A "NEW INTERNATIONAL ECONOMIC ORDER"? AN OUTLINE FOR A CONSTRUCTIVE U.S. RESPONSE, PAPER BY ROGER D. HANSEN,* OVERSEAS DEVELOPMENT COUNCIL

INTRODUCTION

For the past twenty years, and particularly since the founding of the U.N. Conference on Trade and Development (UNCTAD) in 1964, the world's developing countries have grown increasingly critical of major aspects of the various regimes-trade, investment, technological, monetary, and foreign assistancewhich together constitute today's international economic system. Particularly within the UNCTAD format, but increasingly within other spheres of the United Nations system, the less developed countries have pressed the industrial countries to modify aspects of these international economic regimes in ways which would contribute to more rapid rates of economic growth within the poorer countries.

In the aggregate, these requests by the developing countries for systemic changes have evoked what can at best be characterized as marginal responses on the part of the industrialized world. One major reason that Northern responses have been limited-if not wholly negative-is that many developedcountry economists and policy makers have felt that the international economic system has not discriminated against the developing world to any significant degree.' Citing the "success stories" within the developing world, they have consistently held that mismanaged domestic economic policies and development strategies, and not the international economic system, have been the root cause of many developing-country problems. "The fault, dear Brutus, is not in our stars but in ourselves. . . ."

A second, and perhaps equally important, reason for the leisurely pace of the industrialized-country response to Southern demands has been the problem of inequality at the bargaining table. As one close observer of developing-country bargaining tactics has noted, where the demanding side cannot induce fear in the opponent, progress comes very slowly if at all. As long as they were perceived to have little bargaining power as a group, the developing countries were forced to rely on economic analysis and humanitarian appeals to support their requests for change. Some of their economic analysis (e.g., regarding North-South terms of trade) was weak; the "humanitarian" response from most industrial countries was no stronger. For the developing countries, the net result was a decade (1964-1973) of growing frustration with the general unwillingness of industrialized countries to alter the rules of the international economic system to conform with the needs of the development process as perceived within much of the South.

With the success of the OPEC countries in quadrupling the price of oil in a single year (1973-74), perceptions of bargaining power suddenly changed. Nowhere was the South's altered perception of its own position more clearly demonstrated than within the U.N. system during 1974. At the Sixth Special Session of the U.N. General Assembly in April-May 1974, the Declaration on the Establishment of a New International Economic Order-a declaration encompassing a decade of Southern demands for reform-was adopted without a dis

*Roger D. Hansen is a Senior Fellow with the Overseas Development Council and preriously served as U.S. Deputy Assistant Special Trade Representative in the Office of the Special Representative for Trade Negotiations. His most recent publications include "The Emerging Challenge: The Global Distribution of Income and Economic Opportunity," which was issued as a chapter in the ODC's comprehensive annual assessment of U.S. Policy. The U.S. and World Development: Agenda for Action. 1975; "The Policies of Scarcity," which appeared as a chapter in Agenda for Action. 1974; and U.S.-Latin American Economic Policy: Bilateral, Regional, or Global? (Overseas Development Council, 1975). Dr. Hansen is the author of several books on Mexican and Central American economic development, including The Politics of Mexican Development (Johns Hopkins, 1971).

In this essay the term "North" is used as a shorthand description of the world's "developed" or "industrialized" countries: the term "South" encompasses the "less developed countries, ranging from the newly rich but nonindustrialized members of OPEC to the poorest and "least developed" countries of Africa. Asia, and Latin America. 2 Branislav Gosovic, UNCTAD: Conflict and Compromise (Leiden, Holland: A. W. Sijthhoff. 1972), p. 323.

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senting vote. In December of the same year, under pressure from the developing countries, the General Assembly also overwhelmingly endorsed the Charter of Economic Rights and Duties of States, which, at the request of the developing countries, had been under consideration at the United Nations for several years. The United States, together with West Germany, the United Kingdom, Belgium, Denmark, and Luxembourg, were the only U.N. members to vote against the Charter's adoption.

