Food Aid: Competing Goals and Requirements Hinder Title I Program Results
(Chapter Report, 06/26/95, GAO/GGD-95-68).

Pursuant to a legislative requirement, GAO reviewed the impact of Title
I assistance on: (1) broad-based, sustainable economic development in
recipient countries; and (2) long-term market development for U.S.
agricultural goods in those countries.

GAO found that: (1) U.S. agricultural exports and world food aid has
decreased because there are other donor countries and new programs such
as the Department of Agriculture's (USDA) market development programs;
(2) title I has had minimal affect on sustainable economic development
in recipient countries; (3) the primary way in which title I food aid
can contribute to broad-based sustainable (BBS) development in the
recipient country is to give the country the foreign exchange savings it
needs to invest in long-term economic development projects; (4) the link
between title I and market development is uncertain, as USDA and other
agency studies show no link between title I assistance and the
establishment of a long-term commercial market share for U.S.
agricultural products; (5) price-sensitive exports restrict title I
market development opportunities; (6) Title I program management has
been streamlined by assigning title I programs to USDA and titles II and
III to the Agency for International Development (AID); and (7) while the
objectives of P.L. 480 legislation can support U.S. foreign policy and
trade interests, they can also impede the development of an effective
program strategy.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-95-68
     TITLE:  Food Aid: Competing Goals and Requirements Hinder Title I 
             Program Results
      DATE:  06/26/95
   SUBJECT:  Developing countries
             Commodity marketing
             Agricultural assistance
             Food relief programs
             International food programs
             Cargo preference laws
             Foreign economic assistance
             Exporting
             Economic development
             International economic relations
IDENTIFIER:  USDA Cottonseed Oil Assistance Program
             USDA Dairy Export Incentive Program
             USDA Export Enhancement Program
             Food Aid Policy Council
             Gross National Product
             USDA Sunflowerseed Oil Assistance Program
             Official Development Assistance
             USDA GSM-102 Program
             Usual Marketing Requirement
             Special Drawing Right
             Broad-Based, Sustainable
             Egypt
             Morocco
             Sri Lanka
             Philippines
             El Salvador
             Guatemala
             Jamaica
             USDA GSM-103 Program
             Enterprise for the Americas Initiative
             USDA Market Promotion Program
             USDA Food for Progress Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

June 1995

FOOD AID - COMPETING GOALS AND
REQUIREMENTS HINDER TITLE I
PROGRAM RESULTS

GAO/GGD-95-68

Title I Program


Abbreviations
=============================================================== ABBREV

  AID - Agency for International Development
  BBS - broad-based, sustainable
  COAP - Cottonseed Oil Assistance Program
  DCC - Development Coordination Committee
  DEIP - Dairy Export Incentive Program
  EEP - Export Enhancement Program
  ERS - Economic Research Service
  FAO - Food and Agriculture Organization of the United Nations
  FAPC - Food Aid Policy Council
  GNP - gross national product
  GSM - General Sales Manager program
  IMF - International Monetary Fund
  ODA - official development assistance
  OMB - Office of Management and Budget
  SDR - special drawing right
  SOAP - Sunflowerseed Oil Assistance Program
  UMR - usual marketing requirement
  USDA - U.S.  Department of Agriculture

Letter
=============================================================== LETTER


B-260144

June 26, 1995

The Honorable Richard G.  Lugar
Chairman
The Honorable Patrick J.  Leahy
Ranking Minority Member
Committee on Agriculture,
 Nutrition, and Forestry
United States Senate

The Honorable Pat Roberts
Chairman
The Honorable E (Kika) de la Garza
Ranking Minority Member
Committee on Agriculture
House of Representatives

The Honorable Benjamin Gilman
Chairman
The Honorable Lee H.  Hamilton
Ranking Minority Member
Committee on International
 Relations
House of Representatives

The 1990 Food, Agriculture, Conservation and Trade Act (P.L. 
101-624) gave the U.S.  Department of Agriculture responsibility for
managing agricultural commodity assistance to developing countries
provided under title I (Trade and Development Assistance).  The 1990
act also required GAO to evaluate the title I program. 

This report contains the results of our evaluation and discusses the
impact of title I assistance on broad-based, sustainable development
and long-term market development for U.S.  agricultural commodities
in recipient countries.  In addition, the report discusses the impact
of the 1990 act on certain elements of title I program management. 

As arranged with the Committees, we are sending copies of this report
to the Secretaries of the Departments of Agriculture and State; the
Director, Office of Management and Budget; the Administrator of the
Agency for International Development; and other congressional
committees.  Copies will also be made available to other interested
parties upon request. 

Please contact me at (202) 512-5889 if you have any questions
concerning this report.  Other major contributors to this report are
listed in appendix IV. 

Allan I.  Mendelowitz, Managing Director
International Trade, Finance, and
 Competitiveness


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

Over the past 40 years, the United States has allocated more than $88
billion (1993 dollars) in food assistance to developing countries
under title I of the 1954 Agricultural Trade Development and
Assistance Act (Public Law 83-480, 1954), commonly referred to as
P.L.  480.  Under the title I program, which is administered by the
U.S.  Department of Agriculture (USDA), U.S.  agricultural
commodities are sold on long-term credit terms at below market-rate
interest.  Although the United States remains a world leader in
providing food aid, title I's share of both U.S.  food aid and
overall U.S.  agricultural exports has declined dramatically since
the program's inception. 

The 1990 Food, Agriculture, Conservation and Trade Act (the 1990 act)
most recently amended P.L.  480 and required GAO to evaluate several
aspects of the title I program.  For this review, GAO assessed the
impact of title I assistance on (1) broad-based, sustainable economic
development in recipient countries and (2) long-term market
development for U.S.  agricultural goods in those countries.  GAO
also reviewed the effect of the 1990 act on restructuring title I
program management and its ability to accomplish the program's
sustainable economic development and market development objectives. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

P.L.  480 first established the legal framework for U.S.  food aid in
1954.  Since then, numerous amendments, including the most recent
amendments in the 1990 act, have revised the goals and the provisions
of the food aid programs administered under P.L.  480.  The P.L.  480
program includes three titles.  Title I, the concern of this report,
authorizes the sale of U.S.  agricultural commodities to developing
countries using concessional credit provided by the U.S.  government. 
The terms are concessional because they include a maximum 30-year
period for repayment, with a maximum 7-year grace period and interest
rates below prevailing market rates.  In comparison, credit
guaranteed under another USDA program offers no grace period and
requires a shorter repayment period (i.e., from 6 months to 3 years)
with interest rates set at prevailing market rates.  Titles II and
III are administered by the Agency for International Development
(AID) and provide food aid grants and donations in response to
emergencies and in support of economic development.\1

Currently the goal of the P.L.  480 legislation, as amended,
including title I, is to promote U.S.  foreign policy by enhancing
the food security\2 of developing countries through the use of
agricultural commodities and local currencies to (1) combat world
hunger and malnutrition and their causes; (2) promote sustainable
economic development, including agricultural development; (3) expand
international trade; (4) develop and expand export markets for U.S. 
agricultural commodities; and (5) encourage the growth of private
enterprise and democratic participation in developing countries.  For
this report, GAO considered these five ways to promote U.S.  foreign
policy by enhancing food security as the "objectives" of the 1990
act. 

The importance of title I, domestically and internationally, has
declined significantly since the program's inception.  When P.L.  480
was first enacted in 1954, its objectives were to move large amounts
of U.S.  surplus agricultural commodities and serve U.S.  foreign
policy objectives.  During the 1950s, title I aid represented over 80
percent of U.S.  food aid and approximately 20 percent of the total
value of U.S.  agricultural exports.  By the late 1980s, increased
food aid donations from other countries and the establishment of new
USDA export assistance programs reduced the importance of title I aid
as a humanitarian, surplus disposal, and export assistance program. 
Title I's share of U.S.  food aid declined to 14 percent in fiscal
year 1993, and its share of U.S.  agricultural exports dropped to
less than 1 percent in fiscal year 1993. 

As part of its responsibilities for managing the title I program,
USDA proposes the amount of title I assistance to be allocated to
recipient countries and negotiates and monitors title I agreements
with recipient governments.  As part of the title I agreement,
recipients must state in writing how they will integrate the benefits
of the title I assistance into their countries' overall development
plans.  The concessional nature of the title I loan (i.e., long grace
periods and interest rates below prevailing market rates) allows a
developing country to conserve its scarce foreign exchange when
importing U.S.  agricultural commodities.  In fiscal year 1993, 22
countries received about $333 million, in allocations ranging from $5
million to $40 million, in title I loans from the United States. 

As part of this review, GAO conducted audit work at USDA, AID, and
the Department of State in Washington, D.C., and their missions in
seven countries that received title I assistance in fiscal year 1992
(Egypt, El Salvador, Guatemala, Jamaica, Morocco, the Philippines,
and Sri Lanka).  While overseas, GAO also interviewed foreign
government officials and representatives from U.S.  commodity groups. 


--------------------
\1 The 1990 act also required GAO to evaluate the title II and III
programs.  GAO reports addressing these programs are:  Food Aid: 
Management Improvements Are Needed to Achieve Program Objectives
(GAO/NSIAD-93-168, July 23, 1993) and Foreign Aid:  Actions Taken to
Improve Food Aid Management (GAO/NSIAD-95-74, Mar.  23, 1995). 

\2 The 1990 act defines food security as "access by all people at all
times to sufficient food and nutrition for a healthy and productive
life." GAO reported in July 1993 that AID had not developed a
strategy for implementing food aid programs to enhance food security
(see GAO/NSIAD-93-168).  AID is currently in the process of
developing such a strategy. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Through the literature reviewed and interviews conducted with U.S. 
and foreign government officials, GAO found that the primary means by
which title I assistance could contribute to broad-based, sustainable
development in recipient countries would be by helping countries save
foreign exchange that then could be used to invest in projects that
promote long-term economic development.  These savings should occur
when title I assistance displaces commercial sales, i.e., when
countries purchase agricultural goods through the title I
concessional sales program instead of purchasing them through
commercial channels. 

GAO's analysis of title I assistance to 15 recipients in fiscal year
1991 indicated that even if the maximum possible foreign exchange
savings had occurred, title I's contribution to sustainable economic
development would still have been minimal because of the program's
small size relative to each country's overall development needs.  On
the other hand, GAO's research also indicated that title I assistance
could be making a meaningful, short-term contribution to the food
supply in some recipient countries.  While a short-term increase in
the supply of food may help relieve hunger, it is not sufficient for
achieving food security because food security is a long-term,
broad-based economic development issue.  The program's ability to
achieve its sustainable economic development goals through foreign
exchange savings is also hampered by legislatively mandated
requirements. 

