prominent columnist, Karl Otto Foehl, however, presented the view that the export surge would soon lose its force because less expansive growth rates in the U.S. and France would bring reduced demand for German goods. In addition, he anticipated an increase in German investments abroad and a diminishing of foreign, especially

American, investments in Germany.^* In spite of Poehl's doubts that the current account surplus will maintain its recent level, the expansionary trade pattern is not likely to deteriorate soon.

Foreign Trade and the Short-Run Optimization of German Interests

Having examined the postwar trade record in general terms, it will be helpful now to turn to a more explicit analysis of the benefits of trade to the German economy, particularly with regard to trade with the

LDC's.

It appears that by and large the Federal Republic has attempted to optimize its own short-run self-interest. Table 15 documents the relation­ ship of exports, imports and the balance on current accounts to the gross national product. It is instructive to compare the German rates with those of the U.S., the U.K., and France. Table 15 does this for the period

1954-1965. German dependence upon trade is unquestionably even greater

^Karl Otto Foehl, uEine Neue Aufwertungsdebatte," Per Volkswirt No. 14 (April 7, 1967),.pp. 531-2. TABLE 15

THE SIGNIFICANCE OF TRADE TO THE FRG, U.S., U.K., AND FRANCE: 1954-1965a

A = Imports as a percentage of GNP, (M/GNP) B = Exports as a percentage of GNP, (X/GNP) C = (X - M)/GNP

A B C

FRG US UK FR FRG US UK FR FRG US UK FR

1954 12.25 2.82 14.73 9.18 13.96 4.11 13.72 9.12 1.71 1.29 -1.01 -0.06 1955 13.57 2.86 16.23 9.53 14.26 3.91 14.73 9.75 0.69 1.05 -1.50 0.22 1956 14.06 2.99 15.61 10.16 15.52 4.52 15.86 8.31 1.46 1.53 .002 -1.85 1957 14.65 2.94 16.29 10.54 16.63 4.69 16.16 8.78 1.98 1.75 -.13 -0.83 1958 13.45 2.85 15.50 9.62 15.98 3.97 15.65 8.79 2.53 1.12 0.15 -0.83 1959 14.28 3.11 16.07 9.39 16.42 3.62 15.56 10.36 2.14 0.51 -0.51 0.97 1960 14.40 2.91 17.44 10.46 16.16 4.07 15.74 11.43 1.76 1.18 -1.70 0.97 1961 13.60 2.83 16.50 10.31 15.63 4.04 15.88 11.15 2.03 1.21 -0.62 0.84 1962 13.96 2.92 16.55 10.41 14.94 3.87 16.13 10.20 0.98 0.95 -0.42 -0.21 1963 13.84 2.91 16.87 10.88 15.44 3.96 16.55 10.08 1.60 1.05 -0.32 -0.80 1964 14.22 2.97 18.37 11.28 . 15.69 4.21 16.38 10.20 1.47 1.24 -1.99 -1.08 1965 15.70 3.16 16.37 11.19 15.97 4.04 15.46 11.06 0.27 .88 -0.91 -0.13

Mean 13.99 2.94 16.38 10.25 15.55 4.08 15.65 9.94 1.55 1.15 -0.73 -0.31

aData are taken from individual countries' statistical yearbooks, see Appendix I. Calculations are my own.

VO Ln 96 than these figures suggest when the foreign-trade multiplier is taken into account.

Wallich even compares the benefits derived from trade to the benefits generally sought in “modern capitalism" through monetary and fiscal policies.

On the whole it seems unlikely that, with a more expansionary policy but without the benefits of freer trade, Germany could have pushed her economy ahead faster. The growth of national income has been so rapid that little extra pressure could prob­ ably have been applied before inflation and dislocation began to set in. Yet the case can be argued, and while there are adequate reasons for rejecting it it should remind us that the domestic benefits which a rising external trade has bestowed might in some part at least have also been achieved by a policy of internal expansion.!

A quasi-substitute relationship between fiscal policy and trade pro­ motion has been made a realistic possibility for German policymakers because the trade multiplier has been large. Recognition of this large multiplier is implicit in journalistic economic literature. The Economist. for example, in assessing the current economic plight of the Federal

Republic, finds that buoyant export orders have been "the one bull point" in the face of recent sluggish activity on the part of Germany's private investors and consumers and public authorities on the local level. It expects that the German economy's "one great boost will come from the expected swing in the current account of the balance of payments -- and this could still feed back into home demand by the second half of next

^■Henry C. Wallich, op. cit., p. 243.

^The Economist, Vol. CCXXI, No. 6436 (December 31, 1966), p. 1410. 97

An editorialist of a comparable German publication, Per Volkswirt, recently referred to the foreign trade sector as the best "anticyclical stabilizer1' that one could imagine. Foreign trade dampens cyclical waves by exploiting foreign markets when domestic demand is weak and by "im­ porting stability from abroad in times of excess demand."*

In order to establish more definitively what the trade multiplier has been, a simple, highly-aggregated model can be developed which will give at least a crude indication of the desired information.^

The Trade Model

The model to be tested was inspired by a similar but more fully developed construction by Roger E. Bolton.** The period tested was 1951-

1965. Symbols will be used as follows:

Yn = GNP Yx = Income from exogenous sources, [G ♦ (X-M)] Yd r Income from endogenous sources, Yn - Yx (or, in more traditional terms, C + I.) X r Exports M = Imports G s Government expenditures P = Population

*Karl Otto Poehl, loc. cit.

^Ideally, one would trace out the interindustrial multiplier effects by an. input-output analysis. The next most precise quantitative approach would be to develop an econometric model. Both of these conceptually more desirable alternatives will have to be foregone, however, since the disaggregated and detailed data are not available in sufficient quantity.

^Roger E. Bolton, Defense Purchases and Regional Growth (Washington D.C.: The Brookings Institution, 1966), see especially pp. 20-36. 98

The model Is comprised of the following equations, the first two of which are definitional:

(4-1) Yn * Yx + Yd

(4-2) Yx « G + (X-M)

The postulated behavioral relationship is given by

(4-3) Yd = a + b Yn from which the "basic equation" (to use Bolton's terminology) is derived:

(4-3a) Yd = a + b Yd «■ b Yx

(4-3b) : Yd (1-b) = a + b Yx

(4-4) Yd = a/ (1-b) + [b/ (1-b)] . Yx

The "basic equation" can alternatively be expressed as

(4-5) Yd - _a_ + _b_ [G + (X-M)] . 1-b 1-b .

The next step is to test the model statistically. This was done by

putting all variables in per capita form and analyzing equations (4-3)

and (4-5) by least-squares regressions.

It is not surprising that (4-3) gave a good "fit":*

(4-3)' /Yd\ = .075 + .827 /Yn\ (.027) (.006) U /

As a matter of fact, the "fit" was too good. Since Yd is included

in Yn, the test did little more than regress the dependent variable upon

itself. It is therefore necessary to test equation (4-5), the "basic

*The following relevant statistical values were: = 0.99; partial correlation ■ 0.9997; the F test, 22924; t value for Yn/P = 151.4, Elasticity ■ .98, Durbin-Watson test = 1.538. 99 equation1' or reduced form of (4-3). When this was done the result was statistically significant and the "fit" was still good:^

(4-5)i /Yd\ = .490 + 4.71 /Yx \ ( p / (.i4i) (.190) ( p ;

The value of b given by both equation (4-3)' and (4-5)' was .827.

The trade multiplier, given as b/(l-b) in equation (4-5) was 4.71.

When this large multiplier is applied to Germany's trade balance

(Table 14), or even to the balance with developing countries for the years

1957-1961, it can be seen that the effect on the economy is great. From

1952-1965, the trade surplus approximated 54 billion DM. When the multi­ plier is brought into consideration, trade accounted for more than 250 billion DM of the Federal Republic's income in that period. By the same reasoning, the trade surplus with the LDC's in the period 1957-1961 resulted in an income of over 25 billion DM.

As was pointed out earlier, the trade multiplier also implies that tangible domestic benefits accrue to a foreign aid donor so long as pro­ curement is made in the donor country. Since approximately eighty per cent of German capital credit assistance flows back to German industries in the form of increased o r d e r s , ^ significant welfare benefits are multiplied

^This is in part due to the fact that the level of aggregation is so high. The conceptual value of the model remains, however, in spite of technical limitations such as the aggregation problem. The model's limitations need merely be kept in mind; there is no necessity for present purposes to demand highly sophisticated performance or detailed and precise forecasts. The relevant statistical values associated with (4-5) were: r 2 * .98; partial correlation = 0.9906; the F test, 681.51; the t value for Yx/P = 26.11; Elasticity => .875; Durbin-Watson test a 1.535.

^Bundesministerium fuer Wirtschaftliche Zusammenarbeit, Deutsche Entwicklungshilfe.. .was .jeder wissen sollte, Bonn, Zeitblld Verlag, GMBH, 1965, pp. 13-14. 100 through the economy, as reflected in higher income levels. Indeed, assum­ ing (to be on the safe side) that in the 1950-1963 period only seventy per cent of the Federal Republic's bilateral public development assistance

(totalling 8,585 million DM) was transformed into German exports, foreign aid resulted in slightly over six billion DM worth of export orders. Since it was established in the previous chapter that the actual cost of aid to the German economy was just under four billion DM, the net benefit exceeded two billion. When the multiplier is applied to this figure, the total net benefit of Germany's "business-like" aid is well over eight billion DM in income for German citizens. In other words, the national security, prestige and other non-economic benefits cost German citizens a total of minus eight billion DM.

Prospective Long-term Gains of Trade in Developing Markets

The short-run benefits of tied aid are appreciated in German administra­

tive circles; moreover, the aid program is considered a means of providing

for long-run trade gains by developing and nourishing future markets. It

is openly recognized by the exponents of the Maerkte von Morgen doctrine

that the parties "for whom the just distribution of goods is intended will be the buyers of tomorrow."^ Former Chancellor Erhard has stated that

nothing is more likely to lose us our markets in those (underdeveloped) countries than to leave them entirely to their fate. On the other hand, it does not take much imagination to realize what immense prospects would be opened up if these countries succeeded with the help of the Western world in converting 6-700 million people into more and more exacting consumers.^

^Grunwald and Eheirihold, oj>. cit.. p. 436.

^Ludwig Erhard, op. cit.. p. 240. 101

Since the promise of entry Into future markets has been cited by

German officials as a primary motivation for aid, one is led to wonder whether the doctrine is an expression of pure dogma or of carefully designed, long-term commercial strategy. In any case, the doctrine professes concern with a long-term optimization of trade gains; in fact, it equates a policy of long-run trade optimization with a policy designed to give immediate preference to the developing countries.

If this is actually strategy rather than mere propaganda for aid, penetrating questions should be asked about: (1) the validity of the assumption that generosity will necessarily result in future preferential treatment in developing markets, and (2) the likelihood that the present value of long-run net gains from trade might be equal to or greater than the present value of current gifts.

There is little evidence that these issues have been the object of any serious German research. A typical statement of the Ministry of Economic

Cooperation^ makes reference to a study by the Hamburg International Economics

Institute (Weltwirtschaftsarchiv). which predicts that in the future "develop­ ing countries will make good customers of the industrial countries." Its conclusion seems to be based largely on the fact that these countries have had expanding levels of annual trade (LDC exports increased by eight per cent in 1964), which is an expression "of the mutual efforts of developing and industrial nations to increase the developing countries' exports."2

With regard to the question of whether present generosity will nec­ essarily result in future preferential treatment in developing markets,

3-Fuer Sie Gelesen. No. 24 (July, 1965), p. 6.

2Ibid. 102 official German optimism claims its justification from two complementary lines of thought. First, like institutional advertising, any growth in the industry will "help us all." As income levels increase, world trade will prosper. Tibor Mende has this in mind when he observes that the Ger­ mans "fear satiated markets while a hundred million people living at below subsistence levels are at our doors.... It would be in our interest to integrate these people as consumers in a market of six billion."^

Little is said about the magnitude of the task of transforming potential demand of the LDC's into effective demand, although it is recognized that the process will necessitate an increase of incomes for the developing areas.

Ernst Majonica, for example, insists that they must become "partners of equal rights" and "consumers with purchasing power.

If the development of the "markets of tomorrow" is indeed contingent upon significant increases in per capita incomes, long-term trade benefits would result from more generous and more concentrated aid programs in

the present, as well as from the adoption of more favorable trade policies

toward the developing countries. It is apparent from the existing policies

of the Federal Republic that, in spite of propaganda to the contrary, any

long-term trade benefits expected to result from general increases in in­

come and trade levels in the developing world will be insignificant.

The second rationale which might justify expectations that trade

benefits would stem from aid benevolence does not require an extensive

increase in incomes in the LDC's. It merely holds that because of some

1-Tibor Mende, "Unsere Interessen und die der Entwicklungslaender," Fuer Sie Gelesen. No. 27 (October, 1965), p. 8.

^Ernst Majonica, "Deutschland und die dritte Welt," Fuer Sie Gelesen. No. 22 (May, 1965), p. 18. 103 comparative trade advantages Germany can claim a gradually Increasing share of the total of LDC international trade. This would require that aid be used to establish institutions and behavior patterns favorable to

German exporters; this is a possibility to the extent that aid (often tied) generates goodwill, advertizes and promotes German goods and es­ tablishes trade contacts. Although this line of thinking is not usually made explicit in the official aid literature, much stress is placed upon the notion of "partnership,” and great confidence is expressed in the competitiveness of German products.

Relating the actual worth of prospective trade gains to the cost of granting development assistance is a more difficult task. It was seen above that the present value of development loans can be calculated. It will be impossible in this study, however, to obtain precise quantitative estimates of the present value associated with the long-term gains of German trade with the lagged-growth regions.

Trade gains in a dynamic, general-equilibrium setting would depend on countless variables, including: the income elasticities of demand for imports of Germany, the developing nations, and relevant third parties; the changing terms-of-trade facing all the trading participants and the related income and substitution effects; the determinants of the changing comparative advantages which serve as a basis for specialization and trade-- changing tastes, changing technology, and changing quantities and qualities of the factors of production.*

In terms of the very long-run, it would be dangerous for Germany to

■^For a good treatment of comparative advantage in a dynamic setting, see C.P. Kindleberger, International Economics, 3rd Edition, (Homewood, 111: Richard D. Irwin, Inc., 1963), Chapter 7, esp. pp. 134-135. 104 make even tentative trade predictions based upon estimated comparative

advantages currently enjoyed; or, indeed, to assume that the configuration

of future trade is necessarily adumbrated by that of the present. H.6.

Johnson has made the pertinent statement that:

in the long run no country is likely to enjoy increasing gains from trade at the expense of its trading partners, since such gains are likely to be undermined by the development or transmission of countervailing technical change. The possibilities of technological improvement as a substitute for natural advantages also suggest that international trade will become of relatively decreasing importance as a contributor to national real income levels.*

Whether the Germans have attempted to estimate quantitatively the

prospective benefits of long-run trade is, as has been mentioned, doubt­

ful. Since the unknowns are so numerous, however, the results of such

research might be of less predictive value than would justify the costs.

In the absence of reasonably accurate knowledge of the long-run parameters,

however, it is not possible to accuse German policymakers of irrational­

ity. Propaganda aside, it appears that aid will continue to be given

primarily for German national security and German commercial advantage.

If the commercial returns prove to be small, no matter! With hard loans

the costs of aid will be correspondingly small. If commercial benefits

are smaller than aid costs -- a proposition that cannot be accepted un-

questioningly -- the difference will be more than compensated for by

national security, prestige and other benefits. This amounts to saying

that in reality German trade and aid policy is not one either of long­

term optimization or of preference for LDC needs.

*H.G. Johnson, "Effects of Changes in Comparative Costs as Influenced by Technical Change",in International Trade Theory in a Developing World, ed. by Roy Harrod and D.C. Hague, (New York: St. Martin's Press, 1963), p. 112. 105 Although a sophisticated attempt to account for the dynamic inter­ action of trade variables is beyond the scope of the chapter, a crude estimate of German trade with the LDC's over the next decade or so can be made. This is not the same as forecasting long-term trade gains in­ volving income level shifts in the LDC's; as has been indicated, the long­ term designs of German aid have been secondary anyway, and, moreover,

FRG credits have been too dispersed and too inconsequential to affect income levels in the developing countries, i.e., to generate the long­ term benefits under discussion.

If the assumption is made that current trade trends will not change significantly in the next decade or so, German exports and imports will continue to expand as they have since 1951 and the trade surplus will be maintained. Exports will grow at a rate approximating 8.4 per cent annually, and the portion of these exports going to the developing countries will approximate twenty-five per cent. Under these assumptions

Germany could plan on exporting around 255 billion DM of goods to the

LDC's in the next fifteen years. An extrapolation of trade values such as

this has no theoretical value, but has practical value as a crude indication of where contemporary trade will carry the economic vessel if the sailing remains smooth. A similar but even simpler extrapolation of German trade with the LDC's can be made; instead of assuming a constant rate of total

exports with a fixed percentage going to the LDC's, one can simply assume

that FRG-LDC trade will continue to flow as it did from 1951-1965. Under

these assumptions, Germany could plan on exporting around 232 billion DM

of goods to the IDC's in the next fifteen years.

These estimates are admittedly an admission of inability to make precise and reliable predictions; moreover, no attempt can be made here 106 to perceive future currents of international supply and demand and to forecast future terms-of-trade movements. Even crude extrapolations, however, make it clear that the demand for German goods from developing markets will make a significant contribution to the growth of German product in the next few years. Since the German economy is dependent upon a healthy export industry, these markets are of sufficient importance to warrant development assistance at least in the quantities currently being provided by the Federal Republic.

German Trade and its Benefits for the LDC's

When one turns to the benefits derived by the developing countries

from their trade with West Germany, the picture is less satisfying. In

the postwar period Germany's trade with the underdeveloped areas has indeed been both reasonably extensive and moderately expansive. Table 16 shows

that the exports of the LDC's to Germany have enabled them to purchase

German products vital for the establishment of an infrastructure that will

lead to developmental take-off. Nevertheless, even the literature partisan

to the German government's "international publie-relations" viewpoint is

constrained to admit that in spite of the trade liberalization of recent

years and the concomitant absolute increase in imports from Asia, Africa

and Latin America, the flow of products from these areas "have in com­

parison with the imports of industrialized countries lagged behind.

^Hans Braeker, op.. cit., p. 9. 107 TABLE 16

PRINCIPLE GERMAN EXPORTS TO DEVELOPING COUNTRIES, 1964

PRODUCT AFRICA ASIA LATIN AMERICA

Machinery 718 1,490 723 Automotive Vehicles 647 589 354 Electrical Products 273 512 264 Tools 200 -- Synthetic and Chemical Semi-finished Products 135 444 371 Chemical Products 368 318

Source: Germany, Federal Republic, Bundesministerium fuer Wirt- schaftliche Zusammenarbeit, Ihre Zukunft - Unsere Zukunft. (Bonn: Druck- und Verlagshaus Heinz Moeller, 1965), p. 23.

Table 17 shows the value of German trade with the LDC's as a percentage of her total product and gives a vivid picture of the declining portion of total German trade directed toward the developing nations. Fifteen years ago approximately one-third of Germany's foreign commerce was trans­ acted with developing countries, a figure now reduced to one-fourth of the

German total. Proportionate trade will continue to decline as long as the

Federal Republic expands activity in the markets of the North more rapidly than in those of the South.

If the period 1951-1965 is any indication of a secular trend of German trade with the LDC's, there is reason to believe that the official German policy of promoting future markets in underdeveloped areas will have no TABLE 17

GERMAN TRADE WITH DEVELOPING COUNTRIES, 1951-1965

(1) (2) (3) (4) Exports to LDC's Imports from Ld C' s Exports to LDC's Imports from LDC's as percentage of GNP as percentage of GNP as percentage of total as percentage of total (Xu/GNP) (Mu/GNP) (Xu/X) (Mu/M)

1951 3.60 4.47 30.04 36.96 1952 3.76 4.07 30.90 34.98 1953 3.89 3.99 31.44 37.30 1954 4.54 4.65 32.51 37.96 1955 4.52 4.81 31.73 35.49 1956 4.84 5.00 31.17 35.52 1957 5.37 4.76 32.31 32.50 1958 5.27 4.41 32.99 32.78 1959 4.97 4.60 30.28 32.19 1960 4.44 4.28 27.51 29.72 1961 4.07 3.85 26.06 28.32 1962 3.56 3.83 23.83 27.44 1963 3.65 3.80 23.63 27.47 1964 3.74 3.96 23.83 27.84 1965 3.95 4.11 24.77 26.19

Source: Das Statistische Jahrbuch. Computations are my own. 109

AO

35

30

Imports from LDC's 25 (% of total) Exports to LDC1s 20 (7® of total)

1951 1955 1960 1965

FIGURE 2 FRG EXPORTS AND IMPORTS TO AND FROM LDC'S AS A PERCENTAGE OF TOTAL FRG EXPORTS AND IMPORTS, 1951-1965. (See Table 17.)

discernable impact on trade statistics. The data of Table 17 and Figure 2 seem to confirm the suspicion that Germany's trade with these countries has followed the general world pattern. A preliminary examination of them leads one to the hypothesis that whereas the Federal Republic's average income elasticity of demand for imports from the rest of the world was elastic during this period, the average income elasticity of demand for imports from developing countries was inelastic. 110 When the hypothesis is tested by regressing both total imports, M, and imports from the LDC's, Mu, on national income, Yn, the following relationships emerge:*

(4-6) M = -5.297 f .159 Yn (1.448) (.005)

(4-7) Mu = 1.56 + 3.62 Yn (.557) (.002)

Conducting the same test with per capita variables yields the following:*

(4-8) /M\= -.110 4 .162 /Yn\ (pj (.029) (,006)(^P /

(4-9) /MuU .032 + .035 /Y n V V?/ (.011) (.002)\py

Thus, the statistical evidence verifies the hypothesis that the income elasticity of demand for imports from all sources fY . AM\ was on the Vfi AY/ average elastic (for (4-6), 1.15 and for (4-8), 1.17). The proposition

that the demand for imports from the LDC's is inelastic is likewise statis­

tically verified. (Specifically, the elasticity for (4-7) is .857 and

for (4-9) is .839.)

Toward an Integration of the Trade-Aid Model

It would be desirable at this point to tie together the above dis­

cussion on the interaction of trade and aid variables. Ideally, this ana­

lysis would merely be one part of an econometric model. The equations

*The associated statistical values are: (4-6) (4-7) (4-8) (4-9) r 2 0.986 0.961 0.983 0.947 Partial Correlation 0.993 0.98 0.992 0.973 F test 928.42 324.05 760.05 233.52 t test of (Yn/P) 30.47 18.00 27.57 15.28 Durbin-Watson 1.295 0.687 1.28 0.679 Ill describing economic patterns would be identified, solved simultaneously, and the multiplier matrix would be determined. Unfortunately, it is im­ possible to construct a complex model for the whole postwar German economy, for the available statistical observations or data points (and hence, degrees of freedom) are far too few. Therefore, the model presented in this chapter is necessarily simple. Although it cannot be used to make sophisticated or precise forecasts of values, preliminary indications are within its capacity.

Helpful insights into economic patterns as influenced by aid and into aid patterns as influenced by other economic variables are gained by "shock­ ing" the simple model developed (causing some variable to shift) and tracing the effects through the system. Except for the variables affected by the

"shocks," everything else is assumed to remain constant.

Assume, for example, that development assistance is increased incre­ mentally, perhaps by 1,000 DM. From the empirical investigations of this chapter and of Appendix 11, we anticipate that: (1) Since around eighty per cent of German aid is tied, exports will increase (by about 800 DM).

(2) Income from endogenous sources will initially decline, for resources

(around 600 DM worth!) will temporarily be shifted away from domestic consumption and investment* (3) These resources will be channeled through the government and government spending will thus increase. Some of the required funds will likely be diverted from other government uses, so that the change in total government expenditures (around 800 DM) will be less than the full amount of development assistance granted. (4) Imports will

^The magnitudes given are taken from Table 18. They are explained in footnote b of the table. 112 decline very slightly as the demand for foreign consumption and investment goods declines along with falling income from endogenous sources. (5)

Gross national product is likely to remain fairly constant, though it may increase slightly if the economy is not at full employment and a part of the resources now employed by the public sector in export industries has remained idle.

All of these changes are immediate. In succeeding periods multiplier effects will work through the economy. Then (if it is assumed that there is some slack in the economy), more government spending in the export sector will raise income from endogenous sources between 4,000 and 5,000 DM.

Thus, increasing aid by 1,000 DM will have a net effect of increasing the gross national product almost 4,000 DM.

In Table 18 the case of expanding aid (column (11) is presented with

three other cases, (columns (2), (3) and (4). Notation is as previously used. An incremental change (1.00, representing a hundred, a thousand,

or a million marks) in Yn, G, and X is assumed. The reactions of other variables are found in the appropriate rows. Where specific coefficients

are presented behind the reaction symbols (+,-,k), they should be viewed

as a rough indication of the order of magnitude involved, not as accurate

forecast values.

German Trade and the Future of the Developing Countries

The purpose of this section is to discuss current and potential German

trade measures designed to give preference to the development efforts of

the LDC's. It has been shown that German attempts to develop the markets

of tomorrow have resulted in growing trade for the developing countries. 113 TABLE 18

THE TRADE-AID MODEL

(1) (2) (3) (4) A Yn G X

Ab f, 1.00 + , 0.005 + , 0.028 0.005

Yn k, 0.20a + t 1.00a + » 0.44a + , 1.00a

Yd -, 0.60a + » 0.83a "* 9 0.55a 0.83a

G •f, 0.80 0.15 + > 1.00 0.15

X f, 0.80 + , 0.18 k, 0.02 + » 1.00

M -- .0.16 -- 0.16

Symbols: - = an increase; - = a decrease; k = constant, no significant change.

aIn successive periods increases in the values of exogenous variables, i.e., government spending and exports, will have a multiplier effect of between 4 and 5 on this variable.

bThe coefficients in this row enter the model in precisely the same fashion as other government expenditures (G). They are derived from the regressions of Appendix 11. Some of the coefficients of other rows have been slightly modified to account for recognized interdependencies not taken into consideration by the oversimplified structure of the model.

In spite of the fact that Germany's income elasticity of demand for the

products of the LDC's is low (so that her trade with them is expanding less

rapidly than with industrial nations), it remains a fact that the Federal

Republic has generally had a trade deficit with these countries.

It has justly been said that "Germany cannot be regarded as a high

tariff country as European tariffs go."* Indeed, one of Germany's leading

aid personalities, former Minister of Economic Cooperation, Walter Scheel,

*Henry C. Wallich, op. cit.. p. 258. 114 insists that but little additional help could be given the developing countries through further reduction of German import barriers. As early as 1962, the Federal Republic had already liberalized an approximate 6200 of the 6600 items on German import lists. According to Scheel, the greater

share of the remaining 400 protected goods applied to items that "are of no

significance to the developing countries. "■*■

It is, of course, not possible for the Federal Republic unilaterally

to liberalize trade with the developing areas, since as a member of European

Economic Community (EEC) she is subject to the tariff policies of the six.

This limitation on independent German action is vividly illustrated by the

provision with respect to German customs duties that "rates for goods with

origin outside the Common Market...will be gradually increased until the

common external tariff is reached since for many products the common ex­

ternal tariff is higher than the present German tariff.

Official German policy has been, however, to "attempt to influence

EEC policy so that to the greatest possible degree external trade with the

developing nations will be in accordance with their needs."^ Scheel states

that it is in the interest of the Federal Republic to work within the EEC

to establish and maintain a liberal trade policy, "for otherwise our exports

to the third world would soon begin to shrink."^ In short, German trade

as a form of aid is no worse and possibly better than that of some Northern

^•Walter Scheel, o ]d . cit., p. 28.

^Steuern und Wirtschaft in Deutschland, op. cit.. p. 71.

^Hans Braeker, op. cit., p . 9.

^Scheel, op. cit.. p. 62-67. 115 nations. The conclusion should not be drawn, however, that there is no

room for improvement. Indeed, several specific suggestions can be made that would be of great commercial benefit to the indigent nations.

First, some rather extreme quantitative trade restrictions could be

removed or at least moderated. These are the core of Germany's protective

arrangements. Along the same line, duties or consumption taxes on coffee

and tea should be greatly reduced.

The situation has not greatly changed since Neale, standing just inside

the threshold of the sixties, singled out German import taxation as the

model of deplorable policy. Her import and excise taxes on coffee were at

the beginning of the "development decade" totaling over seventy per cent,

and per capita consumption in 1956 was only 2.5 kilograms (as compared with

eight kilograms and a total taxation of only a little over ten per cent in

Sweden). Charges on tea were over fifty per cent — even higher than in

most other similarly offensive importing countries. As Neale comments,

It is hard to understand the purpose of such taxation, which seems to be too high even to maximize the revenue; and it cannot make much sense for wealthy areas to reduce consumption in this way of noncompetitive products of poor countries at a time when the latter require ever increasing loans or grants to finance their purchases of capital goods from the former.2 (Emphasis supplied.)

Taxes on coffee and tea have been yielding 800 million DM in yearly

^-Jan Tinbergen favored reducing EEC outer tariffs and has also given some specific proposals for German and Common Market reduction of consumption taxes on coffee, tea, sugar, cocoa bean products and bananas. The results would be highly desirable from a development standpoint, even if "small increases in the general turnover tax" of EEC countries is necessary "to compensate for the decline in fiscal revenues." See Shaping the World Economy. (New York: The Twentieth Century Fund, 1962), pp. 147, 294-309.

^Alan D. Neale, 0£. cit.. pp. 19-20. 116 revenues for Germany. Scheel concedes that such products should not be taxed for political and psychological reasons. "It is unthinkable that highly developed countries derive tax revenues from products that represent the sole source of income for other countries,"* and the Federal Republic, he insists, remains firm in her determination eventually to eliminate the fiscal burdens on coffee, tea and similar products.

In spite of such avowed high goals, however, he points to the FRG's dire need for revenues as reason to continue such taxation until it can eventually be lowered in a "step-by-step fashion." In a curious bit of logic he concludes that if the FRG were to lose this 800 million in revenues it would be necessary to reduce development assistance by precisely the same amount.^ The burden-sharing implication of his statement is devastating: assuming that in the absence of trade barriers Germans would consume the products in question, at least 800 million DM of the Federal Republic's yearly aid burden is borne not by the German taxpayer but by Germany's underdeveloped trade partners. This seems akin to paying taxes with funds

stolen from the tax collector.

Germany might make a very real contribution in this area by supporting

something of the nature of a proposal by Neale:

If we are looking for ways of increasing the earnings of the poor countries as a group from their sales of primary products, it may be more to the point to consider whether the rich countries might not be brought at some stage to agree among themselves...to impose common flat-rate excise duties on their total intake of certain commodities from all sources and to devote the proceeds of such taxation to economic development in poor countries.3

*Walter Scheel, loc. cit.

2Ibid.

^Alan D. Neale, o£. cit., p. 15. 117 A second suggestion for improvement of German trade policy, one which is in keeping with the above proposal, is that all German development assistance should be untied as long as her favorable trade position is maintained. Scheel officially favors international agreements on untying aid, but adds that until such an agreement is reached, Germany "must nat­ urally act in the light of the policies of other countries." Not only may

Germany be forced by the actions of others to protect her own interests, but also, "the federal government in her consideration of the question must take the German economic situation into account." If the FRG fails to convince other nations to agree to drop completely the practice of tying their foreign assistance, "she will in the future deal more flexibly with the principle and base her actions more firmly upon the economic and com­ petitive position of the Federal Republic."*-

Little defense can be made for Scheel1s assertions on this matter.

Some countries may of necessity follow a "tied aid or no aid" policy; but

Germany, with her favorable balance of payments position and healthy economy, has no such excuse for demanding that aid recipients do their shopping in

German markets whether or not procurement is more economical elsewhere.

A third policy suggestion is that the Federal Republic continue its program of promoting private investment in the LDC's. German officials have taken the position that development simply cannot be brought about without such investment, and they are inclined to consider it a part of the country's total aid contribution. Nevertheless, in spite of extensive

lWalter Scheel, op. cit., pp. 23-24. 118 efforts to coax German industry to increase its efforts, conspicuously little has been accomplished.*

The South itself is partially responsible for its failure to attract the large amounts of private capital needed to increase its growth rates and to reduce its excessive dependence on development aid. As Pincus has observed, the Southern nations seem to play a balancing game, "simultaneous­ ly trying to attract foreign investors by model legislation and frightening them away by a formidable combination of controls and expressions of hostil­ ity, the latter usually coinciding with election campaigns or other periods of domestic political disarray."^ In these circumstances, enlightened

German policy must continue to encourage private capital flows to retarded growth regions without relying on these investments to reduce in the near future the need for considerable public flows of capital.

The fourth and final trade policy proposal is advocated by a prominent

German authority on foreign aid, Matthias Schmitt. He has observed that it is in all cases very difficult to get a foothold in new markets, but

that the problem is compounded for countries like Burma, India or Egypt which have not yet become firmly established in world markets. Even when

a developing nation has succeeded in producing goods of a quantity, quality

and price to meet market competition, its ignorance of the special skills

and techniques required in overseas commerce often nullifies its efforts.

