[Budget of the United States Government, Fiscal Year 1998]
[Page 141-143]

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                       13.  INTERNATIONAL AFFAIRS


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

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


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

 Foreign Assistance

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

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

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

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

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

 Export Promotion

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

 International Organizations

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