Title I's importance to helping develop long-term U.S.  agricultural
markets has not been demonstrated.  To the extent that title I
contributes to broad-based sustainable development and helps expand a
country's domestic economy, the program may lead to an increase in
the volume of U.S.  agricultural exports over time.  Title I
assistance may also contribute to market development by increasing
U.S.  market share if the program creates preferences for U.S. 
products that persist after title I sales have been discontinued. 
However, none of the many studies GAO reviewed was able to establish
a link between title I assistance and the establishment of a
long-term commercial market share for U.S.  agricultural products
over the 40-year history of the title I program.  GAO also found that
achievement of the program's market development objective is hindered
by several legislatively mandated program requirements, including the
requirements to carry title I cargo on U.S.  flag ships,\3

reexport restrictions on P.L.  480 food aid that impose constraints
on recipients, and commodity eligibility rules. 

The 1990 act streamlined title I program management by abolishing the
cumbersome interagency administration of the program and assigning
the management of the title I program to USDA.  In addition, the 1990
act simplified title I program implementation overseas by eliminating
the requirement that recipients undertake specific and measurable
economic development activities as part of the title I agreements and
requiring only general development statements.  Despite these
changes, the revised structure of the title I program did not improve
the program's ability to accomplish either its sustainable economic
development or market development objectives of the 1990 act.  USDA
must still cope with the program's multiple and sometimes competing
goals and objectives and various program requirements that are
difficult to integrate into an effective program strategy. 


--------------------
\3 See Cargo Preference Requirements:  Objectives Not Significantly
Advanced When Used in U.S.  Food Aid Programs (GAO/GGD-94-215, Sept. 
29, 1994). 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      TITLE I MAKES MINIMAL
      CONTRIBUTION TO LONG-TERM
      ECONOMIC DEVELOPMENT IN
      RECIPIENT COUNTRIES
-------------------------------------------------------- Chapter 0:4.1

If 100 percent of a country's title I assistance were to displace
commercial imports, the country would gain the maximum amount of
foreign exchange savings possible.  If, instead, a country's title I
imports were "additional" to the level of commercial imports a
country would have imported, then foreign exchange savings would not
occur.  GAO's evaluation of two separate literature reviews that
together examined over 100 studies on food aid's impact on commercial
trade and GAO's own analysis of wheat import statistics for 5 (El
Salvador, Guatemala, Jamaica, Morocco, and Sri Lanka) of the 7
countries visited, supported the view that a country's imports of
agricultural commodities under food aid displaced commercial imports. 
However, the degree of displacement varied considerably among
countries.  In GAO's case-study countries, Guatemala and El Salvador
provided the clearest examples of title I aid displacing commercial
imports.  For any country, GAO cannot define with certainty the
extent to which title I assistance displaced commercial imports
because many other factors affect a country's import and production
of particular food products. 

GAO's analysis indicated that even if the maximum possible amount of
foreign exchange savings had occurred, title I's potential
contribution to broad-based, sustainable development would have been
minimal because the dollar value of the program was small relative to
each recipient's overall development needs.  Data were available for
14 of 15 title I recipients in fiscal year 1991.\4 In all of these
countries, the dollar value of title I assistance was 4 percent or
less, and generally much less, of the dollar value of the countries'
total imports.  For eight of these recipients (the Congo, Costa Rica,
the Cï¿½te d'Ivoire, Guatemala, Morocco, the Philippines, Sri Lanka,
and Tunisia), title I represented 1 percent or less of the dollar
value of the countries' total imports.  The GAO analysis looked at
title I as a percent of a country's imports because imports represent
at least some of those goods the country finds necessary for its
development and must purchase with its scarce foreign exchange. 

Although GAO's analysis of potential foreign exchange savings
indicated that title I's contribution to broad-based, sustainable
development was limited, title I assistance could have contributed
significantly in some cases to helping a country meet its short-term
food import requirements.  Food import data were available for 12 of
the 15 recipients in fiscal year 1991.\5 For five of these countries
(Costa Rica, Egypt, Guatemala, Jamaica, and Sierra Leone), title I
aid amounted to 7 to 13 percent of the country's food imports.  In
addition, title I assistance represented 24.7 percent of the value of
El Salvador's total food imports.  GAO's analysis also indicated that
title I assistance could have enabled 5 of the 15 recipients (the
Congo, the Cï¿½te d'Ivoire, Guyana, Jamaica, and Sierra Leone) to
acquire food that they otherwise would not have been able to
purchase, because these 5 countries were experiencing a critical
shortage of foreign exchange.\6 While increasing the supply of food
may help relieve hunger and malnutrition in the short term, achieving
food security requires long-term solutions to the problems of food
availability, accessibility, and utilization in developing countries. 

The title I program also contains legislative requirements that
impede the program's ability to achieve its sustainable economic
development objective through foreign exchange savings.  Food aid
provides foreign exchange savings when it displaces commercial
imports.  However the P.L.  480 legislation includes requirements
that are designed to ensure that food aid is in addition to normal
commercial imports and therefore does not lead to displacement of
commercial imports.  Section 403(e) requires that reasonable
precautions be taken to ensure that the sale of agricultural
commodities will not unduly disrupt normal patterns of commercial
trade with foreign countries, and section 403(h) requires that
reasonable precautions be taken to avoid displacing U.S. 
agricultural commodity sales.  Thus, these requirements hamper the
program's ability to provide foreign exchange savings, which would
otherwise occur through displacement of commercial imports. 

These requirements also interfere with another legislative
requirement called the Bellmon determination, which is designed to
ensure that food aid does not disrupt domestic production.  The
Bellmon determination stipulates, in part, that the distribution of
food aid in the recipient country will not result in substantial
disincentive to or interferences with domestic production or
marketing in that country.  In economic terms, this generally
requires that food aid not increase the total supply of food, as the
increase in the food supply may create disincentives to local
production by putting downward pressure on local agricultural prices. 
Consequently, it may at times not be possible to satisfy the Bellmon
determination and simultaneously ensure that the food aid is in
addition to commercial imports. 


--------------------
\4 The 15 title I recipients in fiscal year 1991 were the Congo,
Costa Rica, the Cï¿½te d'Ivoire, Egypt, El Salvador, Guatemala, Guyana,
Jamaica, Morocco, the Philippines, Sierra Leone, Sri Lanka, Tunisia,
Yemen, and Zaire.  Import data were available for all the recipients
except Yemen. 

\5 Food import data were not available for Guyana, Yemen, and Zaire. 

\6 GAO defined those countries experiencing a critical shortage of
foreign exchange as those countries whose nongold international
reserves cover less than 1 month's worth of imports. 


      TITLE I'S IMPORTANCE TO
      LONG-TERM MARKET DEVELOPMENT
      HAS NOT BEEN DEMONSTRATED
-------------------------------------------------------- Chapter 0:4.2

USDA officials in many of the countries GAO visited said that
promoting broad-based, sustainable development is the key way in
which title I could contribute to market development in those
countries.  However, many factors besides title I assistance
influence a country's economic development as well as its decision to
import from the United States.  As a result, it is difficult to
demonstrate a link between title I assistance, economic development,
and subsequent market development.  Despite the longevity of the
title I program and claims by USDA officials, GAO did not find any
studies, by USDA or other researchers, that established a link
between food aid and long-term commercial market share for U.S. 
agricultural products.  Nor did any studies address the issue of
whether former title I recipients were more likely to be greater
importers of U.S.  agricultural products than countries that never
received title I assistance. 

South Korea is frequently cited by USDA and others as the best
example of a former title I recipient's becoming a market development
success.  However, GAO's research did not identify any strong
evidence to support a direct tie between title I aid and the
development of commercial markets for U.S.  agricultural goods in
South Korea.  Instead, GAO's research suggests that the increase in
absolute value of U.S.  farm exports to the South Korean market was
the result of a number of complex macroeconomic, political, and
social factors in conjunction with substantial foreign aid from the
United States, including title I assistance, and other donors. 
According to a 1985 AID study, South Korea received approximately $26
billion (nominal dollars) in international assistance between 1943
and 1983, much of it in grant or concessional forms.  According to
the U.S.  Overseas Loans and Grants statistical annex, for fiscal
years 1946 to 1992 the United States gave South Korea almost $15
billion (nominal dollars) in economic and military assistance.  This
amount included $1.6 billion (nominal dollars) in title I assistance
for fiscal years 1956 to 1981. 

While economic growth influenced South Korea's ability to import,
other factors, such as technical assistance and commodity price and
quality, also played a role in South Korea's decisions to import from
the United States and other countries.  As a result of this complex
combination of factors, it is very difficult to attribute market
development results to any one factor in isolation from other
possible causal factors. 

Title I assistance also could contribute to market development if the
program created preferences for U.S.  products that remained after
the title I concessional sales have been discontinued, resulting in
greater U.S.  market share or sales.  However, it is difficult to
achieve market development success when title I commodities, which
are typically bulk and semiprocessed agricultural goods,\7 can be
easily replaced by, or substituted with, products at a lower price
from other nations.  According to USDA's long-term agricultural trade
strategy, the prices of U.S.  bulk and semiprocessed commodities in
comparison to those of competitor nations are a primary determinant
of U.S.  sales in overseas markets. 

USDA told GAO that title I assistance serves as a market maintenance
tool.  In the short term, the program can help the U.S.  producers of
some agricultural products (1) move commodities, albeit on a
concessional basis, and (2) possibly keep a market presence that they
might not have had otherwise.  However, GAO does not consider this
situation to be long-term market development unless market presence
remains after the assistance ends.  In several of GAO's case-study
countries, the concessional sales did not lead to commercial sales
unless the United States offered competitive prices.  For example,
although the title I program once helped the United States to
maintain a market presence for U.S.  wheat exports to Jamaica and
vegetable oil to Guatemala, the United States lost its share of these
markets to competitor countries offering similar commodities at lower
prices. 

Title I may help lay the groundwork for market development by
exposing consumers to U.S.  commodities and familiarizing country
traders with U.S.  trade practices, according to USDA officials. 
However, several legislatively mandated program requirements hinder
the program's ability to achieve its market development objectives. 
For example, "cargo preference" provisions requiring that 75 percent
of food aid tonnage be shipped on U.S.  flag ships can impede market
development efforts.  Because of these provisions, some recipients
were forced to purchase a different variety of the commodity than
planned:  their purchasing decisions were driven by the availability
of U.S.  flag ships rather than by the availability of the commodity. 
For instance, both El Salvador and Guatemala were interested in
purchasing western white wheat under the title I program in fiscal
year 1993; however, they were forced to purchase different varieties
of wheat because no U.S.  flag vessels were obtainable from the West
Coast where western white wheat is loaded for export. 

Other program requirements discouraged potential importers from
participating in the title I program because they severely restricted
the recipient's ability to reexport title I goods after processing
in-country, thus eliminating an important source of foreign exchange
earnings.  For example, Poland declined to import U.S.  cotton in
fiscal year 1991 and Latvia declined to import U.S.  wheat in fiscal
year 1994 under the title I program because of the program's reexport
restrictions. 

Program requirements also restrict the types of commodities eligible
for promotion under the title I program to those considered in excess
of domestic U.S.  requirements and anticipated export
opportunities.\8 Thus, the program supports a limited range of
commodities without regard to recipient country preferences.  In
fiscal year 1993, 18 categories of commodities were eligible for
export under the title I program, but commodities associated with
only 6 of the categories were actually exported (i.e., wheat, rice,
corn, vegetable oil, tallow, and soybean meal).  Items offered but
not exported under the title I program in fiscal year 1993 included
cotton, wood, legumes (e.g., beans, peas, and lentils), wheat flour,
Atlantic mackerel and dogfish, peanuts, nonfat dry milk, and raisins. 