^From 1952-1962 German private investments in Latin America were somewhat more than 1 billion DM, in Africa no more than 222 million DM and in Asia only 150 million DM. Given the extent of government pro­ motions efforts and investment needs, this activity is pathetically meager.

2John Pincus, Trade. Aid, and Development, p. 359. 119 "It will therefore often be impossible for inexperienced developing countries

to increase their exports to Germany without her cooperation and support.

Helping (the LDC’s) to smooth the paths of commerce in word and deed rep­

resents, therefore, an avenue of assistance not less important than techni­

cal and industrial help."^

Here Germany to implement these four suggestions, there is no question

that she would be accepting a greater assistance burden than in the past.

Such action, though not quantitatively measurable in terms of marks, should

be brought into consideration in annual aid reviews and in the determination

of "fair" aid shares. Although it could represent no specific numerical

deduction from a conceptual development assistance "tax," it would serve to

temper judgments on fair aid shares as a "relevant consideration."

It is unfortunate that Germany is, at least in the near future, no more

apt to adopt such enlightened trade policies than are the other developed

countries. Pincus is probably safe in predicting that the expansion of LDC

exports to the Atlantic countries ,lwill come largely from the growth of

Northern income and demand, and not from dramatic moves toward free trade in

commodities.His pessimism on the short- or even medium-term expansion

of trade assumes that policymakers on both sides of the wealth gap will con­

tinue to be influenced more by political irrationalities than by welfare

considerations.

It is perhaps asking too much of the North to recognize that the interests of the world will probably be best served by generous trade and aid policies toward the South. For that matter, it may be too much to expect the South to respond favorably to more generous policies if offered.

^Matthias Schmitt, op. cit., p. 74.

^John Pincus, Trade, Aid, and Development, p. 266. 120 A determined resentment is often the cement that binds social movements.^-

Even in the event that such pessimism is unwarranted, the assumption that the implementation of the enlightened trade policies discussed above would obviate development assistance in the near future is unduly optimis­ tic. After a careful investigation of the trade prospects of developing countries, Belassa comes to the conclusion that steadily rising living standards could be realized only if the right policies were followed by all parties -- the Western countries, the Soviet bloc and the developing econo­ mies. Moreover, he finds that ''action in one field, such as in trade policy or foreign aid, can have only a limited effect without measures taken in other areas."^

^•Ibid., p. 374.

^Bela Belassa, op. cit., p. 127. CHAPTER V

DEFENSE BURDENS AND AID CONTRIBUTIONS: THE TRADE-OFFS FOR GERMANY

Foreign aid policy is not established in a vacuum. The current

level of a country's defense outlays, among other things, will have

considerable influence upon aid policy. The nature of the inter­ relationship between defense and aid, though complex, is important.

Both aid and defense are "non-domestic" outlays, in the sense that both represent sacrificed domestic utilization of scarce resources.

Both are important elements of national security policy."^ Both are held to be activities most satisfactorily implemented, at least

in part, by some form of community cooperation. Finally, both represent policies which are considered fair game for annual review by

internationally interested parties (specifically NATO and DAC). For

these reasons this study defines Germany's "international contribution"

as the sum of both aid and defense expenditures. Other comparatively negligible donations to international organizations will be ignored

for the sake of simplicity. This chapter examines the nature of the

aid-defense trade-off from a cost-sharing standpoint. It will be

profitable to begin by briefly reviewing the burden-sharing aspects

of defense expenditures.

^That almost all donor nations have considered aid policy to be an element of national security policy can be seen from Goran Ohlin, op. cit.. Chapter II.

121 122

Defense as a Cost-Sharing Problem: The NATO Experience

The claim has justly been made that the exercise of burden- sharing in NATO "never took place, at least not in a manner that rose above the level of ad hoc negotiations.*1^ As was observed earlier in this study, when an international effort begins to re­ quire large contributions, nations protect their individual budgets by retreating from cost-sharing exercises. Though such behavior seems intuitively reasonable, its implications can be fully grasped only through an understanding of the development of the Atlantic organization. Broadly speaking, certain cohesive forces made possible the establishment and functional implementation of the Alliance. Two of the most significant centripetal forces were

(1) common perception of the external threat and (2) military and i economic benefits of sharing the mutual security burden. If it currently appears that NATO has entered an era of irreversable dis­ solution, it is because forces directly antithetical to these are becoming ascendant. Thus, the centrifugal forces which account for

NATO's decline are (1) perceptions of a declining Soviet threat and

(2) doubts by both the super and the mid-range powers that the heavy burden of defense expenditures is still warranted. The primary interest of this investigation is, of course, the latter. Since willingness to share in the costs of mutual security is closely related to perceptions of threat, however, the political-military element must not be ignored.

*T.C. Schelling, op. cit.. p. 7. 123 The element of threat became motivationally significant in the early 1950's as the Korean War generated fear of an imminent Soviet attack on Western Europe. It became apparent that greater sacrifices would be necessary in order to provide the needed defense strength to off­ set the challenge posited by potentially aggressive Red armies. Since resources were still badly needed for reconstruction and growth efforts, however, the individual members of the alliance were prone to elicit maximal contributions from their allies and themselves to provide only minimal contributions augmented by a maximal amount of cost-sharing rhetoric.

Schelling's observation that mechanical formulae for determining concrete country shares are operationally infeasible has relevance to

NATO history. When the North Atlantic Council met in Ottawa in

September of 1951, an interim report was presented by the Financial and

Economic Board. This report represented the first systematic investi­ gation of financial and economic problems associated with the potential military effort of the alliance. After having been discussed within

NATO during the previous year, the question of how to achieve equitable sharing which would meet the mushrooming demand for defense goods now became a matter of formal concern. The report emphasized the board's belief that "no simple and generally acceptable formula could be devised: the complex factors which determined each country's capac- ity to undertake defence could not be reduced to mathematical terms."'*'

^Lord Ismay, NATO. The First Five Years. 1949-1954, (Paris: North Atlantic Treaty Organization, 1955), p. 43. Ismay is the standard reference on NATO and early NATO history. This source contains a good account of the unfolding cost-sharing problem in the early years of NATO. 124

The inability to agree upon a specific, explicit formula meant, in practice, that an implicit formula was utilized. This implicit formula will be discussed below.

In 1950 and 1951 NATO was transformed, according to Gordon, from an alliance to a coalition "with a complex integrated military command structure, elaborate planning machinery to maximize military commit­ ments, and at least some effort to spread the consequent economic burdens."1 The transformation was a fairly painful one. The financial experts in NATO had been very hesitant about pushing for immediate and expensive expansion of military capability, in spite of widespread fear of war. Even with extensive Marshall Plan aid, Europe was just beginning to hit its economic stride, and "there was no serious thought 2 in Western Europe of assuming major additional defense burdens." The

United States also was loathe to abandon its sharply limited military budget.

The Financial and Economic Board had urged that final decisions about the extent of capability expansion should be made only after a careful appraisal of the economic risks of a buildup action as opposed to the military risk of inaction. Since the Board did not consider itself qualified to make such an appraisal, a Temporary Council

Committee (TCC) was created to determine the requirements of "fulfilling a militarily acceptable NATO plan for the defense of Western Europe and O the realistic political-economic capabilities of the member countries."

1Lincoln Gordon, o jd . cit.« p. 529.

2Ibid., p. 530. O JLord Ismay, 0£. cit.. p. 44. 125

In order to determine whether governments were simply offering too little or military authorities demanding too much, the TCC was empowered to acquire information, assistance and advice from appropri ate civilian and military agencies and member governments.

The TCC submitted its report on December 18, 1951. The document included an investigation of the cost-sharing capacity of member countries and proposals for improving the general level of defense.

The following interesting statement was included:

The assessment has taken into consideration the evident desirability that the contributions to the common defence should be equally distributed among the member countries; this suggests that, other things being equal, the greater the level of income or the potential rate of increase in income ex­ pected in a country, the higher can be the proportion of national income devoted to defence. Careful consideration was given to the specific obstacles limiting the efforts of each country and the extent to which these could be overcome by appropriate national and international action.*- (Emphasis supplied.)

A "fair” defense contribution had come to mean, then, at least by implication, that a country should make greater or lesser contri­ butions according to the level of its national income (viewed as its

tax base). But the rate of increase in income was also cited by the

TCC as a logical criterion for equitable contributions. Indeed, the

committee went so far as to point to the potential rate of increase

in national income as an equity standard. Nor did the implicit sub­

stance of the formula stop here. If a nation were troubled with

particular economic difficulties, it could be forgiven for dragging

^TCC Report, December, 1951, quoted in Lord Ismay, Ibid., p. 46. 126 its feet (claiming tax deductions) in the matter of meeting force commitments. Finally, the United States, being much richer and having no reconstruction problem, could be expected to bear an assymetrically large share of the burden (i.e., the defense "tax11 was progressive in nature). Among some member countries there was strong feeling that the capacities of the more powerful alliance members had not been adequately explored by the TCC. The degree of progressivity attached to suggested donations seemed inadequate to poorer participant countries.

The Temporary Council Committee went beyond an emphatic pro­ nouncement of the need to strengthen and coordinate NATO agencies and recommended that something like the TCC exercise "be made a regular feature of NATO's work, so as to ensure a continuous appraisal of defence programmes in the light of economic and political developments."^ Out of this suggestion grew the notion of the

"annual review," which will be discussed at greater length below.

The remainder of NATO history can be epitomized rather briefly for the purposes of this study. Through the later fifties and the sixties the members of the alliance have been inclined to espouse verbally the sword and shield mythology -- a firm posture to counter a continuing threat. However, the framers of the national budgets of the mid-range powers have indicated a willingness to rely on the U.S. deterrent while contributing somewhat less than maximal or, from the

American viewpoint, even "fair" defense shares. Since the completion of the German military buildup after the Berlin crisis, general

^Lord Ismay, oja. cit.. p. 46. 127 disenchantment with Alliance expense has been evident. The U.S., with its increasing involvement in Southeast Asia, has become less preoccupied with Europe'*' and has shown great interest in off-setting part of its expanding military budget by eliciting greater contributions from its NATO allies.

A number of sound reasons underlie the attitudes and behavior patterns mentioned here. An investigation of some of them will permit greater understanding of NATO's defense problems. Again, difficulties invariably arise when any attempt is made to define what actual contributions have been or what they should be.

As the analysis of aid sharing showed (see Chapter II), a fundamental problem is determining the ability of a country to contribute. The alliance has faced the question from the beginning.

In March 1951, when NATO Council Deputies were attempting to establish sharing prescriptions for infrastructure requirements, the "capacity" 2 issue was at the heart of their difficulties. Even negotiating about the relatively small sums required for the infrastructure program turned out to be a tedious and strenuous undertaking. In

September 1951, after extensive, difficult bargaining, the Deputies negotiated a cost-sharing formula which was acceptable to the Council.

When it became apparent, however, that actual costs would be 152 million pounds over original estimates, a committee of ministers finally

^To be specific, pressure has long been growing in the U.S. to reduce the number of troops in Europe. On May 2, 1967, the U.S. announced plans to withdraw up to 35,000 troops from Germany--the first substantial reduction of U.S. forces since it committed six divisions to NATO in 1951. Redeployed troops will remain committed to NATO and under a "rotation plan" will be temporarily returned to Germany for periodical duty. See The New York Times, May 3, 1967, p. 1. o Lord Ismay, op, cit,, p. 115# 128 had to devote no less than sixteen hours to the sharing problem 1 before agreement could be reached.

Malcolm W. Hoag has examined this problem at length. He observes that when one is dealing with highly developed industrial countries, especially those where the current ratio of defense expenditures to

GNP is less than a quarter of that of World War II, "calculation of economic capacity becomes at once more elusive and more likely to result in estimates that are so high as to be irrelevant for cold o war preparedness."

It is evident that countries could (and would) maintain much larger defense budgets if national survival itself were at stake.

Absent perceptions of threat, countries merely maintain that they are doing all they "should," and the issue of fair sharing becomes 3 paramount in alliance discussion.

In addition to the capacity problem, a host of technical difficulties is encountered when any attempt is made to deal with the determination of specific cost shares. A number of these were mentioned in the general cost-sharing discussion of Chapter II, and a few of importance in defense sharing will now be discussed.

1Ibid. 2 Charles J, Hitch and Roland McKean, The Economics of Defense in the Nuclear Age, (Cambridge, Mass.; Harvard University Press, 1960), p. 296. 3 Nevertheless, even though it is obvious that "capacity" varies with different assumptions about the extent of the external threat, the question cannot be eliminated from discussion. Given the nature of the current threat, an administration's ability to contribute is affect­ ed not only by economic constraints, but by political constraints as well. Public opinion and parliamentary parsimony may be very restrictive capacity determinants. 129 Hoag, in various writings, has come to grips with numerous sharing issues. Although no exhaustive review of his work can be undertaken here, four points which bear on conceptual and operational defense-sharing difficulties and which carry both substantive and illustrative significance will be reviewed.

The first problem lies in isolating military expenditures considered relevant for common ends. Generally in alliance lit­ erature no attempt is made to deal with the problem; discussions of defense contributions tacitly assume that countries undertake military projects that further only alliance (as opposed to purely national) interests. This is probably unavoidable because "anything approaching a precise imputation of military benefit country-by-country is manifestly impossible."^ The assumption that all defense projects are alliance projects will not proscribe the analysis of German defense contributions, for all of the FRG's military efforts have been assiduously tied to NATO. As former Defense Minister Franz Josef

Strauss has observed, "The role of the Bundeswehr begins and ends with NATO."2

The second problem relates again to military interests outside the alliance endeavor. Mutual economic gains from military special­ ization will be greater where confidence is strong that military ob­ jectives and foreign policy objectives are shared with allies. If

^Hitch and McKean, op. cit.. p. 289.

Bulletin: A weekly Survey of German Affairs issued by the Press and Information Office of the German Federal Government (Hereafter referred to simply as The Bulletin.) Vol. 9, No. 30 (August 8, 1961), p. 5. outside interests are extensive, confidence will be weak and potential division-of-labor gains are smaller. That is, because some nations feel compelled to maintain a more independent defense posture, they must produce some military goods less efficiently than could have been produced by other members in a division of labor under coalition auspices.

The third issue deals with another particular aspect of measuring the defense contribution. Suppose a country is ideally suited to produce military good A, and in the alliance division of labor is assigned to produce a given number of units of that good. In addition to good A, however, the donor country feels motivated to produce some quantity of good B, which is produced with less efficiency and not under alliance mandate. Ideally, this donor should be given full credit for its contribution of good A plus a discounted credit for that of good B. Techniques for operationalizing this suggestion will not likely be available in the near future.

The final issue is described by Hoag as the "perverse incentive1' problem. Where no actual cost-sharing agreement has been established, contributions will presumably be determined by bilateral or multi­ lateral ad hoc bargaining. According to Hoag, the "prospect of external support encourages countries to reduce their future military budgets, especially in support of the very military specialties they know their allies are most interested in, in order to generate a claim for outside support."'*'

1Ibid., pp. 295-296. 131 This phenomenon, Hoag seems to imply, can always be assumed present except in the case of a nation which can satisfactorily demonstrate that it is doing "all it should." In such event, each donor nation would be wise to administer a burden-sharing test to its own contributions, whether or not the alliance tests have formally been established. It can thus allay suspicions that it is being in­ fluenced by the "perverse incentive."*'

A number of the intricate difficulties of burden-sharing in defense have been covered by Hoag's comparison of alliance financial affairs with game theory. Each alliance member is a "player" in the non-zero sum game, and each may gain at another member's expense, "either by switching some military costs to him or by influencing his choice of military preparations in a direction more favorable to one's national military purpose."

The maximum gain possible for a participant nation is the difference between the hypothetical cost of a comparable degree of military security outside the alliance and actual defense costs 3 within the alliance. Mancur Olson and Richard Zeckhauser have pointed out that, because defense is a public good, i.e., not subject to the exclusion principle, the difference can be great. Their theory of alliances is an extension of the senior author's earlier work,

1Ibid.

Malcolm W. Hoag, "Economic Problems of Alliance," Journal of Political Economy, Vol. 65, (December, 1957), p. 526.

^Mancur Olson, Jr. and Richard Zeckhauser, An Economic Theory of Alliances^ The RAND Corporation, Santa Monica, California, RM-4297-ISA, October, 1966. The Logic of Collective Action. It postulates that since no member of a community (or alliance) can be excluded from the enjoyment of already existent defense goods, and since such goods can be made available to other members at little or no marginal cost, no individ­ ual nation should rationally feel constrained to pay, unless sanctions or side benefits exist. Even these may be superfluous in small groups like alliances, for if one member has a disproportionate interest in the collective good, it will probably be prepared to furnish a substantial portion, perhaps the whole cost, of the desired commodity. The interests of individual countries, if not of the alliance, therefore, is to eschew large defense contributions, a proposition which has indeed seemed to underlie nearly all of NATO history.

The German Contribution to the Alliance

Within a decade of the close of World War II, military expend­ itures were restored to the West German government’s budget. Rearm­ ament made its early appearance in spite of the articulated apprehen­ sions of large segments of most national populations (including

Germany's). The Western powers deemed German rearmament vital to the mutual security effort. What is not generally so well known is that the early renaissance of German military preparation was to a large extent also a burden-sharing exercise. The Soviet threat, of which the Korean War so starkly gave notice, had resulted in large economic sacrifices, and the European powers believed that Germany's participation in the defense effort could help ease their growing defense burden. While vanquished Germany nourished a burgeoning economy, the victors of the past war found that they were assuming complete responsibility for her costly military security. One

British official, ostensibly sensitive about the rise of German economic power, expressed what had become a pervasive sentiment:

If we do not support a German arms contribution, we shall be encouraging competition in the field of foreign trade which may eventually ruin us.l

Opposition to rearmament was very strong in Germany. Konrad

Adenauer himself was initially opposed, feeling that the allies should be responsible for German defense. However, he added that should the allies demand a German military contribution, he would favor a German contingent in a European force rather than an independent national army.^

The Socialist Party (SPD) waged an extensive campaign against rearmament, and the entire period was a trying one, ’’a drawn out and 3 frequently very confused affair." Although the claim has been made that the SPD was attempting to exploit prevailing antimilitaristic sentiment for political capital, there can be no question that most socialists as well as multitudinous members of other parties

■''Sir Ivone Kirkpatrick, British High Commissioner in Germany, in an interview with Alistair Horne, August 12, 1952, reproduced in Hans Speier, German Rearmament and Atomic War. (New York: Row, Peterson, and Company, 1957), p. 7.

o James L. Richardson, Germany and the Atlantic Alliance, (Cambridge Harvard University Press, 1966), p. 17. 3 Eric Waldmann, The Goose Step is Verboten: The German Army Today. (New York: The Free Press of Glencoe, 1964), p. 21. 134 sincerely deplored the revival of the German military establishment.

Even today there remains "a strong rejection, even if not marked by

an outspoken hostility, by part of the population of a German

contribution and of soldiers in general."*-

Although the ohne mich attitude may have receded since the early

fifties, it remains a constraint on the German government's willing­

ness to embrace greater defense cost shares. However, the significance

of German antimilitarism to the question of cost-sharing can be

exaggerated. The real quarrel of the SPD was not with the costs of O rearmament, but rearmament per se.

With the decision to rearm came the formation of the official

German position on defense and alliance matters, a position which

has been consistently expounded amidst the vagaries of changes in national administrations and shifting alliance policies. Numerous

spokesmen of Bonn have over the years declared that Germany, living

at the center of European tension, is more dependent upon her allies

than other geographically peripheral nations, that the security of the

Federal Republic "continues to be guaranteed by the Atlantic Alliance Q and the nuclear power of the United States," and that, therefore,

J-Ibid. ^When Hans Speier summarized the main grounds upon which Socialist opposition was based, the cost of rearmament was not mentioned. The SPD abhorred rearmament because: (1) major war would be suicidal for all belligerents, (2) either a relaxation of international tensions or out­ right nuclear warfare would render a German military buildup pointless, (3) the force proposed by the CDU-CSU would be too small to protect West Germany in a major war, and (4) if war should occur in Europe, tactical nuclear weapons would be used whether the German military effort were large, small or nil. See op cit.. p. 205. ^Gerhard Schroeder, "Germany's Position and Germany's Future," The Bulletin. Vol. 12, No. 13 (April 7, 1964), Supplement, p. 6. 135 the German people feel obliged to do everything possible "to fortify

the defensive strength of NATO and to maintain the cohesion of

the alliance."^

Naturally, the actual pattern of defense contributions has in

fact been affected by shifts both in national and in alliance policies.

In addition, defense expenditures have been influenced by the import­ ant principle mentioned above that when a country's policymakers

"foresee an additional burden-sharing argument with allies, they are

further encouraged to dig in their heels at low budget levels."

This intransigence has proved effective in reinforcing the U.S. in­ centive to provide higher levels of military strength, thus removing pressure from the German defense budget.

The technique of relying on the U.S. deterrent — a technique not unique to the Federal Republic -- was adopted by Adenauer as early as 1956, when he announced that the period of German conscription would be cut to twelve months. His decision was interpreted abroad as a sign that he would also renege on the German commitment of half a million men for NATO. The Chancellor's response was to blame his action on U.S. plans to diminish the number of American forces in

Europe, in conjunction with the Radford Plan, which, he claimed, made doubtful parliamentary approval of eighteen months' service. Hans

Speier holds, however, that Adenauer's response was not to the Radford 3 Plan, but to domestic pressures. It is reported that the Chancellor's

1Ibid.

^Malcolm W. Hoag, op. cit.« p. 523.

% a n s Speier, 0£. cit.. pp. 212-213. 136 rationalizations were not well accepted in the NATO countries.

Adenauer's new policy

was criticized with special severity by the British, Belgians, Dutch, Danes, and Norwegians, who pointed out that their countryment would find it difficult to understand why Germany, one of the main countries in need of protection, had adopted a defense burden less onerous than that carried by other border states of NATO.-*-

Table 19 demonstrates that the defense effort of the FRG was lessened significantly from 1956 until the Berlin crisis of 1961.

In order to show that the German performance continued at a lower order of magnitude than that of her allies, comparative figures for

Britain, the United States and France have been included in the table. It may be observed, however, that from the mid-fifties to

1961 the allies were also in the process of putting a rein on upward drifting defense budgets, especially relative to the growth in national product. (Note column B for France, the U.K. and the

U.S.).

In this period the Germans had three motivations for devoting precious resources to the distasteful defense buildup. The first was, of course, national security. This omnipresent concern required little sacrifice, however, for under the "massive retaliation" umbrella, a

German contribution appeared militarily irrelevant. A conventional buildup would have no significance other than indicating alignment with the Western camp.

Any overt defense commitment to the alliance was bound to have some meaning, however, even if only political. Indeed, the desire

1Ibid. TABLE 19

THE PATTERNS OF DEFENSE OUTLAYS, 1954-1965®

A = Defense expenditures per capita in national currencies (Deutsche Mark , Dollars, Pounds, and Francs respectively). B = Defense expenditures as a percentage of gross national products. C = Defense expenditures as a percentage of total government expenditures •

A B C

Year FRG US UK Fr FRG US UK Fr FRG US UK Fr

1954 115 288 28.3 279 3.77 12.90 7.08 7.44 27.0 69.4 31.5 32.3 1955 115 245 27.6 251 3.35 10.20 6.74 6.30 25.5 63.2 29.5 27.5 1956 103 241 29.8 320 2.76 9.71 7.16 7.29 21.6 61.5 29.5 30.0 1957 101 252 27.8 333 2.50 9.83 6.59 6.89 19.8 62.9 27.2 26.0 1958 112 253 28.4 332 2.63 9.89 6.74 6.04 19.9 62.0 26.8 26.9 1959 142 261 28.4 363 3.10 9.63 6.52 6.11 23.2 57.9 26.2 27.5 1960 170 253 30,5 363 3.17 9.07 6.73 5.58 23.3 59.7 25.8 27.7 1961 204 258 32.0 389 3.51 9.13 6.89 5.58 24.9 58.3 27.1 26.6 1962 262 274 33.1 379 4.21 9.12 7.13 4.93 28.1 58.2 27.4 22.4 1963 301 279 33.4 388 4.59 8.95 6.91 4.66 29.3 56.9 26.3 20.7 1964 274 282 35.3 399 3.86 8.62 7.00 4.41 25.8 55.5 26.1 21.0 1965 304 258 37.5 399 4.00 7.42 6.63 4.23 25.7 52.0 25.1 19.9

Mean 184 262 31.0 350 3.46 9.54 6.84 5.79 24.5 59.8 27.4 25.7

®The calculations are my own. Underlying data are from individual countries' statistical yearbooks. See Appendix I. 138 to be a "good ally" represented the second reason for sacrificing scarce resources to the military. Pincus observes that some countries will make significant defense expenditures to maintain a colonial or

European power status or, "as with Germany, to maintain a 'good soldier'posture."^

The third motivation underlying the German defense contribution is closely related to the second. Bonn felt the need not only to present a "good ally" image in general, but to insure U.S. military guarantees in particular. Since the U.S. was sensitive about putting the entire defense burden on the shoulders of the American taxpayer, it was essential that the FRG at least give the appearance of attempting to assume its share.

Indeed, Adenauer was not above warning those who opposed his rearmament plans that the Americans might become disinterested in partnership with the Federal Republic in the coalition if his policies were not implemented.

One of the Socialists' most potent arguments throughout the era of rearmament debate implied that the CDU-CSU defense program was de­ signed merely to buy U.S. support. Since any European war would unavoidably involve nuclear weapons, they contended, the German con­ ventional force would be militarily meaningless, and any defense expenditures could be best understood as purchases of appeasement for

Washington. Speier shows that the debate generated great heat; thus,

^John Pincus, op., cit.. pp. 104-105.

^Hans Speier, op. cit.. p. 237. 139

Socialist Deputy Fritz Baade attacked the opposition in December of

1954:

Reviving in part Schumacher's early argument against German rearmament, Baade then pointed out that the addition of German divisions to existing Western strength would not change the fact that the Soviet Union would still be able to overrun Western Europe. What difference did German rearmament really make then? Baade answered maliciously that German divisions would make it possible for Allied troops to execute an "orderly retreat" to the Atlantic coast, while without German help the retreat would get out of control. German troops would serve only as a "shield" to prevent losses and disorgan­ ization among the retreating British, American and French formations.^

By 1961, the failure of the European members of NATO to provide

forces adequate to serve as a shield against the more than 100 Soviet divisions had long been apparent to everyone. In Washington, in early

August, 1961, German Defense Minister Strauss noted that the eight divisions Bonn had contributed to the alliance were only at about

seventy to eighty per cent of scheduled strength. In a meeting with

Secretary McNamara, he agreed upon the necessity to "improve conven­

tional armament as well as to increase and modernize the nuclear 2 potential of the Armed Forces" of the Alliance.

It is impossible to know whether, ceteris paribus. the colorful

defense minister would have indeed been willing and able actually to bolster German military strength, for the ceteris paribus condition

did not hold. Within a week after the Washington meeting, on August

13, construction of the Berlin Wall was begun. The ensuing crisis

*Ibid., pp. 167-168.

^ h e Bulletin. Vol. 9, No. 30 (August 8, 1961), p. 4. 140 triggered a renewed drive for security in Bonn. Defense appropriations reached new heights, and constant renewals of American guarantees were sought in succeeding months. Table 19 documents German willing­ ness to accept substantially greater defense sacrifices after 1961.

The period of conscription was again extended to eighteen months, and the manpower target of the Bundeswehr increased from 350,000 to

500,000 men* The Berlin crisis had made the Germans acutely aware of the inadequacy of the existing conventional forces, particularly those on the northern sector. James L. Richardson claims that the

Germans found it easy to suppose ’’that the United States no longer had the will to use nuclear weapons in defense of European interests.

The passive acceptance of the Berlin Wall served to reinforce this impression."^

Nevertheless, although Germany was the only European power that accepted the American number one military priority of increasing continental conventional capability, the evidence shows that the portion of German total product devoted to military security remained substantially below that of Britain, France and the United States.

Germany's relatively poor defense effort is a result of the

"perverse incentive" problem described by Hoag. By relying on the

American nuclear deterrent and, to some extent, American and foreign research and development for military hardware, policymakers in the

Federal Republic have been able to satisfy their defense tastes by permitting the U.S. unilaterally to maintain a massive military

^James L. Richardson, op. cit.. pp. 78-79. 141 structure. It is true that the Berlin crisis and a recent trend toward more independent action in military research and development have somewhat altered this picture. As was seen above, however, equal­ ity and balance have by no means already been achieved within the alliance.

Subsequent to the Berlin crisis the official attitude remained that "any effort that is made to enhance the deterrent effect of the

North Atlantic Alliance both militarily and politically is of immediate interest to the Federal Republic." Even the Socialists came to accept the need for a firm military policy. After the adoption of the 1959

Bad Godesberg Program with its explicit and extensive doctrinal re­ orientation, the SPD seemed to discard the old doctrine "if strength, only through reunification;" Adenauer's foreign policy dictum, "if reunification, only through strength," was no longer rejected. Al­ though Strauss continued to question the genuineness of the SPD's new position, insisting that he could still perceive "a strong element" among the Socialists having "reservations about present German defense 2 policies," recent events confirm the sincerity of SPD spokesmen in their firm contention that the enemy "must be taught to expect from us, in every instance, the fitting answer: equal to any provocation, any incident, any attack."

■^Minister of Defense Kai-Uwe von Hassel, "Towards New Techniques in Atlantic Partnership," The Bulletin. Vol. 11, No. 11 (March 19, 1963), p. 1. ^Franz Josef Strauss, The Grand Design: A European Solution to German Reunification. (New York: Frederick A. Praeger, 1965), p. 84.

^Willy Brandt, The Ordeal of Coexistence. (Cambridge: Harvard University Press, 1963), p. 28. 142

As a consequence of the Bad Godesberg policy transformation, there no longer exists a formal, articulated opposition to German military preparedness. Antimilitarist sentiment no longer has a political vehicle through which it can directly influence national security policy. Nevertheless, the Federal Republic has still apparently re­ fused to accept a fair share of the defense burden. While supplying the twelve divisions formally committed, Bonn has contributed less actual manpower than pledged, and her effective contribution more closely approximates eight divisions.^

In light of recent events, moreover, it is possible to predict that the German contribution will diminish, at least in the short run.

When the coalition government assumed administration in December 1966,

Germany was in the midst of a financial crisis, facing the prospect of a budget deficit of 3.3 billion DM. A balanced budget was the 2 "most immediate concern" of the Kiesinger government. It quickly moved to accomplish what it considered to be a considerable success by relying on extensive budget cuts to eliminate the "tremendous" deficit. The defense budget did not escape the financial axe of Karl

Schiller and Franz Josef Strauss, the newly appointed ministers of economics and finance respectively. The defense ministry faced a

240 million DM reduction of funds, in spite of Gerhard Schroeder's

^Edwin H. Fedder and James A. Robinson, Beyond Hegemony: The United States and the Future of NATO. Mershon Social Science Program, The Ohio State University, 1967, p. 31. ftrhe New York Times. December 14, 1966, p. 18.

•*Die Frankfurter Alleemeine. January 21, 1967, p. 4. 143 representations. The new defense minister argued, as he had in the foreign ministry of the Erhard government, that the slightest restrict­ ion of budget allocations to defense would cost the Federal Republic her capacity to maneuver politically vis-a-vis her allies.^ By the time of this writing the defense budget was already causing a financial squeeze in the Blindeswehr. The defense ministry, because of ’’extreme penury," was curtailing allocations for reservist maneuvers. The German Tribune reported that

Herr Schroeder’s staff can still ease the pressure by postponing a project here, rechannelling money there or tapping reservist funds elsewhere. But financial embarassment will become acute whenever the Bundeswehr must set about acquiring a new weapons system.2

Paralleling this historical era of unwilling and frugal German defense activity has been the problem already mentioned of providing balance-of-payments compensation to Great Britain and the United

States through purchases of military equipment. Even before the decade of the sixties the United States had been urging Germany (among other European countries) to procure a substantial amount of its military equipment from the United States. This was seen by Americans as an equitable offset to the costs of maintaining U.S. troops in Germany.

In June 1956, after difficult negotiations, the spokesmen of Bonn agreed to continue supporting foreign troops on German soil "only on q a reduced scale." The British were especially irritated by German

•*~Der Spiegel. No. 51, December 12, 1966, p. 30.

^The German Tribune. April 8, 1967, p. 8.

% a n s Speier, op. cit.. p. 214. 144 reluctance to volunteer large-scale balance-of-payments assistance,

although there was reason to expect that rather extensive procurement

sales would be forthcoming anyway.*

In 1961 the Pentagon established a military export sales program under the office of International Security Affairs. It was headed by the newly appointed Deputy Assistant Secretary of Defense for

International Logistics Negotiations, Henry Kuss. The objectives of the program were to:

(1) Promote the defensive strength of our allies, consistent with our political-economic objectives.

(2) Promote the concept of cooperative logistics with our allies.

