the basic principles of private ownership and free competitive markets. Inherent in such an appeal is the belief that the longrun salvation for the poorest countries lies in their own efforts. The aid we provide, the reforms we accept will not help these countries unless they themselves create the conditions for self-sustained economic growth, and we will seek to maintain such principles in the seventh special session. Thank you, Mr. Chairman.

[Mr. Parsky's prepared statement follows:]

PREPARED STATEMENT BY HON. GERALD L. PARSKY, ASSISTANT SECRETARY OF THE TREASURY FOR TRADE, ENERGY, AND FINANCIAL RESOURCES POLICY COORDINATION Mr. Chairman and Members of the Committee: I appreciate the opportunity to discuss with you today one of the liveliest subjects on today's international agenda: the economic demands of the developing countries, and how the United States will respond to those demands at the Seventh Special Session of the United Nations. The challenge that the developing countries have put to the industrial world is fundamental. They have called for a "new economic order," a proposal which involves a basic redistribution of wealth from the industrialized world to the poorer countries. Inherent in such a policy is the belief that the less fortunate countries cannot develop unless major dramatic changes take place in the international economic system. These demands and the fundamental issues they have raised have substantially pre-occupied our efforts in a number of international forums during the last year, and our Government has been attempting to respond to them in responsible, creative ways. Underlying our approach is a desire to cooperate with all of the countries of the world, but at the same time not to be afraid to stand up for what we believe to be economically sound. As we address the important issues relating to commodity policy, we should not be afraid to defend a free enterprise system that has made us strong and, equally as important, has helped many of the less developed countries.

The United Nations General Assembly Seventh Special Sessions, to begin in New York on September 1 and continue for two weeks will be the next forum for debate on these issues. This Session has been the ultimate focus of intensive work by all the agencies of the Government having direct roles in international economic policy. Before addressing the issues that will form the major portion of the agenda at this Session. I think it would be helpful to sketch the background of the Seventh Special Session.

BACKGROUND LEADING TO THE SEVENTH SPECIAL SESSION

The Seventh Special Session is the next in a series of international events through which the "Third World" countries-aligned in the so-called Group of 77-have expressed their grievances and formulated their demands for economic justice. Though these demands are not new-indeed have been in the process of formulation since the creation of the U.N. Conference on Trade and Development in the early 1960s-momentum in the last two years has increased sharply as the poorer countries have felt an increased sense of their own power and influence. The reasons for this are clear. The advent of OPEC suddenly presented the other developing countries with both a model and an incentive for action. The apparent success of OPEC in forcing a rapid increase in oil prices convinced many developing country leaders that they too could band together in producer associations and set prices for their commodities.

Furthermore, the rapid increase in oil prices, combined with related inflationary price increases in fertilizers and other manufactured goods, confronted non-oil-producing developing countries with a greatly increased need for foreign exchange. The 1973-74 boom in commodity prices reinforced the feelings of many raw material producers that they were suddenly in the driver's seat. At the same time, many of our developed country trading partners, generally far more dependent on foreign sources of raw materials than we are, also began to fear that a fundamental shift in the rules of the game was taking place. This has meant that many of the developed countries have been extremely reticent about directly opposing the new demands of the non-aligned.

The sense of self-assertion by the developing countries was expressed in a new and potent way at the Sixth Special Session in April and May 1974, when the General Assembly, led by Algerian President Boumediene, adopted, against

the wishes of the economically advanced countries, a "Declaration and Program of Action for the Establishment of a New International Economic Order." At the heart of these resolutions are the following principles:

The right to nationalize foreign property without mention of compensation or recourse to international law;

Restitution for those who have been subject to neocolonialism in all its forms; A just and equitable relationship between the prices of LDC exports and their imports; and

Facilitating producers' associations for the purpose of increasing prices received for commodity exports.

The next step came in November 1974 when the U.N. General Assembly's Second Committee met and adopted a resolution on indexation for commodity prices. The resolution was adopted by a vote of 116 to the United States' single dissenting vote. The Second Committee resolved "to establish a link between prices of exports of developing countries and prices of their imports from developed countries."