While USDA officials also told GAO that the title I program had
helped the United States build trade relations with countries of
Eastern Europe and the former Soviet Union, such a benefit may be
overstated because several of these countries declined to participate
in the program in fiscal year 1994 because of dissatisfaction with
the program.  For example, Bulgaria, Latvia, Poland, and Slovakia
declined to import title I commodities either because of the high
prices of title I commodities, restrictions on reexporting title I
goods, and/or reluctance to assume additional debt, according to USDA
and State Department officials we interviewed. 


--------------------
\7 Bulk commodities are essentially raw agricultural commodities,
such as grains and oilseeds; and examples of semiprocessed
commodities include wheat flour and vegetable oil. 

\8 This restriction may be waived if the Secretary of Agriculture
determines that some part of the supply should be used to carry out
urgent humanitarian purposes. 


      PROGRAM MANAGEMENT HAS
      IMPROVED, BUT STRUCTURAL
      BARRIERS REMAIN
-------------------------------------------------------- Chapter 0:4.3

The 1990 act streamlined the administration of the title I program by
eliminating the interagency body\9 that managed the title I program
and assigning program responsibility to USDA.  Once actively involved
in administering the P.L.  480 programs, the role of the interagency
body is now primarily limited to approving the country selection and
program funding allocations proposed by USDA and AID.  Officials GAO
interviewed from USDA, AID, the Office of Management and Budget
(OMB), and the State Department agree that the allocation process is
much simpler and much less time consuming.  In general, they believed
that the revised function of the interagency body provides the
necessary level of communication to coordinate program
implementation. 

USDA now does not have to negotiate specific and measurable
development activities as part of the title I agreements.  In part,
the provisions were revised in recognition of the difficulties in
negotiating and managing specific development activities that were
supported by local currencies generated from the sale of title I
commodities and owned by the recipient government.  The 1990
legislation requires only that agreements contain a statement on how
the country will integrate title I assistance into its overall
development plans.  In addition, the 1990 act does not require USDA
to monitor a country's use of the local currencies and its progress
on implementing its development plans. 

Although program management has been streamlined, the 1990 act
continues to support multiple and sometimes competing goals,
objectives, and program requirements that are difficult to integrate
into an effective program strategy.  For example, legislative
requirements impede the program's ability to achieve its sustainable
development objective through foreign exchange savings, and cargo
preference provisions impair the program's ability to accomplish its
market development objective.  In addition, the process for selecting
countries for title I aid illustrates how the multiple objectives and
goals of the program can sometimes work at cross purposes.  For
instance, the 1990 act requires USDA to give priority to countries
that demonstrate the greatest need for food.  However, the 1990 act
also requires USDA to give priority to countries that demonstrate the
potential to become commercial markets for competitively priced U.S. 
agricultural commodities.  In addition, the State Department and AID
have influenced the selection of title I recipients to pursue program
objectives that more closely align with their primary missions: 
foreign policy and economic development, respectively.  While these
objectives can complement USDA's market development objective, they
can also work at cross purposes to each other. 


--------------------
\9 The interagency body, called the Development Coordinating
Committee, was composed of five agencies:  USDA, AID, OMB, the State
Department, and the U.S.  Department of the Treasury. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO is making no recommendations in this report. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 0:6

The size and importance of the P.L.  480 title I program have
declined, and the program as currently structured does not
significantly advance either the economic development or the market
development objectives of the 1990 act.  Thus, if Congress wants to
continue to support these objectives and devote resources to
achieving them, it may want to consider alternative approaches to
doing so.  Among the alternatives available to Congress are (1)
refocusing the program on more specific economic and/or market
development objectives by eliminating some of the multiple and
competing requirements of the present framework; (2) restructuring
the program to concentrate on a single objective, such as market
development; (3) eliminating the program and transferring its
resources to existing programs with compatible purposes; and (4)
eliminating the program and replacing it with a new program or
programs unencumbered with a history of competing objectives and
outdated program requirements. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:7

GAO received comments on a draft of this report from USDA, OMB, and
State Department officials.  AID officials were offered the
opportunity to provide comments but declined. 

USDA, OMB, and State Department officials generally agreed with the
information presented in the draft report.  USDA and OMB agreed with
the report's overall conclusion that multiple and competing
objectives, along with certain program requirements, make it
difficult to create and implement an effective title I program
strategy.  They agreed that the program, as currently structured, is
unable to significantly advance either the sustainable economic
development or market development objectives. 

However, USDA disagreed with GAO's conclusion that the title I
program has not demonstrated long-term market development success,
stating that the program moves commodities and possibly keeps a
market presence that the United States might not have had otherwise. 
GAO acknowledges the short-term contributions the title I program has
made but does not believe that these benefits constitute long-term
market development unless market presence remains after the
assistance ends.  The evidence presented in this report shows many
examples where title I exports did not transform into commercial
share.  Nor did GAO find any studies that established a link between
food aid and long-term commercial market share.  USDA did not refute
this evidence. 

USDA and OMB officials did not agree with the original phrasing of
GAO's matters for congressional consideration.  Rather than eliminate
the title I program and dedicate those resources to new or existing
programs that individually address each of the program objectives,
both USDA and OMB officials suggested restructuring the program to
reduce the impact of multiple and competing objectives and improve
the program's focus on market development.  A complete discussion of
USDA's and OMB's comments on the draft report appears in chapter 5. 

Officials at the State Department also disagreed with GAO's overall
conclusion and matters for congressional consideration.  These
officials said that the title I program as currently structured
serves the multiple objectives reasonably well and does not need to
be significantly restructured.  The State Department's comments are
discussed in
chapter 5. 

While GAO did not intend to imply in its matters for consideration
that elimination of the program and use of its resources on new or
existing programs to achieve the program's objectives was the only
option for Congress to consider, it appears that the original wording
led the agencies to believe GAO discounted other options.  GAO has
expanded and reworded its matters for congressional consideration to
make it clear that there is a range of options available for Congress
to consider. 


INTRODUCTION
============================================================ Chapter 1


   BACKGROUND
---------------------------------------------------------- Chapter 1:1

International assistance using agricultural commodities, or food aid,
has been an important part of U.S.  agricultural and foreign policy
since 1954.  The Agricultural Trade Development and Assistance Act of
1954,\1 commonly known as Public Law (P.L.) 480, established the
legal framework for U.S.  food aid.  The title I program is one of
the three food aid programs authorized under P.L.  480 and is
administered by the U.S.  Department of Agriculture (USDA).  Under
the title I program, U.S.  agricultural commodities are sold on
long-term credit terms at below-market-rate interest to developing
countries. 

Numerous acts, including the most recent amendments in the 1990 Food,
Agriculture, Conservation, and Trade Act\2 have revised the goals and
provisions of P.L.  480.  The P.L.  480 legislation and its
amendments have always consisted of a composite of multiple and
sometimes competing objectives.  While the emphasis among the various
P.L.  480 program objectives has shifted over time to reflect the
changing needs of domestic farm policy and emerging foreign policy
developments, the importance of the title I program as a U.S.  export
program and U.S.  food aid program has diminished significantly since
the program's inception in 1954.  Title I commodity exports, which
once represented a significant share of the total value of U.S.  food
aid and U.S.  agricultural exports, have declined
dramatically--representing about 14 percent of the total value of
U.S.  food aid and less than 1 percent of U.S.  agricultural exports
in fiscal year 1993. 

For this review, we assessed the impact of title I assistance on (1)
broad-based, sustainable development in recipient countries and (2)
long-term market development for U.S.  agricultural goods in those
countries.  In addition, we evaluated the effect of the 1990 act on
the interagency coordination of the title I program, the content of
development plans included as part of title I agreements with
recipient countries, and the process for selecting and funding
countries for title I assistance. 


--------------------
\1 Public Law 83-480, 1954. 

\2 Public Law 101-624, 1990. 


   P.L.  480 FOOD AID CONSISTS OF
   THREE PROGRAMS
---------------------------------------------------------- Chapter 1:2

The P.L.  480 legislation, as amended, authorizes international food
assistance under three different programs:  government-to-government
concessional loans that offer long-term, low-interest-rate credit
(title I program); donations (title II program); and grants (title
III program).  Specifically, the three P.L.  480 programs are
intended to provide the following types of assistance: 

  Title I (trade and development assistance) authorizes concessional
     loans to developing countries that are short of foreign exchange
     and have difficulty meeting their food needs through commercial
     channels.  The 1990 act gives priority to countries that are
     experiencing the greatest need for food, are undertaking
     economic development measures, and have demonstrated a potential
     to become commercial agricultural markets for U.S.  exports. 
     This type of food aid program is unique to the United States: 
     no other country offers a food assistance program using
     long-term, low-interest concessional loans (i.e., repayment
     terms of 10 years or more and interest rates below prevailing
     market rates). 

  Title II (emergency and private assistance programs) authorizes
     donations of agricultural commodities to provide emergency
     feeding programs and carry out activities to alleviate the
     causes of hunger, disease, and death. 

  Title III (food for development) authorizes grants of agricultural
     commodities to be (1) used for food distribution programs and
     the development of food reserves or (2) sold and the proceeds
     used for economic development purposes.  The 1990 act targets
     title III aid for least-developed countries.  Before the 1990
     legislative changes, the title III program forgave debt incurred
     under title I if the recipient governments used the local
     currencies generated from the sale of title I commodities to
     finance mutually agreed-upon development projects. 

Under the 1990 act, before an agricultural commodity can be
considered for export under any one of the P.L.  480 programs, the
domestic supply of that commodity in the United States must be in
excess of what is needed to meet domestic consumption requirements,
provide adequate surplus for domestic reserves, and meet anticipated
export opportunities.  Each fiscal year, the Secretary of Agriculture
announces a P.L.  480 "docket" that lists the types and amounts of
agricultural commodities available for sale or donation under the
three P.L.  480 programs.  Agricultural commodities typically sold
under the title I program are bulk commodities (i.e., wheat, rice,
corn, and cotton) and semiprocessed commodities (i.e., vegetable oil,
wheat flour, and tallow). 

Commodities typically donated under title II and III assistance
include those exported under the title I program as well as legumes
(e.g., beans, peas, and lentils) and soyproducts.  According to
officials from USDA, several commodities that are regularly on the
P.L.  480 docket represent planned production for export rather than
an accidental byproduct of U.S.  farmers' overproduction during a
year.  For example, USDA considers the P.L.  480 programs at the
outset of the fiscal year when it sets production goals and
establishes acreage reduction programs to remove farm land from
production for price-supported crops, such as wheat, corn, rice, and
cotton. 

The total volume of U.S.  agricultural goods exported and the total
amount of program funds allocated for titles I, II, and III in fiscal
year 1993 are presented in table 1.1.  Countries are not restricted
to receiving one type of U.S.  food aid and can participate in more
than one food aid program simultaneously.  For example, many title I
and title III recipients also receive title II assistance.  Appendix
I lists the countries that participated under each of the P.L.  480
programs and the value of the agricultural commodities exported in
fiscal year 1993. 



