Foreign Policy Tools: Budget, Aid, Defense, Force

Mickey Edwards and Stephen J. Solarz

American spending on foreign assistance and diplomacy has fallen by more than 15 percent since the 1980s. Under current plans to balance the federal budget by 2002, the U.S. international affairs budget would fall again as much—if not more.

With the Cold War over, it is only natural that the United States focus more on domestic concerns. But domestic renewal must not blind us to the world’s continuing dangers. Ethnic strife, regional instability, crime, narcotics, terrorism, famine, environmental degradation, fanaticism, and rogue regimes with mass destruction capabilities have taken the place of the global communist threat. Unless the United States is prepared to spend the money necessary to address these dangers, it cannot effectively protect its interests and provide world leadership in these important arenas.

Moreover, wise use of the foreign affairs account to strengthen friendly forces and calm and defuse potentially explosive situations can reduce demands on U.S. military forces, potentially saving much more money in the defense account.

One Cent on the Federal Dollar

What is our government now spending to meet its global challenges and opportunities? In 1997 Washington will spend a total of $19.6 billion—just a bit more than 1 percent of the overall federal budget—for its diplomatic missions, foreign assistance, and related activities like Export-Import Bank financing for U.S. businesses. International affairs spending is the only major category of the federal budget to have suffered real cuts since 1980, and one of only two (the Pentagon is the other) to have been cut since 1990.

And much worse may be in store. President Clinton’s fiscal plan released last month anticipates that real funding for international affairs would fall to $16.8 billion by 2002 in constant 1997 dollars. But if Clinton agrees, as he is likely to do, to use the economic assumptions of the Congressional Budget Office in any long-term agreement with Congress to balance the budget by 2002, he will have to cut more.

Robbing Peter to Pay Paul

The State Department and its 260-plus overseas posts constitute the basic and indispensable infrastructure on which all U.S. civilian—and many military—elements rely to protect and promote American interests around the world. Some 30 of these posts have been closed in the past three years for lack of operating funds. Many of the remaining posts are ill-equipped. All are handicapped by obsolete information technology. Staffing is highly uneven, the cadre of language and area specialists has declined, and resources for public diplomacy are fast disappearing even as demands on our missions continue to grow.

Recently Washington has been forced to make some rather arbitrary decisions about what it can and cannot do. To help stabilize Haiti, it had to cut economic support for Turkey, an ally critical to U.S. interests in the Middle East. To provide aid to the West Bank and Gaza, it had to use funds intended to help demobilize the armed forces of parties to a Central American peace agreement that had been years in the negotiating. To come up with the U.S. share of the financing package for Cambodia’s first free election, Washington deferred for more than a year support for smaller initiatives in a dozen or so other countries. To respond to the refugee crisis in Rwanda, it had to take democratic institution-building funds from the rest of Africa at a moment when positive trends were emerging elsewhere on the continent. And when the State Department was unable to provide $2 million to monitor a cease-fire between Kurdish factions in northern Iraq, hostilities between the factions were renewed, affording Saddam Hussein a pretext for sending forces into Northern Iraq (a move that culminated in U.S. military action costing multiples of $2 million).

In addition, U.S. investment in economic development in poorer countries, either bilaterally or through international financial institutions like the World Bank, has fallen from an average of $12 billion during the early 1990s to $9 billion today—and is projected to fall more by 2002. The consequences of not investing in development are impossible to quantify. On the purely human dimension, U.S. bilateral leadership has been critical to recent worldwide advances in agricultural and medical research, as well as in primary education, family planning, and child nutrition and immunization programs. As we fall behind in our commitments to the international financial institutions, we risk losing our ability to shape their agendas in support of our objectives. Even more important are arrearages to the United Nations. The United States now owes $300 million for the regular UN budget and $700 million for peacekeeping operations. How can we expect the UN to work on our behalf, especially after we successfully imposed our will on the issue of a new Secretary General, if we are not prepared to meet those obligations?