(3) Offset the unfavorable balance of payments resulting from 2 essential U.S. military deployment abroad.

In the attempt to offset the gold outflow, Kuss has sold about

$6.6 billion in military exports to Germany and Britain alone — over q half of the total sales to Western Europe. Even as Kuss blandly claims

that "the success of his program is not so much a result of his and

his staff's 'super salesmen' efforts but of free world defense ministers

being 'super buyers',"^ the military export sales program is labelled

abroad as the workings of "a tireless arms merchant with shockingly

1Ibid.

^"Can the U.S. Maintain the Momentum of Its Military Export Sales?" Armed Forces Management. January, 1967, p. 9-F.

3Ibid.

^Ibid. 145 high-pressure sales techniques,"'*' and the Germans have been espe­ cially articulate in this matter. Bonn has made its position on currency offsets well known. Before the most recent currency offsets discussions betwsen the FRG, the U.S., and the U.K., Heinrich Bechtoldt declared that

the tripartite discussions that Bonn will conduct with Washington and London involve not only a problem of finance, even though the American balance of payments puts unusually great pressure upon U.S. strategic concepts. The Federal Republic also has a financial problem and the limits of German capacity must not lead to an isolation of Germany....It is to be hoped that it has been recognized in America that the last government was too harshly confronted with an "either-or." The situation was neither permissive of decisions satisfactory to U.S. demands nor conducive to putting Germany into a political position where she could stand on her own feet. The long political crisis in Bonn is a lesson for Washington.^

It appears that, beginning with the tripartite talks, the United

States is beginning to reduce the pressure on the tight German budget.

Der Spiegel announced a State Department promise of March 1967, that

"U.S. troops in Europe would in no case be drastically reduced," and furthermore that the Federal Republic's burden of currency offsets

Theo Sommer, "Bonn Changes Course," Foreign Affairs. Vol. 45, No. 3 (April, 1967), p. 483. In this reference, Sommer is actually characterizing Kuss's boss, Secretary McNamara, as the "tireless arms merchant." Since Kuss himself speaks of "his and his staff's 'super salesmen' efforts," however, perhaps he would prefer that Sommer's colorful appellation be applied to the Deputy Assistant Secretary.

^Heinrich Bechtoldt, "Kiesinger und die deutsche Aussenpolitik," Aussenpolitik. Vol. 17, No. 12 (December, 1966), p. 707. 146 for the maintenance of U.S. forces would be lightened.^- One wonders whether the firm stand taken by the Kiesinger government is winning more respect from Washington than did the "good ally" stance of the defunct Erhard administration.

The Substitute Relationship Between Aid and Defense

This study has assumed that there is a need to investigate the nature rather than to prove the existence of the trade-off between 2 defense and aid expenditures. Although it is not difficult to demonstrate that there is no one-to-one substitute relationship be­ tween the two, i.e., that a strong defense program does not neces- 3 sarily justify or compensate for a weak aid program, it cannot be denied that there is a similarity of aims and implications in the two programs. According to Pincus, "if they were perfect substitutes,

Der Spiegel, No. 11, March 6, 1967, p. 18. U.S. troop withdrawals did shortly succeed this announcement, however. See "3-Power Agreement on Troop Cuts," The Bulletin. No. 17, May 9, 1967, pp. 126-127. In the "package plan" agreement, the FRG agreed to buy $500 million in U.S. securities and to continue to avoid converting dollars into gold. Germany will also buy U.S. military equipment, but under a more flexible plan than previously, "guided by changing requirements."

^To this point I am still referring to the total aid and defense expenditures as given, for example, by country statistical yearbooks. As explained earlier, no attempt will be made here to break down defense expenditures as motivated by (a) alliance or (b) purely national military objectives. Pincus has developed techniques by which the portion of a country's total defense budget actually in the interest of the alliance and of the nature of a real inter­ national contribution can be measured. See pp. cit., pp. 73-74. The techniques are more relevant, of course, for such countries as France, Great Britain and the United States.

^John Pincus, op. cit.. pp. 86, 110-112. 147

it would be immaterial whether the country spent its combined defense

and aid appropriation on one of these purposes alone. Clearly, there

is a diminishing rate of substitution in terms of some kind of national

utility system."*

Nevertheless, Pincus also points out that although no apparantly

legitimate trade-off exists between aid and defense outlays dollar-

for-dollar, it would be reasonable and useful to view defense 2 outlays as a deduction from a fair-share aid contribution.

Were aid and defense outlays perfect substitutes, in terms of

the expression previously used, the taxation principle would become

(5-1) A t = q (Ynt - D t) , where Dt represents per capita defense outlays and is a deduction

from income, Yn, taxed for development aid, A, all in period t.

Since it can scarcely be argued, however, that aid and defense are

perfect substitutes, the expression must be modified. It is the purpose

of this section to attempt to determine the nature of this imperfect

substitute relationship in order to find an appropriate modification

which will permit the implicit international aid "tax formula" to

account explicitly for an appropriate defense deduction. For a variable

as important as defense to the determination of fair aid shares, it

•is helpful to have more distinct benchmarks than "informed intuition"

can provide.

The most ostensible observation that can be made about the trade-off

1Ibid., p. 130.

2Ibid. is that defense is always favored in terms of absolute resources and relative emphasis. Though both defense and aid are elements of national

security policy, the former appears to approach the objective in a direct manner, the latter in an indirect manner. In addition, there

are reasons, aside from pure considerations of national security, to opt for large defense outlays while permitting aid to remain almost purely symbolic by comparison. In the first place, defense forces,

even more than aid, may "provide purely national, noncollective benefits

to the nations that maintain them."* The alleged prestige motive behind the French force de frappe is probably a case in point.

A second point, unique to the German case, stems from the belief of some that military strength would open the path to reunification.

Adenauer's government in moving to bring Germany into the alliance,

"asserted that reunification could be achieved only through a policy

of strength." Its position, however, was not without opposition,

for the Socialists "held that German membership in the alliance would prevent reunification," and for a number of years they favored the

thesis of "lost opportunities," believing that the West should negotiate reunification with the Soviets on the basis of a possible

armed neutrality for Germany. Most recently the policy of "building bridges to the East" has made apparent an official shift of foreign policy emphasis. Nevertheless, it should not be forgotten that the

*Mancur Olson Jr. and Richard Zeckhauser, oj>. cit.. p. 19. 2 James L. Richardson, op. cit.. p. 25.

3Ibid. 149

Adenauer policy of "unity through strength" influenced the German aid-defense trade-off over a significant part of the period under investigation.

More subtle observations about the nature of the aid-defense sub­ stitution are possible. If policymakers can be taken at their word, a number of a priori postulates may be made about the nature of the trade-off. Two initial observations are: (1) that greater levels of disutility are attached to greater international contributions since

they represent sacrifices from domestic consumption and investment,

and (2) that only a fairly large reduction (increase) in defense expen­ ditures will result in an increase (reduction) of aid expenditures.

Former Chancellor (and Economics Minister) Erhard has made a

statement that adds insight to German tastes regarding the aid-defense

trade-off. In addressing himself to the question of economic disloca­

tions which might arise from the realization of general disarmament

agreements, he expressed the belief that a reduction of defense expen­

ditures to zero would result neither in a collapse of demand nor in a

lack of opportunities to continue to expand production. He explained

his optimism as follows:

It would be too much to hope that, with the disappear­ ance of military expenditure, the burden of taxation will be quickly and appreciably reduced. Many other desirable targets which in every country have had to be shelved in order to satisfy defence requirements would be pursued in place of defence programmes, above all social welfare. Moreover, as I have already said, the industrial countries of the West are committed to increasing their aid to the underdeveloped countries. In the event of a general disarmament a not inconsider- 150

able part of their present defence expenditure could be diverted for this purpose, thereby benefiting the world as a whole.1

The notion that a decline in defense outlays by one dollar would result in an increase of less than one dollar for foreign assistance

intuitively seems reasonable. Erhard seems to go further, however, when he implies that the percentage of the last dollar taken from defense to be devoted to aid will be higher than the percentage of the

first dollar taken from defense to be devoted to aid. If this is true,

the lower defense expenditures become, the more willingly policymakers will increase aid outlays. At the other extreme, as defense outlays become very large, aid expenditures become very small. It appears, however, that policymakers are unwilling to let the aid program fall below some minimal (probably symbolic) level. Thus, as military budgets become very large, aid outlays decrease only until they approach some minimal level asymptotically. To describe this pattern of operation mathematically, a quantitative modification of equation (5-1) is

possible:

(5-2) A t = q Ynt (1 + 1/u D t),

or, alternatively:

(5-2a) A = q Yn + q Yn/uD where D f 0, and u f 0. It would probably be preferable to put a floor

on defense outlays, say D 5? .5 billion and to set u within a certain

range of values, perhaps .20 ^ u 2? .60.

This equation says what Erhard and other policymakers have been

^Ludwig Erhard, The Economics of Success. (Princeton: D. Van Nostrand Co., 1963), p. 258. 151

implying about military and aid budget activity. If international negotiators could agree on values for the parameters q and u, a pattern of contributions could be determined which would make their

tastes quantitatively explicit. Moreover, a specific deduction from

the (implicit) international development assistance "tax" (fair share)

for defense expenditures would be incorporated.

If, for example, a value of .25 were assigned to u, and q were

set at .005, the following defense outlays would dictate the

corresponding aid expenditures.

Defense Aid

50 bil DM 2.7 bil DM 40 bil DM 2.75 bil DM 30 bil DM 2.83 bil DM 25 bil DM 2.9 bil DM 20 bil DM 3.0 bil DM 10 bil DM 3.5 bil DM 5 bil DM 4.5 bil DM 1 bil DM 12.5 bil DM .5 bil DM 22.5 bil DM

A preliminary examination of the actual data on Germany (see Tables

19 and 20) might lead one to hypothesize that equation (5-2) and,

consequently, Erhard's policy statement, are actually descriptive of

German international contributive patterns during the period since 1954.

Though Table 20 (see also Figure 3) shows that the Federal Republic's

actual contributions level remained below that of the U.S., the U.K.,

and France, it is also evident that a significant military buildup

followed the Berlin crisis of 1961. German foreign assistance outlays

as a percentage of GNP, at a peak in 1961, thereafter declined steadily

and significantly until making a very slight rebound in 1965. TABLE 20

THE PATTERNS OF INTERNATIONAL CONTRIBUTIONS, 1954-1965®

International contributions per capita in national currencies (Deutsche Mark, Dollars, Pounds and Francs respectively). International contributions expenditures as a percentage of gross national products. 11 11 11 11 II

o o w i> International contributions expenditures as a percentage of total governmental expenditures

A B C

Year FRG US UK Fr FRG US UK Fr FRG US UK Fr

1954 124 322 29.8 308 4.09 14.40 7.45 8.21 29.3 77.5 33.2 35.7 1955 129 270 29.2 284 3.75 11.30 7.13 7.12 28.5 69.8 31.2 31.1 1956 115 267 31.3 393 3.08 10.80 7.52 8.95 24.1 68.2 30.9 36.9 1957 123 274 29.4 424 3.05 10.70 6.96 8.77 24.2 68.3 28.7 33.1 1958 134 276 30.5 429 3.14 10.80 7.25 7.82 23.8 67.6 28.8 34.8 1959 167 284 30.9 454 3.64 10.50 7.09 7.63 27.3 62.9 28.5 34.3 1960 196 273 33.5 455 3.67 9.78 7.39 6.98 27.0 64.4 28.3 34.7 1961 248 276 35.2 490 4.27 9.78 7.58 7.03 30.3 62.4 29.8 33.6 1962 295 295 36.1 483 4.74 9.83 7.78 6.29 31.6 62.7 29.9 28.5 1963 331 291 36.4 477 5.05 9.65 7.53 5.74 32.2 61.4 28.6 25.5 1964 303 301 38.8 484 4.27 9.20 7.70 5.35 28.5 59.2 28.7 25.5 1965 336 275 41.1 475 4.42 7.91 7.26 5.04 28.4 55.4 27.5 23.7

Mean 209 285 33.5 430 3.93 10.38 7.39 7.08 27.9 65.0 29.5 31.4

a,,International contributions" are defined, for the sake of simplicity, as the sum of aid contributions and defense expenditures. Calculations are my own. The data are taken from individual countries' statistical yearbooks. See Appendix I. 153

15

14 FRG U.S. 13 U.K. France

12

11

10

9

8

7

6

5

4

3

1954 1956 1958 1960 1962 1964

FIGURE 3

THE PATTERNS OF INTERNATIONAL CONTRIBUTIONS, 1954-1965, AID PLUS DEFENSE AS A PERCENTAGE OF GNP (See Table 20) 154

Table 21 also shows the same phenomenon in the form of a

declining aid-defense ratio subsequent to 1961. This ratio as a

comparative measure is instructive. Over the period there has been

considerable variation in ratio values for the four countries given;

TABLE 21

AID EXPENDITURES AS A PERCENTAGE OF DEFENSE EXPENDITURES, 1954-1965

FRG U.S. U.K. FRANCE

1954 8.52 11.76 5.34 10.29 1955 11.87 10.36 5.86 13.02 1956 11.55 10.89 4.94 22.82 1957 21.92 8.56 5.68 27.43 1958 19.16 9.01 7.46 29.36 1959 17.52 8.66 8.79 25.03 1960 15.71 7.84 9.89 25.22 1961 21.58 7.13 10.07 25.95 1962 12.48 7.74 9.11 27.47 1963 10.04 7.79 8.94 23.03 1964 10.58 6.71 10.01 21.28 1965 10.50 6.65 9.50 19.13

however, France and Germany have generally been high, and the U.S.

and the U.K. have generally been low. The ratio is low for the

United States and Great Britain because of their relatively large

defense expenditures; it is high for France because of her relatively

liberal aid expenditures and it is high for Germany because of her

relatively limited defense expenditures.

Equation (5-2a) describes an indifference curve similar to

the family of indifference curves (I]_, !£» 13 * I4) in 155

Figure 4. If it is assumed that the budget line is linear (as is

Aid Yn/A^ Yn/Dx in Figure 4)

and that efficient allo­

NS' cations are being made,

actual expenditures will

be determined at the

point of tangency of the

NS two lines. As the budget

line is pushed to the Defense northeast, either by an

FIGURE 4 expanding national income AID-DEFENSE SUBSTITUTION or by increasing anxieties about national security, a "national security expansion path" will be formed by the locus of points at which the different budget lines are tangent to the family of indifference curves describing policy­ makers' preferences for aid and defense. The "national security expansion path" is shown as NSNS1 in Figure 4.

Since it is known a priori that the budget line is tangent to the appropriate indifference curve, the expansion path can be found by the following process:

First, equations are found describing the budget lines and the indifference curves. They are

(5-3) Yn = aD + bA and

(5-2a) A ® qYn + qYn/uD respectively.

Then, we find the slopes of the two. For the budget line, we have: 156

(5-3) Yn = aD + bA

(5-3a) bA = Yn - aD

(5-3b) bdA = -adP dP dP

(5-3c) dA = -a dP b

When A = 0, Yn = aD and a = Yn/P When P = 0, Yn * bA and b = Yn/A

Hence, dA = _ a = _ A dD b P

For the slope of the indifference curve, we again differentiate with respect to P,

(5-2a) A » qYn + qYn/uP

(5-2b) dA = qYn d/.l\ dP dp u Id ]

(5-2c) dA = q Yn / I \ dD u I D2/

The point of tangency is given by:

(5-4) q Yn (-1 \ = -A . u I D 2) D

The value of the parameter q/u determines uniquely the configu­ ration of the indifference curve. If Yn is permitted to increase, the budget line (seen as some percentage, q, of national income, Yn) will move to the northeast and an expansion path away from the origin will be traced commensurate with the preference expressed by A = qYn/iiD.

The actual expansion of German aid and defense programs has not followed a smooth path of consistent growth. When actual values are calculated for the period 1954-1965, q/u is found not to be a constant parameter. It varies from 0.370 to 1.545. This inconsistency suggests that the shape of the applicable indifference curve is never the same 157

in successive years, which seems to contradict our expectation of

even the most fickle policymakers' behavior. Close inspection of

the equations shows that if Yn increases and q/u declines, policy­ makers may still be operating on the same indifference curve, unless

aid and defense have both declined. In fact, if policymakers do not

decide to expand national security outlays in spite of increases in

national product, q/u must decline as Yn increases (q/u x Yn is held

constant so that a single indifference curve is applicable in more

than one period).

The domestic implication of finding (q/u)t< (q / u ) i s that

the budget for national security outlays has either remained constant

or been constricted, even though the total government budget has

grown in response to expanding national income and concomitant

greater tax revenues. Either domestic government expenditure in­

creases or tax reductions can result in greater aggregate consumption

or investment expenditures. However, if q/u has increased as a result

of an increase of either aid or defense expenditures alone, movement

along an expansion path is definitely being observed.

It is possible to test statistically whether the German policy

has followed a consistent national security expansion path. The test

used was a Chi-square test of equation (5-4). Since equations of

the (5-2) and (5-3) families were differentiated with respect to

defense, it seemed desirable to conduct a test using D as the dependent

variable.

In the equation D = q/u (Yn/A), the expected value of D was

obtained by finding the mean value of q/u, 0.883, and substituting 158 it together with the annual values for Yn and A, Into the equation.

These expected values were then compared with actual or observed

n values and the Chi-square value, (0-E) /E, was found to be 535.14.

Only .001 per cent of the time will a Chi-square value (corresponding to the number of degrees of freedom given in this test) exceeding

31.26 be found among sets of random samples from the same population.

The hypothesis of a consistent policy of expanding national security outlays in accord with growing national income clearly had to be rejected.

The fact that behavior has not in practice fit the normative pattern described by the "national security expansion path" analysis does not, however, detract from its conceptual value as a basis for future planning. Some possible "fair" values for development assistance patterns are given for Germany in Table 22 in columns

(3) and (4). These incorporate the defense deduction principle and they may be compared with the actual aid performance given by column (1).

Column (2) takes the q and u values of 1961,^ the year in which German aid performance was best, as one possible measure of German aid capacity. This measure, a "golden year fair share," provides guidelines indicative of the amounts of devel­ opment aid which would constitute a consistent and "fair" annual

1 44 = q (5,810)+ q (5,810) / u (204). Where u = 23.7, q » .0075. 159

TABLE 22

THE DEFENSE DEDUCTION AND TOTAL "FAIR” AID OUTLAYS (Million DM)

(1) (2) (3)a Year Actual q=.007 5 q=.005 Aid u=23.7 u=.01

1954 507 1,184 1,475 1955 718 1,352 1,685 1956 641 1,491 1,958 1957 1,186 1,623 2,153 1958 1,169 1,735 2,189 1959 1,363 1,882 2,138 1960 1,478 2,223 2,354 1961 2,473 2,450 2,433 1962 1,865 2,659 2,449 1963 1,739 2,834 2,517 1964 1,689 3,105 2,825 1965 1,884 3,368 2,984

a 44 = .005 (5,810) + .005 (5,810)/u(204), so u = .0095 ^ .01.

effort. The assumption is that if Germany was actually capable

of this performance in 1961, it continued to be within her capacity.

The results of column (2) are somewhat unsatisfactory, however,

since u, the defense deduction, is so high that the increment the

This, of course, would not hold if economic conditions had materially worsened after 1961. Such was not the case, however, and the lower level of aid thereafter can scarcely be ascribed to a decline in national economic well-being (especially as a decline arising from an over-extension of sacrifice to the developing world in 1961). As has been seen, one of the main causes of the decline was that the military buildup after the Berlin crisis diverted resources from the aid effort. Another was that the FRG by that time seemed, at least to the satisfaction of her policymakers, to "reach her stride" in this area. After the buildup of aid from 1956 which had led to the 1961 best effort, German policymakers appeared to feel that in quantitative terms the Federal Republic's level Of assistance was "fair." See Chapter VII. 160 second term adds to the total level of aid is negligible. A somewhat lower q value and smaller defense deduction would seem more reasonable.

Column (3) is based on values (q = .005, u = .01) selected for illustrative purposes. This column shows the amount of contributions which would be prescribed by an internationally negotiated formula selecting these specific values for q and u. In this particular formulation, q was arbitrarily selected, and (given q) u was computed from the 1961 performance as the appropriate ("golden year") defense deduction. It is ostensible (see the estimates of both columns (2) and (3) ) that had Germany been up to the par of 1961 consistently, the total foreign assistance effort would have been considerably greater.

A number of other relationships were tested statistically in the effort to conduct a rather thorough analysis of German defense and international contributive efforts. Different forms of the defense expenditure variable were regressed on per capita national income and on total government expenditures. International contributions were also regressed on per capita national income and on total government expenditures. Finally, aid was regressed on defense expenditures.

The results of these statistical tests are given in some detail in

Appendix III. In order to have some measure against which to compare the German effort, the tests were also applied to the U.S., the

U.K., and France. Only a brief summary of the findings on the Federal

Republic will be presented here. Several statistically significant regression equations were found. 161 ✓V (5-5) (A/P) = .009 + .084 (D/P), (.006) (.027) A (5-6) (D/P) = -.0357 + .299 (G/P), (.0157) (.020) /V (5-7) (D/Yn) = -.046 + .527 (G/Yn), (.010) (.072) A (5-8) (D/P)= -.079 + .051 (Yn/P), (.028) (.005) A (5-9) (A+D)/P = -.082 + .056 (Yn/P), (.026) (.005)

(5-10) (A+D)/Yn = -.041 + .572 (G/Yn), (.010) (.072) A (5-11) (A+D)/P = -.031 + .327 (G/P). (.015) (.019)

It is interesting to note that in the case of the Federal

Republic, a better statistical "fit” is given by regressing per capita international contributions, (A+D)/P, on per capita government expenditures, G/P, than by regressing defense outlays per capita, (D/P), on (G/P). Although the standard deviation of (A+D)/P is slightly greater than D/P, the former gives the better functional relation­ ship with G/P. (See Tables 42 and 47.)

The same phenomenon can be tested by expressing defense, inter­ national contributions, and government expenditures as percentages of national income (GNP). The results are very similar when D/Yn and

(A+D)/Yn are regressed on G/Yn. The standard deviation of (A+D)/Yn is only .00002 greater than that of D/Yn. (See Tables 43 and 46.)

When per capita defense was regressed on per capita income, a strong direct relationship was discovered. An even closer relationship was found to exist, however, when the per capita international contribution, (A+D)/P, was taken as the dependent variable. (See Tables 44 and 45.) The level of Germany's defense outlays appears,

then, to have great impact upon the level of her foreign assistance

outlays.

Interestingly enough, aid expenditures expressed as a percentage

of total government expenditures, A/G, were not found to be a function

of defense expenditures expressed as a percentage of total government

expenditures, D/Gj yet per capita aid was found to be a function of per capita defense spending. (See Tables 41 and 38.)

Toward an Integration of the Aid-Defense Model

In the previous chapter an attempt was made to integrate the

trade analysis (based upon the Bolton-type model) with the empirical results of the investigation of German development assistance. It is

useful at this point to integrate the defense-aid model of the present

chapter with the trade model. Again, it is unfortunate that sophisti­

cated econometric tools cannot be applied; crude tabular presentation

of established results will have to suffice.

Table 23 presents the variables with which the study has so far been concerned. The effects of incrementally changing D, Yn, A, and

Gd (Columns (1) through (4) respectively) are traced through the

system. The response of the system's variables are found in the

appropriate rows. It is assumed that except for the variable changes

and the consequent responses from affected variables, other things re­ main the same. Once more, where specific figures are associated with

the reaction symbols (+, -, k), they are indicative only of the order

of magnitude involved, not of a reliable forecast value. 163

TABLE 23

THE EXPANDED MODEL: TRADE, AID, AND DEFENSE

(1) (2) (3) (4) D Yn A Gd

A k, (-) + , 0.005 + , 1.00 k, (-)

D +, 1.00 + , 0.05 k, (-) k, <-)

Yn +, 0.20a + , 1.003 + , 0.803 + , 0.20a

G +, 0.90 + >0.15 +, 0.90 + , 0.80 Gd k, (-) +, 0.095 k, (-) + » 1.00 Yd -, 0.65a +, 0.83a * 5 0.683 “ y0.553 Xb k + , 0.18 + , 0.80 k Mb k + , 0.16 - -

Symbols: + = an increase; _ ss a decrease; k = constant, no significai change. Symbols in parentheses are alternative or "second best" estimates.

In successive periods increases in the values of exogenous variables, i.e., government spending and exports, will have a multiplier effect of between 4 and 5 on this variable. bThe coefficients of this row are taken from the model appearing in Chapter IV. The coefficents in the aid (A) and defense (D) rows enter the model in precisely the same fashion as other government expenditures (G) , since the former are subcategories of the latter. The coefficients have sometimes been slightly modified to account for recognized interdependencies not taken into consideration by the oversimplified structure of the model.

In column (1), for example, it is assumed that defense outlays

are increased incrementally, perhaps by one million DM. Our investi­ gation has established that the reaction will be roughly as follows:

(1) Total government spending will necessarily increase, though 164 probably by less than one million DM. Some other government projects may be scrapped altogether; some will be reduced.

(2) Aid may for awhile stay constant, but declines will eventually follow, especially if there is little slack in the economy and heavy government spending threatens to prove inflationary.

(3) Government civil and domestic outlays may also be curtailed somewhat, as welfare programs expand less rapidly and infrastructure investments are postponed.

(4) Income from endogenous sources will certainly decline as resources are shifted away from domestic consumption and investment for national security purposes.

(5) Imports will be influenced by both the decline in demand for foreign investment and consumption goods and the countervailing force associated with increased military procurement abroad. If the two effects are not mutually offset, the over-all difference will probably be negligible.

(6) Total national product will increase slightly, since the increase in government outlays will more than offset the decline in domestic spending occasioned by the transfer of resources to the public sector.

All of these changes are immediate. In succeeding periods multiplier effects will work through the economy. These are shown in

Table 23. If there is slack in the economy, an increase of one million

DM in defense outlays would result in a net increase of about three million DM in GNP. (G, 0.90, is multiplied by about 4.5. This gives 165 the increase in endogenous income, but the initial decline of .65 occasioned by transferring resources to the public sector must be deducted. The total expansion approximates 3.4 million DM.)

Cost-Sharing and the Future of the Alliance

After having seen that extensive and institutionalized cost-sharing arrangements have never really existed in NATO (other than in the comparatively insignificant infrastructure operation) and that defense contributions have been inadequate on a cost-sharing basis, there remains but one question to investigate. What of the future? This section will review current thinking on both the alliance in general and on future German burden-sharing efforts in particular, and will attempt on the basis of subjective probabilities to assess the outlook for cost-sharing in the alliance.

A keen mind once observed that the easiest prophesy to make in international affairs is that things will continue to go about the way they have been going. The analysis thus far suggests that cost- sharing for many years has not gone well and, indeed, that an irreversible process of dissolution may be under way. The dictum on prophesy in international affairs would call for an attitude of pessimism.

Recently a noted German columnist remarked that the spirit of integration is waning in the alliance and that not only France, but the United States and Britain are attempting to "regain or reinforce 166 their autonomy of decision." It was his conclusion that "the alliance will not survive the year 1969 in its original shape."■*•

If pessimism about the viability of the alliance is not misplaced,

NATO is destined to become a large-scale repeat performance of the disproportionate cost-sharing of the United Nations Relief and

Rehabilitation Administration (UNRRA) experience. Indeed, it must be recognized that the postwar movement to integrate economies, societies, and armies has as yet failed to establish a single institution capable of effectuating a large-scale cost-sharing system. There are numerous indications that the development of such institutions remains in the rather distant future. The inference can be drawn from the inter­ national milieu as well as from the nature of alliances.

In the first place, the cohesiveness of military integration can be no greater than the collective perception of potential external hostility. As the Germans themselves have observed, the compulsion of the drive to achieve political solidarity has been removed with the 2 "abatement of the external threat." The position that "a Soviet attack on Europe may now be regarded as a hypothetical exception," was not long ago looked upon with disdain in the Federal Republic; today belief is widespread that although the "balance of the stalemate must be main- 3 tained, ...it can be brought down to a lower (and cheaper) level."

Officially, of course, such a nation remains unacceptable, at best.

^Theo Sommer, op. cit.. p. 484,

2The_ German Tribune. April 8, 1967, p. 1.

3Ibid. 167

In Washington the "flexible response" doctrine has not been forsaken.

American strategy still favors more and better conventional forces in

Europe, but, as Richardson has observed, the current thirty divisions

of uneven quality scarcely represent a real military guarantee.

The present reinforcement ratios give the Soviets an incentive to prolong any ground fighting until the weight of their superior numbers could be brought to bear. Unless fighting were at once terminated, the West would have to face all the difficult decisions involved in initiating nuclear warfare.^

It is doubtful that the United States would so much as consider withdrawing troops from Europe if means of implementing a swift return

of U.S. forces did not exist, if balance-of-payments factors were not

so distressing, and if other military endeavors were not so distracting.

This was indicated by the pressure Washington recently put on the

British government when the latter threatened to remove substantial 2 portions of her 51,000 man army stationed on the Rhine. Since German

currency offset proposals had failed to give satisfaction to the British,

the U.S. went so far as to promise to counter-balance part of the

English costs by procuring military goods in the U.K. Thus, officially,

both Germany and the United States fear British withdrawal because of

the detrimental implications this could have for the flexible response

James L. Richardson, op. cit., p. 177. ^Der Spiegel. No. 10, February 27, 1967, pp. 41-42. When Finance Minister Strauss sent Ambassador Duckwitz with empty hands and a "Gott segne Sie" (May God bless you) to the tripartite talks on currency off­ sets, the British reaction was almost violent. The initial refusal to honor old commitments made by Erhard, however, was followed by a hasty offer to mitigate British wrath by 250 million DM per year for British hardware. Foreign Minister Brandt was allegedly worried that a re­ duction of British troops on the Rhine might set off an "irreversible chain reaction in the United States." 168 strategy. As Per Spiegel put it, "the NATO strategy would have to collapse if no one could tell the military commands how to implement current defense conceptions with fewer troops.

As has already been pointed out, the continuing disposition of the Americans and Germans to maintain substantial forces — preferably someone else's — as a shield against Soviet aggression in Western

Europe, is not surprising, given the nature of alliances.

Olson contends that in an alliance the collective good (defense) will not be provided in an optimal quantity because its supply will be a function of the satisfaction its production gives the party paying the bill. Contributions will, as a consequence, probably fall short of the point where the entire group would benefit most. The optimum cannot be reached because some of the members (which cannot be excluded from consuming the military security involved) try to turn defense 2 into a free good.

Hans Speier concentrates on political issues which add to the difficulties in extending cost-sharing endeavors in the military field and which also, incidentally, make for rougher sledding in future alliance burden-sharing attempts. He notes that

Xlbid.. p. 42. 2 See Mancur Olson, Jr., The Logic of Collective Action -- Public Seeds and the Theory of Groups. (Cambridge: Harvard University Press, 1965), Chapter 1. Also see Olson and Zeckhauser, oj>. cit.. pp. vi, 16 and 37. They have suggested that the solution to disproportionality and suboptimality in alliance financial efforts is (1) to substitute a union for alliance and/or (2) to make arrangements to share costs of additional forces on a percentage basis. As to how these propositions are to be implemented, no hint is given. 169

not all Americans take due account of the fact that burden-sharing outside the NATO area presupposes a unity of political purpose among the allies which has never been strong — witness Suez 1956; and it has progressively dwindled even within the alliance organization, as Europe has recovered her economic strength. Nor have all Americans given due consid­ eration to the fact that in the process of decolon­ ization some of the powers that are now expected to support U.S. policy outside Europe and engage them­ selves economically in Asia and Africa were not dis­ couraged by the United States from divesting them­ selves of political responsibilities in these parts of the world.^

These and other policy problems will long be with the alliance and continue to act as a divisive force.

Kissinger holds that the prime cause of the European attempt to shift alliance costs to the United States is the American refusal to substitute responsibility-sharing for constant exhortation about cost-sharing. The panacea is implied in his statement that "Europe will not assume a larger burden for its defense until it also shares a larger responsibility."

Olson and Zeckhauser frame the same argument in a similar manner, claiming that "nations may make policy concessions in order to get 3 other members to assume a greater share of alliance costs." And, again, "that a nation can bear part of its alliance burden by making policy concessions rather than by providing additional forces."4 5 Recent research on alliance processes by Edwin H. Fedder,

*Hans Speier, "Germany in American Foreign Policy," Santa Monica, Calif., The RAND Corporation, March, 1966, p. 13. ^Henry A. Kissinger, "For a New Atlantic Alliance," The Reporter, Vol. 35, No. 1 (July 14, 1966), pp. 25-26. 3 Olson and Zeckhauser, op., cit.. pp. 18-19. 4lbid.

^Edwin H. Fedder, The Theory and Process of Alliance, (Columbus, Ohio: The Ohio State Press, forthcoming). however, sharply questions the Kissinger and Olson and Zeckhauser positions. Interestingly enough, it finds the abstract notion of responsibility-sharing is as operationally meaningless as Kissinger1 own analysis found nuclear sharing in the now defunct multilateral force (MLF) proposals.