                          Table 1.1
           
           Amount of U.S. Agricultural Commodities
            Exported Under P.L. 480 Programs, Plus
            Ocean Freight Costs to U.S. Treasury,
                       Fiscal Year 1993

                                           Ocean
                               Total     freight
                   Total      metric    costs to
                value of        tons        U.S.
              commoditie     shipped    Treasury
P.L. 480      s exported         (in         (in   Number of
program              (in  millions)\  millions)\   recipient
title          millions)           a           a   countries
------------  ----------  ----------  ----------  ----------
I                 $332.8         2.9       $58.3          22
II                 509.1         1.8       200.3          68
III                231.7         0.8        46.1          16
------------------------------------------------------------
\a USDA estimates for fiscal year 1993 are based on all shipments
made during that year and may include some tonnage purchased in
fiscal year 1992. 

Source:  USDA. 

In addition to encompassing expenditures for agricultural
commodities, the P.L.  480 programs also include expenditures for
ocean freight, or the cost of shipping title I commodities to
recipient countries.  Cargo preference provisions\3 require that at
least 75 percent of the P.L.  480 commodity tonnage be shipped on
U.S.  flag ships rather than on generally less expensive foreign flag
vessels.  The cost to the U.S.  Treasury to ship title I commodities
during fiscal year 1993 was $58.3 million (see table 1.1).  Ocean
freight expenditures are lower under the title I program than the
other P.L.  480 programs because the U.S.  government reimburses the
recipient countries only for the amount by which the cost to ship on
U.S.  vessels exceeds the cost to carry the same commodities on
vessels of other countries.  In comparison, the ocean freight
expenditures are higher for commodities donated under the title II
and III programs because the U.S.  government pays for the entire
ocean freight costs via U.S.  or foreign flag vessels. 

Although title I assistance is a concessional loan program in which
recipients are expected to pay back the amount of the loan plus
interest, according to officials at the Office of Management and
Budget (OMB), the U.S.  government never fully recovers the cost of
the loans.  In other words, the outlays for the commodities are
greater than the present value of the expected returns, which include
expected principal payments plus interest.\4 Under the Federal Credit
Reform Act of 1990 (P.L.  101-508, 1990), USDA and OMB must estimate
the subsidy rate for program loans to determine the total budgetary
cost of the title I concessional loans.  The composite subsidy rate
for all of the individual title I concessional loans in fiscal year
1993 was approximately 64 percent, according to USDA officials. 
Therefore, even though title I is a loan program, the actual cost of
the fiscal year 1993 title I concessional loans to the U.S.  Treasury
is estimated to be $223 million on the basis of $332.8 million in
title I loans made to recipients for commodity purchases during that
fiscal year.  In other words, OMB expects the U.S.  Treasury to get
back, on average, $.36 for every $1.00 loaned under the 1993 title I
program. 


--------------------
\3 Provisions of the Merchant Marine Act of 1936 (ch.  858, 49 Stat. 
1985, June 29, 1936), as amended by the Cargo Preference Act of 1954
(ch.  936, 68 Stat.  832, Aug.  26, 1954) and the Food Security Act
of 1985 (P.L.  99-198, Dec.  23, 1985). 

\4 The interest paid does not cover the cost of financing because of
the concessional nature of the title I loan (i.e., grace period, long
repayment terms, and below-market rates of interest). 


   USDA MANAGES THE TITLE I
   CONCESSIONAL LOAN PROGRAM
---------------------------------------------------------- Chapter 1:3

As part of its program management responsibilities, USDA directs the
selection of title I recipients and the amount of money they receive
under the program.  In fiscal year 1993, 22 countries imported title
I commodities from the United States in amounts ranging from $5
million to $40 million (see table 1.2 for title I allocations for
fiscal years 1992 to 1994).  In addition, 8 of the 22 title I
recipients in fiscal year 1993 also received title II assistance,\5
and 1 country, Sri Lanka, also received title III assistance. 
Several of the recipients were countries of the former Soviet Union
and were first-time participants of the program in fiscal year 1992. 
While USDA hopes to transform title I recipients into commercial
importers, their "graduation" from the program can be a long and
uncertain event.  For example, 6 of the 22 recipients in fiscal year
1993 have been in the program for 20 years or more. 



                          Table 1.2
           
             Total Value of Commodities Exported
           Through the Title I Program by Country,
             Plus Number of Years That Countries
            Participated in Program, Fiscal Years
                          1992-1994

                    (Dollars in millions)

                                           Fiscal   Years in
                     Fiscal     Fiscal       year    title I
Country           year 1992  year 1993      1994\    program
----------------  ---------  ---------  ---------  ---------
Angola                   --         --       $5.9          1
Belarus               $19.9       $5.0       24.1          3
Bulgaria                 --       15.0         --          1
Congo                   5.0         --        6.0          5
Costa Rica               --       15.0         --          9
Cï¿½te d'Ivoire          10.0       10.0       15.0          8
Croatia                  --         --        9.2          1
Egypt                  40.4         --         --         28
El Salvador            29.4       33.4         --         15
Estonia                 8.4         --         --          1
Guatemala              14.9       15.0       15.0         13
Guyana                  7.1         --         --         14
Jamaica                29.9       30.0       14.8         22
Jordan                 20.0       25.6       15.0         16
Latvia                  8.0         --         --          1
Lithuania               8.8       19.6       13.5          3
Macedonia\a              --         --        4.5          1
Moldova                 7.0        7.6       15.9          3
Morocco                45.0       20.0       15.0         31
Pakistan                 --       40.0         --         37
Philippines            20.0       20.0       15.0         26
Romania                10.0       10.0         --          3
Sierra Leone            7.0         --         --         22
Sri Lanka              13.0       10.0       18.0         33
Suriname                7.4        2.4        5.5          3
Tajikistan              8.2       11.4         --          2
Tunisia                15.0        5.0         --         30
Turkmenistan             --        6.3        8.5          2
Ukraine                  --       16.5       16.9          2
Yemen                    --       10.0         --          9
Zimbabwe               40.0        5.0         --          3
============================================================
Total $               374.4     $332.8     $217.8      n/a\b
------------------------------------------------------------
Legend

 = Title I program was not used in-country that year. 

\a Former Yugoslavia Republic of Macedonia. 

\b Not applicable. 

Source:  USDA. 

The main impact of the 1990 legislative changes on title I
allocations was to shift several former recipients of title I
assistance to the newly revised title III program.\6 However, events
since the 1990 act have spurred even greater changes in the
allocation of title I assistance.  Egypt, one of title I's largest
and longest-term recipients, did not use approximately $100 million
of its fiscal year 1992 allocation and subsequently dropped out of
the program in fiscal year 1993.  In 1991, Egypt's financial picture
vastly improved, in large part as the result of U.S.  and allied debt
forgiveness following the 1991 Gulf War.\7 The unused $100-million
program allocation represented about 25 percent of title I's total
program value for that year.  At the same time, countries of the
former Soviet Union and Eastern Europe had become more important
participants in U.S.  assistance programs.  During fiscal years 1992
and 1993, USDA was able to initiate title I programs in many of these
countries using title I funds that may have otherwise been allocated
to Egypt. 

Once a country is selected to participate in the title I program,
USDA negotiates title I agreements with recipient government
officials to determine the types and quantities of commodities the
country will import.  Under the title I program, countries purchase
commodities selected from the P.L.  480 docket with concessional
credit provided by the U.S.  government.  The concessional terms
include a maximum 30-year period for repayment, with a maximum 7-year
grace period and interest rates below prevailing market rates.\8 USDA
also negotiates with the recipient country to include a statement in
the title I agreement describing how the assistance provided will be
integrated into the country's overall development and food security
plans (see app.  III for development plans for our seven case-study
countries in fiscal year 1992 title I agreements). 


--------------------
\5 These title I recipients also received title II assistance in
fiscal year 1993:  Costa Rica, the Cï¿½te d'Ivoire, El Salvador,
Guatemala, Morocco, the Philippines, Yemen, and Zimbabwe. 

\6 Formerly title I recipients in fiscal year 1990, Bangladesh,
Bolivia, Ghana, Honduras, Peru, Senegal, and Uganda became title III
recipients in fiscal year 1991. 

\7 In 1991, the United States and a number of other countries
canceled about $14 billion of Egypt's total indebtedness of roughly
$50 billion. 

\8 Before the 1990 act, the maximum allowable repayment period was 40
years and the maximum grace period was 10 years. 


   PURPOSE AND IMPORTANCE OF TITLE
   I PROGRAM HAVE CHANGED
---------------------------------------------------------- Chapter 1:4

While the emphasis among the various P.L.  480 goals has shifted over
time to accommodate changing U.S.  farm and foreign policy interests,
the domestic and international conditions that engendered the
inception of the U.S.' food aid program in 1954 have altered even
more so.  An increase in donations of food aid by other countries and
the creation of new USDA market development programs designed to
expand U.S.  exports have significantly reduced the importance of the
title I program as a worldwide food aid program as well as its
importance as a U.S.  agricultural export and surplus disposal
program. 


      TITLE I GOALS HAVE SHIFTED
      OVER TIME
-------------------------------------------------------- Chapter 1:4.1

According to the literature we reviewed on the history of the P.L. 
480 legislation, when P.L.  480 was enacted in 1954 its goals were to
move large amounts of U.S.  surplus agricultural commodities to needy
countries and serve U.S.  foreign interests as well as develop future
markets for U.S.  agricultural commodities.  At the time, the United
States was the primary producer of agricultural commodities
worldwide, there was a shortage of international purchasing power
after World War II, and there was a great humanitarian need for food
aid.  Most U.S.  food aid was sold to foreign governments through
title I loans, but some was donated for disaster relief, economic
development, and feeding programs.  All countries, except some
communist nations, were eligible to participate in the title I
program. 

Although none of the original goals of the P.L.  480 legislation were
abandoned, amendments in 1966 reoriented the goals of the P.L.  480
program toward combating world hunger.  The 1966 amendments required
that recipient countries sign self-help contracts as part of every
title I agreement to encourage the countries to improve their
domestic agricultural and food production.  Amendments in 1968
expanded the use of loan repayments in local currency for self-help
contracts and development programs.  Title I loan repayments in local
currencies were phased down between 1966 and 1971, emphasizing
long-term credit sales for dollars and for convertible local
currencies. 

In the early 1970s, agricultural prices soared as worldwide
agricultural production stagnated and worldwide demand for
agricultural products expanded.  Demand increased because of strong
economic growth in developing countries and rising commercial imports
by the Soviet Union.  The amount of U.S.  surplus commodities
drastically diminished, and Congress did not raise title I program
appropriations to cover the increased costs of providing food aid. 
Amendments to the P.L.  480 legislation in 1973 and 1974 attempted to
direct the distribution of P.L.  480 funds, including title I, to
serve the most needy countries.  Ultimately, the amendments required
that 75 percent of the title I concessional sales go to countries
designated by the United Nations as most seriously affected by food
shortages. 

