    [Budget of the U.S. Government]
    [VI. Investing in the Common Good: The Major Functions of the Federal Government]
    [13. International Affairs]
    [From the U.S. Government Publishing Office, www.gpo.gov]

                           13.  INTERNATIONAL AFFAIRS

      ----------------------------------------------------------------------

                           Table 13-1.  FEDERAL RESOURCES IN SUPPORT OF INTERNATIONAL AFFAIRS
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                Estimate
                Function 150                1996   -----------------------------------------------------------------
                                           Actual      1997       1998       1999       2000       2001       2002
    ----------------------------------------------------------------------------------------------------------------
    Spending:
      Discretionary Budget Authority...     18,122     18,109     22,974     20,079     19,095     18,811     18,762
      Mandatory Outlays:
        Existing law...................     -4,840     -4,744     -4,433     -3,963     -3,839     -3,655     -3,487
        Proposed legislation...........  .........  .........         37  .........  .........  .........  .........
    Credit Activity:
      Direct loan disbursements........      1,674      2,150      1,900      2,191      2,162      2,013      2,023
      Guaranteed loans.................      8,418     12,692     12,059     13,093     13,736     13,702     14,000
    Tax Expenditures:
      Existing law.....................      6,520      6,980      7,565      8,165      8,790      9,445     10,125
      Proposed legislation.............  .........         10       -820     -1,408     -1,484     -1,674     -1,773
    ----------------------------------------------------------------------------------------------------------------

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      The International Affairs function, for which the Administration
    proposes $23 billion for 1998, encompasses a wide range of activities
    that advance American interests through diplomacy, foreign assistance,
    support for American exports, and the activities of international
    organizations. Certain tax provisions also support American business.
    The conduct of foreign relations is inherently a governmental function,
    which explains the need for sustained Government activity and budgetary
    support.

    Diplomacy

       The State Department and its overseas operations are at the heart of
    international affairs activities and programs, and they consume $2.7
    billion, or 14 percent, of the resources. These funds finance the
    salaries and related operating expenses of the Foreign Service and other
    Department personnel, and the costs of overseas facilities. The
    Department carries out foreign policy planning and oversight in
    Washington, conducts diplomacy, and represents the United States at over
    250 overseas embassies and other posts. Overseas posts also provide
    administrative support to about 25 other Federal departments and
    agencies.
       The major achievement of American diplomacy over the past half
    century was creating and sustaining the alliances, notably NATO, that
    successfully countered the Soviet bloc's threat to world security. More
    recently, diplomatic objectives include establishing viable democracies
    in formerly totalitarian countries such as in Eastern Europe and the
    former Soviet Union, curbing regional instability in areas of importance
    to U.S. security such as Bosnia, promoting the American economy through
    trade negotiations and the support of U.S. businesses, and addressing
    transnational issues such as the environment through multilateral and
    bilateral negotiations. American diplomacy also has been critical over
    the past 20 years in promoting peace and reconciliation in the Middle
    East. Finally, the Department has the continuing responsibility to
    protect and assist U.S. citizens abroad.

     Foreign Assistance

       The largest single part of international affairs spending--$13.7
    billion, or 74 percent of the total--goes for a wide variety of overseas
    assistance programs traditionally cat-

    [[Page 142]]

    egorized as security assistance,
    development aid, and humanitarian assistance.

       Security Assistance: International Security Assistance comes mainly
    through the Foreign Military Financing program (FMF, which the State
    Department oversees and the Defense Security Assistance Agency manages)
    and the Economic Support Fund (ESF, which State oversees and the U.S.
    Agency for International Development manages). Over the past 50 years,
    security aid helped support the military establishments of friendly
    countries, mainly around the perimeter of the Soviet Union, and helped
    ease the economic strain of their defense forces. On the whole, these
    countries played a critical role in containing the Soviet Union.
       The FMF program finances the transfer of military goods and services
    to eligible countries, using grant funds and a small loan program. The
    ESF program provides only grant funding. Currently, these two programs
    devote an overwhelming share of their resources to supporting the Middle
    East peace process. For a number of years, over $5 billion a year has
    gone for this purpose. This funding demonstrates strong U.S. support for
    the actions that regional leaders are taking to advance the peace
    process. Most of the remaining funds support the transition of Eastern
    European countries to NATO membership, the establishment of democracy in
    countries such as Angola, Cambodia and Haiti, and the training of
    foreign military personnel, primarily from developing countries.