Past Time to Restore Funding

The destructive funding trend of the past few years must be reversed. For the next fiscal year, spending should increase to at least $21 billion, with annual adjustments through 2002 to offset inflation. That figure is still well below the average of 1980-95. The most crucial areas for expansion are $150-$250 million a year for new information technologies for the State Department and $600 million more in economic and security support funds to allow the State Department to deal with unexpected emergencies around the world. Other important additions are $200 million a year for five years to eliminate U.S. arrears to the UN, $500 million to move bilateral development accounts back toward the average of the earlier 1990s, and several hundred million dollars each year to international financial institutions to make good on arrears and replenish or increase capitalization of multilateral banks and funding of the International Development Association.

Presidential Leadership

Clinton has spoken clearly about the imperatives of global leadership and its price. What remains is for him to recognize that without adequate resources it will not be possible to provide the global leadership that our national interests require.

In his 1998 budget request the president has at least arrested the decline in international spending for the next couple of years, though his long-term projections are not promising. He must also take the international affairs resource issue to the American people. The president, more than any other individual or institution of our system, bears the burden of responsibility for the success or failure of American foreign policy. He, better than anyone else, can make clear what it means not to have the resources required to protect and promote American values and interests. As commander in chief, the president can underscore the vital link between diplomacy and deterrence. Warren Christopher made this connection very plainly in speaking to the Corps of Cadets at West Point last October: “We will serve the American people best of all if we can prevent the conflicts and emergencies that call for a military response from ever arising.” Having spoken to the American people, the president will then be in a position to reach out to the leadership of Congress. Financing international affairs must be a collaborative, nonpartisan undertaking.

The American people do not want to swap a budget deficit for a security deficit. Most Americans would probably be alarmed if the proposed international assistance budget cuts go through only to discover that America faces an influence gap in world affairs as we enter the 21st century. We can afford to do more. We cannot afford to do less.


by Carol Graham

At a time when the entire foreign affairs budget is under fire, it is more important than ever to address the question of whether foreign aid is effective. Official development assistance, or ODA, as the foreign assistance component of the foreign affairs budget is called, is roughly half of that budget, and is arguably the part about which the public is most skeptical.

The United States, once the world leader in global aid, is now in fourth place after Japan, Germany, and France in terms of absolute amounts. In terms of percentage of GDP, with 0.1 percent of American GDP allocated to ODA, the United States is well at the bottom of all industrialized nation donors. This clearly imperils U.S. leadership not only in international financial institutions such as the World Bank, but also in the aid debate more generally. Washington is increasingly being seen as unwilling to pay its global dues.

It is time to ask some hard questions about foreign aid. What do we know about it? Does it work? Is it effective? There has been much debate in recent years. I’d like to try to sum up what we know about aid effectiveness—and what we don’t. One reason for the extensive debate over aid is that so many diverse objectives drive its allocation that it is hard to evaluate how effective it is. While economic growth is clearly not the sole objective of foreign assistance, it’s one of the few areas where empirical evidence permits evaluation. Growth is also important because without growth it is difficult, if not impossible, to achieve all the other goals—security, human rights, democracy—attributed to aid.

Recently the debate has been heightened by a series of studies that have found a negative relationship between conditioned aid flows and economic growth, particularly in low-income countries in Africa. These same studies, however, are also finding that the broader policy orientation that aid seeks to promote—market-friendly, open economic policies with prudent macroeconomic management—is producing strong results in countries worldwide. And the experience of many Asian countries and, more recently, many Latin American countries confirms that appropriate policies do yield good results.

These findings raise three questions about aid flows. First, is aid ineffective, or would poor economic performers have fared worse without aid? Second, how effective is conditionality in its current form? How are we allocating aid, and how is it working? And third, what is the causal relationship? Do policies produce growth, or do better initial economic conditions facilitate the implementation of better policies?

Can Aid Slow Growth?