Amendments in 1977 shifted the emphasis of the food aid program to
promoting the self-sufficiency of recipient countries.  Recipient
governments were encouraged to use proceeds from local sales of title
I commodities for agricultural and rural development projects under a
revised title III program.  The focus of P.L.  480 shifted again in
the 1981 amendment, when social development objectives became
paramount.  Recipient countries were urged to use local currency
proceeds from the sale of title I commodities to support literacy and
health programs for the rural poor.  These development objectives
were retained in the 1985 amendments to P.L.  480. 

By the late 1980s, both U.S.  foreign assistance funds and U.S.  farm
surpluses to help meet global food aid needs were becoming more
scarce.  Under the 1990 amendments to P.L.  480, the focus of the
food aid programs shifted again.  Currently, the goal of P.L.  480,
including title I, is to promote U.S.  foreign policy by enhancing
the food security of developing countries through the use of
agricultural commodities and local currencies to (1) combat world
hunger and malnutrition and their causes; (2) promote sustainable
economic development, including agricultural development; (3) expand
international trade; (4) develop and expand export markets for U.S. 
agricultural commodities; and (5) encourage the growth of private
enterprise and democratic participation in developing countries. 
Food security was defined in the 1990 act as "access by all people at
all times to sufficient food and nutrition for a healthy and
productive life."

While the 1990 act emphasized food security---an economic development
and food assistance issue--it also assigned title I program
management responsibilities to USDA, whose international
responsibilities are foreign market development for U.S. 
agricultural goods, rather than to the Agency for International
Development (AID), which is an international economic development
agency.  The 1990 act removed the requirement that 75 percent of
title I commodity sales go to countries that were defined as those
with the lowest income, allowing USDA more flexibility in selecting
title I recipients.  In addition, the 1990 act removed the
requirement that recipient countries be deemed "friendly" before
receiving title I aid. 


      TITLE I'S SHARE OF BOTH U.S. 
      FOOD AID AND U.S. 
      AGRICULTURAL EXPORTS HAS
      DECLINED
-------------------------------------------------------- Chapter 1:4.2

Despite the shifting emphasis of the title I program, the importance
of title I, domestically and internationally, has declined
significantly since the program's inception in 1954.  Although the
United States remains a world leader in providing food assistance,
title I's share of both total world food aid and U.S.  agricultural
exports has decreased substantially since the inception of the P.L. 
480 programs.  During the 1950s and 1960s, the United States provided
about 90 percent of world food aid, and title I represented around 80
percent of U.S.  food aid.\9 As other countries began to increase
their food aid donations in the 1970s, the U.S.  share of world food
aid decreased, to about 50 percent by 1980 and continued to decrease
to about 43 percent by 1992.  Title I's share of U.S.  aid also
declined to about 65 percent in fiscal year 1980 and to 14 percent in
fiscal year 1993. 

The establishment of new USDA credit guarantee programs and commodity
price reduction programs in the mid-1980s also decreased the
importance of title I food aid as a U.S.  export and surplus disposal
program.\10 In the late 1950s and mid-1960s, title I shipments
accounted for roughly 19 percent of the total value of U.S. 
agricultural exports (see fig.  1.1 for fiscal year 1960 data). 
However, this share decreased to around 2 percent in the mid-1970s to
late 1980s.  In 1993, title I's portion of U.S.  agricultural
commodity exports dropped to its lowest level in over 40 years--0.8
percent (see fig.  1.2).  Appendix II lists the value of title I
exports and total U.S.  agricultural exports for fiscal years 1955 to
1994 and presents title I as a percent of total U.S.  agricultural
exports. 

   Figure 1.1:  Government
   Assisted and Commercial Shares
   of U.S.  Agricultural Export
   Value, Fiscal Year 1960

   (See figure in printed
   edition.)

\a Includes barter sales and direct credit programs (GSM-5). 

Source:  GAO analysis of USDA data. 

   Figure 1.2:  Government
   Assisted and Commercial Shares
   of U.S.  Agricultural Export
   Value, Fiscal Year 1993

   (See figure in printed
   edition.)

\a Includes credit guarantee programs (GSM -102 and -103), commodity
price reduction programs (EEP, SOAP, COAP, DEIP, and combined EEP/GSM
sales), and Commodity Credit Corporation direct sales. 

Source:  GAO analysis of USDA data. 


--------------------
\9 U.S.  food aid includes the P.L.  480 programs (titles I, II, and
III), Food For Progress (7 U.S.C.  1736o), and food donations made
under section 416(b) of the Agricultural Act of 1949, as amended (7
U.S.C.  1431). 

\10 See chapter 3 for descriptions of USDA credit guarantee programs
(i.e., the General Sales Manager (GSM) -102 and -103 programs) and
commodity price reduction programs, such as the Export Enhancement
Program (EEP), Sunflowerseed Oil Assistance Program (SOAP),
Cottonseed Oil Assistance Programs (COAP), and Dairy Export Incentive
Program (DEIP). 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:5

The objectives of our review were to assess the impact of title I
assistance on (1) broad-based, sustainable development and (2)
long-term market development for U.S.  agricultural commodities in
recipient countries.  The 1990 act directed us to evaluate the impact
of title I assistance on agricultural development in recipient
countries.  The three authorizing committees agreed that we would
satisfy this requirement by assessing the impact of title I aid on
broad-based, sustainable development since agricultural development
is included under one of the act's legislative objectives--"to
promote broad-based, equitable, and sustainable development,
including agricultural development." In addition, broad-based,
sustainable development includes raising economic and agricultural
productivity--factors critical to achieving food security, which is
also one of the act's legislative goals.  We also evaluated the
effect of the 1990 act on certain elements of title I program
management.  Specifically, we looked at (1) the interagency
coordination of title I assistance in Washington, D.C.; (2) the
content of the development statements included in the title I
agreements with recipient countries; and (3) USDA's country selection
and title I program fund allocation process. 

The 1990 act required us to review the title I program and conduct
audit work in countries located in three geographic regions of the
world that are representative of countries receiving title I
assistance.  As part of our review, we selected seven case-study
countries in four regions of the world to conduct audit work at
USDA's, AID's, and the State Department's overseas posts.  Our
seven-case study countries were:  Egypt and Morocco (northern
Africa), Sri Lanka and the Philippines (East Asia), El Salvador and
Guatemala (Central America), and Jamaica (the Caribbean).  We
selected these seven case-study countries in four geographic regions
because they represented a variety of title I recipients in terms of
program size, mix of USDA and AID programs, and length of title I
participation.  In fiscal year 1992, these seven countries received
51 percent of the total title I program funds. 

To assess the impact of title I assistance on long-term economic
development and market development in our case-study countries as
well as other recipient countries, we conducted interviews with and
obtained documents from officials with USDA and its Economic Research
Service (ERS), AID, OMB, the State Department, the World Bank, and
U.S.  commodity groups in Washington, D.C.  In each country we
visited, we interviewed U.S.  and host government officials;
representatives from U.S.  commodity groups; and other parties, such
as foreign food aid donors, importers, and exporters.  We also
reviewed literature that evaluated title I's long-term impact on
economic development, agricultural development, and commercial trade
in recipient countries. 

To estimate the maximum foreign exchange savings made possible when a
country imports title I commodities and to estimate the relative
importance of these foreign exchange savings to broad-based,
sustainable economic development, we calculated title I aid as a
percentage of a recipient's total imports for the 15 title I
recipients in fiscal year 1991--the most recent year for which
complete international financial statistics were available.  We
reported this information for each country, arranged by group
according to their foreign exchange shortage.  To measure foreign
exchange shortage, we used a country's international nongold
reserves\11 expressed in number of weeks of imports these reserves
would cover.  We also calculated title I aid as a percentage of a
country's total food imports to determine the size of title I's
contribution to a country's food import needs.  In addition, we
reviewed past and current development statements contained in title I
agreements and discussed them with USDA, AID, and recipient
government officials in the seven countries we visited. 

Using USDA's and the United Nations' trade database, we attempted a
statistical analysis to determine whether there was any relationship
between title I and commercial imports from the United States for
major title I recipients, past and present.  Our regression analysis,
however, was not successful because of problems with the data, i.e.,
missing data, incompatible data sets, differences in reporting
periods, inconsistencies between figures reported by the United
States and other countries, differences in classification, and double
counting of transshipments through other countries. 

Because we were unable to conduct a regression analysis, we based our
conclusions regarding the relationship between title I and a
country's commercial imports on evidence drawn from literature we
reviewed; an analysis of trade data from the International Wheat
Council for our case-study countries for crop years July 1, 1980,
through June 30, 1992 (the one data set we found that was complete
and consistent for more than a decade); and information we collected
from documents and interviews with officials from USDA and U.S. 
commodity groups in Washington, D.C., and in our seven case-study
countries.  Unless otherwise noted, we reported dollar values
covering periods of 5 years or longer in 1993 dollars.  In addition,
we assessed title I's contribution to developing or expanding markets
for U.S.  agricultural products in South Korea, a former title I
recipient considered by USDA to be a best-case example of title I's
market development success.  We interviewed officials from USDA, ERS,
and three different commodity groups; analyzed trade data for three
commodities that were the primary commodities exported to South Korea
under the title I program (wheat, corn, and cotton); and reviewed
several studies that examined factors contributing to South Korea's
economic development. 

To evaluate the effect of the 1990 act on certain elements of program
management, we interviewed officials from USDA, AID, and the State
Department in Washington, D.C., and in our seven case- study
countries, as well as officials from OMB.  In addition, we looked at
the reasons why USDA never implemented a local currency program,
section 104, which was authorized in the 1990 act. 

We requested comments on a draft of this report from the Secretary of
Agriculture or his designee.  USDA chose not to provide us with
written agency comments, but senior USDA officials responsible for
title I program management gave us oral comments on the draft.  We
also discussed the contents of this report at exit conferences with
senior officials from OMB and the State Department.  Our evaluation
of the comments from USDA, OMB, and the State Department appears in
chapter 5.  AID officials declined to discuss the draft report and
did not provide agency comments. 

We did our work between October 1992 and December 1994 in accordance
with generally accepted government auditing standards. 


--------------------
\11 Nongold international reserves include those assets that are
considered as available for use by an economy's central authorities
in meeting balance of payments needs.  Nongold international reserves
are fully convertible currency that are acceptable as payment on the
world market. 


TITLE I MAKES MINIMAL CONTRIBUTION
TO BROAD-BASED, SUSTAINABLE
DEVELOPMENT
============================================================ Chapter 2

While broad-based, sustainable (BBS) development is widely considered
to be a cornerstone of any long-term strategy to achieve food
security, the results of our review indicate that title I assistance
has limited ability to affect sustainable economic development in
recipient countries.  The primary way that the title I aid can
contribute to BBS development in a recipient country is by helping
the country save its scarce foreign exchange\1 to invest in projects
that promote long-term sustainable economic development.  Foreign
exchange savings occur when title I imports displace commercial
imports.  Our analysis indicated, however, that even if the maximum
possible foreign exchange savings occurred, title I's potential
contribution to sustainable economic development would still be
minimal because the program is small in relation to the country's
overall development needs.  There are some cases, though, in which
title I assistance may have made a meaningful short-term contribution
to the food supply in some recipient countries.  However, this
assistance is not considered a contribution to BBS development. 