The Kissinger thesis can be attacked on two fronts. First, as the threat perception declines and commonality of interests weakens, a sharing of responsibility may simply be impossible in practice.

Responsibility cannot be served to alliance members in neat and equal portions. In Fedder's words:

The essence of the security guarantee remains the American deterrent. The question of invoking the deterrent is a function of American, not NATO, decision processes. The ultimate decision cannot be shared regardless of the establishment of special committees or other devices to attempt to assuage conflict and share responsibilities among the members. ^

Fedder's investigation into the nature of alliance policy­ making concludes that even if responsibility-sharing could be institutionalized and operationalized, conflicts between political and economic interests would not necessarily be eliminated. In the long run, "consensual procedures are not adequate for assuring...the maintenance of commonality of interest comparable to that which 2 nurtured the alliance." Nor, according to this analysis, would the existence of an assumed trade-off between force commitments and responsibility-bearing necessarily be an ameliorating factor.

^Edwin H. Fedder and James A. Robinson, op. cit., p. ii.

^Edwin H. Fedder, op.cit.. p. 182a, 171

Since alliances "require that policy be made by means of unanimous agreement, it is axiomatic that all members or actors participate equally in the policymaking process. Although the sharing of re­ sponsibility may be high, there is no evidence that such sharing mitigates against conflict among the allies.11'*'

In short, nations may be expected to revert to jealous protection of national resources at the expense of cost-sharing efforts, whether or not there is responsibility-sharing.

NATO may survive its current internal crisis, but it seems un­ likely that prevailing disintegrative tendencies will be reversed.

Even if revived external threats should strengthen the centtipetal forces of the North Atlantic defense community, this study indicates that systematic burden-sharing still would not prosper in NATO. No real progress toward its attainment was made in the past; and, as long as nations are little inclined to do for themselves what others will do for them and less inclined to do for others what they have refused to do for themselves, the prospect is against its future development.

Recent events portend an almost equally bleak outlook for the advocate of improved cost-sharing efforts by the Federal Republic.

The budget crisis, the currency offsets conflict, and the troop with­ drawal controversy may all be added to the general alliance dissolution tendencies previously discussed as obstacles to cost-sharing progress.

Ibid., pp. 162-163. See Chapter VI, pp. 155-183, for a full discussion of the nature of alliance organization, decision and policy making and political community. 172

A final item on the list of delicate issues in Washington-Bonn relations is the proposed non-proliferation treaty which the U.S. is currently negotiating with the Soviet Union. Not only was traditional consultation with our allies neglected; even the information dispensed was "late and fragmentary.11*' When the possibility of success suddenly emerged, U.S. pressure for German acqulescance to the Treaty provisions mounted precipitously. The German Tribune responded that German interests had been largely disregarded, the alliance "informed late and inadequately." As a last straw, it complained, the U.S. had entrusted negotiations to the "duke of disarmament," William Foster, who had publicly expressed the belief that an "erosion of alliances" might have to be accepted for the sake of "the high degree of U.S. --

Soviet cooperation which will be required if a non-proliferation pro- gram is to be successful."

Under Schroeder, Erhard's Foreign Minister, two "sacred strategic positions" had been that Germany should share physical possession in an Atlantic or European atomic force and that a peremptory self-denial of atomic weapons would be granted only as a means of winning concessions in the reunification question. Both seemed lost after negotiations on the non-proliferation treaty gained momentum. Germany also feared that, since in many areas it is difficult to tell peaceful from bellicose

*~Der Spiegel. No. 11, March 6, 1967, p. 17.

^The German Tribune. April 8, 1967, p. 2.

^William C. Foster, "Risks of Nuclear Proliferation: New Directions in Arms Control and Disarmament," Foreign Affairs. Vol. 43, No. 4 (July, 1965), p. 600. 173 nuclear research, her atomic research for peaceful uses might be faced with disastrous consequences.^-

Ostensibly, American policy makers may rest assured that any

(unforeseen) short- or medium-term German provision of larger conven­ tional forces would be motivated not by the desire to maintain her

"good ally" posture, but as a response only to the renewal of direct

Soviet pressure on German frontiers.

A Note on the Role of International Negotiations in Defense Cost-Sharing

The difficulties encountered in attempting to share defense burdens have prompted one observer to conclude that "arming a coalition in peacetime is even more difficult than conducting a coalition war."

Others also have despaired of the hope that, given present alliance institutions, anything can be done to ameliorate past disproportion- alities in NATO finance. Olson and Zeckhauser believe that negotiations on cost-sharing matters "are not likely to be effective" and the

American "attempts to persuade her allies to bear larger shares of the common burden are apt to do nothing more than breed division and O resentment." Their reasoning derives from the thesis that small contributions from medium-range powers are "securely grounded in their individual national interests,"^ which, they find, is inherent in the

•*-Der Spiegel. No. 10, February 27, 1967, p. 17

^Hans Speier, German Rearmament and Atomic Wa r , p. 10. 3 Mancur Olson, Jr., and Richard Zeckhauser, op. cit.. p. vi.

4Ibid. 174

nature of alliances and explanatory of NATO history. After all, as

Lincoln Gordon has made clear, early burden-sharing discussion in the alliance usually ’’came down to multilateral prodding of the more reluctant members, backed by the implicit sanctions of rewards or penalties in American aid distribution.11*

If Olson and Zeckhauser are right and burden-sharing negotiations are merely divisive, it is obviously pointless to develop cost-sharing formulae or even to fret about "relevant considerations" with which to confront allies at the bargaining table. On reflection, however, one wonders whether they do not miss the point with regard to the nature not only of bargaining but of power diplomacy as well.

In the first place, bargaining in international relations (as in other areas) is a means not merely of arranging for the implementation of programs mutually deemed to be of common benefit, but of developing some synthesis out of conflicting individual interests. Would it be meaningful to discontinue labor-management confrontations because the conflict of interests might prove to be divisive? It seems more likely that division arises from the conflict of different interests per se o rather than from discussion of such interests at the bargaining table.

In the second place, Olson and Zeckhauser, by implying that the

^Lincoln Gordon, 0£. cit. . p. 537. 2 Naturally it would be ideal to remove the source of conflict by making national interests coincide rather than merely negotiating solutions given diverse interests. Until a practicable means of eliminating divisive interests can be implemented, however, the meaningful alternatives available are apparently not "bargaining or what?" but "what kind of bargaining?" 175 abstractions of marginal analysis as they bear on national interest thwart cost-sharing attempts, are wrongly imputing the maximizing behavior of "economic man" to policymakers. It is evident that policy­ makers are bound to be subject, among other things, to crisis pressures, interest group activities, a host of irrational human sentiments and

(relevant to the thesis under investigation) moral suasion from very powerful, protective allies. That U.S. power diplomacy can have a significant impact on an ally's policy, national interest notwithstand­ ing, seems to be evident from the success of U.S. military export sales to the reluctant European market. Indeed, given the difficulty of operationalizing cost-sharing principles in alliance defense institutions, bargaining and power diplomacy have been and may continue to be the most effective means of eliciting greater efforts from our allies.

It is partly for this reason that Hoag, though rather agnostic about the value of specific cost-sharing formulae for negotiationgs nevertheless states that

any case for seeking a formula must stress, first, that however crude, a formula can powerfully en­ courage members to assume military duties rather than leave them to allies and, second, that the absence of an explicit formula merely conceals probable gross inequities in the burdens actually shared.2

^Because of "incompletely shared and only partially consistent national objectives" he concludes that "perhaps no substitute for muddling through in the old manner is possible." See 0£. cit.. pp. 532-533. Though agnostic about the use of explicit bargaining formulae, Hoag has never to my knowledge questioned the general utility of bargaining in burden-sharing endeavors, ^Hoag, opw cit., p. 532. 176

The assumption by the mid-range powers of somewhat greater defense costs in the earlier NATO years was to some degree a product of negotiations in the annual review conducted by the alliance. The annual review, established in 1952, sets goals for the buildup of needed military forces, a process which involves "the reconciliation of defense requirements with politico-economic capabilities."'*' Few would deny that the formal annual procedure of justifying defense budgets and programs before allies has no influence on national policies.

The belief that negotiations can be a productive cost-sharing endeavor has evidently been held by a number of nations, not to mention individuals. Indeed, the annual review has been institution­ alized not only in NATO, but also in the Development Assistance

Committee of the OECD,

This study, of course, is grounded upon the assumption that 2 cost-sharing negotiations can be meaningful in both aid and defense.

They can be rendered more so by systematic analysis of "relevant considerations." This chapter has suggested that the primitive international development assistance tax formula -- Aid/GNP plus

"relevant considerations" — be made slightly more sophisticated by incorporating a deduction for defense expenditures made in the interest of mutual security. Finally, it has been proposed that a country's

^Lord Ismay, op. cit., p. 90. 2 Bargaining is of particular importance in defense where the alternative type of cost-sharing arrangement, viz., the institution­ alized "taxation" type arrangement, has not proved feasible where very large contributions are required. 177 current effort should be compared to its previous best performance

(the "golden year fair share"), as a possible measure of that donor*s actual contributive capacity. CHAPTER VI

GERMAN CONTRIBUTIVE CAPACITY

Of the "relevant considerations" that are seen by Scheliing as limitations upon a country's abilities to contribute to international cost-sharing undertakings, economic potential is correctly considered one of the most important. As background to the investigation of the

Federal Republic's contemporary economic strength, the story of Ger­ man postwar economic reconstruction and policy evolution will be briefly traced. Then implications of recent performance, proposals and prospects will be suggested. Finally, the constraint of public opinion on German development assistance will be considered.

The Reestablishment of German Economic Power

The military triumph of the Allies left German industry immo­ bilized, but capital destruction was far from total. Wallich finds that the amount of war damage "proved to have been greatly overrated."

In fact, more capacity was created during the war than the allies destroyed, and at the end of the war "Germany found herself with slightly better than prewar capacity."1 In spite of ubiquitous ruins in the urban areas, the steel industry was only ten per cent destroyed,

1Henry C. Wallich, oj>. cit., p. 7. Wallich is the standard source for German early postwar economic history.

178 179 the machine industry from fifteen to twenty per cent, the chemical in­ dustry from ten to fifteen per cent, and the textiles industry twenty 1 per cent.

Later events were to demonstrate that recovery was largely a mat­ ter of redeeming the system from monetary chaos. After attempts to achieve unified Allied policy proved fruitless, the United States and

Britain permitted German economic authority to introduce a new currency in their respective zones of occupation. The subsequent rapid economic revival has been widely publicized. Total industrial production doubled between 1950 and 1957 as the West Germans sacrificed, invested, labored and produced an annually expanding GNP.

An exogenous stimulus in the form of Marshall Flan aid provided the initial capital requisite to expansion. Further investment was forth­ coming through generous taxation policies and considerable profits. As will be seen below, the state provided the entrepreneur with the means to accumulate large stocks of capital goods throughout the reconstruc­ tion period. The resultant expansion tended to overshadow concomitantly developing problem areas — e.g., lagging productivity in the agricul­ tural sector, uneven distribution of income, and a tendency to restric­ tions on competition— which under different circumstances would have rendered action by policymakers unavoidable.

^"Alfred Grosser, The Federal Republic of Germany, trans. Nelson Aldrich (New York: Praeger, 1961), pp. 72-73. 180

A number of issues, however, were too pressing to be left to a policy of drift. The integration of millions of refugees, massive provision of housing, equalization of war losses, establishment of extensive so­ cial security and welfare programs and the adoption of codetermination in labor-management relations all represent-achievements of postwar

German policy.

In spite of minor problems, however, the annual rates of GNP growth have been extremely high. Table 24 shows that the average an­ nual increase in real GNP was 9.4 per cent from 1951 through 1955,

7.7 per cent from 1956 through 1960 and 4.8 per cent for 1961 and la- 1 ter years.

Helmut Arntz, Facts About Germany, (Wiesbaden: Franz Steiner Verlag, 1964), p. 96. TABLE 24

ORIGIN AND USE OF THE NATIONAL PRODUCT OF THE FEDERAL REPUBLIC OF GERMANY, 1950-1964 (AT CURRENT PRICES)a

Item 1950 1952 1953 1954 1955 1956 1957 1953 1959 1960 1961 1962 19G3P 1964P

I. Origin of G. N . P. thousand million DM 1. Agriculture, forestry and fisheries 10.2 13.3 13.4 13.8 14.5 15.0 15.6 16.5 16.9 17.7 17.9 18.0 19.4 20.3 2. Producing industries2 48.5 69.3 76.1 82.6 95.8 105.2 113.2 120.4 131.7 158.1 174.7 189.9 198.7 219.2 3. Trade and transport3 19.4 27.8 28.6 30.2 35.2 39.1 43.5 46.2 50.3 53.5 63.4 69.7 73.6 79.0 4. S ervices1 19.7 26.1 28.9 31.7 35.3 39.8 44.0 43.1 51.9 62.4 70.6 77.3 85.2 94.7 5- Gross domestic product 97.S 13G.5 147.0 153.2 1S0.3 199.0 216.4 231.2 250.8 296.6 32G.6 354.9 376.9413.2 6. Net income payments to factors of production due from the rest of the world A 0.1 4- 0.1 4- 0.1 -0.3 -0.4 -0.2 - 0 .1 -I- 0.3 +•0.2 + 0.2 - 0 .4 - 0 .4 - 0 .4 - 0 .7 7. Gross N ational Product 97.9 136.6 147.1 157.9 1S0.4 193.8 216.3 231.5 250.9 296.3 326.2 354.5 376.5 412.5

II. U se of G. N .P . 1. Private consumption G3.4 81.8 89.6 95.1 103.2 ■ 117.8 123.2 137,7 146.5 170.0 185.3 204.0 215.1 232.4 2. G overnm ent consum ption 14.0 20.8 21.2 22.0 23.8 25.4 27.3 30.6 33.5 40.4 4G.1 53.1 59.2 61.9 oj which: Civil expenditure 9.6 13.3 14.9 16.1 17.8 19.9 22.0 24.6 25.8 31.0 34.6 33.2 41.8 45.9 Defence expenditure3 4.4 7.5- 6.3 5.9 6.1 5.4 5.4 6.0 7.8 9.4 11.5 14.9 17.3 16.0 3. Gross investm ent 21.8 30.7 31.0 35.6 46.3 43.8 51.8 54.1 62.2 79.2 86.6 93.7 97.2 113.2 oj which: Total fixed investment 18.1 25.6 29.1 32.8 40.7 44.8 46.5 50.4 58.0 70.6 80.7 90.2 34.9 108.0 Inventory changes 4-3.7 4-5.1 + 1.9 4-2.8 + 5.G + 4.0 + 5.3 + 3.7 + 4.2 + 8.6 + 5.9 +3.5 + 2.3 + 5.2 4. E xternal surplus0 - 1.3 4-3.3 + 5.4 + 5.2 + 4.1 + 6.9 + 9.0 + 9.1 + 8.7 + 7.2 + 6.3 + 3.7 + 5.0 + 5.0 5. Gross N ational Product 97.9 13G.6 147.1 157.9 180.4 193.8 21C.3 231.5 250.9 236.8 323.2 354.5 376.5 412.5 1 Discrepancies due to rounding oil. 2 Mining, power, manufacturing and building. 3 Including communications. 1 Credit institutions and insurance companies, lease of dwellings, Government, other services. 5 Up to 5 May 1955, occupation costs. 0 Net balance of goods and services in relation to foreign countries, the DM (East) currency area and - until 1959 - Berlin (Y/est). p — provisional Source: Statislisches Bundesamt, Wiesbaden.

a "Figures on Economic Trends in the FRG,11 German Economic Review, III, Number 3, 1965, p. 254. 182

The yearly expansion of output is documented explicitly in Table

25.

TABLE 25

GNP YEARLY GROWTH RATE OF THE FRGa

Current Prices 1954 Prices

1951 22.1 10.9 1952 14.3 9.0 1953 7.7 7.9 1954 7.3 7.2 1955 14.2 12.0 1956 10.2 7.0 1957 8.8 5.8 1958 7.0 3.3 1959 8.4 6.9 1960 18.3 15.3 1961 9.9 5.4 1962 8.7 4.1 1963 6.2 3.2 1964b 9.6 6.5

a,,Figures on Economic Trends in the Federal Republic of Germany," German Economic Review, III, Number 3, 1965 p. 253.

^Provisional

To the informed, the decline of recent years is neither an indi- cation of declining effectiveness nor a source of surprise, for as the process of reconstruction was completed, less dramatic bursts of output were to be expected.

Charles J. Hitch and Roland McKean, in an assessment of the

economic strengths of the major powers, estimate that an annual growth

of GNP approximating four to five per cent for the Federal Republic

may be anticipated. They present a plausible justification of what

would seem, in the light of economic performance as a whole over the 183 past two decades, to be a conservative estimate.

We should recognize the possibility of dimin­ ishing returns as more labor and man-made capital are applied to types of capital that are compara­ tively fixed...returns to capital increments can be expected to diminish after a nation has exploit­ ed the high-value opportunities, for example, for repairs and reconstruction, that sometimes exist at the end of a war. When forms of capital that have become relatively scarce on account of war are applied to the other resources, incremental returns are high at first but must decline after a while.1

As the economic base expands, then, unexploited possibilities for spectacular forward bounds become sparse and incremental outputs lose their statistical impact. Problem areas may, also develop if growth is uneven. This is not to say that German economic progress is ne­ cessarily on the threshhold of dissolution. Most observers anticipate that it will continue although it cannot be expected to equal that of the past.

The Social Market Economy Today

The growth of total German output in 1965 was 8.5 per cent and in 1966 it was 6.3 per cent. Adjusted for price changes, however, the figures reveal a marked decline in the dynamics of German growth: real output grew by no more than 4.5 per cent in 1965 and 2.8 per cent 2 in 1966.

"^Charles J. Hitch and Roland McKean, op. cit.. p. 91. 2 The German Tribune. January 14, 1967, p. 10. 184

By 1966 it was apparent that the German economic machine was be­ ginning to cool. According to The Economist, the most common estimate being put forward for growth in 1967 was for a real rise in GNP of 1 from 1.5 to 2.5 per cent. Public discussion focussed on the question,

"Is the economic miracle over?"

When journalists from Per Spiegel questioned Paul Binder, a

Stuttgart economist, on this score, he replied that there had never been an "economic miracle." The rapid rise from the bottom which was to be expected immediately after 1945 could not continue indefinitely.

According to Binder, growth "would have slowed after 1959, as full employment was reached, if the EEC developments hadn't occurred." He found it impossible to escape the conclusion that "we are now entering o a period of greatly reduced economic development."

A concomitant of the stagnation of output has been a fairly strong dose of inflationary pressure. Like many German economists, Binder's preference would dictate a significant decrease in growth rates if the maintenance of stable prices requires it. Indeed, the New York

Times announced as early as January of 1966 that Germany was reducing her planned budget expenditures in anticipation of a slowdown from the

3 estimated rate of GNP growth of 4.8 per cent for 1965. The extensive measures taken since that time will be discussed at greater length below.

^The Economist. Vol. CCXXI, no. 6436 (December 31, 1966), p. 1410. 2 "Das Wirtschaftswunder," Per Spiegel. Nr. 1/2, January 3, 1966, p. 14. . ~~ 3 The New York Times. January 6 , 1966, p. 29. 185

The average increase in productivity in 1965 was 5.6 per cent but it settled near three per cent in 1966. Rising more rapidly than pric­ es, wages climbed nine per cent in 1965 and another seven per cent the following year.^

By the end of 1966, The Economist was asserting that "all observers of the German scene are agreed...that the economy has weakened drama- 2 tically." For the first time in years unemployment was more than a

theoretical concept; it hsd risen to one per cent at the end of the year. Industrial employment was down 1.4 per cent and employment in

the "hard-hit" construction industry had declined by more than four 3 per cent. Around 200,000 foreign workers had become superfluous.

Increasing domestic costs, declining profits, restrictive credit poli­

cies, and expectations of slower growth of demand were being cited as

reasons for a general entrepreneurial pessimism throughout the German 4 economy.

The moderate recession currently being experienced by Germany

has influenced a number of (primarily German) observers to conclude

that German capacity to continue to expand aid contributions has for

the time being been impaired. Pauls, for example, frames the argument

in these terms:

In spite of a conviction of the necessity of

1 The German Tribune. January 14, 1967, p. 10.

^The Economist. Vol. GCXXI, no. 6436 (December 31, 1966), p. 1410. 3 Ibid. 4 Neue Zuercher Zeitung. Fernausgabe Nr. 45, February 15, 1967, p. 1 1 . 186

Increasing our development assistance effort, it would be utopian to believe that in the face of the significant demands upon the Federal Republic's budget (including other items stemming from foreign policy considerations), German contributions could be rapidly or considerably increased. For the time being it is a question of optimally employing the available resources. The attempt to do so might proceed from the expectation that future develop­ ment assistance should be given approximately the same status that it had in the 1962 budget.

The determination of a country's contributive capacity, however,

should be made from the perspective of secular trends. Monthly or

quarterly output and employment statistics may not give the complete picture of an economy's real strength; structural and sectoral economic

strengths and weaknesses should also be studied to indicate what poli­

cy tools are available to ensure continued growth.

Investment; The Foundation of the Miracle

After the Germans were given a free hand in economic policy in

1948, postwar growth was constantly under strong fiscal influence. In

addition to direct public investment, the state played a role in private

investment so that about half of the growth of the Federal Republic's

GNP may be directly or indirectly attributed to public finance. The

phenomenal rate of investment in the FRG is one of the most notable

features of Table 24. Table 26 shows investment as a percentage of

GNP and compares it with figures for the U.S., U.K., and France. One

of the most striking features of German postwar economic recovery is

^Rolf Friedemann Pauls, "Aussenpolitik und entwicklungshilfe," Aussen Politik. Vol. 16, No. 1 (June, 1965), pp. 378“379. 187 her dependence upon these high levels of investment for the provision of increasing industrial capacity.

TABLE 26

INVESTMENT AS A PERCENTAGE OF GNP FOR THE FRG, U.S., U.K., AND FRANCE, 1954-19652

FRG USUKFRANCE

1954 23.0 14.2 12.9 17.5 1955 26.0 16.9 14.8 18.2 1956 24.8 16.7 15.8 19.6 1957 24.0 15.4 16.6 20.6 1958 23.4 13.6 16.4 20.8 1959 24.8 15.6 17.2 19.7 1960 26.7 14.8 19.8 21.0 1961 26.6 13.8 20.0 20.6 1962 26.4 14.8 19.1 21.2 1963 25.8 14.7 19.7 21.1 1964 27.5 14.8 23.2 22.4 1965 27.7 15.5 22.8 21.9

Calculations are my own. Underlying data appear in Appendix I.

Throughout the reconstruction era, the federal government became a tacit partner of German industry in restoring, modernizing, and ex­ panding capital equipment. Frederick G. Reuss, in his account of con­ temporary German fiscal endeavor, makes clear that the "practical absence of demand elasticity" meant that consumers were a source of potential profit pools. Corporation taxes favored non-distributed profits, and investment incentives were provided with "massive tax relief for re­ invested income."'*' If the resultant investment opportunity were not

^Frederick G. Reuss, Fiscal Policy for Growth Without Inflation; The German Experiment. (Baltimore: The Johns Hopkins Press, 1963), pp. 122-123. 188 seized, the tax collector obtained the greater part of the potential in­ vestment funds* Moreover, selective policies were used to guide invest­ ment as well as to encourage it. Urgently needed funds were success­ fully channeled, for example, into residential and business construction and shipbuilding.

Nor was the government's contribution limited to the establishment of a favorable investment climate. Since tax revenues were high and government expenses low (especially in the initial period when military requirements were insignificant), a fiscal surplus accumulated. Savings by the government often reached twice its physical investment and it was possible to channel most of these funds through the banking system or via direct credits to business.^*

With the high level of German taxation sufficient to support ex­ tensive public investments the government also participated directly in investment activity. According to Andrew Schonfield, "Without the massive contribution from public saving, it is very doubtful whether

Germany would have been able to maintain her exceptionally high level 2 of investment." Unlike the national income statements of the United

States and Britain, German Investment accounts include government as well as private activity. In the early sixties public saving financed

around a third of the total, which usually approximated twenty-five per cent of gross national product.

Joint Economic Committee, "A Description and Analysis of Certain European Capital Markets," Paper No. 3, Economic Policies and Prac­ tices, Washington, 1964, p. 128. 2 Andrew Schonfield, Modern Capitalism: The Changing Balance of Public and Private Power, (New York: Oxford University Press, 1965), p. 266. 189

Consumption: An Offering to the Miracle

At the end o£ the war it was apparent that the resources needed

for the reconstruction of capital equipment would not be forthcoming

through the traditional capitalistic mechanism of private savings.

Not only was the level of individual income low; a tremendous accumula­

tion of private consumption needs had developed during the last diffi­

cult months of the war. Consumer savings were minimal, as shown in

Table 27. In fact, it took consumers better than ten years to re­

adjust their abnormally high consumption propensities, only after the

mid-fifties did consumer savings exceed twenty per cent of total Ger­

man savings.

TABLE 27

GERMAN NET SAVINGS3 (In percent of total)

1950 1955 1956 1957 1958 1959 1960 1961 1962 Consumers 16.6 20.7 19.0 29.4 34.0 31.7 27.7 29.0 28.8 Enterprises 44.0 45.4 49.1 49.6 54.3 46.9 43.5 36.0 32.0 Government 32.0 30.8 33.7 29.7 22.1 27.1 29.4 26.7 30.6 Other 7.4 3.1 -1.8 -8.7 -10.4 -5.7 -0.6 8.3 8.6 TOTAL 100.0 100. 0 100. 0 100.0 100.0 100.0 100.0 100.0 100.0

aIncludes net capital transfers

Source: Joint Economic Committee, op. cit., p. 130.

Since consumers were not in a position to provide voluntarily the sav­

ings needed, they were extracted in two involuntary ways: through the levying

of rather burdensome taxation, and through the imposition of consumer prices

providing handsome profit margins for potential investors. In Table 27

these involuntary savings mechanisms are reflected by the high levels of

saving by both government and business. 190

The decision to let the middle class bear the brunt of the recon­ struction burden had impact on general taxation policies. Those who were most able to pay higher taxes were spared, while improvements in the German worker's living level were permitted to lag behind general growth. The bulk of tax revenues were derived from income use rather than from the acquisition of income. Only about one-third of German tax revenues at all levels now comes from income taxation (including 1 corporate taxes). Moreover, since 1958 progression has been abolished for over eighty per cent of the taxpayers of the Federal Republic.

Income tax is a flat twenty per cent after allowable exemptions and deductions of up to 8,000 DM for single taxpayers, and 16,000 DM for 2 married couples.

From a welfare point of view these policies appear extremely austere, but the methods chosen were considered the best available alternative for ultimately achieving higher levels of living for everyone. Erhard, the architect of these policies, has explained their welfare rationale:

It is more sensible to direct energies toward the increase of the product of the economy than to become exhausted in a fight about distribution, a fight which would divert efforts from the only fruitful means of increasing the product. It is much easier to give everybody ever increasing pieces of a growing pie than to gain from changes of the distribution of a small pie, in which case every gain must be paid for by a loss.

A rapidly expanding social product was not the only compensation

for the less favored groups. Adverse social effects have been further

■^Frederick G. Reuss, op. cit., p. 72.

^Ibid.. p. 84.

^Ludwig Erhard, Wohlfahrt fuer Alle, (New York: Praeger, 1958), p. 10. 191 mitigated by extensive welfare programs. Reuss holds that the picture greatly changed after their implementation and that the "equation of the workingmen and poor is no longer valid, and almost everybody in

Germany is socially protected and receives some transfer income."^

The arguments that there is no need for better redistribution of the social product may have a specious ring to the ears of outside observers, but Germans seem to accept them. As living standards were gradually elevated and welfare and social measures constructed, labor unions generally showed considerable restraint and the social climate remained peaceful.

Nevertheless, relative to the welfare gains made by labor and the middle classes of other industrial countries, Germans lagged behind.

In the mid-fifties Wallich could show that even the generous welfare program of the Federal Republic "has covered at best the barest needs...

It has left the inequality of incomes probably a good deal more pro- 2 nounced than in most Anglo-Saxon countries."

In the early sixties Reuss observed that the shift away from progressive income and corporation taxes to transaction and sales taxes has added a greater burden for the consumer.

Since 1950 the terms of payment between business and household have shifted somewhat in favor of the business sector, that is, the payments to the government by private households have risen more than those by business, while the government payments to business have risen more than those to households.3

^Ibid., p. 181. 2 Henry C. Wallich, op. cit.« p. 47. 3 Frederick G. Reuss, op. cit., p. 177. 192

Statistics for 1961 indicate that Germany's high investment levels

led to a relative restriction of consumption. In that year average

per capita consumption was fifteen per cent greater in France than in

Germany, seventeen per cent greater in the United Kingdom and sixty-

eight per cent greater in the United States.1,

Economic Policies and Performance: The Miracle Makers

Perhaps the most crucial element in the set of phenomena that characterises a dynamic economy is the human or policymaking element.

If enlightened policies can contribute to price stability and full utili­

zation of resources and economic growth, then the growth of capacity

to contribute to international cost-sharing efforts is assured. It is

for this reason necessary to investigate briefly the German record of

economic management.

In the United States, discussion of the government's role in eco­

nomic policy formation has revolved around the question of the virtues

and limitations of monetary and fiscal policy. In Europe, the discussion

revolves around the question of the virtues and limitations of economic

planning. The first signicicant economic question to arise in the re­

construction period of the Federal Republic was whether or not the

economy should be planned. Two opposing camps quickly crystalized and

developed relatively inflexible doctrinal positions. The German Socialist

Party (SPD) favored the type of planning with which the French have

Helmut Arntz, Facts About Germany. (Wiesbaden: Franz Steiner Verlag, 1964, p. 105. 193 become associated, while the Christian Democrats advocated the "social market economy" — an arrangement often described by the doctrinaire

as pristine pure, or at least only moderately modified, capitalism — otherwise referred to in Western society as the mixed economy.

The choice in favor of a social market economy not only marked the mid-forties as a turning point in German economic history but also set the temper of government economic policy thereafter. Its

selection, however, was not peremptory, and the debate continued, albeit with less attention, once reconstruction was well underway.

Under Ludwig Erhard's economic leadership a policy of radical decontrol was initiated at a very early stage. His complete reliance on the incentives of a free market economy to liberate long quiescant productive capacity seemed a tremendous gamble. In an age rampant with experiments in economic planning, the "Soziale Marktwirtschaft" was a unique demonstration of faith in classical doctrine.

To the casual observer ErhaaJ1 s name has become linked to the notion of rigid opposition to anything suggestive of "socialism" or "planning." (It will be seen below that the linkage is an in­ correct one.) James Conant's succinct characterization is typical of what has become a general misconception:

Professor Erhard is a strong believer in private enterprise, competition, sound money and the min­ imum of governmental interference with business. He has often said: "I am more of an American than the Americans; I really believe in the economic policies the Americans talk so much about.

Even before the FRG came into being, Erhard was building his reputation as a modern advocate of 19th century liberal economic

Ijames Conant, Germany and Freedom, (Boston: Harvard University Press, 1960), p. 69. 194 doctrine. A statement made before the 37th meeting of the Economic

Council on May 24, 1948, addressed to the SPD, is characteristic.

Personally I strongly oppose arbitrary measures for capital investment. All will depend on the invest­ ment of capital in an organic manner. I am convinced... that we can overcome the present stagnation through the market economy, while the rigidity of planning would certainly lead us deeply into trouble.

In the great electoral victory of the CDU in 1953, it became apparent that Erhard’s party and, hence, his economic philosophy had been endorsed by the people and would continue to prevail.

The SPD had favored planning both for economic reasons, and because it feared the restoration of the political forces against which it had long struggled and which in the eyes of many Germans was burdened with the guilt of the Hitler era. As things went well with the postwar market system, however, opposition gradually dissolved and the SPD accepted the principle, "Competition where possible, planning where necessary" ("Wettbewerb soweit wie moeglich, 2 Plannung soweit wie noetig").

German hostility to planning is best understood as a belated reaction to the period 1933-1945 as well as an expression of general hostility towards methods employed by contemporary Eastern Germany.

There has been an emotional reluctance to consider seriously the possible uses of such tools as short-term economic forecasting,

1Ludwig Erhard, The Economics of Success, (Princeton: D. Van Nostrand Co., 1958), p. 89.

^Gustav Stolper, Deutsche Wirtschaft Seit 1870. (Tuebingen: J.C.B. Mohr-Paul Siebeck-Verlag, 1964), pp. 268-269. 195 long-term projections, of private planning and of national economic budgets.*

Preoccupation with the competitive free market is nowhere more evident than among the German economists known as "neoliberals" or

"ordoliberalsTheir stronghold, the "Freiburg School," is much more influential in terms of policymaking than is our own "Chicago

School." The most eminent spokesman of the neoliberals has been

Walter Eucken (now deceased); best known to American readers is his 2 article in Economica in 1948. >v In a skillful and comprehensive exposition, Euken discusses the planning experience of the Third

Reich. The most inadequate and undesirable facet he designates as the price-setting attempt.