The next major event in this integrated chain leading to the Seventh Special Session was the adoption by the General Assembly in December last year, of the Charter of Economic Rights and Duties of States (CERDS). The CERDS, passed over the negative vote or abstentions of nearly all Western industrialized nations, contains the major principles of the new international economic order that had been adopted in the Sixth Special Session: national sovereignty over resources, expropriation, and producer associations.

Several other important meetings of the "Group of 77" have played an important role in preparing for the Special Session:

The Dakar Conference of the Non-Aligned in February this year focused on increasing income from exports through commodity price agreements and proposed an international organization to do so.

The signature of the Lomé Convention in February 1975 by the European Community (EC) and the 46 countries of Africa, the Caribbean, and the Pacific (ACP) to which the EC has traditional, special ties, provided an important new commitment by the Community. The EC agreed-under limited conditions-to provide compensatory financing when a member country's specific commodity export earnings fall below certain levels. Although our analysis shows that it may not have a significant effect in practice, the Lomé Convention is a concrete response to the developing countries' demands, and as such has increased pressure on the U.S. to initiate a similar scheme.

Finally, at two meetings in March this year, in Havana and in Lima, the non-aligned met to reaffirm and refine the resolutions and purposes earlier developed. At Lima, the U.N. Industrial Development Organization (UNIDO) adopted the "Lima Declaration and Plan of Action on Industrial Development and Cooperation," which called again for sovereignty over natural resources, indexation, and producers' associations.

ISSUES AT SEVENTH SPECIAL SESSION

This is the background of the intense international activity which leads directly to the Seventh Special Session, in which the developed countries will be called specifically to account for progress or lack of progress-in acting on principles which have now been firmly established as goals for the Third World. In developing the United States' position, we want to address the problems which the developing countries have raised and to support their legitimate aspirations to participate more fully in the world economy. We are not seeking to maintain the status quo. We have put a great deal of effort into analyzing these problems and developing a policy which will be flexible enough to adopt changes in the system where necessary to improve the operation of the market. Such a policy is being developed under the leadership of the Economic Policy Board and the National Security Council which established a joint Task Force for this purpose. Let me summarize some of the basic conclusions we have reached to date:

First, our essentially open trading system, including free markets for commodity trade, has not failed. On the contrary, the efficient allocation of resources made possible by the market system has improved the living standards of all the world's people.

Second, the U.S. is not faced with the sole alternatives of unending confrontation with the developing world or agreement to jettison an international economic

system which we feel has basically worked well. There is a sufficient middle ground on which cooperative efforts between producers and consumers, developed and developing countries, can be productive without the U.S. abdicating its basic principles.

Third, excessive price fluctuations are costly to both producers and consumers. However, price fluctuations per se are not evil-in fact, they are part of the realities of the marketplace, and we should not distort the functioning of the market in the interest of short-run price stability.

Fourth, the solution to commodity problems does not lie in establishing high fixed prices and attempting to maintain their value through indexing.

Fifth, joint efforts between consumers and producers are the appropriate means of coping with specific commodity problems. Such efforts should be aimed at improving and strengthening the market oriented system. We must resist any generalized system of commodity agreements aimed at fixing prices.

With these basic principles in mind, let us look at some of the commodity and trade problems of the developing countries in more detail. To begin with, it's important to emphasize that trade in commodities is not simply a question of developing countries trading raw materials to developed countries in exchange for manufactured goods. Seventy percent of total world exports of non-food, non-fuel, raw materials are supplied by industrialized nations. In the case of the United States, two-thirds of our raw materials imports other than oil comes from developed nations, and we are the world's most important source of food and feed grains. Conversely, most developing nations are dependent on imports of fuel, raw materials, and often food for their own well being, often from developed countries.

Second, it is by no means clear that the terms of trade have inexorably moved against raw materials producers. The argument we have heard is that over the years a producer of raw materials must trade more units of his goods to get the same amount of manufactured goods in exchange. This is the basic rationalefor the proposals for indexation, in which the ratio of exchange between a raw material and manufactured goods is frozen.