What accounts for the negative correlation between aid flows and growth performance? Africa, for example, receives 10 times more aid per capita than Latin America or East Asia and yet performs far worse by most or all economic measures. There are several explanations, and I don’t want to oversimplify the issue, but one point is clear. By removing a hard budget constraint, aid inflows to a country can impede formation of a domestic consensus on the need for difficult economic reforms. Recent research on economic crisis undertaken at the World Bank suggests that countries that enter high-inflation crises tend to implement more complete reforms and then enjoy higher average growth rates than countries that just muddle along at “medium” inflation rates. What happens is that aid flows are often cut off in countries with very high inflation rates but continue in countries with medium inflation rates. These aid flows protect countries from the full costs of bad economic policies, often preventing the onset of deeper crisis and the important policy learning experience that is often critical to successful economic reform. Countries often have to hit bottom to get a domestic consensus on the need for economic reforms. Of course, allowing countries to enter acute crisis is hardly an acceptable policy recommendation. And to complicate the issue further, it’s also important to note that in some cases aid has actually helped develop a consensus in favor of market reforms. For example, in Poland in 1989 the promise of foreign aid as something that the reform team could deliver was critical to the election of that team and the undertaking of market reform.

Both the timing and the role of aid flows in the implementation of policy reforms is still being widely debated. But what we clearly do know is that financial aid to countries where there is no consensus at all in favor of reform has a negative impact.

Stopping the Flow of Ineffective Aid

How and why has so much aid continued to flow under such conditions? Conditionality, which is how aid is appropriated for the most part, is usually applied “ex ante,” that is, borrowing countries must meet certain conditions to be eligible for a loan and then must continue to meet those conditions along the way as aid is disbursed. But despite a marked increased in conditional lending in the past decade, and also an increase in the number of conditions on each loan, conditionality has not been particularly effective in attaining borrower compliance. The higher number of conditions actually seems to decrease borrower ownership of reforms. It creates a vicious cycle: weak compliance with conditions prompts donors to impose more conditions, increased conditions make it yet harder for the recipient to comply, thus increasing the incentive not to comply, and so on. On the donor side, meanwhile, the incentive structure rewards continued lending rather than halting financial flows in response to breaches in compliance. Ultimately multilateral institutions are lending institutions, and they must lend to remain operational. It’s their raison d’etre. So the average loan officer at the World Bank or the Interamerican Development Bank has a lot more incentives to disburse loans on time than to enforce strict compliance among recipients of those loans.

As a result, many countries continue to receive loans even though they have bad records at both compliance and policy reform. It’s increasingly evident, at least to those who observe it closely, that we have to move to more selective lending, with less focus on detailed conditions and more focus on building overall agreement on a policy package. At the very least we really have to stop lending to countries with major slippage on conditions.

While the shift to more selective lending makes intuitive sense, it also entails substantial risk. For example, withdrawing funds, particularly from many poor countries in Africa, may well spur the adoption of policy reforms in some, but in others it will cause performance to deteriorate even further, and at a relatively high human cost. At the least, one would need to maintain humanitarian and technical assistance. There could also be other costs to lending more selectively. A lot of the lending that takes place now is undertaken to enable debtor countries to pay back loans. For example, when heavily indebted countries default on loans, somebody is going to have to pay the cost. So a shift to selective lending must be taken with care, and while budget cutters would like to see it as a way of saving money, in the short term a shift toward more selective and more effective lending would actually increase costs.

The Chicken or the Egg?

The final question is whether policies or initial conditions determine a country’s economic performance. One school of thought is that poor countries perform badly on the macroeconomic front because of their weak initial conditions: a very poor country’s performance is almost predetermined regardless of the level of aid. But some recent research refutes this view. Jeffrey Sachs and Andrew Warner of Harvard University did a study of the effects of policy as against those of initial economic conditions on economic performance. Using a sample of more than 100 countries, they found that countries that follow standard, market-oriented policies, and in particular maintain open trading regimes, have an overwhelming tendency to grow faster and converge with wealthier countries, regardless of initial conditions. Indeed, they had trouble finding a single case where a poor country that protected property rights and maintained economic openness did not grow. Very few of the countries that pursued poor policies, meanwhile, grew at equivalent rates. One that did was China. In fact, one reason why China is growing is that half of its economy actually functions with the market policies that produce growth in all the other countries. In any event, we have increasing evidence besides the Sachs and Warner study that good policies produce growth performance and poor policies do not, and that initial conditions are not a predetermining factor.

