Mr. John Schmirtzer
Minister, Ministry of Foreign Affairs
Suite 1307
Government Administration Building
Peleponne
Arcadia

Subject: Negotiations on aid program with A.I.D.

Dear Mr. Schmirtzer:

It was good to talk with you over the phone the other day, and I was especially grateful for the helpful advice you gave. We are pleased to reply to your request that we keep you informed on how negotiations with A.I.D. are progressing, and I hope that you find that the following will satisfy your needs.

Our negotiations focused on two questions: how much aid and in what form it would be given. After several difficult rounds of negotiation, the delegates from Arcadia and A.I.D. have reached a satisfactory agreement that we will donate US$90 million in the form of cash, products, and human resources, and that, in return, A.I.D. will take measures to improve Arcadia's international image and find a suitable country for Arcadia's construction project.

Some background information leading up to the final agreement will help you understand more clearly how the negotiations have developed. From the beginning, we fully appreciated the two difficulties in achieving the cuts in aid: one was the potential hurts on our image worldwide and the other was harmful effects on our economy. As for the first difficulty, we were afraid that A.I.D. would launch a public campaign widely that would make us appear the epitome of greedy capitalism. Recently, it was publicly being said that A.I.D. would launch the campaign and that it was well preparing to fight against us, using our aid giving policy and need to improve our image at home and abroad. Furthermore, the data showing aid giving in other countries was proved to be an obstacle to our decreasing the donation. Unlike our country, countries like Ireland and Portugal still made progress towards increasing the aid in spite of the economic recession. In addition, the second difficulty we saw in cutting the amount of aid was the anticipated negative effects on Arcardian economy. We could tell that the campaign would hurt the market for Arcadian goods worldwide and weaken our diplomatic power in many of the developed countries. As one example, Sweden suffered from 5% decrease in its total export every year from 1997 to 2000 in a row after it reduced aid by $30 million in its own way in 1997, which was showed in one survey that Sweden's besmirched image was a major factor. Likewise, Italy, Denmark, and Brazil, which once also cut their aid, were reported to have difficulty trading with foreign countries-their total amount of that year's export went down by 6%, 3%, 5%, respectively. In addition, the Minister of Foreign Affairs in Italy reminded us that it took so much effort and time to recover from the internationally besmirched image. With these difficulties in mind, we realized that we could benefit economically from the improved image in the long run, so our team made adjustment to increase the amount of donation more than our originally planned $60 million on condition that A.I.D. allow the form to be more advantageous to Arcadia's economy. As far as the forms are concerned, we planned to get A.I.D. to accept more products and human resources than cash, which would be beneficial to Arcadia's economy.

Currently negotiations have developed into an agreement in which both parties will contribute and from which both parties will benefit. As for the amount of aid, A.I.D. and our team have reached an agreement that Arcadia will donate 0.135% of its G.N.P., which this year will be $90 million, for the next 4 years--from 2002 to 2005. (This four-year period comes from our team's assessment that it be the least period for Arcadia to recover from its economic crisis.) It has also been agreed that we will begin to give them 0.15% of our GNP from the year 2006, so as to keep up with many other developed countries. Furthermore, $90 million will be the minimum even if Arcadia's economy worsens. Other than the concurrence on the amount of aid, we managed to get agreement on form of aid from A.I.D. that US$40 million will be given in the form of cash, $30 million in products, and $20 million in human resources. As for the cash, we didn't go into a stipulation since we found little need of further discussion. The products and the human resources are all related to agriculture, mainly for relieving severe famine in developing countries. (Here, only making these products and services available will be our responsibility, and detailed use will be dealt with by A.I.D.) Concerning the products, A.I.D. and our team came to an agreement that Arcadia will spend $9 million on providing digging equipment, $6 million on cultivators, $9 million on pumps, and $6 million on sickles and plows. In regards to human resources, A.I.D. has willingly accepted our proposal that we dispatch 140 researchers, 310 trainers, and 180 engineers. We came up with these figures after considering the allocation and the total expenses for maintaining these people--including salary and all living expenses; we estimated the amount of money that is to be used for each researcher around US$38,000, and each trainer and engineer will be provided with around $30,000 respectively. Please see the tables below to help get the picture more easily.

Table 1. Amount of Aid 2002 (Unit: US$ 1 million)

*No table has been provided for cash since the specific distribution has not been stipulated.