It should be noted that the Germans consider central price de­ termination the essence of planning; a system is "planned" if the government attempts to set prices and "unplanned" if pricing is left to market forces, other considerations by this definition being irrelevant. Since Eucken saw this form of planning as a means of replacing consumer welfare with state power and economic growth, he concluded that the political costs of such a system far outweigh potential economic benefits. He contended also that economic inconsistencies and irrationalities (in his opinion the historical

^Robert M. Weidenhammer, Review of Planung Ohne Planwirtschaft. Frankfurter Gespraech der List-Gesellschaft, 1963, German Economic Review. III. No. 3 (1965), p. 216.

^Walter Eucken, "On the Theory of the Centrally Administered Economy: An Analysis^ of the German Experiment," Economica, New Series, Vol. XV, No. 58 (May, 1948), pp. 79-100. Reproduced in Comparative Economic Systems. ed. by Morris Bornstein, (Homewood, 111: Richard D. Irwin, Inc., 1965), pp. 157-197. 196

concomitants of virtually all market replacement systems up to that

time) are unavoidable in formal planning.

H.M. Oliver, a scholar who has done some penetrating work in

German neoliberal theory, has well expressed Eucken*s position.

Among the restrictions most frequently recommended are the outlawing of all agreements restricting competition, the prohibition of mergers and other combinations that result in monopoly or oligopoly, the splitting of monopolistic and oligopolistic firms except where this is not technically feasible, and the prohibition of cometitive practices intended to cripple one's rivals....One reason why most neo­ liberals do not believe that much monopoly is inevitable is, of course, their faith in the compet­ itive process of foreign trade.1

The impact of neoliberals on policymaking in the Federal Republic

is susceptible to overestimation. They were generally not the group which had the ear of Erhard and the majority party leadership. As was

observed earlier, Erhard was against planning; but it must be noted

that this opposition was only against comprehensive planning, which

includes the setting of prices. The German Chancellor defined the

Soziale Marktwirtschaft as a "socially committed free economy, a

covenanted as opposed to either a completely unfettered economy on the 2 one hand or a steered or planned economy on the other hand." His public

statements in this regard were unequivocal:

Our criticism is thus not directed against the planned economy per se, whose manifold forms can be variously interpreted, but most definitely against the state-

Oliver, "German Neoliberalism," Quarterly Journal of Economics, 74, February, 1960, pp. 117-149. Quoted sections from pp. 142-143. o *Ludwig Erhard, The Economics of Success, p. 3. 197

controlled authoritarian economy, which if carried to its logical conclusion wipes out the market and robs the consumer of all freedom of choice.^

Erhard was generally the political exponent of the type of economic thinking that characterizes Alfred Mueller-Armack, the spiritual father of the "social market economy" and the economist who coined that term. In his formulation Mueller-Armack leaves the door open for extensive participation of the government in economic activity. He writes that

it is wrong to regard the Social Market Economy as a variety of neo-liberalism...the Social Market Economy does not mean abandoning social measures or measures of social policy. It has been possible to elaborate a perfectly valid system of economic policy, with full co-ordination preserved, to a free market economy whose essential needs are to be given attention.2

From his implication that the free market should be enhanced where necessary or possible by socially desirable policies, one would expect to find extensive utilization of public power in the pursuit of full employment, price stability and growth. The German performance in this regard, however, has been a mixed one. From the outset the FRG was much more concerned about price stability and balance-of-payments equilibrium than about full employment. It is not surprising that after experiencing devastating inflations in the first half of this century the German mentality values currency stability so highly. The amazing growth record of the recovery was

1Ibid.. pp. 9-10. 2 Alfred Mueller-Armack, "The Principles of the Social Market Economy," German Economic Review. Ill (Number 2, 1965), p. 7. 198

not the product of a carefully managed money supply or a Keynesian

attempt to provide for the proper level of aggregate demand, but of

a "concatenation of good fortune and good management."^ Thus,

growth was a result of a combination of such things as state-encouraged

investment, the exceptional stimulus of postwar reconstruction and

expansive world demand for German goods.

At times German policies were outright deflationary. In 1951,

for example, taxes were increased substantially in spite of the fact o that over six per cent of the labor force was unemployed. For a

time there was even an antipathy in German administration for

Keynesian thinking. The "Tower of Julius" (JuliusturnO incident

of the mid-fifties is the best illustration. When the decision to

rearm had been made, Chancellor Adenauer was anxious to avoid greater burdens for Europe's most heavily taxed people, so his finance minister, Schaeffer, ambitiously set about accumulating the needed

funds in advance. Schonfield describes the results:

It was estimated that the rearmament programme would cost some DM 45 billion over five years. Although the bulk of this money would only be spent much later, the Finance Ministry's scheme, starting from 1954, was to tuck away DM 9 billion a year....It seems that Schaeffer was unaware of the economic consequences of what he was doing; it was deflation by accident...In the end Schaeffer was defeated not so much by the Keynesians as by other simple housekeeping types, who decided that since the money was there, it ought to be used for some good purpose. The Finance Minister was

% e n r y C. Wallich, o£. cit., pp. 19-20, 86.

^Andrew Schonfield, o£. cit. , p. 272. 199

unable to prevent his tower from being pillaged. The first raids occurred in 1956. At this point, the metaphor of the popular debate changed; the body of MP's appointed to consider alternative uses for these large funds was known as the 'Cake Commission1 (Kuchenausschuss^. When Schaeffer heard how it had decided to divide up the cake, he is reported to have wept.*-

Not only was the German government little disposed to Keynesian thinking; other impressive roadblocks stood in the way of an active fiscal policy. Of total tax revenues, for example, the Federal

Government receives only thirty-nine per cent, since those who feared a powerful central government in Germany made constitutional arrangements to funnel the greater part of such revenues to the individual German states. The individual states, however, bear no responsibility for national economic well-being, and each dislikes being deterred from spending by abstract considerations of movements in price indices. In addition, the German constitution formally constrains the government to operate under a yearly balanced budget.

Although the law is not without loopholes, the Federal Government can theoretically be brought before the supreme judiciary for deficit O finance.

Although at first reluctant to accept Keynesian influence, the

German government underwent a modernization of policy machinery in

1961. A law of that year empowered the administration to respond to cyclical changes by increasing or decreasing taxes without recourse to parliament. The Ministries of Economics and Finance undertook a

■*-Ibid., pp. 284-285.

2 Ibid., pp. 268-270. 2 0 0

joint investigation which, when published in 1964, made a plea for

radical reform. Deficit spending was advocated explicitly, and it was proposed that the Swedish technique of preparing a "shelf" of

investment projects for short-notice initiation be adopted.'*'

In recent years the German government, though ostensibly

continuing to favor non-intervention, has actually proved willing

to accept some economic techniques and policies characteristic of economically activist governments. Perhaps one of the best illustrations

is the use of the forecast. This is one of the prime instruments of a planned economy, although by itself it does not constitute "planning."

The Economic Ministry in Bonn employs rather sophisticated forecasting methods which are more than vestigial remnants of the Marshall

Plan period. Erhard has commented:

It is indeed true that a socialist economy cannot do without planning on an extensive scale, but this does not mean that a free economy — or, to be more precise, a market economy — can be written off as aimless or anarchical. The fact is that it uses the highly developed methods of market research so extensively for the systematic recording of economic data and the evaluation of trends, that with this type of economic order there is a very strong and growing tendency to put plans first.

The medium-range economic forecast permits a rational organization and coordination of cyclical and structural policy. It is essential to have rather good forecasts covering several years if policy measures are to be effective. The FRG's Scientific Advisory Council depicted the problem:

To demonstrate the importance that attaches within the

llbid., p. 287. Ludwig Erhard, The Economics of Success, p. 8. 2 0 1 overall framework to the individual programmes, such as for defence, housing, the transport and communications system* the agrarian pattern, the futherance of science, social services, develop­ ment aid and others, and to make sure that they neither run counter to one another nor overtax as a whole the capacity of the economy, it is necessary to have an overall picture of the potential eco­ nomic development for a number of years ahead.

It is a little amusing that the French view their iterative fore­ casts as sophisticated planning, while the Germans, who describe their methods in similar terms, view them as merely supplementary features of a free market economy. When we read that the ’’setting up an absolute forecast" is not the desirable approach and that it is much more worth­ while to proceed "from different hypotheses, above all on proposed govern­ ment expenditures, and of investigating how the latter conforms to the general economic trend which it helps to influence," we may be sur­ prised to find that we are not reading from a French economic journal.

It has also been found that sectoral and regional programs can be more effective if medium-range global forecasts are employed. Finally, par­ ticipation in EEC programs and plans can be rendered more meaningful

3 when medium-range forecasts are available.

Even with the availability of these methods and the attempt to im­ plement them, the economic slowdown of 1966 was not averted. As interest rates began to ascend in response to upward movements of prices, and as budget deficits grew, confidence in the Erhard administration waned.

■^Scientific Advisory Council, "On Medium Range Economic Forecast," German Economic Review. II, No. 1 (1964), p. 80.

^Ibid., p. 81

^Ibid., pp. 84-86. 2 0 2

There was some intercontinental expression of surprise when Erhard sud­ denly proposed that government authorities at all levels be required to

"prepare long-term plans for public spending in an effort to relieve the economy from undue strain." Wage increases and work week reductions were strongly discouraged, and the chancellor made a plea for a commit­ ment of "federal, state and local governments to heavier reliance on 1 long-term economic planning."

When the crisis continued and it began to appear that genuine re­ cession had finally returned to Germany, Erhard was blamed for the stagnation of output and the inflation that appeared. The latter pheno­ menon was ascribed to the "rash" tax reduction of 1964 and inflationary 2 excess spending of the public sector.

Erhard's misfortunes however, transcended this policy sphere, and by 1967 a new coalition government had given the economic reins of the

FRG to an acknowledged Keynesian, the leading SPD economist, Karl Schiller.

Economic growth was for the first time seen as the economic ministry's top priority and as the necessary condition for technical and social progress,

The New York Times. February 2, 1966, p. 43. For an interesting discussion on Erhard's attempt to provide for closer financial plans and coordination between central and state governments see "Konjunk- turpolitik," Per Spiegel. June 27, 1966, p. 19. 2 See, for example, "Wir Zahlen fuer Suenden: Interview mit Pro­ fessor Dr. Drs. H. c. Fritz Neumark," Per Volkswirt. Nr. 4, January 27, 1967, pp. 114-115. 3 For a full treatment of Schiller's fiscal policy orientation see his "Stabilitaet und Wachstum als Wirtschaftspolitische Aufgabe," Neue Zuercher Zeitung. Fernausgabe Nr. 39, February 9, 1967, p. 8. 203

The first action of Schiller and Finance Minister Strauss was to slash government spending and balance the budget; an additional "contin­ gency" or "emergency" budget of 2,5 billion DM was created, however, to provide stimulation for the sluggish economy. This emergency budget was to be financed by credit and the funds used for infrastructure in- 1 vestments as follows:

Federal Railroad 750 million DM Highway Construction 534 million DM Post Office 485 million DM Housing Construction 350 million DM Agriculture and other 381 million DM

It is too early to know whether this program or the concomitant efforts to reduce interest rates drastically will be successful. Al­ though Erhard claims the "social market economy" has been converted to 2 a "socialist market economy," There is some expectation that the new administrations policies will prove sufficient to overcome the previous 3 general lack of confidence in fiscal policy.

In any event, it is evident that Germany now has both the policy tools and the willingness to implement them in order to ensure continued full employment of resources and economic growth. Some years ago Wallich noted the then prevalent tendency of German policymakers to "reject ex­ pansionary advice" when the boom threatened to slow down. They were of­ ten by good fortune spared the trauma of recession, such as when the

Korean boom recharged the Wirtschaftswunder. Wallich gave the following

"Das deutsche Kreditfinanzierungsgesetz," Neue Zuercher Zeitung. Fernausgabe Nr. 49, February 19, 1967, p. 11. 2 Per Spiegel, Nr. 3, January 9, 1967, p. 23. 3 "Wir Zahlen fuer Suenden," loc. cit. 204

advice:

There is no stabilizing magic in the German system, and someday depressing tendencies will no doubt have to be met. It would be tragic if the great sucess so far should then become an obstacle to flexible action.*-

Since the German government is apparently aware of the need for anticyclical action, there is no reason to anticipate that her "economic

situation" should at any time in the future render her incapable of making a significant contribution to the international development effort.

Contributive Capacity and the Investment Deduction

The above discussion of the "miracle's" dependence upon heavy in­ vestment is a first step toward developing a rationale for treating in­ vestment as a deduction from the portion of a country's total product

"taxed" for international financial efforts. Investment will be consid­

ered a deduction for three reasons: (1) the economics of all donor coun­

tries attach great worth to rapid growth rates which necessitate high

levels of investment. Permitting an "investment deduction" would not

penalize a country for policies favorable to the accumulation of capital

goods. (2) Investment represents a sacrifice from current consumption

and a potentially greater total future product. This enhances not only

future domestic welfare, but the capacity for international contributive

effort as well. (3) Empirical tests demonstrate the existence of inter­

relationships between both development aid and the other "aid tax" de­

duction, defense. It will be seen as the discussion procedes that the

"Slenry C. Wallich, op. cit.. pp. 19-20. 205 nature of these interrelationships is such that it would seem improper to ignore investment activity when settling on 1lfair" aid or defense cost-sharing quotas.

Although investment is still favored, in more recent years con­

sumption in Germany has been less severly depressed than earlier. In­ vestment is no longer, in effect, a form of taxation on the German con­

sumer,^ but there was a time when an international development tax ap­ plied to total German product would have been tantamount to double

taxation.

During the past few years profit margins have been narrower in

German industries. Shorter hours, more militant labor unions, an insuf­

ficiently large labor supply and an intermittently weaker international

competitive position have diminished the capacity of German firms for 2 high levels of internal investment.

Although Germany is no longer as capital poor as Wallich found her 3 in the mid-fifties, the need for expansion of infrastructure invest­

ments and extensive modernization of some sectors remains.

Germany's rapid reconstruction, the "economic miracle," and, later

on, greater international contributions were all made possible at least

in part by her willingness to invest. If continued economic growth and

enlarged contributive capacity are to be encouraged, investment should

Frederick G. Reuss, op. cit.. p.. 123 discusses the movement of the FRG away from the "investment-at-any-price" policies that got under­ way after the mid-fifties. 2 Joint Economic Committee, op. cit., p. 135.

^Henry C. Wallich, o£. cit., pp. 190-192. 206 certainly be a "relevant consideration" in cost-sharing discussions.^

Fortunately, it is a consideration susceptible of quantitative treatment.

In their essay on alliance, Olson and Zeckhauser find that signifi­ cant increases in defense outlays might in some cases lead to a con­ siderable reductions in capital formation and that "there appears to be a remarkable constancy of the percentage of GNP that is made up by 2 the sum of defense spending and capital formation."-

Their observation has been tested in Table 28. Although the ad­ jective "remarkable" may be somewhat extreme, the results do appear to substantiate the claim. Germany shows a consistent increase in the proportion of total output devoted to defense and investment because of the nature of her rearmament and post-1961 military buildup. Had re­ sources merely been shifted from investment to defense, a dire state of affairs would have resulted. In cases where changes are gradual, however, an incremental resource increase in one of these areas may re­ sult in an offsetting decline in the other.

Since a relationship is found to exist between aid and defense

(see Chapter V) as well as between investment and defense, one is led to wonder whether aid and investment are not related. The empirical evidence suggests that they are. A number of hypotheses were tested statistically and the results are found in detail in Appendix III; the

^See Karl Schiller's discussion of infrastructure needs in "Ger­ many's Economic Requirements," Foreign Affairs, Vol. 43, No. 4 (July, 1965), pp. 674-676 and a statement by Hermann Abs on the dangers of permitting general consumption levels to soar too high at the expense of the investments required for future growth in the Frankfurter Alle- gemeine, January 2, 1967, p. 9.

201son and Zeckhauser, o£. cit., p. 9. 207

TABLE 28

THE SUMMATION OF INVESTMENT PLUS DEFENSE AS A PERCENTAGE OF GNPa

FRG U.S. U.K. FRANCE

1954 26.8 27.1 19.9 25.0 1955 29.4 27.2 21.6 24.5 1956 27.6 26.4 22.9 26.9 1957 26.5 25.2 23.2 27.5 1958 26.0 23.5 23.2 26.9 1959 27.9 25.2 23.7 25.8 1960 29.9 23.9 26.5 26.6 1961 30.1 22.9 26.9 26.1 1962 30.6 23.9 26.3 26.2 1963 30.4 23.7 26.6 25.7 1964 31.4 23.4 30.2 26.9 1965 31.7 22.9 29.5 26.1

a Calculations are my own. Underlying data are given in Appendix I broad implications of these tests deserve brief summary here.

Statistically significant relationships were found to exist be­ tween the following variables:

(1) Per capita aid and per capita investment. (Partial correlation,

0.774.) This held for all countries tested (FRG, U.S, U.K., and FRANCE), and probably implies not that the policymaker keeps his eye on invest­ ment levels when allocating resources to aid, but rather that investors and aid planners both respond rather consistently to changes in the na­ tional product.

(2) Per capita defense outlays and per capita investment. (Partial correlation, 0.946.) Here the relationship is very close (as it is for the UK and France -- only in the case of the U.S. was no statistically significant relationship found), and it appears that this conclusion reinforces the Olson-Zeckhauser thesis. 208

FRG U.S. U.K. FRANCE 30- »/-

25

20

1954 1956 1958 1960 19641962

• FIGURE 5 INVESTMENT PLUS DEFENSE AS A PERCENTAGE OF GNP, 1954-1965 (See Table 28)

(3) The summation of per capita aid and defense (the "international

contribution") and per capita investment. (Partial correlation, 0.956.)

This once again merely shows that aid, defense and investment indicators

all tend to move together. It is interesting that the statistical re­

sults are better when aid and defense together are correlated with in­

vestment, rather than when tested individually.

(4) The summation of aid and defense as a percentage of GNP and

investment expenditures as a percentage of GNP. (Partial correlation,

0.55.) This demonstrates the same thing as (3), but the statistical re­

sults here are not as strong. 209

Interestingly enough, in the German case no statistically signifi­ cant relationship was found between aid as a percentage of GNP and the summation of defense and investment expenditures as a percentage of GNP.

In the cases of the U.S., the U.K. and France, reasonably close rela­ tionships appeared between these variables. Again, this would seem to be a result of the unusual German military buildup associated with re­ armament and the Berlin crisis.

Investment can be treated as a deduction form national income

"taxable" for international cost-sharing endeavors merely by making an extension of equation (5-2):

(6-1) A/P = qYn/P + qYn/u’D + q»Yn/u»I, where P = population, I = investment and the other symbols are as pre­ viously used. None of the denominators is permitted to go to zero.

If international negotiators could agree on appropriate q and u values, a pattern of aid contributions could be established which would incorporate specific deductions for two of the most "relevant considera­

tions," defense and investment outlays. Most would probably agree that

aid shares should be directly related to these variables. Assuming that

this value judgment carries general appeal, some possible "fair" aid

shares have been calculated on the basis of equation (6-1) and are pre­

sented in Table 29.

Column (1) gives the actual aid performance. Column (2) gives a

"golden year" fair share, taking explicit account only of the proportion

of GNP devoted to aid in the "golden year," 1961, and listing aid values

that would have resulted had German aid been equally as generous in every 210

TABLE 29

"FAIR" AID SHARES WITH DEFENSE AND INVESTMENT DEDUCTIONS

(1) (2) (3) (4) Actual "Golden Fair Shares Fair Shares Aid Year" Allowing Allowing Fair Defense Defense and Shares3 Deduction*5 Investment Deduction3

1954 507 1,196 1,475 1,525 1955 718 1,367 1,685 1,726 1956 641 1,506 1,958 1,999 1957 1,186 1,640 2,153 2,194 1958 1,169 1,753 2,189 2,232 1959 1,363 1,902 2,138 2,182 1960 1,478 2,246 2,354 2,394 1961 2,473 2,475 2,433 2,476 1962 1,865 2,687 2,449 2,496 1963 1,739 2,864 2,517 2,568 1964 1,689 3,138 2,825 2,870 1965 1,884 3,403 2,984 3,031

^his is calculated from the formula A/P = q(Yn/P), where q takes the "golden year," 1961, value of .00758.

bThis is calculated from the formula A/P = q(Yn/P)+ (qYn/uD) where q " .005 and u = .<01. See column (3), Table 22.

°This is calculated from the formula A/P = q (Yn/P)+ 5/8q (Yn/uD)+ 3/8q (Yn/ul), with q = .005 and the Defense and investment deductions calculated on the basis of 1961 values, weighted 5/8 and 3/8 of q respectively. 211 other year throughout the period. Column (3) incorporates only the defense deduction (one of those developed in Chapter V).

Column (4) incorporates the defense and investment deductions, using the same q value as column (3), .005. Equation (6-1) has been modified here, with arbitrary weights attached to the q values for income, defense and investment as follows:

(6-2) A/P = q(Yn/P) + 5/8 q(Yn/uD) + 3/8q(Yn/uI).

These weights represent the author's conception of how "relevant" these specific variables are in international cost-sharing. Column (4) also accepts the "golden year" principle in that the deductions are computed from the 1961 performance.^

Aid and the German Economy: The Complete Model

It is now possible to integrate the analysis of this and the previous two chapters. The same tabular presentation will be developed.

Table 30 presents in summary form the economic relationships discovered.

All the variables listed along the top row (Yn, A, D, Tp, G, Gd and X) are, with the exception of the gross national product, Yn, and exports,

X, policy variables. The objective is to trace changes in the values of these exogenous variables through the system. Yn is included because the effects of an expanding total product upon the economy are of particular interest to the study. Exports are included because their general magnitude is also particularly susceptible to the effects of public policies.

1 44 - q(5,810) + .625q(5.810) + .375q(5.810). Where q=.005, u=.0064. u(204) u(1540) TABLE 30 THE INTEGRATED MODEL

(1) (2) (3) (4) (5) (6) (7) Yn A D Tp G Gd X

0.023 0.028 + » 0.005 A + > 0.005 + » 1.00 k, (-) + » + » k, (-)

D 0.24 0.299 k, 0.051 + , 0.05 k, (-) +, 1.00 + , + » (-) +»

Yn 0.25* 0.40* 0 .20* + » 1.00* + » 1.00* +> 0.80* + » 0 .20* +» +» +,

G 0.85 1.00 0.80 + » 0.15 + > 0.15 + > 0.90 + » 0.90 + » + » + ,

Gd 0.55 0.67 1.00 + » 0.095 + » 0.095 k, (-) k, ( - ) + » + » + ,

0.70 - J 0.70 0.70 Yp + > 0.75 “ ) 0.70 “ 3 0.70 0,85 “ > + »

Tp . * 0.85* 0.80* + » 0.25* + » 0.25* + 3 0.80* + » 0.85* + » 1 00 + » + ,

C 0.40* 0.40* + » 0.58* + » 0.58* " ) 0.50* "» 0.50* “» 0.40* -» " 3

I 0.15* 0.15* 0.25* + » 0.25* " y 0.18* “ > 0.15* “» 0.15* ■ » + »

(0 .02) + » 1.00 X k, ( + ) + , 0.80 k k, (.015) k, ( + )

M - - - - - 0.16 + , 0.16 + *

Symbols used are: + = an increase, - = a decrease, k = constant, * = Multiplier (in successive periods increases in the values of exogenous variables, i.e., exports and government spending, will have a multiplier effect of between 4 and 5 on this variable). 213

As before, the response of any given variable is listed in the appropriate row, the relevant column depending on which policy variable is being shifted. It is still being assumed that all other variables remain constant except as influenced by the "controlled" changes in policy variables. There are no monetary variables in the model.

Instead, it is assumed that prices will, as in the past few years, remain relatively stable, and that monetary policy is neutral. Where specific coefficients are listed behind the reaction symbols (+,-, and k), they are intended only to describe a general order of magnitude.

They should not be interpreted as econometric forecast values.

Column (1) shows the effect of incremental GNP growth, which will arbitrarily be set at one million DM. The investigation of this and the previous two chapters suggests that the following response will be observed in the economy:

(1) Personal income will increase by approximately 750 thousand

DM.

(2) Tax revenues will increase by about 300 thousand DM. A portion of these revenues will follow the route of transfer payments and appear as personal income, however, so (1) and (2) will not necessarily be equal.

(3) Consumption will increase by about 580 thousand DM.

(4) Investment will increase by approximately 250 thousand DM.

(5) Total government outlays will follow the general expansion and increase by about 150 thousand DM. As long as social imbalance is believed to exist, the government in Bonn, like that in Washington, will not be content with a constant budget when there is an expanding 214 national product. National security needs have also continued to elicit some response from FRG policymakers; this again implies higher levels of government fiscal activity as the economy grows.

(6) Of the government's expanded budget, around 95 thousand DM will be used to further domestic and welfare pursuits.

(7) Another 55 thousand DM will find its way to the national security budget. About ten per cent of this will be devoted to aid, the remainder to defense.

(8) Exports may remain constant, but the possibility that they will expand (if by nothing more than the amount of the increase in tied aid) should not be discounted.

(9) Imports will rise by around 160 thousand DM in response to increased German demand for foreign consumption and investment goods.

As was emphasized earlier, these changes are short-term reactions.

Multiplier effects will follow in periods immediately subsequent to the initial "shock" on the system if the economy is producing at less than full capacity. It will have been noticed that the effects of an increase in Yn described above will also follow only if there is some slack in the economy. Were resources fully employed, production could not increase to accomodate desired expansion of public and private spending. Nor could multiplier effects shown in Table 30 affect the system. Instead, greater competition in the market place would result only in price increases.

The multipliers shown in Table 30 are the same as those derived in Chapter IV, except here the multiplier is also applied to taxation.

This can be shown as follows:

(6-1) Yn = Yd - Tp + Yx 215

(6-2) Yd = C + I

(6-3) Yx ■ G + (X-M)

(6-4) Yd = a + bYn «= a + b(Yd - Tp + Tx)

(6-4a) Yd = a - bTp 4- bYx 1-b 1-b 1-b

The methods by which this simple model were expanded were not of an orthodox econometric type.Where the model left gaps in needed information, estimates were made. It is known, for example, that national income is the sum of several relatively stable magnitudes, the values of which are approximately as follows:

Yn = C + I + G + (X-M) 1.00 » 0.58 + 0.25 + 0.15 + .02

With these general magnitudes in mind and assuming that a change in national income would result in marginal changes in the value of the

GNP components roughly equivalent to their average values, Table 30 could be made more precise and informative.

Aid and defense expenditures entered the model directly as government expenditures. Total government expenditures, G, were considered the sum of aid, defense, and other outlays for domestic purposes, Gd. The relationship

(6-5) G = A + D + Gd was, however, considered of secondary importance in Table 30 to the behavioral relationship

(6-6) Gd = a + bG

Statistical tests show that the relationship described by (6-6) 216

is a very close one.^ Likewise, the simplified consumption function,

(6-7) C = a + b(Yp - Tp), which postulated consumption, C, as a function of personal income, Yp, 2 minus personal taxes, Tp, also gave good statistical results. It is evident that the spuriously high values given by these relationships are a result of excessive aggregation.

The simple model given by

(6-4a) Yd = a - bTp + bYx 1-b 1-b 1-b has, therefore, been disaggregated in a non-econometric fashion by breaking down income from endogenous sources, Yd, into consumption and investment. Income from exogenous sources was broken down into government expenditures and net foreign investment, (X-M). Government outlays were broken down into aid, defense and outlays for domestic purposes. The disaggregations were then, in effect, "grafted on” to the simple structure. It is recognized that the intuitive manner in which this was done neglects interdependencies among variables that would in some cases, perhaps, be of significant magnitude. Sometimes, however, important relationships ignored by the model were ostensible and the coefficients of Table 30 were modified accordingly.

The model remains undesirably simple. It says, for example, that a change in aid, A, gives rise via the multiplier, b/l-b, to a change

* A(Gd/P) = .031 + ,672 A(G/P), R2 = .992, t value of independent variable = 34.31.(.015) (.019)

2 A(C/P) = .099 + .945A[(Yp - Tp)/P], R 2 - .997, t value of (.045) (.014) independent variable = 67.34. 217 in endogenous income, Yd, but reality is certainly more complex. It is true enough that in the long-run an increase in development assistance will result in an increase in endogenous spending as budget and trade multipliers become operative. More sensitive relationships would be observ­ able, however, if a more sophisticated econometric model could be developed or, better yet, if interindustrial effects could be traced through the economy with the aid of an input-output table. Unfortunately, this task must await a day when more extensive data are available and developing secu­ lar trends begin to render themselves amenable to time-series analysis.

Contributive Capacity and The Public Opinion Constraint

Given the present commitments of and demands on the Federal Republic's yearly national product, the question arises as to the quantity of resource

increments which can be freed for sharing cold war economic burdens. It

is quite a simple matter to generalize about the problem. Fritz Erler has

done so, for example, pointing out that "in the area of direct assistance we have probably not fully exploited the possibilities that have been made

available to us since our economy began to bloom again.

It must be pointed out that "contributive capacity" should in reality

be dependent upon purely economic considerations. If, however, it is true

that there is a way where there is a will, the willingness of the West German

public and its political representatives to sacrifice scarce resources to

the development effort is a fundamental problem. Goran Ohlin has made the

following pertinent observation: Substantial and recurrent claims on the public purse

lAtlantik-Bruecke & American council on Germany, Ost-West-Beziehungen. (Freiburg: Verlag Rombach, I960), p. 103. 218 cannot, in democratic countries, do without a measure of public acceptance, and some of the difficulties of aid policy are assumed to stem from the hesitant attitudes of the public in industrial countries.*

Ultimately, then, the fate of policy decisions in this area depends on the understanding and acquiescance of the citizen. Although this constraint is not permanently inflexible, it is a real one in the present. If the public is currently opposed to any aspects of foreign policy, including aid, the process of providing for education and arriving at positive con­ sensus, if possible at all, is slow and painful. Without such consensus any really significant policy change, including increased aid, is almost inconceivable. Precisely what, then, is the current state of West German opinion on aid?

The prevailing sentiment toward development assistance is neither as favorable as might be hoped nor as unfavorable as might be feared. The

German entry into the club of aid donors was characterized by a sense of optimism, largesse, and even some understandable amount of pride. As is usually the case in this sphere of endeavor, however, if any immediate and considerable gratitude, recognition or progress by its recipients were antic­ ipated, the results were miniscule.

The injection of German funds into industrially backward economies did not provide the stimulus hoped for, as multiplier and accelerator effects were insufficient to induce self-sustained growth from so meager a base.

In a number of those countries in which the monotony of poverty is broken only by the ostentatious living levels of the politically powerful and

corrupt, aid funds were sometimes wasted and misused. German disillusion­ ment replaced the skepticism which had so recently expelled optimism.

■^■Goran Ohlin, o£. cit., p. 12. 219

Newspaper journalists in their search for the sensational accentuated the negative, and the honeymoon period was over. John White reports that after

"the initial enthusiasm for aid had subsided, the German public passed through a phase of violent reaction against it, as did the Americans and the French.” According to his analysis, the German reaction was reinforced by the fundamental belief "that aid is almost a self-defeating activity, an artificial interference with the economy of the recipient country that is likely to fail because it is not governed by the harsh criteria of the open market."!

In Dieter Danchwortt's celebrated study of German attitudes toward foreign assistance,2 the complexity of the opinion constraint was stressed.

The analysis employed interviews with sample groups "ranging from politicians to girl friends of foreign trainees,"^ as well as a content analysis of 1500 publications from the period 1950-1959.

Ohlin summarizes Danckwortt's results:

There was much self-criticism of the superficiality of German attitudes and objectives, much spontaneous hope for sympathy, gratitude and admiration, and much warning against any such self-deception. On the emotional level, the diffuse threat posed by the problem of the underdeveloped countries seemed to cause vague anxiety, but sometimes foreign aid also seemed to inspire feelings of superiority, not only vis-a-vis other aid donors, notably the colonial powers and the United States, whose past and present mistakes caused a certain glee.^

Since Danckwortt wrote, however, the federal government of the FRG has

Ijohn White, "West German Aid to Developing Countries," International Affairs. Vol. 41, No. 1 (January, 1965), p. 86.

^Dieter Danckwortt, Zur Psychologie der deutschen Entwicklungshilfe. (Baden-Baden und Bonn, 1962). For some discussion of this see Goran Ohlin, op. cit., pp. 56-57. 3 Goran Ohlin, op. cit., p. 56. 4 Ibid. 220 carried on a rather intense propaganda effort for development assistance.

By all appearance the campaign has been effective.