The recipient government's sale of the title I commodities to the
private sector in-country generates revenues, called "local
currencies," that the recipient government can use to cover budgetary
expenses.  These revenues, however, are not an infusion of additional
resources to the country since they are generated from the sale of
the title I commodities within the local economy.  Instead, the local
currencies are a shift of money from the private to the public
sector. 

The title I program is also intended to promote BBS development
through the title I agreements in which countries agree to undertake
certain development activities in exchange for receiving title I
assistance.  However, the results of our review indicated that the
title I program provided the United States with relatively little
leverage to induce recipient countries to undertake additional BBS
development activities or policy reforms.  The leverage was limited
because the dollar value of the title I aid was small compared to the
countries' basic development requirements as well as to the total
assistance provided by other world donors.  Moreover, other competing
program objectives dilute whatever leverage might have been
associated with the provision of title I assistance.  Although
economic and agricultural development is one of P.L.  480's
objectives, a chief criticism of title I assistance has been that it
may have a disincentive effect on local farmers and local food
production, according to the studies we reviewed.  Any disincentive
effect, however, may be diminished to the extent that food aid
imports displace commercial imports rather than domestic production. 

The title I program contains legislative requirements that impede the
program's ability to achieve its BBS development objectives through
foreign exchange savings.  These requirements also interfere with
another provision in the legislation that is meant to ensure that the
distribution of food aid in the recipient country does not interfere
with that country's domestic production. 


--------------------
\1 Foreign exchange savings are also known as "balance of payments
support" because a country can use these savings to make
international purchases. 


   BBS DEVELOPMENT IS A
   CORNERSTONE TO ACHIEVING FOOD
   SECURITY
---------------------------------------------------------- Chapter 2:1

The 1990 act unites P.L.  480's multiple objectives under one central
policy goal:  to promote the foreign policy of the United States by
enhancing the food security of the developing world.  While
increasing the supply of food may help to relieve hunger and
malnutrition in the short term, it is not sufficient for achieving
food security.  That goal requires long-term solutions to the
problems of food availability, accessibility, and utilization in
developing countries.  BBS development is an integral component of a
successful food security strategy because its tangible benefits,
which include raising the purchasing power and productivity of the
recipient population, are critical to attacking the causes of
poverty, hunger, and malnutrition. 

The P.L.  480 legislation does not define BBS development.  The World
Bank and AID, however, broadly define BBS development as meeting the
needs of the present generation without compromising the needs of
future generations.  "Broad-based" refers to development policies
designed to raise productivity (including agricultural productivity),
buying power (including the foreign exchange earnings), and quality
of life for the majority of the recipient population. 
"Sustainability" is concerned with avoiding policies that buy
short-term gains at the expense of future growth, e.g., unsound
macroeconomic policies that involve excessive borrowing or that
unduly damage the environment, thereby impairing the quality of life
for current and future generations.  "Development" implies a
continuing improvement in the "quality" of life and the extension of
this improvement in quality to the lives of all the people in the
country concerned. 


   POTENTIAL CONTRIBUTION TO BBS
   DEVELOPMENT DERIVED FROM
   FOREIGN EXCHANGE SAVINGS
---------------------------------------------------------- Chapter 2:2

According to representatives from USDA, AID, our seven case-study
countries, and the World Bank, and based on our literature review,
the primary way in which title I aid can contribute to BBS
development is through the foreign exchange savings that occur when
title I imports displace commercial imports.  These foreign exchange
savings take place when a country purchases agricultural goods
through the title I concessional sales program instead of purchasing
them through commercial channels.  Maximum gains in foreign exchange
savings occur when 100 percent of the title I aid displaces
agricultural imports that were previously purchased through
commercial channels.  Foreign exchange savings do not take place when
title I imports are received in addition to a country's customary
level of commercial imports.  In other words, title I assistance
contributes to foreign exchange savings only when it displaces
commercial food imports.  This question of "additionality," whether
title I imports displace a country's commercial imports or constitute
an addition to the country's food supply, is considered to be one of
the most important issues when analyzing food aid's impact on BBS
development and on commercial trade. 


      TITLE I AID DISPLACES
      COMMERCIAL IMPORTS TO
      VARYING DEGREES
-------------------------------------------------------- Chapter 2:2.1

We evaluated two separate literature reviews\2 that together examined
over 100 studies on food aid's impact on commercial trade.  While all
of these studies evaluated P.L.  480 food aid's impact on commercial
trade, every study did not specifically address the title I program. 
However, taken as a whole, these studies tended to support the view
that food aid partially displaces commercial imports, though the
degree of displacement varies greatly from country to country.  Three
studies within our literature review\3 specifically examined whether
title I assistance displaced commercial imports in three of our seven
case-study countries--Egypt, Sri Lanka, and Jamaica.  Through the use
of statistical models, each study concluded that title I assistance
had allowed the countries to achieve some foreign exchange savings by
displacing commercial imports.  For example, the analysis of
commercial and concessional wheat imports in Sri Lanka from 1955 to
1981 strongly suggested that food aid had substituted for commercial
purchases.  The author concluded that P.L.  480 food aid imports
clearly resulted in foreign exchange savings for Sri Lanka. 

We also compiled trade data from the International Wheat Council on
wheat imports for six of our seven case-study countries\4 for crop
years July 1, 1980, through June 30, 1992, to help assess the impact
of title I assistance on U.S.  commercial imports.  While we could
not conclude that title I concessional sales had displaced U.S. 
commercial sales of wheat in Egypt, it appears that title I wheat
had, to varying degrees, displaced U.S.  commercial sales of wheat in
the other five case-study countries (El Salvador, Guatemala, Jamaica,
Morocco, and Sri Lanka).  For any of our case-study countries,
however, we could not define with certainty the extent to which title
I aid had displaced commercial imports because many other factors
affected the importation and domestic production of wheat.  To be
more precise, for example, we would have to know what each country
would have imported and produced in the absence of the title I
assistance. 

On the basis of our analysis of wheat import statistics, El Salvador
and Guatemala provide the clearest examples of displacement of
commercial imports by title I assistance.  In both El Salvador and
Guatemala, the United States had been the dominant supplier of wheat
since the 1950s.  Until the early 1980s, when Guatemala and El
Salvador first imported wheat under title I programs, these countries
had generally imported wheat from the United States on a commercial
basis.  After the introduction of title I aid, both the volume and
share of commercial wheat purchases declined greatly, even as total
U.S.  wheat exports to these countries increased. 

For Morocco, the interpretation of import statistics is more
complicated due to the volatility of, as well as the reduction in,
the volume of total U.S.  wheat imports.  However, in at least one of
the many years of title I assistance, it appears that title I
concessional sales replaced U.S.  commercial wheat sales to Morocco. 
For crop years July 1, 1990, through June 30, 1992, the total volume
of U.S.  sales of wheat to Morocco declined by nearly 50 percent,
whereas the volume of title I wheat sales increased by 72 percent. 


--------------------
\2 See Food Aid Impacts On Commercial Trade:  A Review of the
Evidence, prepared for AID by Nathan Associates (Washington, D.C.: 
Oct.  1990) and The Development Impact of U.S.  Program Food
Assistance:  Evidence from the AID Evaluation Literature, AID, Bureau
for Food for Peace and Voluntary Assistance (Washington, D.C.:  Aug. 
1989). 

\3 See Grant Scobie, Government Policy and Food Imports:  The Case of
Wheat in Egypt, International Food Policy Research Institute,
Research Report 29 (Washington, D.C.:  Dec.  1981), covering the
period of 1949-1979.  Also, see H.  Christine Bolling, Jamaica: 
Factors Affecting Its Capacity to Import Food, Foreign Agricultural
Economic Report Number 176 (Washington, D.C.:  Jan.  1983), covering
several periods, especially the latter 1970s through the early 1980s
and Edward J.  Clay, "Sri Lanka:  Food Aid as a Resource Transfer,"
Food Policy (Aug.  1983), covering 1955-1981. 

\4 We excluded the Philippines from this analysis because it received
only a small volume of wheat under the title I program during the
years we reviewed (1980 to 1991). 


   POTENTIAL FOREIGN EXCHANGE
   SAVINGS MAKE MINIMAL
   CONTRIBUTION TO BBS DEVELOPMENT
---------------------------------------------------------- Chapter 2:3

The extent to which foreign exchange savings can contribute to BBS
development largely depends on the value of these foreign exchange
savings relative to the country's total economic needs.  Imports
represent one component of the resources that a country regards as
vital to its developmental needs.  On the basis of our analysis of
fiscal year 1991 recipients,\5 it appears that even if 100 percent of
the title I assistance displaced the equivalent in a country's
commercial imports, the foreign exchange savings that title I
provides could satisfy only a fraction of a country's total imports. 
Consequently, title I's potential contribution to BBS development is
limited.  However, despite its small size, title I may constitute a
significant percentage of some of the countries' food imports, which
indicates that title I aid could be making a meaningful contribution
to these countries' food supply in the short term.  In addition,
title I could be quite important to those countries that are severely
restricted in their ability to pay for commercial imports due to a
critical foreign exchange shortage. 

To determine the extent to which the maximum foreign exchange savings
made possible by the title I program could potentially contribute to
a country's BBS development, we compared the value of title I aid to
the country's total imports.  A country's imports include, but are
not limited to, those goods the country finds necessary for its
development that are currently available only from abroad and that
the country must purchase with its scarce foreign exchange.  To
highlight the relative scarcity of the countries' foreign exchange
situation, we grouped the 15 title I recipients for fiscal year 1991
according to their foreign exchange position (see table 2.1).  A
general rule of thumb is that a developing country is experiencing a
shortage of foreign exchange if it has less than approximately 3
months of reserves to cover its current rate of imports.  We used
nongold international reserves, expressed in terms of the number of
weeks of imports these reserves covered, to measure a country's
foreign exchange status.\6



                          Table 2.1
           
            Title I as a Percent of Total Imports
                and Food Imports for Recipient
                 Countries, Fiscal Year 1991

                    (Dollars in millions)

                                Title I as a    Title I as a
                                  percent of      percent of
Country/foreign        Title   total imports    food imports
exchange reserves          I  (1991 figures)  (1991 figures)
--------------------  ------  --------------  --------------
Nongold
reserves: < 1
month's import
coverage
------------------------------------------------------------
Congo                   $2.0            1.0%            2.1%
Cï¿½te d'Ivoire           10.0             0.6             3.3
Guyana                   6.9             1.3              \a
Sierra Leone             5.0             3.1            12.8
Jamaica                 40.0             2.2            10.9

Nongold reserves:
2 to < 3 months
of import coverage
------------------------------------------------------------
Tunisia                 15.0             0.3             1.9
El Salvador             35.0             4.0            24.7
Yemen                    5.0              \a              \a
Sri Lanka               15.0             0.4             2.3

Nongold reserves:
3 to 5 months of
import coverage
------------------------------------------------------------
Philippines             15.0             0.1             1.8
Zaire                    9.0             1.3              \a

Nongold reserves:
about 6 months or
more of import
coverage
------------------------------------------------------------
Costa Rica              15.0             0.8             8.9
Egypt                  169.3             2.2             7.4
Guatemala               18.0             1.0             8.1
Morocco                 35.0             0.5             4.6

============================================================
Total                 $395.2              \b              \b
------------------------------------------------------------
\a Not available. 