This concept, while simple in theory, is most difficult to apply in fact. There have been great advances over the years in the ability to produce and transport raw materials cheaply, which have naturally brought prices down while not necessarily reducing the rate of return to producers. On the other hand, qualitative changes in manufactured goods make it difficult to compare what it takes in terms of raw materials to buy a unit of manufactured goods. After all, while a new Boeing 747 costs more than a DC-3 used to, the only change is not in price. I should note that at the request of the last United Nations General Assembly, the United Nations Conference on Trade and Development recently assembled a committee of scholarly experts from around the world to study the question of terms of trade and indexation. Even they were unable to arrive at a concensus as to whether there was convincing evidence that the terms of trade had moved against raw material producers. However, we can make these observations about the concept of indexation.

INDEXATION

Any attempt to fix prices independent of market forces will ultimately run into trouble. Although we are aware of the dependence of many countries on a single commodity for their earnings we do not believe that indexing commodity prices will bring them a long-term stable source of earned income for their development. First, price indexing would strengthen those least in need of help. Most raw materials production still takes place in the industrial countries, and price indexing would harm those most in need of help because the poorest, most populous states are net importers of raw materials. Finally, such a scheme would introduce artificial rigidities which are likely to result in misallocation of resources and scarce capital and underutilization of needed productive capacity in many parts of the world.

An indexation formulation most commonly put forward for commodity exporting developing countries is the idea of linking their export prices to import prices, which is to say to manufactured goods. This approach basically attempts to disconnect commodity prices from actual costs of production, and from consumer demand. The results of this policy are well known, as reflected in our own experience with the farm parity program. Basically, if prices received rise above costs of production, new producers and substitute products are encouraged and if prices bring forth more production than consumers are willing to purchase at

the given price, surpluses accumulate. At the same time, on the demand side, consumption is discouraged. This happened in the U.S. farm program and is now happening with oil.

Putting aside the economic arguments against indexation, the technical problems are also great. For example:

Agreement on representative base period.-Indexation assumes some price ratio between a commodity and what it is indexed to, but this ratio will be quite different depending on the time period selected.

Composition of a basket of goods against which to index the commodity.-In a multicountry arrangement, different countries have different import compositions, and those compositions change over time. A single basket of imports will be difficult to choose.

Qualitative changes in manufactured goods.-An airplane or tractor of the 1970s not only costs more than one of the 1960s, it is presumably better, whereas the commodity will likely be of the same quality.

Productivity changes.-Particularly in the case of commodities, some decreases in price may reflect productivity increases, so that price may drop but returns to equity increase.

Qualities and grades of commodities.—Most commodities vary widely in characteristics and require different manufacturing processes. A single pricing formula is most difficult to derive.

Nevertheless, the best argument against indexation may actually be the actual record of the purchasing power of commodity earnings. World market prices of most non-energy commodities have in fact risen over the past quarter century. This is true both in terms of their nominal prices and in terms of the industrial products which developing countries need. The Economist index of all commodities (excluding energy) rose over two times from its high in 1951 to its new peak in the first quarter of 1974. The index for metals went up some four times over the same period. On the other hand, the U.N.'s index of industrial goods did not quite double over the same period. Thus, the actual purchasing power of earnings from these commodity exports went up, not down.

ADDRESSING COMMODITIES' PROBLEMS ON A CASE-BY-CASE BASIS

These comments about indexation are not meant to suggest that all developing country complaints are unwarranted, nor indeed that the worries of some devel oped countries over supply availability are groundless.

It is true that many developing countries are highly dependent on one or a few raw material exports for their foreign exchange earnings, which they must have in order to pay for needed imports of food, fuel, raw materials, and manufactured goods. Sudden changes in prices of commodities have a much more exaggerated effect on their economies than on the larger, more diverse economic structures of developed nations.