In polls taken in Germany, responses have been more and more favorable to the question, "Do you find it right or wrong that the Bundesrepublik participates in the industrial countries' effort to help the developing countries in Asia, Africa, and Latin America?" Survey results^ reveal the

following trend: For Against Undecided 1962 46o/o 36o/o I80/0 1963 47o/o 27o/o 26o/o 1964 71o/o 21o/o 2o/o

Occupational groups most in favor of aid were: first, civil servants;

second, white collar employees; then professionals, workers and, finally,

farmers. Significantly, humanitarian motives were expressed with a frequency

four times greater than political ones. Between these two extremes were

listed economic motives. Younger people showed greater favor toward aid

and those with higher education approved nearly twice as often as those whose backgrounds were limited to primary education.^

There is g.iod reason to expect that support may increase as aid tech­

niques improve, and as some positive achievements gain recognition. In

addition to the official literature endorsing aid, there is a popular

literature which stands firm in the conviction that the principle of aid

simply must prevail.3

Fuer Sie Gelesen, Bundesmlnisterium fuer Wirtschaftliche Zusammenarbeit No. 21 (April, 1965), p. 20.

^Goran Ohlin, o£. cit., p. 61

^See, for example, Ruediger Altmann, Das deutsche Risiko, (Stuttgart- Degerloch: Seewald Verlag, 1962), pp. 140-141 for a typical expression of a generally strong pro-Western, pro-assistance, pro-U.S. sentiment. "Je mehr sie (die unentwickelten Laender) sich von ihren antikolonialistischen 221

The weight which should be assigned to any Influence by this literature is uncertain, but it is, in any event, a positive force. To the extent that public opinion does indeed affect development contributions, it appears that German aid capacity should continue to grow.

Some Final Considerations of Contributive Capacity

Optimism about German capability must be tempered by a considerable number of limiting considerations; the boundaries of this study are such, however, that only a few examples can be given.

The current budget of any advanced nation is normally faced with two spheres of demand — domestic and international. Germany's domestic needs, though much less pressing, perhaps, than in the immediate postwar years, still remain formidable and may in certain instances be viewed as legitimate burden-sharing constraints. Social imbalance, an apparent characteristic of modern industrial society, for instance, is no less discussed in Germany than it is in the United States. Karl Schiller, the German Galbraith, writes

It may even be argued that we are on the threshold of the Affluent Society. In any case, it is also characterized by "private wealth and public poverty." It is indeed a fact that increased social investment and the building up of our infrastructure are prerequisites for further economic growth and continuing social stability...we need economic growth to accomplish the great common tasks before us, to compete in international markets, to make our contri­ butions to developing countries, to hold our own in the

Ressentiments entfernen, desto staerker wird die wirtschaftliche Anziehungs- kraft des Westens. Dass sie seine Hilfe brauchen, bedarf keine Eroerterung. Diese Hilfe ist gewiss auch eine humanitaere Mission, eine moralische Ver- pflichtung fuer uns. Vor allem ist sie aber eine weltpolitische Aufgabe von gar nicht zu ueberschaetzender Bedeutung; Wir muessen eine neue Welt- wirtschaft bauen." 222 international contest for rapid grates of growth, and finally to be prepared when the day comes to settle the reunification question.^

Schiller's last suggestion -- that resources are somehow needed to pre­ pare for possible reunification -- is an interesting one. It would seem to many that the possibility of achieving a unified Germany is so small at the present that it can safely be ignored. Nevertheless, as Kissinger warns, from a political standpoint it is "incumbent on Germany's allies to take the concern for unification seriously and to help develop responsible pro­ grams"^ if some potentially dangerous problems are to be avoided. Should reunification prove to be more than a myth, raising the performance of the

German Democratic Republic (GDR), or "Soviet Zone," to the productivity level of West Germany would present "a sobering if not a shattering" problem.^

On balance, however, it appears unreasonable to demand that this con­ sideration be used to justify a smaller German aid contribution. Were re­ unification an accomplished fact, considerable aid would likely flow from

West to East Germany and this would be relevant to the burden-sharing prob­ lem. But this, of course, is not presently the case.

Another possible "relevant consideration" lies in the fact that Ger­ many's taxes are already high. The burden of taxation in relation to na­ tional product stood at 23.3 per cent in 1960, as compared to a 22.8 per cent level for the United States and 23.1 per cent for France. (Britain's tax was even greater at 25.7 per cent of GNP).^

^Karl Schiller, o£. cit.. pp. 674-676.

^Henry A. Kissinger, "What About the Future," The Atlantic Community Quarterly. Vol. 4, No. 3 (Fall, 1966), p. 327.

3Ludwig Erhard, The Economics of Success, p. 151.

4Helmut Arntz, op. cit.. pp. 200-201. 223

If the question arises as to why the Germans pay higher taxes than Ameri­ cans, even though they have no comparable level of defense spending, the answer is not hard to find. Since 1953, the West German Citizen has given from thirty-one to thirty-four per cent of his taxes for welfare programs.

In the year 1962 alone this expenditure amounted to 4370 DM per worker.*

With a disproportionate number of elderly war widows, the German welfare budget for past wars may be relatively comparable to U.S. outlays for present and future wars. On the one hand,/ Germany's high taxation levels may temper any unrestrained optimism about German burden-bearing capacity. On the other hand, it is probably more relevant to argue that the social product itself should be the chief burden-sharing consideration, not the mechanisms or institutions by which the product is distributed within a given national economy.

A final limiting consideration is found in Germany's unique federal financial institutions. The Federal Government has in recent years faced increasing needs for revenues to meet growing national security require­ ments, such as foreign aid and defense, while the state governments have

faced less persistently burgeoning fiscal needs. State governments, however, receive approximately two-thirds of the income tax receipts which both government levels are obliged to share.^ Difficulties are encountered

particularly during times of inflationary pressures; to provide for greater

international contributions might necessitate an increased total tax take, which would increase the tax revenues of the individual states and stimu­

late inflationary spending at that level. In short, due to the unique German

•^Gustav Stolper, op. cit., p. 309. O Joint Economic Committee, op. cit., p. 132. 224 fiscal arrangement, increased contributive effort could (1) necessitate significant tax increases and (2) result in reenforcing inflationary trends. CHAPTER VII

RECENT FOREIGN ASSISTANCE TRENDS OF THE FEDERAL REPUBLIC

An analysis of the Federal Republic's actual and declared aid ef­ fort from 1930 through 1963 was conducted in Chapter III of this study.1

Since the latter date, however, three significant developments have af­ fected German aid programs. First, the Soviet threat has been perceived as less immediate, both in terms of the military danger associated with the Berlin confrontation and in terms of the Soviet aid offensive in the third world. Second, the United States has continued to downgrade its own relative assistance efforts, with a resulting decline in its ability and inclination to prod other countries to better performance.

Finally, the vertiginous postwar ascent of German economic power has lost its momentum; recession, albeit not severe, has finally returned to Germany.

This investigation will conclude, therefore, with consideration of current German motivations and attitudes regarding development as­ sistance; the recent record of the Federal Republic's aid performance;

1 For general but thorough investigations of Germany's aid history, see Mary Ann Cisar, "Patterns of West German Development Aid Policy," (unpublished Ph.D. dissertation, Department of Political Science, The Ohio State University, 1965)» and German International, "Twelve Years of German Development Assistance," (Bonn: Heinz Moeller Verlag, 196*0. The present chapter will discuss only the more recent aid trends in Germany with special reference to their cost-sharing implications.

225 226 and Germany's attempt to stretch the value of limited development ex­ penditures to increase their over-all effectiveness*

German Attitudes and Motivations

Aid programs are, according to Federal Republic officials, a re­ sponse to perceived "humanitarian obligations, international political necessity and considerations of economic advantage.Acceptance by the recipient countries of the Federal Republic's position on reunifica­ tion, although currently in the process of being modified, has been of particular concern*

Allusion is often made in Germany to the deplorable fact that some­ one dies of starvation every second in the developing countries* The danger that the revolution of rising expectations may one day become more violent is frequently pointed out and leads to admonitions that

prudent self-interest demands that political and social stability be

maintained in the world’s poverty areas. Walter Scheel, for example,

has said "the goal of all development policy is worldwide social equali­

zation through raising living standards of the people in the developing 2 countries." In spite of public positions and kindly words, however,

no substantive measures to demonstrate German willingness to share

greater development assistance costs have appeared* On the contrary,

FRG, Deutsche Stiftung fuer Entwicklungslaender, Deutsche Ent- wicklungshilfe — Warum und Wofuer? Rednerdienst, 2. Auflage, 1965, P. 3. p Walter Scheel, "Entwicklungspolitik im Wandel," Fuer Sie Gelesen, No. 22 (May, 1965), p. 1. 227 indications are that the expressions of concern are calculated only to give backbone to the propaganda campaign of the Ministry of Economic Co­ operation*

When one turns to the actual aid statistics, it is difficult to avoid the impression that the following statement by Pincus applies

(although not exclusively) to Germany*

The desire of some Northern countries to cut a good figure in the eyes of other rich countries (notably the United States) and in those of the LDC's is of diminishing importance because American generosity itself shows evidence of flagging, and the United States thereby becomes a lightning rod for Southern ire toward the North*1

Recent Aid Performance and the "New Look” in the Ministry of Cooperation

German officials boast that in recent years "Germany alone has pro­ vided roughly twice as much development aid as all the Communist coun- p tries taken together." Table 31 shows the declared performance for the years from 1950 through 1966. It appears that contributions in recent years have found a relatively stable equilibrium. It was established above (see Chapter III) that the actual cost of past aid contributions to the German economy has not been great* Perceptive German analysts, even in administrative circles, are aware that declared aid contribu­ tions exaggerate the sacrifice German taxpayers make to developing

John Pincus, Trade, Aid, and Development, pp* 3^9-350. 2 Gerhard Schroeder, "Germany's Position and Germany's Future," The Bulletin, No. 13 (April 7* 196*0, Supplement, p. 3* 228

TABLE 31 NET CONTRIBUTIONS OF THE FEDERAL REPUBLIC OF GERMANY TO DEVELOPING COUNTRIES, 1950-19668 (Million DM)

Contributing Sector 1950 1961 1964 1965 1966 1950 through 1960 through 1963 through 196'

I, Bilateral net contributions 11,809.1 6,645,0 2,561,0 2,447.5 2,895,0 26,357',6

a) Government Payments 4,518,6 4,423.9 1,653,0 ■ 1,728,7 1,874.0 14,198,2 1. Credits (repayable) Financial 2,183,8 2,870,0 1,031,9 1,025.3 1,339,4 consolidations, etc,^

2. Grants (not repayable) 2,334,8 1,553,9 621,1 703,4 534.6 (Technical Assistance in the broadest sense) (108.5) (627.0) (342.8) (374.3) (506.4)

b) Private Contributions 1,290.5 2,221,1 908.0 . 718,8 1,021,0 12,159,4 1, Credits and direct investments 2,267,5 1,445,0 420.8 485,6 620,5 2. Export credits0 (net increase) 5,023.0 716,1 487.2 233,2 400.5

II, Multilateral net contributions 2,837,7 . 1,686,3 264.5 456,6 171.3 5,416.4

1, Grants 785,1 835.5 95,8 149.4 57.0 2, Credits 2,052,6 850,8 168,7 307,2 114,3 of which: public 1,776.2 817.9 60,0 169,4 88,4 private 276,4 32,9 108,7 137.8 25,9

Aggregate Net Contributions 14,646,8 8,331,3 2,825,5 2,904,1 3,066.3 31,774.0

of which: public 7,079.9 6,077.3 1,688,8 1,708,5. 2,019,4 18,573.9 private 7,566,9 2,254,0 1,136,0 1,195,6 1,046.9 13,200,1 Percentage of Total: public 48 73 60 60 66 58 private 52 27 40 40 34 42

a Letter from the Ministry of Economic Cooperation, March 30, 1967, Contributions of private organizations excluded k All credits with duration over 1 year, c 1966: preliminary figures 229 economies,'1' and also that the level of German contributions will probably not shift upward in the next few years. Nor do many of them (in light of the stated objectives of the assistance program) find the aid per­ formance very laudable. Rolf Pauls, for example, a noted political analyst, states that from the standpoint of winning developing nations to the idea of supporting German unity,

development assistance of recent years has hardly been adequate. The path of parsimony which we have taken is not in harmony with Germany's central foreign policy interest. As our social product has increased, our ag­ gregate commitments have diminished. In this situation not only do wo fail to do justice to our foreign policy goals and national interest, but we fail to recognize that a country with so many opportunities to help simply has a moral obligation to do everything possible. 2

Pauls accepts the argument, nevertheless, that because of Germany's current "economic situation" nothing can be done to change the inevit­ able. The claim that the trend line of Gorman aid would have con­ tinued to climb but for the development of economic difficulties in

1966 is, however, not convincing. As early as October, 196**, Minister

Scheel claimed that his official objective "from the beginning" had been to be "frugal in giving away resources" while attempting to achieve "a higher degree of efficacy" in the administration of the aid program.^ The assumptlw" that there is a trade-off between con-

^ See, for example, Ferdinand Kopp, Unsere Welt im Umbruch. Bundes- ministerium fuer Wirtschaftliche Zusamenarbeit, (Bonn: Eichholz-Verlag, GMBH, 1965) pp. 29-32. p Rolf Friedmann Pauls, op. cit.. p. 378*

^ Walter Scheel, Konturen Elner Neuen Welt, p. 98* 230 tributive generosity and distributive efficiency has definite implica­ tions for donation patterns, especially where budget constraints are also involved. This becomes evident in Scheel's recent book, Neue

Wege deutscher Sntwicklungspolitik (New Paths for German Development

Policy), which outlines specific proposals designed to make a limited number of marks bring greater development returns.^

Once it had become clear that the economic situation was deteri­ orating, the brakes were applied with a vengeance. When the Erhard government fell, Wischnewski replaced Scheel as the Minister of Econ­ omic Cooperation. The original aid budget of approximately 1,900 mil­ lion DM was slashed by 100 million DM. Favorable aid sentiment was at an all-time low according to The German Tribune, and the long-term placing of development assistance in future FRG budgets was of great concern for Minister Wischnewski. The paper said:

Now that the economic slump and budgetary deficits are dominating public discussion, this should be a tough nut to crack for development aid politicians. Fear of an economic recession and anxiety over rising unemploy­ ment are the issues now claiming the attention of a people never really sold on the idea of development a i d . 2

In terms of the model previously developed (see Table 30, Chap­ ter VI), a policy of accelerating aid programs in periods of pros­ perity and decelerating them during recession is in effect an attempt to tie aid programs more directly to national income. The relation-

^ See a review of this volume in Per Volkswirt, Nr. 26 (July 1, 1966), p. 11^5. p The German Tribune. "Wischnewski hit by red pencil," Febru­ ary U , 1967, p* 10. 231 skip between aid and GNP implied by the model is a rather loose one; national income grows« policymakers gradually get the feeling that "we can afford a little more now" and aid is more generously given. The

"stop-go" aid policy now being pursued might indeed tie aid more close­ ly to GNP* On the other hand, it may be even more probable that the

"stop" policy of recession will be more vigorously applied than the

"go" policy of prosperity, at least until the level of humanitarian or national security demand shifts upward in contemporary Vestern society*

As soon as he entered office Wischnewski announced that all as­ sistance should be tied to supply purchases in the Federal Republic and that he would attempt to get the development fund of the EEC to place more procurement orders in Germany* (The FRG's payments amount to about a third of the fund, but less than ten per cent of its orders are filled in Germany*)

It has already been contended that an economy's contributive capa­ city should not be tied to short-run business-cycle and balance-of- payments considerations* Here is confirmation. Wischnewski's state­ ment was scarcely off the press before record trade surpluses were be­ ing announced.

Not only is it undesirable from a cost-sharing standpoint to run a "stop-go" aid policy as current economic indicators fluctuate, it is also undesirable from a development standpoint. If all donor countries acted in concert to reduce aid flows in the recession phase of the cycle

and to increase them in the expansion phase, the effect would likely be procyclical and the recipients of aid subject to alternating periods of 232 sparcity and superabundance. Rosenstein-Rodan finds that if developing countries know that they will have consistent access to capital for a decade or so, up to "the limits of the capacity to absorb," they will be given incentive to apply greater efforts. "Assurance of continuity of aid, therefore, is as important as the amount of aid."1

The significant upward shift of both aid and defense outlays after

I960 demonstrates the high degree of elasticity upwards when interna­ tional events threaten national survival. National security expendi­ tures may be reduced in times of domestic economic stress, but only if no meaningful and immediate threat is perceived.

A more relevant explanation for the low level of equilibrium of

German aid in recent years was presented earlier; it was observed that there is little incentive to expand outlays for national security when it is already provided by the benevolence of one's allies or can be achieved through diplomatic means. That the Germans themselves are not completely oblivious to this fact is implicit in an analysis by Horst 2 Zimmermann of the motivations underlying national participation in international undertakings generally. Zimmermann finds that such cooperation is a product of the utility it offers to individual parti­ cipants. The upper boundary of the expansion of any such political and financial relationship is given by the direct calculability of utility and the length of time necessary to await its enjoyment. The

1 Rosenstein-Rodan, op. cit., p. 107. 2 Horst Zimmermann, Qeffentliche Finanzhilfen an Sntwicklungs- laender, (Berlin: Duncker und Humblot, 1 9 6 3 ). 233 advantage must be susceptible of direct calculation "so that partici­ pant states need not forego their nationalistic manner of thinking and can attempt to employ a sort of 'short-run maximization of returns' in the international sphere. Zimmermann points out that some agree­ ments, e.g., investments undertaken jointly by several countries, advan­ tageous bilateral tariff agreements, and agreements on double taxation, are relatively easy to attain because everyone enjoys calculable gains.

In the area of development assistance where the only product is a nebu­ lous sense of greater humanitarianism or national security (the mag­ nitude of which is inelastic with respect to the aid contributions of most individual countries), however, it is inevitable that budgetary stringency will carry the day.

Getting More Magnanimity per Mark

Faced with limited budgets and large demands for assistance, the

German aid ministry is making an intense effort to use available re­ sources more efficiently, to elicit greater private contributions and to provide for an ultimate increase in allocable aid funds.

Since the coalition government made clear that "public aid to fur­ ther the substructural development of Latin America, South East Asia and African countries must be curtailed," the aid ministry has declared 2 that "everything will be done to intensify private investment." The

Law for the Promotion of Economic Relations Abroad, Especially with

1 Ibid.. p. 1 5 3 . o The German Tribune, May 13, 19&7* P« H * 234 Developing Countries, effective as of August 2, i9 6 0 , decrees that “the

German contribution to the economic growth of the developing countries should, in accord with our economic order, come primarily from the pri­ vate sector*"^ This theme pervades contemporary German development policy and has led the Federal Government vigorously to encourage pri­ vate industry to provide capital for investment favorable to develop- p ment without being "afraid of the risks involved." Capital aid has 3 been provided in five principal forms:

(1) Direct financing of projects from public funds, through loans.

(2) Government promotion of private measures (e.g., counseling, etc.)

(3) Government assumption of sureties and guarantees.

(4) Investment protection and investment guarantee agreements.

(3) Tax concessions.

German investors, however, have hesitated to commit themselves in 4 developing areas because of four principal considerations:

(1) Fear of expropriation (particularly after losses from two wars).

(2) The feeling that they are placed at a disadvantage by already

established British and French enterprises.

(3 ) Lack of profitability in most projects.

(4) Inability of any guarantees to make up for loss of time and effort.

1 See the "Entwurf eines Gesetzes zur Foerderung der Wirtschafts- beziehungen zum Ausland, insbesondere zu Entwicklungslaendern," Teil II, A 10, S. 6 , quoted in Horst Zimmermann, op. cit.t p. 130. 2 Ludwig Erhard, The Economics of Success, p. 24l.

^ Grunwald and Rhinhold, op. cit.t pp. 437-438.

John White, op. cit.. p. 87. 235 The results of the investment promotion effort have been very dis­ appointing. The State Secretary in the Ministry for Economic Coopera­ tion, Professor Friedrich Vialon, says it is clear that the "new course" of development policy - gradual abandonment of direct budget finance of development in favor of measures to promote private investment - must fail "if the incentives are too small," and if German industrial inter­ ests "don't perceive their opportunities and necessities clearly enough."'*’ He reports that German movementa of private capital to de­ veloping countries are actually contracting, as is the portion of total

German capital movements going to these areas. From 1956 to 1962, Ger­ man private investment in the LDC's totalled million dollars. Dur­ ing the same period French investments reached billion dollars,

British investments reached 2.99*t billion dollars, and U.S. investments rose to 7.34 billion dollars.2

A special Development Assistance Tax Law was enacted in 1963 to help promote more extensive private investments in the world's poverty areas. This, too, has failed to elicit greater private capital move- 3 ments, as its concessions are not being exploited.

It seems incredible that anyone could believe the German share of the development assistance burden might successfully be shifted from

^ Friedrich Karl Vialon, fhtwicklungshilfe in der Diskussion: Prob- leme von heute und morgen, FRG, Bundesministerium fuer Wirtschaftliche Zusammenarbeit, (Bonn: Butzon & Bercker Kevelaer, 1 9 6 5 )? p* 21. 2 Bundesrepublic Deutschlands, Bundesregierung, Deutsche Politik, 1963, Bonn, 1 9 6 ^, p. *f70.

^ Die Welt. "Ekitvicklungshilfe - Steuergesetz nur wenig beansprucht," January 12, 19^7, p* 12* 236 the public to the private sector* Even If the relevant fact that in­ vestment is "trade not aid" could be overlooked, the establishment of a satisfactory arrangement between such ardent demanders of capital

(the LDC's) and such lethargic and disinterested suppliers of capital

(German investors) is scarcely conceivable*

In the framework of the model developed in previous chapters, this amounts to hoping that the aid coefficient can be made smaller without ill effects being noticed in foreign policy* Aid benefits would continue to flow, but they would now appear only in the trade sector of the model and the impetus would come from private investors rather than from government expenditures. In actual fact it is doubt­ ful that declining aid outlays can be offset in this manner*

Another main thrust in the Ministry of Economic Cooperation's at­ tempt to stretch the value of each aid mark has been to plan to con­ centrate outlays in fewer geographical areas* When Under-Secretary

Hein recently said that development aid policy is facing a period of

"intense dovetailing," he accredited this to the fact that a "tight budget has made regional concentration inevitable."1 Thi« trend toward concentration proves upon investigation also to have originated before, not as a response to, the German financial crisis beginning in 1966*

The original policy of wide dispersal of funds, adopted both be­ cause of the lack of historical ties and the desire to win reunification support in as many developing states as possible, was abandoned in 19&2*

1 The German Tribune, May 13* 1967* p» 11• 2 See Friedrich Karl Vialon, op. cit.* p. jM, 237 Its successor was a policy of "moving foci of concentration" (wandernde

). which was designed to concentrate for a time on the

Middle East, then on Africa, and later on Latin America*

Technical assistance was still widely dispersed, but financial assistance began to express a preference for aid programs and project groups rather than individual projects*^

Greater concentration carries two implications for burden-sharing*

First, project groups take more careful planning and coordination.

Although this is unquestionably desirable, it also means that some available funds may lie idle while project groups are sought, planned, and organized* Total aid commitments may lessen merely as a result of the decline in "effective demand" (planned and programmed project groups) for aid that would formerly have been more rapidly absorbed. Addition­ ally, those commitments actually made will be more slowly dispersed as required planning time increases and the gap between commitments 2 and actual flows is widened*

Second, if policymakers can rationalize reduced assistance con­

tributions because funds "are now being better spent," this implies an

across-the-board downward shift in the international cost-sharing ef­

fort. There is, however, no legitimate trade-off between effective

assistance and adequate amounts of assistance* It should simply be

^ Goran Ohlin, op. cit.. p. kO, 2 See Bundesrepublik Deutschlands, Bundesministerium fuer Wirt- schaftliche Zusammenarbeit, Deutsche Entwicklungspolitik im Jahre 196*», (Bonn: Verlag Butzon & Bercker Kevelaer, 1%5)» P* 30. 238 assumed that countries will apply effectively the ’’fair share" quantity of resources to the international project for which they have been elicited.

Closely related to the effort to maximize the impact of limited re­ sources by concentrating them geographically is the avowed attempt of the aid ministry further to concentrate aid in those countries "that accept the general political standpoint and also respect the export and investment interests of the Federal Republic. To those steeped in the "no-strings attached" doctrine this suggestion of intervention and control at first glance seems to substantiate the charge of coloni­ alism by means of foreign assistance, liska holds that it is more ac­ curate to admit that "reciprocal control relations between donors and recipients have replaced one-sided control by a metropolitan power; and, more to the point, indigenous 'colonizers' have assumed the role of the 2 foreign ones." Germany would no doubt agree with his view that

the dilemma for ... a donor is not to decide for or against intervention in principle. Instead, the pol­ icymaker is continually confronted with the quandary of whether, when, and how to intervene in concrete conditions.••in ways that are acceptable to the ac­ tual or alternative regime and compatible with the in­ terests of the aided countries themselves.3

The demands placed by the Federal Republic upon the recipient countries have not in fact been rigorous. Support for the abstract

^ Per Volkswirt, Review of Neue Wege deutscher Entwicklungspolitik, by Walter Scheel, Nr. 26 (July 1, 1966)7 P* 11^5. 2 George Liska, op. cit.. p. 129.

3 Ibid.. p. 128. 239 principle of self-determination from those nations, many of which have but recently acquired that right themselves, presents no problem* Sup­ port for the specific demand for German reunification fellows less naturally, but it has been sought with great restraint, and the Hall- stein doctrine has not become a major issue in German relations with the LDC's* The positive part of the German position that "sacrifices are given for the Western world and for the maintenance and propaga­ tion of its ideals," is therefore not a real barrier; but its negative corollary that Germans "have no surplus of resources for the enemies of this order and these ideals,"^ will doubtless seriously affect future aid allocations under tighter budget constraints*

The final thrust of the German aid ministry's attempt to provide for a brighter aid future is a program to expand the quantity of re­ sources available for future development assistance* For some time the ministry has been conducting a vigorous propaganda campaign, hop­ ing to reverse unfavorable public opinion, which has, it is felt, in­ fluenced parliament to appropriate inadequate aid funds* Scheel be­ lieves that it would not be possible to expand aid outlays in the near future precisely because "public opinion exerts pressure upon parlia­ ments and governments to the extent that development assistance con- p tributions must be made as paltry as possible."

1 A quotation of Friedrick Karl Vialon, found in FRG, Deutsche Stiftung fuer Entwicklungslaender, Deutsche Entwicklungshilfe - Warum und Wofuer? op. cit*. p. 10. 2 Walter Scheel, Konturen ELner Neuen Welt* p. 1^5* 240 In its efforts to win the sympathy of the public for the aid effort, literature has been written for and distributed to schools at all levels, the general public, and the intelligentsia* A monthly series, Fuer Sie

Gelesen, publishes short pieces that reflect the point of view of the developing countries and vividly portray the desperate needs of the world's underprivileged. A series of brochures containing articles, lectures, and researches of aid and public officials is supplemented by distribution of appropriate information from contemporary popular and political literature*

With regard to the model developed by this study, the ministry's

campaign of public enlightenment can be viewed as an attempt to provide

for a medium- to long-run increase in the aid coefficient. It is based

on the assumption that the current adverse aid trend is, though a direct

outcome of policymaker parsimony, an indirect product of inadequate

public understanding and support*

Actually the aid ministry itself has been compelled to follow the

government's line that the "financial situation" is indeed the cause of

reduced public aid* Unfortunately the propaganda campaign is under-cut

by the fact that, except for subtle implication, the argument that aid

contributions are inadequate and falling short of contributive capacity

is foreclosed to the ministry. It must instead concurrently justify

current efforts and endorse the official doctrines of the administration

in power* Minister Wischnewski, for example, recently conceded that

the Federal Republic ranks only seventh among donor countries. In the

next breath, however, he added, "The fact that on the other hand it

takes second place in world trade and third place in the volume of in­ 241 d vis trial production all too easily leads to a false view of the German position."1 Enlightening the populace is thus an uphill battle. It is even more difficult when public news media exploit the fairly fre­ quent opportunities to dramatize negative aid experiences.

As was mentioned in the previous chapter, it is difficult to assess the immediate impact of the propaganda campaign. It appears from recent opinion polls, however, that some positive effect has been gained. This might be favorable for Germany's cost-sharing record in the long run.

1 The Bulletin, No. 19 (May 30, 1967)* p. 1^5 CHAPTER VIII

SUMMARY AND CONCLUSIONS

After the postwar reconstruction of the Atlantic powers,

American policymakers sought assistance in bearing the onerous alliance costs of defense and development assistance. They turned to Germany, and the issue of cost“sharing received much attention in Washington-Bonn relations.

The Federal Republic was chosen as the American focus for three reasons. First, the "economic miracle" associated with the postwar reconstruction of Germany had transformed the country into a foremost economic power. She was now capable of significant contribution to an international development effort. Second, buoyant world demand for German products had resulted in large trade surpluses which had helped to establish

Germany as the second largest trading nation. Finally, although her defense contribution increased after the Berlin crisis of

1961, Germany had still faced less burdensome demands for de­ fense outlays than other industrial powers.

United States policymakers stress that the obvious impli­ cation of these factors is that Germany should be obliged to exploit more fully her capacity to provide badly needed resources

242 to the third world. Officials of the Federal Republic, how­ ever, respond that the American analysis is misleading and that special domestic needs for limited resources preclude greatly increased contributions. The central objective of this study has been to determine Germany's ''fair1' aid share in the light of these and other important considerations.

The Principles of Burden-Sharing

In order to arrive at some meaningful conclusions about the principles by which a "fair share" can be determined, it was first necessary to investigate the theoretical contribu­ tions of past cost-sharing analyses. The principle of cost- sharing is grounded in considerations of equity taxation. Most contributors to the analytical literature hold that ability-

to-pay principles are most appropriate when an international

"foreign aid tax" is being conceptualized. As in domestic

taxation the formula is based on income, and equity can be

incorporated by letting the percentage of a donor country's

GNP contributed to development assistance reflect progressive

rates for higher-income countries.

Using such formulae Rosenstein-Rodan, Kravis and Daven­

port, and Pincus have explored both the actual record of cost-

sharing performance and the conceptual determination of "fair

shares." Although the United States in recent years has not

been bearing a disproportionately large share of the development assistance burden per se. the addition of American defense out­ lays for "mutual" security increases United States over-all contributions to more than its fair share. Thus, it is legit­ imate to examine the performance of other advanced countries to see if they should not be called upon to accept a greater part of the cold war financial burden. These comparative studies also suggest that the German aid effort is relatively inadequate. It should, however, be pointed out that the authors neglect two considerations: (1) In practice taxation cannot and should not consider income alone (Schelling has made a plea to avoid rigid formulae in burden-sharing so that "relevant con­ siderations" can bring more equitable outcomes to the computa­ tion of national contributions), and (2) Actual contributions are based on parliamentary interest perceptions rather than on equity demands of conceptual formulations.

Domestic income tax formulae are modified by numerous allowances and exemptions. Likewise, the assessment of "fair" international cost shares by equity-oriented formulae should be modified by qualifying or "relevant considerations." Where

"equitable" quantitative cost-sharing solutions serve as flex­ ible benchmarks to be tempered by non-quantifiable considerations, outcomes should more closely approximate "optimality."

The history of burden-sharing attempts among Western nations

shows that there has been a willingness to share international costs and "fair shares" formulations only when countries deem it

in their national interests to do so. The extent of involvement 245 on the part of an individual country will be limited if the re­

quisite sacrifice threatens to result in a considerable drain of

resources. Only a threat to national survival will cause a

nation to contribute massive quantities of its national wealth

to mutual security purposes, and even then this will occur only

to the extent that no other nation can be relied upon to bear

the costs. Similarly, countries hesitate to grant large sums

to an international effort if such action threatens to have

precedent-setting implications.

Objectives of German Aid

The development assistance program of the Federal Republic

was undertaken because German policymakers considered it in the

national interest. The specific objectives and motives under­

lying German aid are:

(1) To supplement defense programs as an element of

national security policy.

(2) To provide psychological utility to those who (a) feel

strongly about contributing to causes of humanitarianism or

(b) enjoy the prestige associated with being in the club of

donor countries.

(3) To placate the demands of both allies and developing

countries in international organizations and forums.

(4) To provide for the establishment of commercial relations

with developing countries, the "markets of tomorrow."

(5) To win support in the third world for German reunification. 246

The Role of Bargaining in the Cost-Sharing Operation

This vector of motivations will, given a particular inter­ national environment and domestic situation, yield a range of values for possible aid contributions. According to specific utility functions, policymakers will choose a unique point of operation at the low end of this range if through diplomatic or other means smaller resource sacrifice can accomplish the

objectives. A countervailing tendency to increase contributions

stems from negotiating and bargaining roles (increasing the

impact of the element (3) of the motivations vector); thus

policymakers will operate nearer the upper end of the range in meeting external demands such as those emerging from DAG

annual reviews.

In an ideal world fair shares would not be the product

either of internal politics or external bargaining, but of im­

partial equitable taxation, with levies determined by a formula

taking specific account of all relevant cost-sharing variables.