\b Not applicable. 

Sources:  Title I figures are from USDA's Economic Research Service
database.  Import figures for Guyana and Zaire and figures for
nongold reserves and number of weeks of imports covered by stock of
nongold reserves are from the International Monetary Fund's
International Financial Statistics 1993 Yearbook.  The rest of the
total import figures and food import figures are from the World
Bank's World Development Report, 1993, tables 14 and 15. 

Our analysis indicated that even if 100 percent of the title I
imports had displaced commercial imports, title I's maximum foreign
exchange savings represented a very small portion of a country's
total import requirements and, therefore, did not meaningfully
enhance the recipient's capacity to import.  Consequently, the
potential foreign exchange savings, at best, could make only a
minimal contribution to BBS development.  Data were available for 14
of the 15 recipient countries in fiscal year 1991.  In all of these
countries, title I assistance as a percent of the value of the
countries' total imports was 4 percent or less, generally much less. 
For eight of the recipients, title I represented 1 percent or less of
the value of the country's total imports (see table 2.1). 

Although our analysis of potential foreign exchange savings showed
that title I's contribution to BBS development was limited, our
research indicated that title I assistance could contribute
significantly, in some cases, to helping a country meet its food
import requirements in the short run.  Food import data were
available for 12 of the 15 fiscal year 1991 title I recipient
countries.  For six of these countries, title I constituted a
significant portion, about 7 to 13 percent, of the countries' total
food imports.  For El Salvador, this figure was 24.7 percent (see
table 2.1).  While a short-term increase in the supply of food may
help relieve hunger, achieving food security requires long-term
solutions to the problems of food availability, accessibility, and
utilization in developing countries.  Food security is a long-term,
broad-based economic development issue. 

In addition, title I may have enabled some countries that were
experiencing critical shortages of foreign exchange (i.e., reserves
available that covered less than 1 month of imports) to acquire food
that they otherwise would not have been able to purchase.  Five of
the 15 fiscal year 1991 title I recipients were experiencing a
critical shortage of nongold reserves (see table 2.1).  Since these
countries were so restricted in their ability to pay for commercial
imports, the title I imports were probably in addition to their usual
commercial imports.  Consequently, the title I assistance probably
did not result in foreign exchange savings that then could be
invested in long-term BBS development.  However, in the short run,
title I possibly provided food that these countries otherwise would
not have been able to import. 


--------------------
\5 We used fiscal year 1991 rather than fiscal year 1992 title I
recipients as the subject of our analysis because international
financial statistics were unavailable for 6 of the 22 recipient
countries in 1992.  These six countries (Belarus, Estonia, Latvia,
Lithuania, Moldova, and Tajikistan) were all members of the former
Soviet Union. 

\6 Nongold international reserves include the country's (1) reserve
position in the International Monetary Fund (IMF) and use of IMF
credit; (2) holdings of internationally acceptable means of payments
for the purpose of financing payment imbalances or influencing the
movement of the exchange rate of its currency (i.e., foreign exchange
holdings); and (3) holdings of special drawing rights (SDR), which is
an international reserve asset that the IMF allocates to individual
member nations and that is transferable among them to settle
international indebtedness. 


   TITLE I SHIFTS RESOURCES TO THE
   PUBLIC SECTOR
---------------------------------------------------------- Chapter 2:4

According to some program supporters, one way title I assistance
might be able to contribute to BBS development is through the
recipient government's sale of the title I commodities in-country. 
When title I commodities enter a country's food distribution system,
their sale by the recipient government to the private sector
generates revenues for the government that are called "local
currencies." These revenues, however, do not represent an infusion of
additional money into the country; instead, the revenues are a shift
of money from the private to the public sector.  In theory, this
transfer of resources enables the recipient government to gain
control over additional domestic spending power that it would not
have otherwise had to help support activities that could contribute
to BBS development.  Ultimately, any contribution that local
currencies can make to BBS development depends on their investment in
activities with long-term, broad-based, and sustainable benefits. 

In practice, there are many difficulties associated with ensuring the
effective use of these local currencies.  It is difficult for USDA or
anyone else to say whether the currencies were actually dedicated to
the projects specified in the title I agreements because these local
currencies are owned and usually controlled by the recipient
country's government.  Ensuring that the local currencies are
invested in BBS development activities is further complicated by the
fact that money is fungible and difficult to track.  This condition
is also aggravated by inadequate accounting and control systems in
some recipient countries.  Before the 1990 act, when AID managed the
title I local currency program, we\7 and AID's Office of the
Inspector General found that the monitoring of local currencies by
U.S.  government officials in-country was insufficient to provide
reasonable assurance that the currencies were properly used. 


--------------------
\7 See Foreign Assistance:  Use of Host Country Owned Local
Currencies (GAO/NSIAD-90-210BR, Sept.  25, 1990). 


   TITLE I'S LEVERAGE TO DIRECT
   BBS DEVELOPMENT IS LIMITED
---------------------------------------------------------- Chapter 2:5

The contribution of title I assistance to BBS development depends on
the recipient government's investment in sound, long-term economic
policies and projects.  In return for the title I assistance,
recipients must state in their title I agreement how they will
integrate the benefits of the title I assistance into their country's
overall development plans.  In general, we found that title I
agreements usually reinforce macroeconomic reforms or activities that
the recipient governments are already undertaking.  The program
generally provides USDA with little leverage to direct the recipient
governments to undertake additional reforms or projects because the
program's value is small relative to the countries' overall
development needs and the total assistance that other donors provide. 
Furthermore, other competing program objectives can dilute whatever
leverage might be associated with the provision of title I
assistance. 


      AGREEMENTS TEND TO REINFORCE
      COUNTRIES' EXISTING
      DEVELOPMENTAL GOALS
-------------------------------------------------------- Chapter 2:5.1

The 1990 act requires title I agreements to contain a statement that
describes how the title I commodities or the revenues generated by
the sale of these commodities will assist the overall development
plans of the country to improve food security and agricultural
development; alleviate poverty; and promote broad-based, equitable,
and sustainable agriculture.  In addition, the agreements must
include a statement about how the recipient country intends to
encourage private sector competition and participation.  Within the
title I agreements, a section known as the "development plan"
describes what actions the recipient country will undertake in
exchange for receiving title I assistance. 

For five of our seven case-study countries in fiscal years 1991 and
1992, we found that development plans in the title I agreements
tended to reinforce those macroeconomic reforms or activities that
the recipient governments were already undertaking (see app.  III for
development plans found in fiscal year 1992 title I agreements for
our seven case-study countries).  For example, the 1992 title I
agreement in Morocco specified that the government would support two
agronomic research institutes, an activity that AID had already
included as part of its title I agreements from fiscal years 1988 to
1990.  In Jamaica, the fiscal year 1992 title I agreement encouraged
the country to work toward meeting the criteria necessary to become
eligible for debt forgiveness under the Enterprise for the Americas
Initiative, a program established by the United States in 1990 to
promote economic liberalization and growth in Latin American and
Caribbean countries.  Similarly, an Egyptian government official told
us that his country's development plans reinforced economic goals
similar to those found in Egypt's agreement with the International
Monetary Fund (IMF).  In Sri Lanka, USDA and AID officials explained
that the country's title I agreement paralleled the provisions
included in its title III agreement.  For example, in both agreements
the country pledged to support crop diversification and
liberalization of certain import and trade policies. 

In two of our case-study countries, El Salvador and Guatemala, USDA
negotiated title I agreements that included promises by the recipient
countries to undertake certain policy reforms in addition to the
countries' ongoing development efforts.  In their fiscal year 1992
title I agreements, El Salvador and Guatemala pledged to eliminate
"price bands" for certain commodities.  Price bands institute tariffs
to protect farmers from agricultural imports.  Eliminating this
policy was in keeping with USDA's objectives to promote trade
liberalization and reduce trade barriers that discriminate against
U.S.  products.  The countries entered into similar agreements for
fiscal year 1993.  However, El Salvador dropped out of the title I
program in fiscal year 1994 because its government did not want to
pursue these particular reforms, according to State Department
officials.  Although the country was initially allocated funds for
title I assistance in fiscal year 1994, the funds were never made
available to the country because the United States and El Salvador
failed to reach an agreement.  For El Salvador and Guatemala, their
agreements in fiscal year 1992 also supported another USDA activity
in-country that was designed to protect the United States from pests
and diseases that could be imported into this country. 

We found that all 22 of the title I agreements for fiscal year 1992
contained some reference to how the local currency proceeds generated
from the sale of title I commodities should be allotted to support
the reforms or projects cited in the agreement.  For 5 of the 22
countries (El Salvador, Guatemala, Guyana, Sierra Leone, and
Suriname), the fiscal year 1992 agreements required that some portion
of the local currency sale proceeds be deposited into special
accounts designated to support activities specified in the title I
agreements.  In Sierra Leone and Guatemala, it was the U.S. 
Ambassador rather than USDA who insisted that the sales proceeds be
assigned to specific accounts, according to USDA officials.  The
agreements for the other 17 recipients assigned the local currency to
the country's general treasury, which meant that these funds were
intermingled with other government revenues. 


      TITLE I DOES NOT PROVIDE
      MUCH U.S.  LEVERAGE
-------------------------------------------------------- Chapter 2:5.2

Title I assistance often provided the United States with relatively
little leverage to influence BBS development activities or initiate
policy reforms beyond those that the country was already undertaking
because of the program's small size as well as the primacy of other
competing objectives.  We found the dollar value of title I
assistance was small relative to the countries' overall development
needs as well as to the development assistance provided by world
donors in most cases (see table 2.2).  For example, in fiscal year
1991, total title I assistance distributed among the 15 recipients
amounted to $395.2 million, while total official development
assistance (ODA)\8 from the entire world to these countries was $10.8
billion.  Representatives from the World Bank and a prominent
international food policy research group told us that it would not be
reasonable for countries to undertake major reforms with wide-ranging
economic consequences in exchange for the relatively small amount of
assistance provided through the title I program. 



                          Table 2.2
           
            Title I Aid Compared to Total Official
               Development Assistance (ODA) by
                 Recipient, Fiscal Year 1991

                    (Dollars in millions)

                                             Total worldwide
Country               Title I assistance               ODA\a
--------------------  ------------------  ------------------
Congo                               $2.0              $133.4
Costa Rica                          15.0               172.9
Cï¿½te d'Ivoire                       10.0               632.7
Egypt                              169.3             4,988.0
El Salvador                         35.0               289.6
Guatemala                           18.0               196.8
Guyana                               6.9               108.6
Jamaica                             40.0               165.6
Morocco                             35.0             1,075.1
Philippines                         15.0             1,051.4
Sierra Leone                         5.0               104.8
Sri Lanka                           15.0               814.0
Tunisia                             15.0               322.4
Yemen                                5.0               313.4
Zaire                                9.0               475.9
============================================================
Total                             $395.2           $10,844.6
------------------------------------------------------------
\a Total ODA data are collected on a calendar year basis, and title I
assistance data are collected on a fiscal year basis. 