We need to know more about how aid can better support the adoption of appropriate policies. We have a sense that the answer lies in a more selective aid strategy, but the debate over the appropriate timing and level of aid flows is unresolved. Such uncertainty about aid effectiveness, uncomfortable enough at any time, is particularly worrisome when the foreign affairs budget is under fire.


Michael O’Hanlon

As Congress shapes the federal budget for 1998, with the goal of fiscal balance by 2002, debate rages over whether it is possible, once again, to cut U.S. defense spending.

Some analysts argue that today’s military, with annual real spending still 85 percent of the Cold War average, remains greatly overfunded for the challenges of the post-Soviet world. Others warn of a widening chasm between projected budget resources and the funding requirements for a military that retains many global commitments and remains active from Bosnia to the Persian Gulf to the Korean Peninsula to the Taiwan Straits.

In my view, small additional force cuts are possible. But they would probably reduce Pentagon spending only modestly and temporarily, given the 10 percent real cutbacks already anticipated for the year 2002 under the president’s budget. (That cut is measured relative to the 1997 spending level; Congress would make slightly deeper cuts by 2002.) The reason, in a nutshell, is the looming need for more weapons procurement spending.

Is There a Funding Shortfall now?

Is the U.S. military underfunded for maintaining an active-duty force of nearly 1.5 million soldiers, sailors, airmen, and Marines? Although certain parts of the force are strained because of peace operations in places like Bosnia, the answer, for now, is no. It is harder, however, to be equally sanguine about the next decade.

Today’s military is in quite good shape, at or near its historical peak in quality and fitness. Department of Defense employees are being reasonably well compensated. Military salaries are down slightly from recent years and are perhaps slightly less than would be ideal, but still compare acceptably with pay for similar work in the private sector.

Funding for training combat forces as well as repairing and maintaining equipment is high, even by comparison with the Reagan years. In fact, on a per capita basis, such funding is too high, largely because of the costs both of closing bases and of continuing to maintain more bases than are needed. Even taking into account such distortions, as well as the increased costs of health care, real readiness funding remains robust. Such indicators as spare parts availability, weapons usability rates, accident rates, and training hours are favorable and provide concrete evidence that resources are adequate.

In the past few years, readiness concerns have arisen in connection with the financial and human costs of unexpected operations, of which there have been many. Some are related to peacekeeping (the Golan Heights), peace implementation (Bosnia), or peace imposition (Haiti); others involve keeping pressure on Iraq’s Saddam Hussein or responding to his provocations; still others concern humanitarian relief. These operations have been averaging about 20,000 troops at a time and $3 billion a year (or 1 percent of the Pentagon’s budget)—not a great deal in the scheme of things, but sometimes enough to disrupt the training and operations of various military units.

Fortunately, funding amends have been made quickly—in 1993 and 1994 through supplemental appropriations, in 1995 and 1996 by tapping into funds the 104th Congress had added to the president’s Pentagon budget request. As long as funding for contingencies can be found, readiness will not suffer unduly, though Pentagon leaders must ensure that certain units do not wind up disproportionately burdened by such operations (as the Army’s 10th Mountain Division and Europe-based Air Force wings arguably have been).

Planners need to remember that $2-$3 billion a year more than anticipated will often be needed for contingency operations in places like Bosnia. A comparable sum would, if available, ensure that military pay is not only adequate, but good. But neither issue is causing an acute problem today.

The Looming Procurement Shortfall

One way the Clinton administration has kept readiness high has been to make deep cuts in spending for new weapons. The 104th Congress restored some of the programs that were axed in favor of readiness. But Congress’ extra pot of gold is scheduled to be empty again within the next couple of years.

