point of view of less developed countries. And certainly they are not the answer to the poverty of the lowest 40 percent of the world.

Nevertheless, commodities have been elevated to the top of the agenda by the LDC's. They must be dealt with constructively if we are going to get on with the other issues of maintaining a cooperative system.

By maintaining our traditional opposition to new commodity arrangements, the United States will perpetuate the sense of confrontation pervading the world economy. Even U.S. indifference to the problem disguised by saying we will be sympathetic to workable proposals initiated by other countries is likely to sustain confrontation. The United States is too large and too important to hang back and force the burdens of initiation onto others.

A cooperative outcome requires U.S. leadership. Obviously, we must begin by being willing to discuss issues seriously with other countries. But it is our obligation to design honest proposals to meet the needs of LDC's as they see them and proposals that will also serve the essential interests of the United States.

The May 13th speech by Secretary Kissinger may or may not be the opening signal for such a change in U.S. policy. It is to be hoped that a more open-minded approach has finally been adopted. [Mr. Krause's prepared statement follows:]

1

STATEMENT OF LAWRENCE B. KRAUSE, BROOKINGS INSTITUTION

Many observers of the international scene, and I include myself among them, believe that 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 LDCs 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 arangements 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 LDCs 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:

(1) 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

(2) 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 com

1 The views are those of the author and should not be attributed to other staff members, officers, or trustees of the Brookings Institution.

petition 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. 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.

I believe the United States should advocate a new approach to commodities. We should seek a two stage negotiation. In stage one, 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 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 for 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 point of view of less developed countries. And certainly they are not the answer to the poverty of the lowest 40 percent of this world. Nevertheless, commodities have been elevated to the top of the agenda by the LDCs. They must be dealt with constructively if we are going to get on with the other issues to maintain a cooperative system.

By maintaining our tradition opposition to new commodity arrangements, the United States will perpetuate the sense of confrontation pervading the world economy. Even U.S. indifference to the problem disguised by saying we will be sympathetic to workable proposals initiated by other countries is likely to sustain confrontation. The United States is too large and too important to hang back and force the burdens of initiation onto others.

A cooperative outcome requires U.S. leadership. Obviously, we must begin by being willing to discuss issues seriously with other countries. But it is our obligation to design honest proposals to meet the needs of LDCs as they see them and proposals that will also serve the essential interests of the United States. The May 13th speech by Secretary Kissinger may or may not be the opening signal for such a change in U.S. policy. It is to be hoped that a more open-minded approach has finally been adopted.

Mr. FRASER. Thank you, Mr. Krause.

Mr. Grant, I note that your statement is extensive and I don't know how you want to handle it.

STATEMENT OF JAMES P. GRANT, PRESIDENT, OVERSEAS DEVELOPMENT COUNCIL

Mr. GRANT. If I may, I would like to insert the whole statement in the record.

Mr. FRASER. We do that with all of the statements.

Mr. GRANT. And then just cover the introductory part of my statement orally.

Mr. FRASER. Mr. Grant, would you put this into perspective in terms of what happened at the last special session and some of the politics of the problem that we are facing now? Would you give us the context in which we are looking at this set of issues?

Mr. GRANT. I shall, Mr. Chairman.

It is a pleasure to be with this committee and to see that you are looking into this set of issues while there is still time to do something about it. Let me say at the outset that I fully associate myself with the comments of my two colleagues here which I have heard for the first time.

I particularly share with them the sense of cautious hopeful optimism about the speech given by Secretary Kissinger in Kansas City earlier in the week which may precede a major forward step.

I see the special session as providing an opportunity to test the vision and will of the United States. It comes at a time when the vast challenge before us is that of living with growing interdependence, a challenge which is sharpened greatly by the increasingly intensified efforts of the developing nations to secure a greater voice in the management of the international economy and a more equitable share of the benefits of global economic growth.

This obviously is an effort which they have been pushing for a long time, really ever since UNCTAD I. One could describe it as having formally come into being then, but it only took on serious traction with the OPEC moves in the fall of 1973. Then we witnessed at the special session of the General Assembly, April 1974, for the first time, a broad cohesion as John Lewis has described, in which the OPEC countries and virtually all the developing countries cohesed into a common stand challenging the industrial countries of the north.

But I think it is a mistake to allow the debate to be caught within the frame that they have set, because the world has become so interdependent in recent years that for the first time it can be said to

require an economic order that takes into account the needs of the entire globe.

