the tactical energy that some of the middle-level oil-importing countries would expend on sustaining the third-world coalition. And we grossly underestimated the depth of the shared frustrations with the shortfalls of recent international development efforts, with advanced-economy dominance of international decisionmaking, and with the poor countries' longstanding dependence on the rich that bind the third world emotionally.

The wisest premise for American policy, I think, is that the reaffirmed solidarity of the third world, while by no means complete or unexceptional, will prove fairly tough and enduring. If so, two trends are probable. One is toward what is being called collective self-reliance. To some degree, if the solidarity is for real, a portion of the unprecedented volume of savings that now is accruing to the oil exporters will serve as internal resources available to the developing countries collectively. In company with the deployment of those resources we can expect a push-not overwhelming but stepped up-toward greater trade, technical, and industrial cooperation within the third-world group itself.

But the second trend, which is what the New International Order is more particularly about, concerns transactions between the developing and the advanced economies. The predominant theory of the new order is not that the poor countries together with their oil-exporting members who have struck it rich should become independent of the OECD and the socialist countries. It is rather a theory of mutual interdependence in which the augmented power of the developing countries collectively is used to bargain for a better set of developmental outcomes. How should the United States respond to all of this? Let me in the balance of this statement hurriedly sketch a number of points.

First, certain matters of style.

1. The United States can either fight the New International Economic Order or try to make it work-sensibly, without self flagellation or softheadedness. My preference for the second course is not only because, in terms of broad equities and planetary interests (in which Americans also have a stake), I think it is the right course. In any event, negative, blocking strategy probably could not prevail; it would serve only to isolate us, even from many of our OECD colleagues. And it would not serve the very substantial selfish interests--for example, as to regularizing raw-material supplies-that we have in a more buoyant and equitable pattern of development overseas.

2. We no longer can dominate international development policy to the degree we have become accustomed. We must be ready to share power and decision-in ways of which the current moves to increase OPEC voting rights in the Bank and the Fund are only the leading edge. But the obverse of the same point is that because our relative power has been rather suddenly diminished we by no means have become suddenly powerless. Our challenge is not to fall into a funk or settle for the role of a point-scoring opposition. It is to find worthwhile positive measures around which, as still the most influential single actor on the developmentpolicy scene, we can heip organize cooperative consent.

3. We will do well to be pragmatic. In a generally welcome speech at Kansas City the other day, the Secretary of State remarked that we nevertheless will continue to resist demands of developing countries for a ". . . new economic order founded on ideology . . ." Fair enough-if he meant exclusively or unreasonably founded on ideology. But then let us also see that we are not mousetrapped by our own stereotypes-as is the case; for example, when we reject all exercises of market power by developing countries on grounds of high principle or let the whole complex of our policies toward a developing country become dominated by the single (important but usually not transcendent) issue of its government's treatment of American companies.

4. To play the constructive role in the new development policy arena that our own long-term self interest requires we shall need for some time a fairly thick skin. We can confidently expect a fair amount of abuse, for in the dependencia scenario now so widely accepted in all three developing continents, we are the heavy in the piece. We certainly do not need to concur in, or fail to dispute, such assessments. But, by understanding their origins better, we do need to become less distracted by them.

5. The best way of minimizing this kind of rhetorical punishment and establish our credentials as constructive builders of the new order will be as quickly and as much as possible to shift debate from the general to the specific-and out of such general and inherently rhetorical bodies as the General Assembly into smaller more technically competent forums. In those forums the U.S. should seek the

image, not of the occasional, reluctant acquiescer to others' initiatives but of a resourceful advocate of whatever policy improvements it finds acceptable.

Next, by way of illustration, a few of the kinds of specific polices that it seems to me a U.S. Government seriously striving to help implement a workable version of the new economic order might attempt to support.

6. The best beginning we yet have made in the new-order vein is happily in the most urgent field of all-namely, in the areas of food and agricultural development at last November's World Food Conference and the new ventures growing out of it. This is a field in which the United States can and should maintain a strong initiative. Both we and the developing countries know much better now than we did 15 years ago how to guard against food aids becoming a crutch deterring indigenous agricultural development in the poor countries. Given this assurance, considerable food aid both for building buffer stocks and for supporting additive labor-intensive activity in the neediest countries can be a powerful and appropriate agent of development for some years yet. The United States has a comparative advantage in the field that is not unlike that of the oil exporters. It is one whose use, if carefully and systematically planned, need not have disruptive domestic inflationary effect. Skillfully employed, it has the potential for stimulating additional OPEC and other OECD financial transfers into the interrelated food-energy-water-fertilizer sectors. Plainly, food aid is a segment of American policy that invites redesign and reinforcement.

7. A great deal, of course, could be said about general trade policies. But in the opening round I will leave that to my colleagues. What does seem evident is that if the U.S. is indeed interested in making a forthcoming response to the developing countries, it is time to set aside our pro forma opposition to commodity policy proposals. In a context of greater worries about raw materials scarcities and cyclical upshots in import prices, commodity stabilization schemes clearly can benefit buyers as well as sellers. Indeed from a U.S. anti-inflationary viewpoint, it probably is more important to avoid the cyclical price surges than it is to avoid the advance in average prices that most LDC commodity schemes would cause. Nor is it clear that systems of multi-commodity stocks or of modified indexing would need prevent reasonable flexibility of relative prices.