Sources:  The title I figures are the final figures from USDA's ERS
database.  The total worldwide ODA figures are from the World Bank. 

The dollar value of title I assistance overstates its economic value
to the recipient country.  As a result, the leverage provided by
title I assistance as indicated by its dollar value is likely to be
significantly less than the figure suggests.  There are several
reasons why the recipient country may not place the same dollar value
on the title I commodity as does the United States:  (1) the title I
assistance is a loan that needs to be repaid, not a cash grant; (2)
the recipient government may sell the commodity in-country for a
price lower than its purchase price; (3) the program restrictions on
shipping and reexporting title I commodities may further reduce its
value to the recipient country; (4) the recipient country may be
buying something (quality or quantity) other than what it actually
would have preferred; and (5) the title I price per metric ton may
exceed prices for similar commodities available through other USDA
programs and suppliers. 

USDA's ability to use title I assistance as leverage to influence BBS
development in-country may also be limited because other title I
objectives, such as promoting U.S.  agricultural exports or U.S. 
foreign policy, sometimes take priority in shaping title I programs,
according to AID and USDA officials both in Washington, D.C., and in
our seven case-study countries.  We reported similar conclusions in
past reports on title I assistance.\9 For example, if policy reforms
are particularly sensitive, negotiations can be lengthy, and the long
negotiation process may be contrary to U.S.  farm interests who are
concerned about signing agreements as early as possible to move
commodities, according to AID officials.  The AID officials believed
that whatever leverage title I might provide exists only before the
agreements are signed.  The program's leverage to influence which
development activity a country agrees to undertake is reduced once
the agreements have been signed. 

In addition, in some of our case-study countries U.S.  officials told
us that it would be difficult for USDA to negotiate additional policy
reforms as part of the title I agreements since title I aid is also
used to promote U.S.  foreign policy objectives.  For example, AID
officials in the Philippines told us that AID could not be "tough" in
the past when negotiating policy reforms to include in the title I
agreements because the Philippine government considered all U.S. 
assistance "rent" for U.S.  military bases in the country. 

Title I assistance also has served as a major symbol of U.S. 
commitment to Egypt, according to U.S.  and Egyptian officials
in-country.  Egypt has played a key role in U.S.  foreign policy
strategies in the Middle East.  Wheat exported under the title I
program has helped to ensure the Egyptian government's ability to
make inexpensive bread readily available--a social policy critical to
the country's political stability.  Many AID, State Department, and
USDA officials in our case-study countries reported that one of the
primary reasons for providing title I assistance to countries was to
promote U.S.  foreign policy interests. 


--------------------
\8 ODA consists of net disbursements of loans and grants made on
concessional financial terms by all bilateral official agencies and
multilateral sources.  ODA must (1) promote the economic development
and welfare of developing countries and (2) be concessional in
character and contain a grant element of at least 25 percent.  It
consists of grants (e.g., technical assistance, food aid, and
administrative costs), development loans, loans for food, debt
reorganization, and contributions to multilateral institutions. 

\9 See Food Aid:  Improving Economic and Market Development Impact in
African Countries (GAO/NSIAD-88-55, Dec.  21, 1987) and Foreign Aid: 
Problems and Issues Affecting Economic Assistance (GAO/NSIAD-89-61BR,
Dec.  30, 1988). 


   TITLE I ASSISTANCE HAS
   POTENTIAL TO DISCOURAGE
   AGRICULTURAL PRODUCTION IN
   RECIPIENT COUNTRIES
---------------------------------------------------------- Chapter 2:6

One of the chief criticisms of title I assistance, according to the
studies we reviewed,\10 has been that it may have a disincentive
effect on local farmers and local food production, although the
evidence supporting this criticism remains inconclusive.  These
studies concluded that title I assistance has the potential to
negatively affect local agriculture in particular situations. 
However, the agricultural policy environment of the recipient country
is also very important in determining whether and to what extent food
aid creates a disincentive for local agricultural production.  To the
extent that food aid displaces commercial imports, any disincentive
effect on local food production due to an increase in the food supply
putting downward pressure on food prices diminishes since the same
food aid cannot simultaneously result in foreign exchange savings and
be additional to commercial imports.  The disincentive effect
underscores a difficulty in the title I program.  It may not be
possible at times to fulfill certain program requirements and
simultaneously not interfere with domestic production or marketing in
the recipient country. 


--------------------
\10 These studies were the same ones we used to support our
conclusions on the existence of foreign exchange savings earlier in
the chapter (see p.  36, fn.  2).  In addition, we read other books
and journal articles on the subject on which we drew in this
analysis.  For example, Hans Singer, John Wood, and Tony Jennings,
Food Aid:  The Challenge and the Opportunity, Clarendon Press
(Oxford:  1987) and Jim Fitzpatrick and Andy Storey, "Food Aid and
Agricultural Disincentives," Food Policy, vol.  14, Butterworth & Co. 
(Stoneham, MA:  Aug.  1989). 


      DISINCENTIVE EFFECT IS
      POSSIBLE
-------------------------------------------------------- Chapter 2:6.1

According to the studies we reviewed, food aid can discourage local
agricultural production in two ways.  Food aid can create
disincentives to local production, in a direct manner, if it
increases the availability of a commodity to the point where the
additional title I imports put downward pressure on local food
prices.  Food aid can also discourage local agricultural production
indirectly by enabling a government to neglect its own agricultural
sector and/or postpone making policy reforms needed to enhance
domestic food production.  Disincentive effects can affect domestic
production of those commodities that are imported under title I as
well as those commodities that may act as substitutes for locally
grown products; e.g., importing wheat could lead to consumer demand
for bread rather than for locally grown corn-based foods.  P.L.  480
responds to the possibility that the program may create disincentives
by requiring that USDA conduct a Bellmon determination\11 before
signing a title I agreement.  The legislation also requires that USDA
consult donor organizations, such as the World Bank and IMF, to
ensure that title I aid will not create a disincentive to domestic
production or marketing. 

The literature on the disincentive issue, while inconclusive,
indicates that disincentive effects are possible with food aid.  The
literature emphasizes a case-by-case approach involving a thorough
understanding of in-country commodity markets and agricultural policy
environments.  For example, according to one study, wheat, the
principal commodity imported by Sri Lanka under title I, was not
produced in Sri Lanka to any significant extent in the 1970s. 
Therefore, title I aid could have had no direct disincentive effect
on domestic wheat production.  However, because of the possible
substitutability between rice and wheat, it could have been possible
that consumers may have substituted bread for rice, thereby causing
the demand for rice and its production to decrease.  The study,
however, suggested that this situation did not occur.  Rice
production generally remained constant, then increased, during the
1970s, though it is arguable that rice production would have
increased even more in the absence of title I wheat.  Furthermore,
the literature indicates that Sri Lankans prefer rice over bread,
unless the price of bread is significantly lower than the price of
rice. 


--------------------
\11 The "Bellmon determination," named after former Senator Henry L. 
Bellmon, was added to the P.L.  480 program in 1977.  It contains two
stipulations:  (1) the recipient country must certify the
availability of adequate storage space to prevent spoilage of donated
commodities and (2) the local distribution of the food aid must not
create a disincentive to domestic production or marketing. 


      AGRICULTURAL POLICY CAN
      AFFECT THE IMPACT OF FOOD
      AID
-------------------------------------------------------- Chapter 2:6.2

A country's agricultural policy environment is important in
determining whether food aid creates a disincentive for local
agricultural production.  Government policies can try to insulate
local agricultural production from responding to the changing supply
and price conditions as a result of receiving title I aid. 
Conversely, government can create agricultural distortions through
its food policies, which may dwarf any disincentives that food aid
may cause.  Even if title I assistance increases the overall
availability of a commodity, it still may not adversely affect
producers or consumers if the government provides price support or
direct subsidies, though this may cause repercussions elsewhere in
the domestic or international economy.  A government might pursue a
food policy, perhaps partially financed from the revenue from the
sale of food aid, to protect producers and/or benefit consumers by
letting consumer prices fall while keeping producer prices at a
higher level.  For example, one study, which analyzed the grain
sector in Brazil from 1952 to 1971, showed that P.L.  480 wheat
imports had a positive effect on grain production.  This circumstance
was due primarily to the government's wheat import and domestic price
support programs whereby revenues gained from wheat imports were used
to support domestic grain producers. 

While a price system such as Brazil's may, at times, reduce the
negative effects of food aid on producers or consumers, it may also
backfire and lead to further distortions.  For example, according to
the study on Brazil, title I imports displaced commercial wheat
imports, thus disrupting international wheat markets.  Government
intervention in Egypt, a country that had been a major recipient of
title I assistance for decades, provides an example of how food aid
and government policy interact to affect local agricultural
production.  Egypt's wheat policy from 1950 through the early 1980s
reflected the government's objective to make bread, a commodity
considered critical to Egypt's political stability, cheap and readily
available.  To ensure wheat supplies and thereby keep the price of
bread low, the Egyptian government encouraged both imports and local
production of wheat.  This strategy, in turn, supported the
government's policy of subsidizing retail sales of bread by supplying
wheat to the predominantly state-owned mills at a low price. 
However, this policy resulted in an abundant supply of wheat flour
with title I wheat shipments constituting an important component of
this supply.  This policy also contributed to other policies that
acted as disincentives to farmers:  the producer price of wheat was
allowed to decline relative to other crops (maize, rice, and cotton)
and relative to world market prices.  This system had a direct
disincentive effect on domestic wheat production.  Egypt's elaborate
food subsidy program is currently under revision as part of Egypt's
commitment to ongoing structural economic reform, including
agricultural pricing reform.  This reform includes a price
liberalization policy aimed at having most prices in the economy
determined by market forces by 1995. 

Aside from the impact of deliberate government intervention in the
marketplace, other factors could overshadow food aid's potentially
adverse effect on a country's agricultural production.  In
circumstances of war, political strife, or natural disasters, it
would be difficult to disentangle title I's role, if any, in
contributing to the decline in agricultural production.  For example,
the agricultural sector of El Salvador, a country that has received
substantial amounts of title I assistance since 1980, has suffered
from civil war over the past decade.  Resources for agricultural
production, especially for cotton, coffee, and livestock, became
military targets of the guerrillas.  As a result, most crop
production declined in the 1980s.  In instances such as these, title
I assistance may have provided food that the country would not have
otherwise been able to supply. 


   PROGRAM REQUIREMENTS IMPEDE
   SUSTAINABLE ECONOMIC
   DEVELOPMENT OBJECTIVES
---------------------------------------------------------- Chapter 2:7

The title I program contains legislative requirements that impede the
program's ability to achieve its BBS development objective.  Title I
aid could contribute to sustainable economic development if it were
to provide recipient countries with f