Until such a Utopia can more nearly be approached, however,

bargaining will continue to be needed to encourage lethargic

contributors to accept greater cost shares. This study has,

therefore, proposed bargaining formulae designed to evaluate

quantitatively a country's contributive performance in the light

of applicable "relevant considerations" (or deductions from the

tax base of national income). The performance evaluation can

then be used to compare a country's current effort to either 247 its own best ugoIden year" contribution in the past or to the more adequate effort of some other similarly situated country.

These quantitative calculations provide benchmarks which must,

of course, be modified by other non-quantitative qualifications

at the bargaining table.

The German Contributive Effort

In ord^ to evaluate the FRG's contributive performance an

investigation of actual German contributions was undertaken to

determine the actual costs of aid to the German economy. This was

done by:

(1) Deducting private measures from the total declared aid,

for these represent "trade not aid."

(2) Deducting reparations from government grants. Repa­

rations are rightfully a product of military history rather

than of development largesse.

(3) Deducting the commercial elements of development

credits. A discounting procedure was used to approximate the

present value of such credits, which is a measure of their

"grant element." The difference between this figure and the

total face value of credits is "commercial element" and should

not rightfully be considered as an aid burden.

(4) Deducting the commercial element of interest-bearing

IBRD bonds from the aid total.

When these deductions are made for the period 1950-1963,

the declared German aid total of 22,871 million DM shrinks to less than 4,000 million DM. Thus, the declared cost of the aid contribution for the period exceeds the actual cost by well over 500 per cent.

The immediate commercial benefit associated with German aid arises from (a) the increase in foreign trade and employment in export industries resulting from tied German loans and (b) the trade multiplier. Because a high percentage of Germany's development credits have been tied, because the "grant element" of rather hard FRG loans has been small, and because the trade multiplier has been large, the economic benefits of German aid have apparently been even greater than the economic costs. This means that all the non-economic benefits of German economic aid have actually cost citizens of the FRG less than nothing. The long-term benefit arises from trade gains accruing as a result of the ultimate establishment of commercial relations with recip­ ient nations.

An analysis of the relationship of aid to other variables

(i.e., government expenditures, personal income, personal taxes,

defense expenditures, investment, and tbs trade surplus) shows

that German policymakers react to changes in other variables in

about the same manner as do the policymakers of the United States,

Great Britain, and France, but are more parsimonious in actual

aid allocations. International Trade as a "Relevant Consideration*1

Of the 'televant considerations" that should modify quan­ titative formulation of ’'fair*' cost shares, trade was first reviewed. Foreign trade is clearly related to foreign aid; both are generally considered vital to the cause of economic development. Most analysts believe, however, that trade alone could not bring about effective long-run development.

Of course, there is no question that favorable trade arrangements contain an element of assistance. By the same token, aid can be rendered meaningless if trade practices are controlled by short-sighted vested interests in the indus­ trial countries which discriminate against products from the lagged growth regions. On balance, however, it was decided that trade should not be considered a deduction in the taxation framework accepted by this study. Because no costs are involved, it is impossible to measure a country's contribution through favorable trade practices. Besides, since both sides benefit from the more efficient use of re­ sources resulting from more liberal trade policies, they can­ not be described as burdensome.

One of the main selling points for the aid program which has been presented to the German public is the promise of favored entry into the "markets of tomorrow." Penetrating questions have not been asked about the validity of the assumption that generosity will necessarily result in future 250 preferential treatment in these markets, or about whether and when net returns on such trade might become equal to or greater than the value of current gifts. The nearly commercial interest rates preferred by Germans on development credits, the tying of a high percentage of such credits to procurement in Germany, and great confidence in the competitiveness of German goods, how­ ever, all show that German policymakers do indeed view develop­ ment assistance as a commercial undertaking.

The benefits accruing to developing countries from their trade with Germany have not been very great. Moreover, the

Federal Republic's trade with the LDC's as a percentage of total

German product continues to decline and (since markets for German goods expand more rapidly in the developed countries) the pro­ portion of total German trade directed toward the LDC's has also contracted. The hypothesis that Germany's income elasti­ city of demand for imports from developing countries is low was statistically tested and verified.

In spite of its inelasticity of demand for imports from

the underdeveloped countries, Germany has had both expanding volumes of trade and, generally, a trade deficit with the LDC's.

Nevertheless, substantial improvement could be made in German

trade policies vis-a-vis the emerging nations.

The Defense Deduction

The next concern of the investigation was with defense

expenditures as both a cost-sharing problem and as a cooperative input with development assistance in the ’'production" of national security.

Although NATO history shows that sharing formulae are unacceptable when they require large resource sacrifices, discussions focussing on the level of national income and its potential rate of increase did occur in the alliance. An

"annual review" was designed to "ensure a continuous appraisal of defense programs in the light of economic developments."

As the Soviet threat seemed to decline, European contributions were made more grudgingly, and the brunt of the burden was qui­

etly left to the United States.

It is evident that countries could (and would) maintain much larger defense budgets if national survival itself were

at stake. Lacking perceptions of threat, countries merely

maintain that they are doing all they "should," and the issue

of fair sharing becomes central to alliance discussion.

When cold war defense exigencies resulted in large de­

fense budgets, German rearmament was seen as a means of more

equitably sharing the burden. Because of her exposed geog­

raphical and political position, Germany has been an advocate

of a strong, cohesive alliance. Nevertheless, from 1956-

1961, the comparative military contribution of the FRG was

smaller than that of the other major allies. Defense outlays

were kept at a level only sufficient to placate the most in­

sistent U.S. burden-sharing demands and to provide for

continued American nuclear guarantees. After the Berlin crisis of 1961, military outlays were

dramatically increased. Nevertheless, as long as the American nuclear umbrella could be relied upon as the major guarantee

of her national security, Germany's inputs of defense and aid

could remain comparatively modest.

The investigation was also concerned with the substitute relationship between defense and aid as the inputs of the national security product. Policymakers apparently prefer

that the percentage of the last dollar taken from defense to be devoted to aid be higher than the percentage of the first

dollar taken from defense. The lower defense expenditures become, the more willingly policymakers will increase aid

outlays. At the other extreme, as defense outlays become

very large, aid expenditures become very small, approaching

some minimal level asymptotically. Appropriate "fair share"

aid contributions can be determined either by international

agreement or by participants in aid reviews who attempt to

encourage parsimonious donors to contribute more liberally.

Empirical statistical tests show that policymakers of the

Federal Republic responded to such encouragement only in the

most desultory fashion and that a policy of expanding national

security outlays (commensurate with expanding German national

product) has not been pursued. Actual German aid contributions

over the period investigated (1954-1965) would have been

significantly higher (and closer to optimal) had the 1961

"golden year" defense-deduction and aid effort been consis­

tently applied. Contributive Capacity and the Investment Deduction

One of the most significant "relevant considerations" en­ countered in assessing a country's "fair share" of international finance burdens can be given the general designation "contrib­ utive capacity." This would include the country's long-term economic strength, short-term economic conditions and insti­ tutional limitations on the ease with which resources can be transferred from the domestic population to development projects abroad. Closely related to these economic constraints are political and public opinion constraints.

Germany's economic structure is, in spite of current con­ cern about a mild recession, essentially a healthy one. A high level of investments (primarily at the expense of current consumption), an expansive foreign demand for German products, and a postwar history of rapid growth in total output have all contributed to the Federal Republic's capability to make significant contributions to international endeavors. More­ over, public officials are now committed to managing the economy in a manner that will assure full utilization of re­ sources and economic growth, as well as relatively stable price levels. Of a number of procyclical economic policies stemming from the reconstruction period and earlier, most seem to have been peremptorily discarded.

Investment was considered a deduction from the conceptual development assistance tax for three reasons: (1) Rapid growth 254 rates require high investment levels. An '‘investment deduction" refrains from penalizing a country for policies favorable to capital accumulation. (2) Investment represents a sacrifice from current consumption and a potentially greater future prod­ uct. This enhances the capacity for greater future interna­ tional contributions. (3) The empirically determined nature of the interrelationships between investment, national income, aid and defense is such that investment activity should not be ignored when settling on "fair" aid or defense cost-sharing quotas. These interrelationships were investigated in detail.

It would probably be agreed that aid shares should take income, defense and investment into direct consideration. It was proposed that this be done and that the latter three vari­ ables be weighted, the weights representing a personal judgment of their relative cost-sharing importance. Incorporating both defense and investment deductions from the national income

"taxable" for development assistance, some "golden year fair shares" were suggested. Had the suggested degree of magnan­ imity been operative, actual German aid contributions for the period (1954-1965) would have been 10,981 million DM greater

than it was (16,712 million DM). This gives some indication of how much larger German contributions would have to have been to approach optimality, as defined by these criteria.

Public opinion is also a vital consideration in discussions

of contributive capacity. It appears that past public dis­

enchantment in the Federal Republic with aid may be moderated 255 as the Ministry of Economic Cooperation conducts a rather exten­

sive propaganda campaign to develop public support* However, still other capacity constraints present difficult problems that will not easily be overcome.

Recent German Aid Trends

The final undertaking of the study was to analyze recent

foreign assistance trends in the Federal Republic in terms of

their impact upon prospects for cost-sharing.

Because the new coalition government slashed the current

budget of the Ministry of Economic Cooperation, the latter is

attempting to stretch the value of the limited available funds

in order to increase the over-all effectiveness of the aid pro­

gram. The attempt involves action on three fronts. First,

private investors are being encouraged to increase capital

flows to the developing areas. Given the fact that German

investors have been such lethargic and disinterested suppliers

of capital to the LDC's, however, it seems incredible that

the German share of the development assistance burden could

successfully be shifted from the public to the private sector.

The second thrust in the ministry's attempt to generate

more magnanimity per mark has been the formulation of plans for

greater concentration of aid. Not only is assistance to be

limited to project groups and carefully planned development

programs in limited geographical areas; it is also to be given only to the nations friendly to the "maintenance and propagation of order and Western ideals."

The final thrust in the ministry's attempt to provide for a brighter aid future is a program to expand the quantity of resources available for aid through a propaganda campaign de­ signed to enlighten and inform the public of the desirability of development assistance. It is believed in German administra­ tive circles that the key to greater parliamentary generosity lies in obtaining popular support.

The implications of these three programs for future German cost-sharing efforts in the area of development assistance were spelled out. Briefly: (1) even if private investment could be increased, the benefits should be attributed to com­ mercial, not cost-sharing, endeavor; (2) if geographic and political concentration of aid seems fruitful and German officials effectively contend that there is a tradeoff between effective assistance and adequate amounts of assistance, the cause of cost-sharing is bound to suffer further; (3) if the ministry's propaganda campaign should, in spite of its limi­

tations, continue to gain public favor for foreign aid, the

likelihood is greater that the Federal Republic will one day prove willing to shoulder a more equitable portion of the

aid burden. APPENDIXES APPENDIX.

51,880 54,876 52,382 54,292 55,433 56,938 58,266 59,012 (Thousands) Population Tax 26.44 63.99 69.22 57,587 40.22 49.55 3 Personal 137.52 177.50 36.01 119.70 23.76 193.97 Income 316.45341.75 75.38 81.84 Personal 62.16 51.96 165.76 32.82 53,656 36.31 54.13 49.32 152.08 29.63 53,008 46.95 79.21 229.80 93.70 271.90 97.44 289.04 113.82 124.22 Investment TABLE TABLE 32 .641 (Billion DM) (Billion 1.363 1.169 2.473 86.61 251.60 57.01 56,175 1.865 1.739 Aidb 6.10 5.95 .507 5.41 1.186 14.94 17.95 1.884 THE FEDERAL REPUBLIC OF GERMANY, UNDERLYING DATA UNDERLYING OF GERMANY, REPUBLIC FEDERAL THE Total 22.00 30.60 61.87 15.97 1.689 33.53 7.78 53.10 46.05 11.46 Government Defense 180.4198.8 23.75 25.35 6.05 5.48 .718 157.9 216.3 27.30 250.9 GNP 296.8 40.40 9.41 1.478 354.5 326.2 413.8 448.8 69.80 Statistisches JahrbuchFuer Die Bundesrepublik Deutschland, 1967. Statistisches bFor the 1954 and 1955 data, see IMF Balance of Payments Yearbook, 1954-1955, 1954 1958 231.5 1957 1955 1956 1960 1959 1964 1961 1963 377.6. 59.18 17.33 1962 1965 Year statistics are found in earlier editions of the same source. Data are at current prices. Bundesamt/Wiesbaden. Verlag: W. Kohlhammer, GMBH/Stuttgart und Mainz. In some cases p. p. 4. For the 1956-1957 data, see TheFlow of Financial Resources to Less-Developed Volume 7, (International MonetaryFund: Washington D.C., 1956) Germany, Federal Republic, Countries, 1956-1963, OECD, Paris, 1964, p. 140.

258 TABLE 33

THE UNITED STATES, UNDERLYING DATAa (Billion Dollars)

Total Population Year GNP Government Defense Aid Investment Exports Imports (Thousands)

1954 364.8 67.72 46.99 5.524 51.70 14.98 10.24 163,026 1955 398.0 64.38 40.70 4.217 67.40 15.55 11.38 165,931 1956 419.2 66.22 40.72 4.434 70.00 18.94 12.52 168,903 1957 441.1 68.97 43.37 3.712 67.80 20.67 12.95 171,984 1958 447.3 71.37 44.23 3.984 60.90 17.75 12.74 174,882 1959 482.7 80.34 46.48 4.026 75.30 17.44 14.99 177,830 1960 503.8 76.54 45.69 3.584 74.80 20.58 14.65 180,684 1961 520.1 81.52 47.49 3.386 71.70 20.99 14.71 183,756 1962 560.3 87.79 51.10 3.956 83.00 21.70 16.38 186,656 1963 589.2 92.64 52.76 4.107 86.90 23.35 17.14 189,417 1964 628.7 97.68 54.18 3.633 92.90 26.49 18.68 192,120 1965 676.3 96.51 50.16 3.336 104.90 27.35 21.37 194,572

Source: Statistical Abstract of the United States, 88th Annual Edition, 1967, U.S. Department of Commerce and Bureau of the Census.

Definitions of important terms, as given in the Statistical Abstract, will be given below in this appendix. TABLE 34

THE UNITED KINGDOM, UNDERLYING DATA3 (Billion Pounds)

Total Population Year GNP Government Defense Aid Investment Exports Imports (Thousands)

1954 20.29 4.55 1.436 .0767 2.608 2.785 2.989 50,765 1955 20.855 4.76 1.405 .0823 3.097 3.073 3.386 50,947 1956 21.30 5.17 1.525 .0754 3.354 3.377 3.324 51,184 1957 21.70 5.26 1.430 .0812 3.608 3.509 3.538 51,430 1958 21.76 5.47 1.468 .1095 3.578 3.407 3.375 51,652 1959 22.62 5.63 1.476 .1297 3.887 3.522 3.638 51,965 1960 23.71 6.19 1.596 .1578 4.696 3.733 4.137 52,352 1961 24.51 6.23 1.689 .1701 4.895 3.892 4.045 52,816 1962 24.76 6.44 1.767 .1609 4.739 3.994 4.098 53,341 1963 25.91 6.82 1.792 .1601 5.094 4.287 4.370 53,678 1964 27.28 7.31 1.909 .1911 6.328 4.471 5.014 54,066 1965 30.90 8.16 2.050 .1948 7.055 4.779 5.059 54,595

Source: Annual Abstract of Statistics, Central Statistical Office, London: Her Majesty's Stationery Office, No. 103, 1966. In some cases statistics are found in earlier editions of the same source. Data are at current prices.

Definitions of important terms, as given in the Annual Abstract, will be given below in this appendix. 260 TABLE 35

FRANCE, UNDERLYING DATA3 (Billion Francs)

Total Population Year GNP Government Defense Aid Investment Exports Imports (Thousands)

1954 160.8 37.02 11.97 1.233 28.17 14.66 14.76 42,885 1955 172.2 39.45 10.85 1.413 31.32 16.80 16.41 43,228 1956 191.3 46.48 13.95 3.183 37.51 15.89 19.44 43,627 1957 213.0 56.40 14.67 4.023 43.84 18.70 22.46 44,059 1958 244.7 54.90 14.79 4.342 50.92 21.51 23.54 44,563 1959 267.4 59.46 16.33 4.087 52.64 27.71 25.12 45,015 1960 296.2 59.67 16.52 4.165 62.31 33.88 31.00 45,465 1961 319.7 66.98 17.85 4.632 65.72 35.64 32.97 45,904 1962 356.3 78.54 17.57 4.827 75.61 36.34 37.10 46,422 1963 395.9 89.22 18.46 4.253 83.40 39.90 43.08 47,573 1964 435.2 91.28 19.19 4.082 97.70 44,40 49.07 48,134 1965 461.4 98.21 19.54 3.738 101.09 51.04 51.64 48,922

Source: Annuaire Statistique de la France, Ministere Des Finances et Des Affaires Economiques, Nouvelle Serie, No. 14, Soizante-et-deuxieme Volume, Paris, 1966. In some cases statistics are found in earlier editions of the same source. Data are at current prices. Data on aid from 1962 on are from Statistique et Etudes Financieres. Vol. 18, No. 215 (November, 1966), Paris: Imprimerie Nationale Ministere de l'Economie et Des Finances.

definitions of important terms, as given in the Annuaire Statistique. will be given below in this appendix. 262

A Note on the Data Used in the Study

Although there are differences in the way nations define and compile national income statistics, there are enough similarities in the practices of the advanced nations so that meaningful comparisons of the type used in this study can be made. When one is familiar with the national income accounts of the United States, one can readily understand those of the Federal Republic, the United Kingdom and

France. Nevertheless, a number of points of special concern should be expanded.

For a detailed explanation of the German national accounting system, see Das Statistische Jahrbuch. 1966. pp. 531-535. Germans include fixed private and public investment and inventory changes in their investment account. Government expenditures as used in this study include civil and defense expenditures of the federal government only. Personal income is comprised of wages and salaries, returns from entrepreneurial activity, and income from wealth. Defense includes, besides the traditional items, military construction and military equipment. The German definition of aid extends from public bilateral and multilateral grants to reparations, all credits of greater than one year duration, and private investments and credits.

See Chapter III for an analysis of the individual items involved.

For a review of U.S. social accounts, see the Statistical Abstract.

1966, pp. 317-318. Government expenditures are composed of national defense, international affairs, space research and technology, ag­ ricultural resources, commerce and transportation, health, labor and 263 welfare, etc. Investment includes consumer durable goods, business inventories, gross private fixed investment, and net financial in­ vestment. Defense outlays comprise operation and maintenance, pro­ curement, R&D, military construction, military assistance and "defense related activities." Aid is defined so as to include military and development assistance, and these take the form of grants, credits and PL-480 food shipments,

An explanation of British national accounts can be found in the

Annual Abstract of Statistics. 1966, pp. 250-251. Government expendi­ tures are defined as those for defense, agriculture, education, housing, national debt, social services, etc. Investment is computed as gross domestic fixed capital and the value of physical increase ✓ ' in stocks and works in progress. Aid includes bilateral and multi­ lateral grants and credits, as well as emergency aid.

French social accounts are described in Annuaire Statistique.

1966, pp. 547-556. Government expenditures are similar to those described for the other three countries. Investment includes "pro­ ductive" investments, inventories, administrational investments and investments of financial institutions. Aid is defined by the

Annuaire Statistique as "grants and loans to the developing countries for economic development, budget support and emergency relief; costs of technical assistance." APPENDIX II

The data underlying the regressions appearing in this appendix were taken from sources documented in Appendix I. Computations were run off on a 7094 computer; they are the responsibility of the author. The following symbols will be employed: Yn = GNP, P = Population, A «= Foreign Assistance, D = Defense, G ** Government Expenditures, I = Investment, Yp « Personal Income, Tp = Personal Taxes. The period tested was 1954-1965.

TABLE 36 THE FOREIGN AID--NATIONAL INCOME RELATIONSHIP ii > nj

FRG : (A/P)= -.0016+.0051(Yn/P) U.S.: /“N 049 - .0096(Yn/P)

(.0067)(.0013) e 0065)( • .0023)

U.K. : (A/P)= -.0042+.0149 (Yn/P) Fr.: (A/P)«. 03 65+.0069(Yn/P) (.0012)(.0026) ( .022)(.0034)

FRG U.S. U.K. France

(1) R Square .624 .633 .761 .295

(2) Partial Correlation .790 .796 .872 .543

(3) F Test 16.63 17.280 31.77 4.18

(4) t Value of Independent Variable 4.08 4.16 5.64 2.05

(S) Durbin-Watson Test 1.351 1.205 .813 .499

(6) Elasticity 1.06 1.19 2.69 .545

(7) Dependent Variable (a) Mean .0248 .0225 .0025 .0801 (b) Standard Deviation .0098 .0045' .0008 .0247

aNo statistically significant linear relationship was found. When the equation (A/P) = a+b (Yn/P)was tested, the null hypothesis (viz., that the coefficient of the Independent variable, b, is equal to zero) could not be rejected.

264 265

TABLE 37

THE FOREIGN AID--GOVERNMENT EXPENDITURES RELATIONSHIP

FRG j (A/P) =.0046 - .0277(G/P) U.S.: (A/P) == .049-. 060(G/P) (.006) (.0077) C.012)( .028)

U.K. S (A/P) = -.0024-.043(G/P) F r .: (A/P) => .028 - .037(G/P) (.0007)(.006) (.024) (.017)

FRG U.S. U.K. France

.326 (1) R Square .563 .320 .844

(2) Partial Correlation .75 .565 .919 .571

(3) F Test 12.89 4.697 54.13 4.83

(A) t Value of Independent Variable 3.59 2.167 7.36 2.20

(5) Durbin-Watson Test 1.225 1.198. .937 .476

(6) Elasticity .817 1.117 1.95 .647

(7) Dependent Variable (a) Mean .0249 .0225 .0025 .0801 (b) Standard Deviation .0098 .0045 .0045 .0247

aNo statistically significant linear relationship was found. When the equation .(A/P) - a+b(G/P) was tested, the null hypothesis (viz., that the coefficient of the independent variable, b, is equal to zero) could not be rejected. 266

TABLE 38

THE AID--DEFENSE RELATIONSHIP (PER CAPITA BASIS)

FRG: (A/P) - .009+.084(D/P) U.S.: Null hypothesis accepted3 ( ,0055)(.027)

U.K. . (A/P) - -.004+.214(D/P) . Fr.: (A/P) = -.0613 + .4045(D/P) ( .0013)(.041) (.036) (.101)

FRG U.S. U.K. France

.486 a (1) R Square .732 .614

(2) Partial Correlation .697 .86 .784

(3) F Test 9.45 27.38 15.91

(A) t Value of Independent Variable 3.07 5.23 3.989

(5) , Durbin-Watson Test 1.15 .7613 .584

(6) Elasticity .62 2.64 1.76

(7) Dependent Variable (a) Mean .0248 .0025 .0800 (b) Standard Deviation .0098 ■ .0008 .0247

aNo statistically significant linear relationship was found. When the equation (A/P)=a+b(D/P) was tested, the null hypothesis (viz., that the coefficient of the independent variable, b, is equal to zero) could not be rejected. 267

TABLE 39

FOREIGN AID, INVESTMENT AND DEFENSE

FRG: Accept null hypothesis3 U.S. : (A/Yn) =.029 + . 153[(I+D)/Yn] (.007) ( .028)

U.K. j (A/Yn)= -.0039+.038[(I+D)Yn] F r . : (A/Yn)= -.073 + ,330[(I+D)/Yn] (.0018)(.007) (.027) ( .104)

I FRG U.S. U.K. France

a (1) R Square .749 .739 .500

(2) Partial Correlation .865 .860 .707

(3) F Test 29.78 28.28 10.01

(4) t Value of Independent Variable . 5.46 5.32 3.16

(5) Durbin-Watson Test 2.22 .702 .647

(6) Elasticity 4.50 1.72 6.69

(7) Dependent Variable (a) Mean .0084 .0054 .0130 (b) Standard Deviation .0028' .0014 .0040

aNo statistically significant linear relationship was found. When the equation A/Yn=a+b(I+D)/Yn was tested, the null hypothesis (viz., that the coefficient of the independent variable, b, is equal to zero) could not be rejected. 268

TABLE 40

GERMAN FOREIGN AID, INCOME AND TAXATION

(1) (A/P) * -.0019 + .0068 (Yd /P) (4) (D/P) ■ -.0262 4.2411 (Tp/P) (.0066) (.0016) F (.0186) (.020)

(2) (A/P) = .0043 «f .0236 (Tp/P) (5) [(AfD)/P] --.081 4 .0735 (Yp/P) (.0055) (.0059) (.028) (.007)

(3) (D/P) = -.0794 4.6 6 7 (Yp/p) (6) E(A4D)/P] • .-022 4. 265 (Tp/P (.0289) (.007) (.017) (.019)

(1) (2) (3) (4) (5) (6)

A. R Square .638 0.615 .899 .93471 .92260 .953

B, Partial Correlation .798 0.784 .948 .9668 .960 .976

C. F test 17.58 15.99 89.23 143.17 119.20 200.85

D.t value 4.19 3.99 9.446 11.97 10.92 14.17

E. Durbin-Watson Test 1.391 1.313 .946 1.084 1.047 1.23

F. Elasticity .108 * .826 1.432 1.143 1.390 1.105

G. Dependent Variable

(a) Mean .0249 .0249 .1836 .1836 .0021 .0021

(b) Standard Deviation .0098 •0088 .0814 .0814 .0885 .0885 269 Wilson E. Schmidt's formula for the present value "of the costs to the benefactor" for a loan, L, at interest rate p for n years is

(II-l) P = L + zL - pL - ^ zpL - L - zL O+yP (l+y)t (l+y)n (l+y)n where y = the domestic rate of return on capital in the benefactor nation, z - the effect on real income through changes in the terms- of-trade per dollar of receipt or payment.

Disregarding terms-of-trade effects for the moment, the present value of a loan is:

(II-2) Pi- L pL - L (l+y) d + y ) n

Thus, the present value of the loan is equal to the amount of the loan minus the present value of the flow of returns from the loan recipient discounted by the domestic rate of return on capital, and minus the opportunity cost associated with choosing not to invest

funds at home (the present value of an identical sum invested at the domestic rate of return on capital).

Taking z into account involves adding equivalent terms to

equation (II-2). These are:

(II-3) P2 = zL - £ z p L - zL__ (l+y)t (14y)n

Combining (II-2) and (II-3) gives us (II-l). The form used to

find the present value of German loans, however, is an alternative

form of equation (II-l), as-follows:

(Il-ld) = L(l-p/y)x[l-(l+y) ^(l+z). The proof that (Il-ld)

follows from (II-l) is given below. 270 (II-l) P = L + zL -< pL - < zpL - _L - zL (i+y)fc (l+y)* (i+y)n d+y)n

(II-la) = L - L - £L + pL + zL - zL -zpL+ zpL (l+y)n y y(l+y)n U +y)n y y(i+y)n

It is not readily apparent that & pL = pL - pL and that, (l+y)t y y(l+y)n hence, (II-la) follows from (II-l).

The following lemma demonstrates that the relationship holds.

Lemma: ^ 1 = 1_ - 1 (i+y)t y y(i+y)n

Proof: Since 1 - 1 = 1 + y - 1 (i+y)1'“1y (l+y) fcy (i+y)fcy

= V = 1 (l+y)fcy (l+y)

^ 1 - 1 H , which is a (l+y)t U l+y)t_1y (l+y)cyj telescoping series.

= 1_ - 1 . End of the proof of the lemma. y (i+y)ny (II-la), therefore, follows from (II-l).

(Il-lb) = [l - _L - £L + pL 1 (1+z) (i+y)n y yd+y)nJ

(II-lc) = (L - pL/y) [l - _l *) (1+z) (l+y) n-J

(Il-ld) = L(1 - p/y) x [l - (l+y)”nJ (1+z). APPENDIX III

The data underlying the regressions appearing in this appendix were taken from sources documented in Appendix I. Computations are the responsibility of the author; they were run off on a 7094 computer. The following symbols will be employed: Yn *= GNP, P ** Population, A = Foreign Assistance, D = Defense, and G ® Government expenditures. The period tested was 1954-1965.

TABLE 41

THE AID— DEFENSE RELATIONSHIP

FRG: Null hypothesis accepted3 U.S. : (A/G) = -.119 + .286(D/G) (.022) (.036)

U.K. . (A/G) - .067 - . 167(D/G). Fr.: Null hypothesis accepted8 (.015) (.054)

FRG U.S. U.K. France

a a (1) R Square .862 .483

(2) Partial Correlation .928 .695

(3) F Test 62.27 9.35

(4) t Value of Independent Variable . 7.89 3.06

(5) Durbin-Watson Test 1.93 .867

(6) Elasticity 3.29 2.12

(7) Dependent Variable (a) Mean .052 .022 (b) Standard Deviation .014 • .004

aNo statistically significant linear relationship was found. When the equation (A/G) «* a+b(D/G) was tested, the null hypothesis (viz., that the coefficient of the independent variable, b, is equal to zero) could not be rejected.

271 272

TABLE 42

THE DEFENSE— NATIONAL BUDGET RELATIONSHIP (PER CAPITA BASIS)

FRG : (D/P)®5 -.0357 + .2994(G/P) U.S.: (D/P)= .0017 + . 2198(G/P) (.0157) (.020) ( .0022) (.088)

U.K .: (D/P)=.0108 + ,1768(G/P) F r . : (D/P)=. 191 + . 1123(G/P) (.0022) (.0187) (. 025) (. 017)

FRG U.S. U.K. France

(1) R Square .956 .380 .645 .810

(2) Partial Correlation .978 .616 .948 .90

(3) F Test 219.6 6.11 88.8 42.66

(4) t Value of Independent Variable 14.8 2.47 9.42 6.53

(5) Durbin-Watson Test .965 1.306 .984 1.269

(6) Elasticity 1.194 .369 .651 .453

(7) Dependent Variable (a) Mean .1836 .2620 .0310 .3495 (b) Standard Deviation .0814 .0151 .0033 .4794 1 273

TABLE 43

THE DEFENSE--NATIONAL BUDGET RELATIONSHIP

FRG: (D/Yn) - -.046 + .527(G/Yn) U.S.: (D/Yn) = -.096 + 1.20(G/Yn) (.010) (.072) (.021) (.131)

U.K. : Null hypothesis accepted^ Fr.: (D/Yn)= -.036 + .419(G/Yn) (.035) (.154)

FRG U.S. U.K. France

(1) R Square .863 .894 3 .362

(2) Partial Correlation .929 .946 .989

(3) F Test 63.10 84.66 7.384

(4) t Value of Independent Variable 7*94 9.201 2.717

(5) Durbin-Watson Test .848 1.708 .774

(6) Elasticity 2.32 2.003 1.003

(7) Dependent Variable (a) Mean .0345 .0954 .0578 (b) Standard Deviation .0065 .0128 .0109

aNo statistically significant linear relationship was found. When the equation (D/Yn)=a+b(G/Yn) was tested, the null hypothesis (viz., that the coefficient of the independent variable, b, is equal to zero) could not be rejected. 274

TABLE 44

THE DEFENSE--NATIONAL INCOME RELATIONSHIP

FRG: (D/P)® -.079 + .051(Yn/P) U.S.: Null hypothesis accepted3 (.028) (.005)

U.K. : (D/P) = .0014 + .0654(Yn/P) Fr.: (D/P) = .208 + ,022(Yn/P) (.003) (.006) (.022) (.003)

FRG U.S. U.K. France

(1) R Square .905 a .913 .822

(2) Partial Correlation .951 .956 .906

(3) F Test 95.17 104.93 46.20

(4) t Value of Independent Variable 9.76 10.24 6.798

(5) Durbin-Watson Test - - -

(6) Elasticity 1.435 .956 .403

(7) Dependent Variable (a) Mean .1836 .031 .3495 (b) Standard Deviation .0814 • .0033 .4794

aNo statistically significant linear relationship was found. When the equation (D/P)=a + b(Yn/P) was tested, the null hypothesis (viz., that the coefficient of the Independent variable, b, is equal to zero) could not be rejected. 275

+

TABLE 45

THE INTERNATIONAL CONTRIBUTION— INCOME RELATIONSHIP

FRG : [(A+D)/P]= -.082+.056(Yn/P) U.S.: Null hypothesis accepted3 (.026)(.005)

U.K. ! [(A+D)/P]= -.003+.080(Yn/P) F r .: [(A+D) /P ] *. 245+. 029( Yn/P) (.003)(.007) (.042)(.006)

FRG U.S. U.K. France

(1) R Square .926 a .924 .679

(2) Partial Correlation .962 .961 .824

(3) F Test 125.43 121.61 21.14

(4) t Value of Independent Variable 11. 20 11.03 4.60

(5) Durbin-Watson Test 1.069 1.819 .814

(6) Elasticity 1.029 1.087 .430

(7) Dependent Variable (a) Mean .2085 .0335 .4296 (b) Standard Deviation .0885 ' .0040 .0691

aNo statistically significant linear relationship was found. When the equation (A+D)/P**a+b(Yn/P) was tested, the null hypothesis (viz., that the coefficient of the independent variable, b, is equal to zero) could not be rejected. 276

TABLE 46

THE INTERNATIONAL CONTRIBUTION— NATIONAL BUDGET RELATIONSHIP

FRG: [(A+D)/Yn]*=-.041+.572(G/Yn) U.S.: [(A+D) /Yn]:=-.125+1.44(G/Yn) (.010) (.072) ( .026)(.165)

U.K. : Null hypothesis accepted3 Fr.: [(A+D) /Yn] = -. 045+. 516( G/Yn) (.040)(.018)

• FRG U.S. U.lK. France

(1) R Square .863 .883 3 .464

(2) Partial Correlation .929 .940 .681

(3) F Test 6.28 7.55 8.65

(4) t Value of Independent Variable 7.93 8.69 2.94

(5) Durbin-Watson Test 1.138 1.56 . .8629

(6) Elasticity 2.037 2.21 1.637

(7) Dependent Variable (a) Mean .0390 .1037 .0708 (b) Standard Deviation .0065 .015-5 .0128

aNo statistically significant linear relationship was found. When the equation (A+D)/Yn=a+bG/Yn wa8 tested, the null hypothesis (viz., that the coefficient of the independent variable, b, is equal to zero) could not be rejected. 277

TABLE 47

THE INTERNATIONAL CONTRIBUTION— NATIONAL BUDGET RELATIONSHIP

FRG: [(A+D)/P]>= -.031+.327(G/P) U.S.: Null hypothesis accepted ( ,015)(.019)

U.K.: [(A+D)/P] =.0084+.2 20(G/P) Fr.: [(A+D)/P) - ,219+.149(G/P) ( .002)(.019) (.046)(.032)

FRG U.S. U.K. France

(1) R Square .965 a .930 .688

(2) Partial Correlation .983 .965 .829

(3) F Test 278.23 134.05 22.02

(4) t Value of Independent Variable 16.7 11.58 4.69

(5) Durbin-Watson Test 1.043 .1.064 .748

(6) Elasticity 1.01 1.001 .489

(7) Dependent Variable (a) Mean .2085 .0335 .4296 (b) Standard Deviation .0885 • .0040 .0691

aNo statistically significant linear relationship was found. When the equation (A+D)=a+b(G/P) was tested, the null hypothesis (viz., that the coefficient of the independent variable, b, Is equal to zero) could not be rejected. 278

APPENDIX IV

The data underlying the regressions appearing in this appendix were taken from sources documented in Appendix I. Computations are the responsibility of the author; they were run off on a 7094 computer. The following symbols will be employed: Yn * GNP, P = Pop­ ulation, A = Foreign Assistance, D = Defense, I = Investment. The period tested was 1954-1965.