Table 2. Form of Aid

Many details have yet to be finalized. We must still come to some agreement on the details about the upper limit of the amount of aid, the exact date of handover, shipment, kind and period of training, the matter of future contributions, and other such minor but essential details as the visa status of the personnel that we dispatch. We will report on these developments as they are negotiated.

What Arcadia will do for A.I.D. is not the only matter agreed to in negotiations. The other part of the agreement is the measures that A.I.D. will take to improve Arcadia's image and the pledge that they will find a right country for our construction project. A.I.D. promised to send some official documents that explain Arcadia's active and enthusiastic participation in aid program, which will resultantly help Arcadia to recover from besmirched image. In addition, it has been agreed that A.I.D. will find a suitable country that will offer the most favorable condition to Arcadia's construction project, which will be construction of a research institution and a plant that will be used to produce farming equipment. As we didn't have enough time to talk about this matter fully, in future negotiation sessions we will discuss and finalize the number of documents, specific countries A.I.D. will send official documents to, size and period of the construction, specific conditions we can benefit from, import of law materials, kind of products and appliances we are going to produce, and other such details that require further attention.

Our assessment of the agreement we have negotiated is rather positive. On the face of it, though, it appears that we agreed to donate to A.I.D. more than our initial proposal, we will actually be able to benefit from the aid; the aid will help improve our image in the world community and be highly beneficial to our economy after all. Above all, we are already earning a good reputation by showing much enthusiasm--we actually increased the amount of aid-- for helping developing countries, and the positive attitude will be reported by the official documents A.I.D. will send. As far as the economic benefits are concerned, a study conducted by the Economic Planning Board supports our estimation that we will get 3% value added tax from $30 million worth of products. In addition to that, through the provision of the products, specifically agricultural equipment, we will be able to encourage third world countries, who will have long been using Arcadia's equipment, to use Arcadia's instead of that of other countries. This happens because people tend to be attracted to the same or familiar brand and goods from well-known countries. In addition to the benefits from offering products, we can also boost our economy by sending our people to developing countries. Spending our finance paying our residents for working abroad, instead of giving 20 million dollars to A.I.D., will help to reduce our unemployment problem. The economists in the Economic Planning Board reported us that employing 630 people will help decrease our current 13% unemployment rate to 11%.

Our team recommends that Arcadian government consider anticipated problems caused by the unstable exchange rate on US dollar, and that the standard exchange rate be agreed by between A.I.D. and our government. On closer examination, we found that during inflation, the exchange rate is rather fluctuating. Since we promised to give aid in dollar, we might suffer from a big loss. It would be very helpful if this matter would be consulted with the fiscal advisors and the people in the budget department seriously. It would also be wonderful if you paid attention to the enclosed report, which Office of Economic Planning sent us. The report includes some useful information such as how other countries dealt with their economic recession like unemployment and inflation, and some related statistics figures. In addition, we strongly recommend that Arcadian government ask the delegates from A.I.D. to stay in Arcadia two more weeks and that the government allocate additional funds for meeting expenses, so that we can discuss and finalize more of the crucial details, especially our construction project.

In conclusion, we feel that the agreement we have reached goes some way toward keeping Arcadia's aid program in line with our deteriorating economy and, at the same time, improving our negative image in the world community. We pledged to donate 0.135% of our G.N.P from 2002 to 2005, which comes to US$90 million this year, and to begin to give 0.15% of our G.N.P. from 2006, as long as $90 million will be the minimum. As for the form, our final agreement is that we donate $40 million in the form of cash, $30 million in products, and $20 million in human resources. And in return for that, A.I.D. promised to send foreign countries official documents that favorably explain Arcadia's donation and to find a country that will offer the most optimum conditions to Arcadia's construction project. In addition to these agreements, I would like to remind you of our recommendations that Arcadian government agree on the standard exchange rate on US dollar with A.I.D. and examine the enclosed report on economic difficulty in other countries so as to have the aid program more for our good.

As always, we are grateful for your concern and help. We would appreciate more suggestions if you have any. And if you require further information, please do not hesitate to contact me. I will say at Plaza Hotel at least until the 30th, so you can reach me at 777-1357, which I gave you the other day.

Very truly yours,

Lee Og-young
Member
Arcadia representatives of Foreign Aid
Peleponne
Arcadia

LOY/coe

Enclosures:

1. Export statistics of Sweden, Italy, Denmark, and Brazil
   
2. Report provided by Office of Economic Planning