Over a 30-year period, defense procurement averages about 25 percent of Pentagon spending. Today, however, weapons purchases are only about 15 percent of total spending. One reason the shortfall has been tolerable is that the Reagan buildup produced a weapons bonanza. A second is that the defense drawdown of the early 1990s allowed selective retirements of older equipment. But the “procurement holiday” will soon be over. Future costs of purchasing weapons are almost sure to meet or, because of continued technology advances, even exceed the 25 percent average. Thus annual procurement costs will probably grow by $25 billion or more by the early years of the next century.

Savings from base closures will provide a few billion dollars toward that end. Taking some programs like the F-22 fighter out of the research and development account will free up another $5 billion. Procurement reforms and greater use of commercial goods may help limit cost growth a little as well. But those annual savings come up at least $10 billion short.

What does that $10 billion mean in perspective? Once the defense drawdown is complete by 2002, the real budget for national security spending will be about $245 billion (in 1997 dollars)—down from $268 billion in 1997 and $360 billion in 1990. But it will almost assuredly need to go up in future years—probably to about $260 billion, or nearly the present (1997) level.

The main cost drivers are airplanes. The Air Force’s F-22 and the three-service Joint Strike Fighter will pose multibillion-dollar demands. The Army and Marine Corps plan to buy the Comanche scout-attack helicopter and V-22 tilt-rotor transport aircraft, respectively. New strategic lift aircraft may be needed above and beyond the 120 C-17s now being acquired. New attack submarines will also be needed in substantial numbers. And a wide array of precision-guided munitions, as well as the sensors and satellites to find targets and guide the ordnance to them, are on the shopping list as well.

What if the Pentagon’s ongoing Quadrennial Defense Review, expected to be finished in May, were to change the current two-war strategy and reduce the size of the military? If so, real spending would still need to go up—though against a lower benchmark—next decade. Defense spending would be lower than it would have been otherwise, but would still need to be higher in 2005 than in 2000. Given the upward pressure of domestic entitlement spending, however, no cautious Pentagon planner can like the idea of assuming that real defense spending increases will materialize in a few years. For that reason, even Pentagon analysts who are critical of the two-major-war strategy are unlikely to endorse large force cuts this year. They will probably prefer to keep the “extra forces” for now, as a possible bill payer for new equipment purchases next decade. If real spending increases do not occur then, some manpower could be cut to free up funds for hardware. That approach could allow the military to get by with a steady budget of less than $250 billion, in 1997 dollars, well into the next century.

The Two-War Requirement

Can slightly fewer than 1.5 million troops, well-maintained and equipped and ready, satisfy the dictates of national security strategy?

Here the answer is mixed. Those troops probably could not fight two overlapping wars on the scale of Desert Storm. But they are probably up to the task of waging and winning two simultaneous campaigns on the scale that could be required by the size and nature of threats in Northeast and Southwest Asia.

The Desert Storm conflict involved roughly 8 ground combat divisions and more than 10 wings of Air Force combat aircraft, as well as 6 aircraft carriers and associated wings. Total U.S. uniformed personnel in the region exceeded 500,000. Today’s force could only approach those numbers in two places at once if all assets, including reserves, were employed.

But that requirement is excessive. U.S. munitions and sensors are better today than they were in 1990-91. Iraq’s fighting capability is diminished as a result of Desert Storm, and North Korea’s still-large military has also continued to atrophy. Perhaps most important is the enhanced U.S. presence in the Persian Gulf. With nearly a division’s worth of ground-combat material prestationed there, roughly two wing-equivalents of Air Force and Navy aircraft in the immediate vicinity, and U.S. vigilance constant, Saddam would not get far before suffering blistering and debilitating attacks. Desert-Storm-like operations would probably be needed only if we decided to invade Iraq or North Korea and overthrow their regimes—not an operation that we probably need or want to undertake in two places at once in any case.

In short, we may not have a two-war capability of the demanding and rather hypothetical type Pentagon planners set their sights on in 1993. But we probably could prevail in nearly simultaneous lesser wars of a type more likely to arise.