Thus, without prejudging the results of a closer examination, there would be great merit, it seems to me, in the U.S. Government giving the most sympathetic consideration it can to the package of commodity proposals that UNCTAD recently has projected. Tactically, moreover, such a move would be salutary. If the choice as to market power contests is between frontal confrontations with one-sided producers' associations and structured negotiations and rules-making in an organization to which both buyers and sellers belong, there is much to be said for the latter. Furthermore, the UNCTAD secretariat, which has the confidence of its LDC constituents, is unusually competent and is exceptionally well led; it is one with which the U.S. Government would do well to develop improved rapport.

8. In the realm of transfers the base line of a new U.S. position must entail recognition that, as tough as traditional foreign aid has become to sell in this country, nothing, including the OPEC phenomenon, has greatly diluted the obligation of the advanced economies, especially with regard to the poorest countries. Ability to provide concessional transfers still is primarily a function of per capita income and wealth, and that capacity still lies overwhelmingly with the OECD countries, secondarily with a number of the socialist countries. Aside from the special role of food aid in the U.S. case, the first priority, surely, is to provide continued American support for IDA. In addition, a forthcoming U.S. position will be prepared to look more systematically and ambitiously than we have recently at major debt rescheduling exercises. The United States should concentrate this and other forms of bilateral concessional assistance more heavily on the poorest countries. As a participant in the multilateral institutions and otherwise, it should facilitate the channeling OPEC capital to the developing countries on terms differentiated by the neediness of the recipients. For the sake of the record, in my judgment, the U.S. should reverse its quite indefensible refusal to accept the so-called SDR link. However, as a practical matter, that issue has been shelved indefinitely by the lack of liquidity needs for SDR's. Meanwhile, the U.S. should follow up its at least formally quite positive initiative to put a portion of the value of IMF gold holdings to the service of development. There is, for instance, the possibility that an interest subsidy on some of the OPEC capital being cycled to the poorest countries could be financed from this

source.

I have concentrated on a variety of the contributions the U.S. should make to the New International Economic Order that is struggling into being. But I do not by any means see us as only a compliant contributor. As fast as our credentials as a positive yet power-sharing proponent are established, I would see us weighing in quite forthrightly to challenge fallacies in the new-order rhetoric and to hold other participants to account. Here again, three very abbreviated illustrations:

9. We should, I should think, dismiss as rubbish the idea that the new order can be simply or mainly redistributive in a static sense. It does not posit that the world's use of scarce resources has reached an outer limit or call upon the advanced economies to stop growing. On the contrary, the worst immediate problem for the developing countries just now is that the advanced economies are not growing enough; they are in recession. Over time, narrowing the welfare gap between the rich and poor countries does indeed mean that the latter must strive and be assisted to grow more rapidly than the former. But this has a much better chance of happening in a context of rich-country expansion.

10. A further proposition that American development policy makers should be expected emphatically to press is the insistence that, although a new international economic order is and can be important, it never will be more than the lesser half of effective development policy. The greater need is for a new internal economic order in many developing countries. In particular there is a danger that the leadership elites in some poor countries will get mesmerized by their own rhetoric into believing that a surge of new international redistributive justice is about to lessen their need for internal reforms-for example, in agriculture, and with respect to mass poverty and unemployment and internal distributive justice. This is most certainly not the case.

11. Finally, it will be most appropriate, once we have weighed in with our own inputs, for the U.S. to raise pointed questions about the scale and quality of the socialist countries' contributions to the development effort. Too often, because they have not fitted into the established framework of poor-rich country relations, the socialists have done comparatively little. In recent years, while the rest of the world has been caught up in great turbulence, their capacity to meet the poor countries' trade, aid, and other needs has been greatly enhanced. It is time greater demands were placed upon them.

Taken as a whole, the foregoing is not a very palatable prescription for American policy to put to a Congressional committee just now. And yet, if a policy pattern of this sort is what genuinely responsible U.S. participation in these new circumstances requires, it would not, I would ordinarily think, he beyond the capacities of the Executive and the Congress jointly to begin to lead the country in this direction. Frankly, under the extraordinary conditions of the past year or two, I have been very bearish about our ability in the near term to do anything of the kind I have suggested. But hope springs eternal, and Secretary Kissinger's Kansas City speech last week was moderately encouraging. Mr. FRASER. Mr. Krause.

STATEMENT OF LAWRENCE B. KRAUSE, BROOKINGS INSTITUTION, WASHINGTON, D.C.

Mr. KRAUSE. Thank you for inviting me. I am particularly pleased because I am a newcomer to this field, unlike my colleagues, and I am now interesting myself because I believe that the issues between rich and poor countries, the so-called north-south issues, will be the central focus of world politics over the foreseeable horizon.