This global economic order which I prefer to call a GEO, requires a comprehensive approach that takes into account not only the newly intensified challenge of the developing countries of the south to the industrialized countries of the north, their challenge in the new international economic order, but we also need a response that deals with our needs to live with growing interdependence and also that responds to the fact that the poorest billion in the world are still doing abysmally poorly.

The special session, it seems to me, should be an important forum for advancing this broadened GEO concept and for also determining the possibilities for our responding to the challenge from the countries of the south with such ingenuity that all parties gain from the process. That is the key test.

Unfortunately, there is cause for serious anxiety about the special session because of the lack of adequate preparation. I have just finished participating in a meeting which has gone over in great detail the state of the preparedness at this time. There is a lack of adequate preparation which is particularly significant with respect to the United States.

We do not appear to be adequately prepared for the special session either in terms of strategy or in terms of staffing.

Only 100 days remain before the session, and many of the decisions need to be taken much sooner in the context of the meeting in June of the preparatory committee for the session, of the interim committee of the International Monetary Fund and, hopefully, of a resumed preparatory session in Paris for the later meeting on energy and other matters.

During this same 100 days, there will be a massive turnover of key experienced staff at the U.S. mission at the United Nations, and most notably in the still unofficial replacement of Ambassador John Scali by Patrick Moynihan.

The dangers are very real for a U.S. debacle at the seventh special session similar to that experienced by the United States at the sixth special session in April 1974, when our actions could be most kindly described as "too little, too late."

The United States appears to have been far further along at this stage with respect to the successful World Food Conference, both in terms of strategic concepts and organization for effective participation. The key issues for the United States include:

First, is the United States prepared to willingly negotiate, to bargain collectively, with the developing countries on their demands generally, and, more specifically, at the special session.

Assistant Secretary of State Enders' statement on the early demise of OPEC before the beginning of the Paris meeting on energy and other matters was not an auspicious preface to that meeting.

Secretary of State Kissinger's address at Kansas City on May 13, 1975, appears to be a clear affirmation of our willingness to negotiate, but it does not specify the forums, and the United States has not tended to favor the United Nations as a forum for discussing economic

matters.

Second, do we see the current global crisis as primarily a consequence of cyclical factors, drought, Middle East war, simultaneous worldwide boom followed by simultaneous recession, aggravated by the challenge of the developing countries to the northern dominated hierarchy of international power, or is something to far more fundamental now affecting the post World War II political and economic order that a molecular change can be said to be occurring in world order?

The answer to this question should vitally affect our negotiating strategy. If the latter, we will need the cooperation of the developing countries in a major way in developing new structures that will enable us to live successfully with growing interdependence, just as they will need our cooperation in bringing about a change in structures more responsive to their needs.

Under these circumstances, both parties could gain from successful negotiations, as at the World Food Conference. In the former is the underlying strategy, then the negotiations take place in the context of "winners" and "losers," with the United States, the historically advantaged and more privileged party, seeking to minimize its losses. The U.S. Government position on this issue is not yet clear.

Third, does the United States accept as a basic premise, leaving aside the question of degree, that the existing international economic order is in some important ways unfair to the developing countries and requires reform to give the poorer nations a greater voice in the management of the international economy and a more equitable share of the benefits of global economic growth?

Are the advanced countries prepared to acknowledge to the poorer nations on the global scene their claim? Clear acceptance of this premise by the United States would cross an historic bridge, as we did with our industrial workers in the United States in the mid-1930's, and should vastly improve the atmosphere for detailed negotiations with the developing countries this September and the years that follow. This, in effect, would cross the philosophical bridge; so far nobody in the U.S. Government has done this.

Fourth, what are the principal subject matter areas we are prepared to discuss seriously with the developing countries in the months ahead? Then I list a series of these in my paper and John Lewis has discussed others.

Let me say food is clearly one, energy is another one. It is interesting to note on energy that nobody, neither the OPEC countries nor we have yet a long-term global approach to energy as the world has approached the world food problem.

Other issues that are very much on the forefront are the role of multinationals, the sharing of power in the IMF, the World Bank, the restructuring of much of the United Nations machinery. And I would hope that in your subsequent testimony from the administration you could try to identify those areas where they are prepared to take a stand.

The fifth area, then, is for those areas that we are prepared to negotiate on, to what extent can negotiating principles be agreed upon in advance. This was done with great success in the World Food Conference where, before we went to the meeting, on issues such as the