An Alternative Strategic Approach

In fact the two-major-war strategy is not necessary for the challenges of today’s world. Not only have the Iraqi and North Korean threats declined, but also neither side is likely to perceive a window of opportunity to attack just because most U.S. forces are engaged in a war elsewhere. As long as the United States keeps a permanent military presence in Kuwait and South Korea and otherwise retains a clear public commitment to its interests in both regions, Baghdad and Pyongyang will know it would ultimately be suicide to attack.

Under such strategic circumstances, it would be enough to be able to win one Desert-Storm—like war—even if it goes badly and takes more force and more effort than expected—while being able to deter or if necessary begin to wage a second, in the manner of Desert Shield. If an occupation of enemy territory were needed, the second conflict could then be brought to a conclusion after the first was won (or reserves were fully trained). This “Desert Storm plus Desert Shield” approach seems a reasonable replacement for the two-major-war strategy. Critics might call it “win-hold-win,” but, given the diminution of threats in the 1990s, it is better described as “overthrow-defeat-overthrow.”

That is not quite the end of it, however. Today’s U.S. military also needs to organize for the missions it is actually conducting day in and day out. Peace operations place demands on units like military police that are currently found principally in the reserve component of the force; some should be put into the active force. We need more airlift to handle such operations and to increase the speed with which we could deploy forces to a hot spot in time of trouble. And we need to have enough force to leave a division in a place like Bosnia even while executing a Desert Storm and a Desert Shield. Since Desert-Shield-like deterrence operations put a high premium on rapid reaction, it will not do to dig forces out of the Balkan mud or Central African rain forest to protect important U.S. national interests. In the end, the future strategy should be guided by a simultaneous “Desert Storm plus Desert Shield plus Bosnia” framework.

One final point. The force structure of the Navy is established by reference less to warfighting requirements than to the global presence mission. The Navy could maintain the same presence with fewer aircraft carriers and other ships if it changed the way it conducts its mission. Today the Navy sends ships on overseas deployments for only about six months at a stretch, primarily to keep sailors’ time away from home and families to a minimum. As a consequence it must keep five ships in the fleet to maintain one continuous deployment. During the Cold War, when we wanted a big Navy in case global war broke out with the Soviet Union, the inefficiency did not matter so much. Today it is a waste. The Navy’s own Center for Naval Analyses, as well as the Congressional Budget Office, has recently given credence to the idea of leaving ships deployed overseas for up to two years and rotating crews by air.

Adopting the “Desert Storm plus Desert Shield plus Bosnia” strategy and revising naval operations would allow a cut of roughly 10 percent in Pentagon forces. It would also permit some near-term budget savings beyond those now planned, reaching as much as $20 billion in the year 2001 or 2002.

But the generals will need some of that money back in the years thereafter. The U.S. economy, which will be larger then, should be able to provide it—but only if we can get a better handle on entitlement spending. Since few have confidence that we will, don’t expect the Pentagon to say it can get by with a smaller budget any time soon.


by Lawrence J. Korb

In 1992 Army General Barry McCaffrey (now the drug czar) of the Joint Chiefs of Staff testified before Congress on the crisis in the Balkans. McCaffrey told the legislators that the Joint Chiefs, then chaired by General Colin Powell, had concluded that 400,000 ground troops and a year-long bombing campaign would be needed to defeat the Bosnian Serbs. Powell and his colleagues felt that a military intervention in Bosnia would be more difficult than the guerrilla war in Vietnam. A year later Powell himself told the newly elected President Clinton essentially the same thing. Not surprisingly, neither the president nor Congress wished to undertake such a massive military commitment in an area that appeared to have only a marginal security interest.

The advice that Powell and his colleagues gave to their political superiors in the early 1990s was based on two considerations. First, the military did not want to become involved in another long-drawn-out Vietnam-type quagmire. If force were to be used, the chiefs felt it should be applied massively and only for the most urgent reasons. Second, the military did not want to undermine its readiness for real combat by being diverted to peacekeeping or humanitarian operations. As Secretary of Defense William Perry was to remark in November 1994, “We field an army, not a Salvation Army.” Powell and his colleagues structured the armed