As of now, developed countries are on a confrontation track with less developed countries. This was most visible in last year's special session of the General Assembly and again in the breakdown of the agenda session for a World Energy Conference in Paris this year. The basic conflict arises because LDC's are demanding greater equity from the international economic system, while the developed countries are demanding or unwilling to sacrifice-greater efficiency at their own expense.

This conflict on the international scene is the same as that referred to by my colleague, Arthur Okun, as "the big tradeoff" in the

domestic economy. The United States has much to lose from the continuation of the confrontation, yet we have fueled it by outright rejection of LDC demands rather than recognizing that a tradeoff was involved and that a useful compromise was possible.

Among the specific issues raised as part of the new economic order, commodity arrangements have been elevated to the top of the agenda. Commodity arrangements have been highly politicized because many LDC's feel they have been exploited in the production and export of raw materials from their countries in the past and because the success of OPEC raises hopes of carryover into other commodities. The LDC's are seeking four objectives from new arrangements: Greater price stability, improved terms of trade, greater domestic processing, and greater national control over their resources.

The U.S. response in the past has been essentially negative and unsympathetic to the goals being sought.

The U.S. position can be characterized as follows: First, the best economic results will be obtained by leaving the production, pricing, and distribution of commodities to competitive forces of supply and demand in a free market, and second, the administrative and substantive difficulties in operating a commodity agreement are overwhelming and, thus, such schemes are impractical.

The U.S. position, as described, is vulnerable from both a positive and normative point of view. Free competition does not now exist in commodity markets and probably never existed for most commodities. The U.S. Government itself greatly interferes in the market for temperate agricultural products. Most mineral markets are dominated by a few large firms so that the quality of competition is highly suspect. Moreover, foreign governments are unlikely to submit to the free reign of market forces now that the substance of international relations is so dominated by such issues. The United States cannot create a free market for commodities by itself and many other countries are unwilling to operate in such a structure for reasons that are quite understandable from their point of view.

Furthermore, a free market solution may not be optimal even from the standpoint of efficiency. The fact that there have been wild swings in both commodity prices and output during most business cycles suggests that much economic waste is involved. From a theoretical point of view, the fact that forward markets cannot exist to extend over the full life of exhaustible resources means that market prices will not correctly allocate resources among generations.

This is an important point, Mr. Chairman, that even if you had a perfectly competitive market, you would not have an optimal pricing system. Thus, there is ample reason to discard free market ideology as the backbone of U.S. policy.

What should replace it is a pragmatic view of commodity markets which recognizes that there is some gains to be had from prospective new arrangements.

Economists have long been intrigued by commodity agreements. Recently a 1942 British Treasury memo of Lord Keynes has been unearthed in which he advocated such agreements. While the details of the Keynes plan no longer fit the contemporary world, his rationale for them is still pertinent. In my view, commodity agreements are an idea whose time has finally arrived.

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I believe the United States should advocate a new approach to commodities. We should seek a two stage negotiation. In stage 1, a commodity code would be sought in order to establish certain general principles and goals. For instance, the general principle of price stabilization, output, and access guarantees could be established. Furthermore, a disputes procedure could be created. Essentially, the idea is to restore the rule of law in commodity markets.

In the second stage, a comprehensive series of commodity agreements would have to be negotiated and tailored to the characteristics of individual commodities. While they would no doubt have to be negotiated sequentially, they should be linked together to form a mutually reinforcing whole.

At least four patterns of agreements would be necessary: One for petroleum alone, one for other commodities from exhaustible resources, one for agricultural products with a long production cycle, and one for other agricultural products.

Commodities that are incapable of being stored would be excluded. Tentatively, other commodities like coal or uranium that have not evidenced price instability could also be excluded, although the decision could be reversed.

Much study would have to go into the designing of such agreements, but I believe they should include certain characteristics. First, substantial stocks of each commodity should be held under international control.

Second, the financing of the stocks should be provided by a single joint fund.

Third, announced target prices should be set for each commodity along with an intervention range and an agreed mechanism for changing prices overtime.

Fourth, countries would only be given the option of taking part in the entire scheme and could not opt for just certain of the agreements. Fifth, a reasonable amount of resource transfer from rich to poor countries could be built into the scheme, but not through the mechanism of setting artificial prices.

Sixth, equal voting would be assigned to producer and consumer interests, but weighted by the importance of the country in the particular commodity market.

I foresee a great deal of value from this approach for the United States and for other countries as well. There is political benefit to be gained from reestablishing the cooperation needed to manage our interdependent world economy.

Furthermore, substantial economic benefits could arise from the joint gains being created, some of which would go to the United States. The gains will come from avoiding the economic losses from price instability, improved price signals for investment planning and the avoidance of market disruptions. The essence of the negotiation that I see as a possibility is that consumers would offer price stability and assured markets in return for price stability and assured sources of supply. The gains from this agreement would be allocated primarily to poor countries, both as producers and consumers of commodities.

One point should be quite clear. Commodity arrangements will not be the entirety of our economic relations with less developed countries. They may not even be the most important economic measures from the