       Development Assistance: Development assistance is carried out through
    a range of programs:
      The Treasury Department manages contributions to multilateral
              development banks. A major portion of them support the World
              Bank group of institutions, which make development loans both
              at near-market rates and on highly-concessional terms, and
              which provide financing and investment insurance for private
              sector activity in the developing world. Contributions also go
              to four regional development banks for Africa, Asia, Europe
              (lending to Eastern Europe and the New Independent States of
              the former Soviet Union), and Latin America. All but the
              European bank have concessional loan programs. Two special
              programs also receive U.S. contributions: the Global
              Environment Facility, which supports environmental activities
              related to development projects; and the North American
              Development Bank, which was established in conjunction with
              the North American Free Trade Agreement and which supports
              environmental projects along the U.S.-Mexican border.
      The bilateral development assistance programs of the U.S.
              Agency for International Development (USAID) target five
              sectors: broad-based economic growth, population (for which
              the United States is the leading donor worldwide), health, the
              environment, and democracy building. In recent years, USAID
              has significantly restructured its program to focus on
              countries most likely to adopt economic reforms, in order to
              encourage free markets along with improvements in democratic
              governance. USAID has developed performance measures to help
              it allocate resources, and has made major internal management
              reforms to improve its effectiveness and cut costs.
      State, USAID, and other agencies (the U.S. Information Agency,
              Export-Import Bank, Peace Corps, and Overseas Private
              Investment Corporation) also carry out grant and lending
              programs similar to development assistance to support the
              transition to free market democracy in Central Europe and the
              New Independent States.
       Encouraging economic development has proven a difficult task,
    requiring far more time for success than policy makers assumed in the
    early 1960s when they initiated many of the current programs.
    Nevertheless, a number of developing countries have shifted from grants
    and highly concessional loans to near-market rate loans, and a few
    countries have graduated from the ranks of foreign assistance
    recipients. Some early recipients of U.S. bilateral assistance in East
    Asia are now among the world's most dynamic economies, and the major
    Latin American countries no longer require large-scale grant aid.

    [[Page 143]]

       Humanitarian Assistance: Humanitarian assistance programs also
    encompass various activities:
      USAID manages two food aid programs under Public Law 480,
              first enacted in 1954. The agency makes humanitarian food
              donations, under Title II of the law, through U.S. voluntary
              agencies and the United Nations World Food Program, and
              directly to foreign governments. Depending on the
              circumstances each year, about half of this program goes to
              disaster relief--with recent large donations in such areas as
              central Africa and Bosnia--and half to longer-term development
              projects. Under Title III, USAID provides food to governments
              that sell it, then use the proceeds to carry out agricultural
              reforms.
      State and USAID also manage funds for refugee support and
              disaster assistance. State manages humanitarian refugee relief
              funding --mainly grants to international agencies such as the
              United Nations High Commissioner for Refugees and the
              International Committee of the Red Cross. USAID manages the
              Office of Foreign Disaster Assistance, which provides grants
              to deal with natural and human disasters overseas. In a
              crisis, these two programs and Title II of Public Law 480 are
              closely coordinated.
       The United States continues to lead the world in responding to
    humanitarian crises, due to Americans' support for such assistance and
    U.S. voluntary agencies' unequaled capacity to implement relief programs
    quickly and effectively. This humane concern and excellent program
    delivery has, over the years, countered world food shortages, alleviated
    the impact of major droughts in particular countries, managed surges of
    refugees, and dealt with man-made disasters such as genocide in Rwanda.

     Export Promotion

       While U.S. diplomacy and foreign assistance promote open markets and
    export opportunities for U.S. business, three other international
    affairs agencies more directly support or finance American exports. The
    Export-Import Bank provides short- and long-term loans and loan
    guarantees and insurance to support U.S. exports, primarily exports of
    capital goods. Bank support is designed to remedy imperfections in
    private capital markets, and to counter financing by the official export
    credit agencies of other countries. The Overseas Private Investment
    Corporation provides loans, guarantees, and insurance for U.S. business
    investment overseas. The Trade and Development Agency provides grant
    financing for feasibility studies on major infrastructure and other
    development projects abroad. These agencies' activities generate
    considerable payoffs for U.S. exports.
       A series of tax preferences also benefit U.S. trade activities.
    Americans working abroad, for example, often may exclude $70,000 of
    income and a portion of their housing costs from taxes. In addition,
    U.S. exporters who work through Foreign Sales Corporations may exempt
    significant portions of their income from U.S. taxes. U.S. exporters
    also may allocate more of their earnings abroad (and thereby reduce
    their tax obligations). Finally, earnings from U.S.-controlled foreign
    corporations benefit from a tax deferral--they are not subject to U.S.
    taxes until they are received by U.S. shareholders as dividends or other
    distributions.

     International Organizations

       The United States promotes its foreign policy goals through a wide
    variety of international organizations, to which it makes both assessed
    and voluntary contributions. While our global leadership is most clear
    in the United Nations, other organizations are important to U.S.
    interests.
       The International Atomic Energy Agency, for example, strongly
    supports America's non-proliferation goals, while the World Health
    Organization pursues our goal of eradicating disease. NATO advances our
    national security goals in Europe. We support our development assistance
    goals as a leading contributor to the United Nations Development
    Program. Finally, our assessed contributions to U.N.-supported
    peacekeeping operations, and our voluntary contributions to such
    peacekeeping efforts as the Multilateral Force in the Sinai, support
    peace-keeping in regions that are important to our interests.