Developing countries and some developed raw materials exporters do have some legitimate concerns over the issues of tariff escalation. Most countries have tariff systems in which the more processed the good, the higher the duty. Thus while imports of an ore may be duty free, imports of the unwrought metal face a low duty, the basic metal castings or shapes a higher duty, and finished goods of that metal an even higher duty. Raw material producers argue correctly that such systems clearly discriminate against their exports of processed goods as opposed to raw materials. If these countries are to diversify their economies, they should be able to process their own raw materials if it makes economic sense to do so.

Raw material consumers do have reason to worry about the long run availability of supplies, not because their physical resources are disappearing, but because adequate physical investment may not come forth in time to produce the raw materials when they are needed.

An important reason that investment may not be forthcoming is because of the uncertain investment climate in many developing countries, particularly in the extractive minerals fields, which has led to a concentration of investment in developed countries, even when physical conditions might indicate higher returns to investment in developing countries. Therefore, methods aimed at increasing investment in natural resources should be explored.

We need to consider each of these problems, but it is clear that the solutions will vary depending on the community. It is for this very reason that we have rejected the notion of seeking a broad-scale commodity agreement in

favor of a case-by-case approach to the problems of specific commodities. This does not mean negotiations which will fix commodity prices. It does mean that we will consider the range of possibilities for improving the performance of markets for commodities. In some cases, this can simply mean new producerconsumer groups to exchange information about supplies, processing, demand and consumption in order to improve the operation of the market in that commodity. We are willing to sit down with the producers and other consumers to discuss the problems posed by highly volatile price movements. In such cases, however, we have made clear that we will not consider agreements that have the effect of sustaining prices above market levels. On the contrary, we will not participate in such agreements.

As we look at individual commodities, we should bear in mind that commodity agreements, where they have been tried, have not been very successful. For instance, the coffee agreement broke down when prices rose very sharply as a result of threatened supply shortages. The sugar agreement failed for similar reasons. The Wheat Agreement became inoperative in 1969, soon after it was created. With respect to both tin and cocoa, prices were allowed to rise well above the ceiling set in the agreements. One basic reason for the failure of past agreements is that producers have seen them as a means of raising prices, not achieving greater price stability. Nonetheless, we remain prepared to consider improved new arrangements for certain commodities, when they can be negotiated.

As such, we participated in negotiations for a new International Tin Agreement which were completed in London at the end of June. We will now conduct a thorough interagency evaluation of that agreement, in the context of the joint EPB/NSC Task Force on Commodities, to determine whether to recommend to Congress that it is in our national interest to join that agreement. We are also now discussing the renegotiation of the International Coffee Agreement, which has been in existence since 1962, and again, this agreement will be subjected to intense review before a recommendation is made to Congress.

In the fall, probably September, we will be prepared to sit down with producers of cocoa to discuss the problems of the international cocoa market, which has been marked for decades by extremely volatile prices.

BUFFER STOCKS

This willingness to discuss the problems of specific commodities must entail a willingness to discuss possible mechanisms for smoothing out short-term price volatility. One of the major proposals for doing this has been the buffer stock. The idealized conception of a buffer stock is a reserve supply of a specific commodity, which is built up when prices are abnormally low (and which thus acts to raise those prices), and is sold when prices are abnormally high (and which thus acts to lower prices). Thus, both consumers and producers would benefit from less volatile price swings and the distortions they create.

We have found that actual experience with buffer stocks has not been very encouraging. In general, we have found that the buffer stocks must be very large in order to perform their intended function. They can be quite expensive to create, costing potentially billions of dollars, depending on the commodity in question. Thus, the question of who pays for the creation of the stock becomes an important issue.

Further, there is the question of who operates the buffer stock. In the past. buffer stocks have broken down in part because the owners of the stock have not wanted to sell when prices rise, in order to maximize their takings. To further complicate the problem, is the question of how to choose an appropriate range which short-term prices should be permitted to move. Should it be 15 percent, or 5 percent?

These are only a few of the problems, but they have demonstrated that buffer stocks should be approached cautiously and do not provide the ready panacea to the problems of short-term price volatility for every commodity.

NATIONALIZATION

The problem of expropriation without compensation or without adherence to the standards of international law is particularly sensitive and will be another important issue raised at the Special Session. Essentially, we disagree with the