TABLE 48

THE AID— INVESTMENT RELATIONSHIP

FRG: (A/P) “ .0027+.0166(I/P) U.S.: (A/P) = .045 - .053(I/P) (.0060)(.0043) ( .007) ( .017)

U.K. : (A/P)®5 -,0002+.0325(I/P) F r .: (A/P) =. 0424 + ,0286(I/P) (.0003)(.0044) (. 019) ( .014)

FRG U.S. U.K. France

(1) R Square .599 .488 .846 .306

(2) Partial Correlation .774 .699 .920 .553

(3) F Test 14.97 9.54 54.83 4.412

(4) t Value of Independent Variable 3.87 3.09 7.405 2.10

(5) Durbin-Watson Test 1.307 1.07 .646 .484

(6) Elasticity .891 .995 1.085 .471

(7) Dependent Variable (a) Mean .0249 .0225 .0025 .0801 (b) Standard Deviation .0098 .0045 .0008 .0247 279

TABLE 49

THE DEFENSE— INVESTMENT RELATIONSHIP

FRG: (D/P)= -.0406. +.168(I/P) U.S.: Null hypothesis accepted3 (.026) (.018)

U.K. S (D/P) =.0198 +.1334(I/P) Fr.: (D/P) =.230 + .091(I/P) ( .0013)(.0152) (.019) ( .014)

FRG U.S. U.K. France

(1) R Square .895 3 .885 .818

(2) Partial Correlation .946 .941 .904

<3) F Test 85.01 77.18 44.89

(A) t Value of Independent Variable 8.78 6.70

(5) Durbin-Watson Test 1.291 1.49 1.54

(6) Elasticity 1.22 .360 .346

(7) Dependent Variable (a) Mean .1836 .0310 .3495 (b) Standard Deviation .0814 . .0033 .0479

aNo statistically significant linear relationship was found. When the equation (D/P) =a+b(I/P) was tested, the null hypothesis (viz., that the coefficient of the independent variable, b, is equal to zero) could not be rejected. 280

TABLE 50

THE INTERNATIONAL CONTRIBUTION— INVESTMENT RELATIONSHIP

FRG: [(A+D)/P] = -.0379+.1849(1/P) U.S.: Null hypothesis accepted3 ( .0253)(.018)

U.K.: [(A+D)/P]*.0196 +.166(I/P) Fr.: [(A+D)/P]=.2725 +.119(I/P) ( .0013)(.015) ( .0359)(.0257)

FRG U.S. U.K. France

(1) R Square .913 a .920 .682

(2) Partial Correlation .956 .959 .826

(3) F Test 105.34 114.57 21.47

(4) t Value of Independent Variable 10.3 10.70 4.63

(5) Durbin-Watson Test 1.399 1.536 .838

(6) Elasticity 1.182 .414 .366

(7) Dependent Variable (a) Mean .2085 .0335 .4296 (b) Standard Deviation .0885 .0040 .0691

No statistically significant linear relationship was found. When the equation (A+D)/P=a+b(I/P) was tested) the null hypothesis (viz., that the coefficient of the independent variable, b, is equal to zero) could not be rejected. 281

TABLE 51

AID, DEFENSE, AND INVESTMENT

FRG:[(A+D)/Yn=.020+.233(I/Yn) U.S.: Accept Null Hypothesis3 (.028)(.113)

U.K. : Accept Null Hypothesis Fr.: [(A+D)/Yn]=.187 -.571(I/Yn) ( .447)(.219)

FRG U.S. U.K. France

(1) R Square .305 a a .40

(2) Partial Correlation .55 .637

(3) F Test 4.39 6.813

(A) t Value of Independent Variable 2.1 2.61

(5) Durbin-Watson Test 1.158 .937

(6) Elasticity 1.51 1.643

(7) Dependent Variable (a) Mean .0393 .0707 (b) Standard Deviation .0065 .0128

aNo statistically significant linear relationship was found. When the equation (A+D)/Yn=a+b(I/Yn) was tested, the null hypothesis (viz., that the coefficient of the independent variable, b, is equal to zero) could not be rejected. 282

TABLE 52

THE AID— INVESTMENT AND DEFENSE RELATIONSHIP

FRG: Null hypothesis accepted U.S.: (A/Yn)= -.0293 +.153f(I+D)/Yn] (.007) (.028)

U.K.: (A/Yn)=-,0039+.038(I+D)/Yn Fr.: (A/Yn)=-.073+.329[(I+D)/Yn] (.0017)(.007) (.027)(.104)

FRG U.S. U.K. France

(1) R Square a .748 .610 .500

(2) Partial Correlation .865 .860 .707

(3) F Test 29.78 28.27 10.01

(A) t Value of Independent Variable . 5.457 5.31 3.16

(5) Durbin-Watson Test .4885 . .702 .6471

(6) Elasticity 4.50 1.724 6.69

(7) Dependent Variable (a) Mean .0084 .0054 .0129 (b) Standard Deviation .0028 ' .0014 .0039

aNo statistically significant linear relationship was found. When the equation (A/Yn)=a+b(I+D)/Yivas tested, the null hypothesis (viz., that the coefficient of the Independent variable, b, is equal to zero) could not be rejected. BIBLIOGRAPHY

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Bolton, Roger E. Defense Purchases and Regional Growth. Washington D.C., The Brookings Institution, 1966.

Brandt, Willy. The Ordeal of Coexistence. Cambridge, Harvard University Press, 1963.

283 284 von Brentano, Heinrich. Germany and Europe. New York, Frederick A. Praeger, 1962.

Chamberlin, William H. The German Phoenix. New York, Duell, Sloan and Pearce, 1963.

Cisar, Mary Ann. Patterns of West German Development Aid Policy. Unpublished Ph.D. dissertation, Department of Political Science, The Ohio State University, 1965.

Coffin, Frank M. "Burden Sharing and the Balance of Payments," in The United States and the Developing Economies, ed. Gustav Ranis. New York, W.W. Norton & Company, Inc., 1964.

Columbia University. Research Project on Public International Development Financing. Report No. 9 (India), 1963.

Conant, James. Germany and Freedom. Boston, Harvard University Press, 1960.

Cooper, Richard, A Note on Foreign Assistance and the Capital Require­ ments for Development. The RAND Corporation, Santa Monica, California, RM-4291-AID, January, 1965.

Coppock, Joseph. International Economic Instability. New York, McGraw- Hill Book Company, Inc., 1962.

Danckwort, Dieter. Zur Psychologie der deutschen Entwicklungshilfe. Baden-Baden, Bonn, 1962.

II ------and Helga Dieter. Entwicklungshilfe-Entwicklungslander. Ein Verzeichnis von Publikationen in der Bundesrepublik Deutschland und Westberlin, 1950-1959. Koeln, 1960.

Deutsch, Karl W . , et al. Political Community and the North Atlantic Area: International Organization in the Light of Historical Experience. Princeton, New Jersey, Princeton University Press, 1957.

Deutsche Stiftung fuer Entwicklungslaender. Ausgewaehlte wissenschaftliche Bibliographie ueber Entwicklungsprobleme und Entwicklungshilfe. 2. Ausgabe, Berlin, 1961.

Donner, 0. Zum Unbehagen ueber die Entwicklungshilfe. (Sonderschrift des Ifo-Instituts fuer Wirtschaftsforschung Nr. 32.) Berlin- Muenchen, 1962.

Eckstein, Otto. "A Survey of the Theory of Public Expenditure," in National Bureau of Economic Research, Public Finances: Needs. Sources and Utilization. Princeton University Press, Princeton, New Jersey, 1961. 285

Erhard, Ludwig. Deutschland's Rueckkehr zum Weltmarkt. Duesseldorf, Econ Verlag, GMBH, 1954.

------. The Economics of Success. Princeton, D. Van Nostrand Co., 196 3.

-.... . Prosperity Through Competition. New York, Frederick A. Praeger, 1958.

Eucken, Walter. "On the Theory of the Centrally Administered Economy: An Analysis of the German Experiment." Economica. New Series, Vol. XV, No. 58 (May, 1948), pp. 79-100. Reproduced in Comparative Economic Systems, ed. by Morris Bornstein. Homewood, Illinois, Richard D. Irwin, Inc., 1965.

Fedder, Edwin H. The Theory and Process of Alliance. Columbus, Ohio, The Ohio State Press, forthcoming.

------and James A. Robinson. Beyond Hegemony: The United States and the Future of NATO. Mershon Social Science Program, The Ohio State University, May, 1967.

Furth, J.H. Theory and Policy of Foreign Economic Aid. Washington, D.C., 1961.

Goetz, H.H. Weil Alle Besser Leben Wollen: Portraet der Deutschen Wirtschaftspolitik. Duesseldorf, Econ Verlag, 1963.

Goharin, M, Die Darlehenspolitik der Weltbank. insbesondere gegenueber den wirtschaftlich unterentwickelten Laendern. Winterthur, 1961.

Goldwin, Robert A. (ed.). Foreign Aid. Public Affairs Conference Center, University of Chicago, 1962,

Grosser, Alfred. The Federal Republic of Germany: A Concise History. Frederick A. Praeger, New York, 1963.

Heidenheimer, Arnold J, The Governments of Germany. New York, Thomas Y. Crowell Co., 1961.

Hitch, Charles J. and Roland McKeen. The Economics of Defense in the Nuclear Age. Cambridge, Mass., Harvard University Press, 1960.

Holbik, Karel and Henry Myers. Postwar Trade in Divided Germany: the Internal and International Issues. Baltimore, The Johns Hopkins Press, 1964.

Kalbitzer, Hellmut. Entwicklungslaender und Weltmaechte. Frankfurt am Main, 1961. 286

Kindleberger, Charles P. Economic Development. Second Edition. New York, McGraw-Hill, 1965.

Klein, Lawrence R. and Ronald G. Bodkin. "Empirical Aspects of the Trade-Offs Among Three Goals: High-Level Employment, Price Stability and Economic Growth," in Commission on Money and Credit, Inflation, Growth and Employment. Englewood Cliffs, New Jersey, Prentice Hall, 1964.

Koellner, L. Der Internationale Kapitalverkehr seit dem Letzten Kriege. Frankfurt am Main, 1963.

Liska, George, The New Statecraft. Foreign Aid in American Foreign Policy. Chicago, University of Chicago Press, 1960.

Little, I.M.D., and J.M. Clifford. International Aid— A Discussion of the Flow of Public Resources from Rich to Poor Countries with Particular Reference to British Policy. London, George Allen and Unwin, Ltd., 1965.

Lord Ismay. NATO. The First Five Years. 1949-1954. Paris, North Atlantic Treaty Organization, 1955.

Luetge, F. Deutsche Sozial-und Wirtschaftsgeschichte. Berlin-Goettingen- Heidelberg, 1960.

MacBean, A.I. "The Importance of Instability in the Exports of Less Developed Countries," Center for International Affairs, Harvard University, Cambridge, Mass., 1963 (mimeographed).

Mann, F.K. Finanztheorie und Finanzsoziologie. Goettingen, 1959.

Mason, Edward S. Foreign Aid and Foreign Policy. New York: Harper and Row, 1964.

Merkl, Peter H. The Origin of the West German Republic. New York, Oxford University Press, 1963.

Myrdal, Gunnar. Beyond the Welfare State. New Haven, Conn., Yale University Press, 1960.

Neale, Alan D. The Flow of Resources from Rich to Poor. Occasional Papers in International Affairs, No, 2, Center for International Affairs, Harvard University, Cambridge, Mass., November, 1961.

Neumark, F. Handbuch der Entwicklungshilfe. Fortsetzungswerk in Loseblattform, Baden-Baden, Bonn, 1956.

Netherlands Economic Institute. "The European Community and Under- Developed Countries," Netherlands Economic Institute, Rotterdam, May, 1959 (mimeographed). 287 Nurkse, Ragnar. Equilibrium and Growth in the World Economy. Cambridge, Mass., Harvard University Press, 1961.

Ohlin, Goran. Reappraisals of Foreign Aid Policies. OECD Development Center, Paris, December, 1964.

Olson, Mancur, Jr., and R. Zeckhauser. An Economic Theory of Alliances. The RAND Corporation, Santa Monica, California, RM-4297-ISA, October, 1966.

Organisation fuer Wirtschaftliche Zusammenarbeit (OEEC). Entwicklungs- hilfe. Politik und Leistungen 1961 (Riddleberger-Bericht), Bonn, 1962.

Pincus, John. Economic Aid and International Cost Sharing. Baltimore, The Johns Hopkins Press, 1965.

------. Trade, Aid and Development: The Rich and Poor Nations. New York, McGraw-Hill Book Company, 1967.

Portmann, H. Die Weltbank als Kapitalleitstelle fuer Entwicklungs- laender. Winterthur, 1961.

Pounds, Norman J.G. The Economic Pattern of Modern Germany. London, J. Murray, 1963.

Reuss, Frederick G. Fiscal Policy for Growth Without Inflation; The German Experiment. Baltimore, The Johns Hopkins Press, 1963.

Rieger, Wolfgang. Wirtschaftswunder fuer Farbige Voelker? Deutschland und die Entwicklungshilfe. Hamburg, Ruetten und Loening, 1961.

Schelling, T.C. "International Cost-Sharing Arrangements," Essays in International Finance. No. 24, Department of Economics, Princeton University, New Jersey, 1955.

Schmitt, Matthias. Partnerschaft mit Entwicklungslaendern. Stuttgart- Degerloch, Seewald Verlag, 1960.

Schonfield, Andrew. Modern Capitalism: The Changing Balance of Public and Private Power. New York, Oxford University Press, 1965.

------. Angriff auf die Armut der Welt. Probleme der Entwicklungs­ hilfe. Koeln, 1962.

Singer, J.D. Financing International Organizations; The United Nations Budget Process. Martinus Nijhoff, The Hague, 1961.

Speier, Hans. German Rearmament and Atomic War: The Views of German Military and Political Leaders. New York, Row, Peterson and Company, 1957. 288

------*■ .Germany in American Foreign Policy. Santa Monica, California, The RAND Corporation, March, 1966.

Stahl, Walter (ed.). Politics of Postwar Germany. New York, Frederick A. Praeger, 1963.

Stolper, Gustav. Deutsche Wirtschaft Seit 1870. Tuebingen, J.C.B. Mohr-Paul Siebeck Verlag, 1964.

Stolper, Wolfgang F. Germany Between East and West. Washington, National Planning Association, 1960.

Strauss, Franz Josef. The Grand Design: A European Solution to German Reunification. New York, Frederick A. Praeger, 1965.

Tinbergen, Jan. Central Planning. New Haven, Yale University Press, 1964.

------. Shaping the World Economy. The Twentieth Century Fund, New York, 1962.

Uri, Pierre. Partnership for Progress. Harper and Row, New York, 1963.

Vialon, F.K. Die Kunst der Entwicklungshilfe (Vortrag in Stuttgart am 29. 6. 1962), Sonderdruck zur Zeitschrift Europaeische Wirtschaft- Entwicklungslaender, Baden-Baden, Bonn, 1962, von Wysocki, K. Oeffentliche Finanzierungshilfen (Forschungsberichte des Landes Nordrhein-Westfalen, Nr. 946), Koeln und Opladen, 1961.

Waldmann, Eric. The Goose Step is Verboten: The German Army Today. New York, The Free Press of Glencoe, 1964.

Wallich, Henry C. Mainsprings of the German Revival. New Haven, Yale University Press, 1955.

Zimmermann, Horst. Oeffentliche Finanzhilfen an Entwicklungslaender: Gesamtwirtschaftliche und politische Massstaebe zur Bestimmung ihrer Form. Berlin, Duncker & Humblot, 1963. 289

ARTICLES AND PERIODICALS

Allardt, Helmut. "Praktische Entwicklungsarbeit in Afrika," Aussen­ politik, Vol. 11, No. 11, pp. 665-671.

Asher, Robert E. "Multilateral vs. Bilateral Aid: An Old Controversy Revisited," International Organization, Vol. XVI, No. 4 (Autumn, 1962), pp. 697-719.

Bailey, George. "West Germany’s Economic Romantics," The Reporter. Sept. 23, 1965, pp. 36-42.

Bechtoldt, Heinrich. "Kissinger und die deutsche Aussenpolitik," Aussenpolitik, Vol. 17, No. 12 (December, 1966), pp. 705-708.

Beckerman, Wilfred. "Projecting Europe's Growth," The Economic Journal. Vol. 72, (December, 1962), pp. 912-925.

Behrendt, Guenther. "The Agrarian Problem," The German Economic Review, Vol. 2, No. 2, 1964, pp. 111-123.

-...... "Figures on Economic Trends in the Federal Republic of Germany," The German Economic Review, Vol. 3, No. 3, 1965, pp. 253-258.

Betout-Mosse, E. "Sur Quelques problemes poses par l'aide aux pays sous-developpes, Revue Economique, No. 4, (July, 1962), pp. 590-628.

Bhagwati, J. "International Trade and Economic Expansion," American Economic Review, Vol. 48, No. 5 (December, 1958), pp. 941-953.

Blass, Walter P. "Economic Planning, European Style," Harvard Business Review, Sept.-Oct., 1963, pp. 109-120.

Butler, W.F. "Trade and the Less Developed Areas," Foreign Affairs, Vol. 41, No. 2, (January, 1963), pp. 372-383.

Chenery, H.B. "Comparative Advantage and Development Policy," American Economic Review, Vol. 51, No. 1 (March, 1961), pp. 18-51.

------, and A.M. Strout, "Foreign Assistance and Economic Development," The American Economic Review, Vol. LVI, No. 4 (September, 1966), pp. 679-733.

Deutsch, K.W., and A. Eckstein, "National Industrialization and the Declining Share of the International Economic Sector," World Politics. Vol. 13, No. 2 (January, 1961), pp. 267-299. 290

Dosser, 0. "National Income and Domestic Income Multipliers and their Application to Foreign Aid Transfers," Economica, Vol. 30, (February, 1963), pp. 74-82,

Erhardt, Carl A. "Die Assozierung von Uebersee-Laendern mit der EWG," Aussenpolitik, Vol. 14, No. 6, pp. 381-392.

Foster, William C. "Risks of Nuclear Proliferation: New Directions in Arms Control.and Disarmament," Foreign Affairs, Vol. 43, No. 4 (July, 1965), pp. 587-602.. von Gersdorff, R. "Proposals for an Increased Financial and Technical Assistance to Underdeveloped Countries: with Special Reference to West Germany as Donor Country," Indian Journal of Economics, Vol. 42, (January, 1962), pp. 209-230.

Gordon, L, "Economic Aspects of Coalition Diplomacy: The NATO Experience," International Organization, Vol. 10, (November, 1956), pp. 529-543,

Gregh, Frangois-Didier. "NATO and Economic Problems," NATO Letter: Ten Years of Atlantic Co-operation, (April, 1959).

------. "Some Economic and Financial Aspects of the NATO Alliance," NATO's Fifteen Nations, (Amsterdam). April-May, 1963, p. 82.

Hefferman, Paul. "Bonn Nominated to Increase Aid," New York Times Magazine, Oct. 30, 1960, III, p. 1,

Hensel, K. Paul. "Establishing the Economic Order as a Scientific Problem," The.German Economic Review, Vol. 3, No. 3, 1965, pp. 181-192.

Hoag, M.W. "Economic Problems of Alliance," Journal of Political Economy. Vol. 65, (December, 1957), pp. 522-534.

------. "Nuclear Policy and French Intransigence," Foreign Affairs. Vol. 41, (January, 1963), pp. 297-322.

Kajitani, Y. "Multi-Nation Approach to Aid Underdeveloped Countries," Asian Affairs, Vol. 5, No. 1, (October, 1960), pp. 22-35.

Kissinger, Henry A. "For a New Atlantic Alliance," The Reporter. Vol. 35, No. 1 (July 14, 1966), pp. 18-27.

------. "What About the Future," The Atlantic Community Quarterly. Vol. 4, No. 3 (Fall, 1966), pp. 317-329.

Kravis, Irving B., and Michael W.S. Davenport, "The Political Arithmetic of International Burden Sharing," Journal of Political Economy, Vol. 71, No. 4 (August, 1963), pp. 309-330. 291

Kuznets, Simon. "Quantitative Aspects of the Economic Growth of Nations: II. Including Distribution of National Products and Labor Force," Economic Development and Cultural Change, Vol. 5, No. 4 (July, 1960), Supplement, pp. 1-124.

Lewis, Flora. "Inquiry Into German Prosperity," The New York Times Magazine. June 25, 1961, VI, p. 20.

Mason, E.S. "The Equitable Sharing of Military and Economic Aid Burdens," Proceedings of the Academy of Political Science. (Columbia University), Vol. 27, No. 3, (May, 1963), pp. 62-76.

Morgenthau, Hans. "A Political Theory of Foreign Aid," The American Political Science Review, Vol. LVI, No. 2 (June, 1962), pp. 301-309.

Mueller-Armack, Alfred, "The Principles of the Social Market Economy," The German Economic.Review. Vol. IV, No. 2, 1965, pp. 89-104,

Needleman, L. "The Burden of Taxation: An International Comparison," National Institute Economic Review. No. 14 (September, 1961), pp. 55-61.

Oliver, H.M. "German Neoliberalism," Quarterly Journal of Economics. Vol. 74, No. 1 (February, I960), pp. 117-149.

Pauls, Rolf Friedmann. "Aussenpolitik und Entwicklungshilfe," Aussenpolitik, (June, 1965), pp. 375-382.

Pincus, John A. "The Cost of Foreign Aid," Review of Economics and Statistics. Vol. 45, No. 4 (November, 1963), pp. 360-367.

Pfeffer, Karl. "Die Werdende Mittelklasse in den Entwicklungslaendern," Wirtschaftsdienst, 1963, pp. 189-198.

Poehl, Karl Otto. "Eine Neue Aufwertungsdebatte," Der Volkswirt, No. 14 (April 7, 1967), pp. 531-532.

Radspieler, Anthony. "The West German Economy," Current History, Vol. 50, No. 297 (May,.1966), pp. 295-299.

Rosenstein-Rodan, P.N. "International Aid for Underdeveloped Countries," Review of Economics and Statistics, Vol. 45, No. 4 (November, 1963), pp. 360-367.

Ross, Myron H. "Fluctuations in Economic Activity: Planned and Free Market Economies," American Economic Review, Vol. LV, (March, 1 9 6 5 ) , pp. 158-160,

Scheel, Walter. "Die Entwicklungspolitik der Bundesrepublik," Aussenpolitik, Vol. 13, No. 5, pp. 301-306. 292

Schiller, Karl. "Germany's Economic Requirements," Foreign Affairs. Vol. 43, No. 4 (July, 1965), pp. 671-681.

Schmidt, Wilson. "The Economics of Charity: Loans vs. Grants," Journal of Political Economy. Vol. 71, (August, 1964), pp. 387-395.

Schmokel, Wolfe W. "German Aid to Africa," Current History. April, 1963, pp. 219-225.

Scientific Advisory Council, Federal Ministry for Economic Affairs (FRG), "On Medium-Range Economic Forecast," The German Economic Review, Vol. 2, No. 1, 1964, pp. 80-87.

Singer, J.D. "The Finances of the League of Nations," International Organization, Vol. 13, No. 2, 1959, pp. 255-273.

Sommer, Theo. "Bonn Changes Course," Foreign Affairs, Vol. 45, No. 3 (April, 1967), pp. 477-491.

Sonnenhol, G.A. "Die Ordnungspolitik der Entwicklungslaender," Wirtschaftspolitische Chronik, Heft 1, 1965, pp. 1-28.

Stahn, Eberhard. "Deutsche Leistungen fuer Entwicklungshilfe, 1956-1961," Aussenpolitik, Vol. 12, No. 10, pp. 676-684.

Staller, G.J. "Fluctuations in Economic Activity," The American Economic Review, Vol. 54, (June, 1964), pp. 385-395.

Struve, Walter. "West Germany's Waning Economic Miracle," Current History, Vol. 44, No. 260, (April, 1963), pp. 219-225.

Sumberg, T.A. "Financing International Institutions," Social Research, (September, 1946), pp. 276-306.

Warburton, A.M. and J.B. Wood. "Paying for NATO: How Common Finance can Help the Defense of the West," Friends of Atlantic Union, London Author, 1957.

Weidenhammer, Robert M. Review of Planung Ohne Planwirtschaft, Frankfurter Gaspraech der List-Gesellschaft, 1963, German Economic Review. Vol. Ill, No. 3, 1965, pp. 216-218.

OFFICIAL DOCUMENTS AND PUBLICATIONS

France. Minlstiere des Finances et des Affaires Economiques. Annuaire Statistique de la France. 293

Germany, Federal Republic. Aussenwirtschaftsgesetz.

.... Bundeshaushaltsplan.

Bundesministerium Fuer Wirtschaftliche Zusammenarbeit, Deutsche Entwicklungshilfe.. .was jeder wissen sollte. Bonn, ZeitbiId-Verlag, GMBH, 1965.

Bundesministerium Fuer Wirtschaftliche Zusammenarbeit, Deutsche Entwicklungspolitik Im Jahre 1964. Technische Hilfe, Private Entwicklungshilfe. Oeffentliche Entwicklungshilfe. Bonn, Verlag Butzon & Bercker, Kevelaer, 1965.

...... Bundesministerium Fuer Wirtschaftliche Zusammenarbeit, Deutsche in Entwicklungslaendern: Erfahrungen deutscher Fachkraefte in Afrika. Asien. Lateinamerika. Baden-Baden, Druckerei Karl Metzmaier, 1965.

... a Bundesministerium Fuer Wirtschaftliche Zusammenarbeit, Entwicklungshilfe in der Diskussion. von Karl Vialon. Bonn, Verlag Butzon & Bercker-Kevelaer, 1965.

Bundesministerium Fuer Wirtschaftliche Zusammenarbeit, Entwicklungspolitik. Bonn, Ausgabe 1/8, 25. Mai, 1965.

------. Bundesministerium fuer Wirtschaftliche Zusammenarbeit. Erzaehlungen aus Indien. Fhilippinen, Tuerkei. Syrien. Argentinien. Jamaika. Motive der Entwicklungshilfe aus deutscher Sicht. Europas Verantwortung gegenueber den Entwicklungslaendern. Herrenalb/ Schwarzwald: Horst Erdmann Verlag, 1965.

Bundesministerium fuer Wirtschaftliche Zusammenarbeit. Fuer Sie Gelesen; Aus Deutschen Buechern und Zeitschriften.

------. Bundesministerium fuer Wirtschaftliche Zusammenarbeit. Ihre Zukunft-Unsere Zukunft. Bonn, Druck-und Verlagshaus Heinz Moeller, 1965.

Bundesministerium fuer Wirtschaftliche Zusammenarbeit. Maerkte von Morgen; Eine Bilanze der deutschen Entwicklungshilfe. Bonn, Druck-und Verlagshaus Heinz Moeller, 1964.

Bundesministerium fuer Wirtschaftliche Zusammenarbeit. Twelve Years of German Development Assistance. Bonn, Druck-und Verlagshaus Heinz Moeller, 1964.

------. Bundesministerium fuer Wirtschaftliche Zusammenarbeit. Unsere Welt Im Umbruch. von Ferdinand Kopp, Bonn, Eicbholz- Verlag, GMBH, 1965. 294

Bundesministerium fuer Wirtschaftliche Zusammenarbeit. Voelker Im Wartesaal: Entwicklungshilfe Im Schulunterricht, Erfahrungsberichte und Diskussionsbeitraege deutscher Paedagogen. Baden-Baden: Druckerei Karl Metzmaier, 1964.

------. Bundesministerium fuer Wirtschaftliche Zusammenarbeit. Wie Sie Die Deutschen Sehen. Meinungen aus Asien. Afrika. Iberoamerika. Herrenalb/Schwarzwald, Horst Erdmann Verlag, 1965.

nDas Bundesministerium Fuer Wirschaftliche Zusammenarbeit.11 Sonderdruck aus dem Taetigkeitsbericht der Bundesregierung, Deutsche Politik, 1963. Bonn, 1964.

------. Bundestag. Stenographische Berichte.

------. Der Bundeszentrale Fuer Heimatdienst, Probleme der deutschen Entwicklungshilfe von Hans Braeker. Hamburg, Girardet & Co., 1962.

" ' -.... . Deutsche Stiftung fuer Entwicklungslaender, Deutsche Entwicklungshilfe— Warum und Wofuer? Rednerdienst. 2. Auflage, 1965.

1 . Kreditanstalt Fuer Wiederaufbau (Reconstruction Loan Corporation), Annual Report. Frankfurt am Main.

Kreditanstalt Fuer Wiederaufbau. By-Laws. Frankfurt am Main, 1949.

------. Kreditanstalt Fuer Wiederaufbau. German Loans to Developing Countries: Africa and Asia. Frankfurt am Main, 1965.

------. Press and Information Service. The Bulletin: A Weekly Survey of German Affairs.

------. Statistisches Bundesamt. Statistisches Jahrbuch Fuer Die Bundesrepublik Deutschland. Wiesbaden: W. Kohlhammer.

Organization for Economic Cooperation and Development. Bulletin Statistique.

------. The Flow of Financial Resources to Less-Developed Countries. 1956-1963. Paris, 1964.

------. Main Economic Indicators.

------. The OECD Observer.

United Kingdom. Central Statistical Office. Annual Abstract of Statistics.

United States. Dept, of State. The Department of State Bulletin. 295

U.S. Department of Commerce and the Bureau of the Census. Statistical Abstract of the United States.

United Nations. Department of Social and Economic Affairs. Yearbook of National Accounts Statistics.

-...... Office of Public Information. Yearbook of the United Nations.

------. Secretary General. Annual Report.

------. Unesco Statistical Yearbook.

PERIODICALS

Europa Yearbook.

Europaeische Wirtschaft/Entwicklungslaender (Bonn).

Die Frankfurter Allgemeine

The German Economic Review.

German International.

The German Tribune.

The London Economist.

Neve Zuercher Zeitung

The New York Times.

Der Spiegel.

Der Volkswirt.

Die Welt.

Wirtschaftsdienst (Hamburg). 296

PAMPHLETS AND SPECIAL STUDIES

Goergen, Hermann M, Richard Kerschagl and Roswitha Zastrow. Entwicklungs- laender Zwichen Ost und West. Muenchen, Kopernikus Verlag, 1964.

Rateike, Friedrich. Entwicklungslaender und Wir. Muenchen, List Verlag, 1964.

Wilpert, Bernhard. Hilfe fuer Entwicklungslaender. 4. verbesserte Auflage. Mannheim, Pesch-Haus Verlag, 1963.

Winkler, Hans-Joachim. Die Entwicklungslaender. Berlin, Colloquium Verlag, 1965.

1 I