Following these initial essays in constitution making, the developing countries held a series of conferences among themselves-most notably, the meeting of 110 nonaligned nations at Dakar, Senegal, in February of 1975 at which they reached a consensus on concrete proposals for transforming the New International Economic Order from rhetoric to reality through the reform of the rules and norms of the present international economic system." Most of these proposals were subsequently incorporated-with only the United States casting a negative vote-into the more internationally based Lima Declaration issued by the Second General Conference of the U.N. Industrial Development Organization (UNIDO) held in Peru in March 1975.*

For several reasons, all of this Third World activity assumes an importance quite unimaginable only a few years ago. First, it comes at a time when relations between the United States and the so-called "Group of 77" developing countries (now numbering close to one hundred) are characterized by unparalleled antagonism. Second, it comes at the threshold of a series of formal and potentially crucial confrontations-beginning with the U.N. General Assembly's September 1975 Seventh Special Session on Development Cooperation. Other meetings in the series will include the General Assembly's regular session (September-December 1975), the fourth session of UNCTAD scheduled for 1976, and a potential series of “producer" "consumer" summit meetings likely to be scheduled under the initial auspices of the Organisation for Economic Co-operation and Development (OECD) and the Organization of Petroleum Exporting Countries (OPEC). And finally, as noted, it comes at a time when the developing countries' perceptions of their economic goals are far stronger than they have been at any moment since most of them became independent states. In this setting, a refusal by the United States and other industrialized countries to discuss and begin to negotiate quite specifically and constructively on the broad range of economic issues raised by the developing countries might well trigger a series of unilateral economic and political actions by the South whose net result might well prove costly to all countries. Among the more obvious candidates for such unilateral actions in the event of continued deadlock over the next year are the formation of new cartels to raise raw-material prices, the use of embargoes, debt defaults, and expropriation of foreign direct investment.

What are the major issues which must be dealt with, why are the developing countries' perceptions of their enhanced bargaining power likely to push them to overt actions damaging to U.S. (and probably global) interests if future North-South sessions on reform of the international economic system end in deadlock, and what are the proper policy conclusions to be drawn by the United States?

THE SOUTH'S ECONOMIC DEMANDS

Most of the major demands which have filled the recent plethora of declarations by the United Nations, the nonaligned countries, and the Group of 77 are familiar to anyone who has followed the history of developing-country appeals for change in the present international economic system. Cumulatively, they for the most part represent demands for higher levels of resource transfers-direct and indirect—from North to South. The specific areas covered are international trade, aid. foreign investment (both direct and indirect), technology transfer, and international monetary reform.

In the trade field, the demands are for (a) various forms of international commodity agreements which would raise and stabilize the price of raw materials; (b) nonreciprocal reductions in developed-country barriers to developing

3 See "The Dakar Declaration," Conference of Developing Countries on Raw Materials (Dakar, Senegal. February 4-8, 1975). U.N. Doc. TD/B/C.1/L.45., February 17. 1975. 4 See Report of the Second General Conference of the United Nations Industrial Devel opment Organization (Lima, Peru, March 12-26. 1975), U.N. Doc. ID/CONF. 3/31. May 30, 1975.

5 Certainly not all demands fit this characterization. Particularly in the trade field, many demands are for systemic reforms which would increase the efficiency of global resource allocation and, in so doing, increase Southern growth opportunities.

country exports; (c) expanded generalized trade preferences for the developing countries to better enable them to compete with industrial-country production in the markets of the North; and (d) better-financed domestic adjustment assistance programs in the North which, by easing the transitional pains accompanying the restructuring of Northern economies, will facilitate increased imports of Southern manufactured (and in some cases agricultural) goods." In sum, the South seeks increased relative prices for its exports to the North as well as increases in the volume of such exports.

In the field of aid, the Southern demands include the following: (a) that the developed countries meet the aid targets they themselves agreed to in the International Development Strategy for the Second U.N. Development Decade (a) minimum of 0.7 per cent of GNP in the form of official development assistance and 1.0 per cent GNP including private capital flows to the South); (b) that the North increase its financial commitments to those emergency funds created during the last eighteen months in response to the food and fuel crises of 19731975; and (c) that the North be prepared to renegotiate the terms of debt for those Southern countries experiencing serious balance-of-payments problems aggravated by debt-repayment obligations.

In the area of foreign investment, there are again several distinct Southern goals. One is greater access to international capital markets. A second is the elimination of the traditional international legal restraints on the expropriation of foreign direct investment, including the putative requirement of "full, prompt, and effective" compensation. Demands in this area often are worded so ambiguously that they have been characterized by many developed countries-with some justice as demands for the acceptance of the principal of "confiscation." A third Southern goal is to engage Northern assistance in policing the activities of multinational corporations for the general purpose of increasing the level of economic benefits to the host countries. Such increased benefits might take various forms, e.g., greater North-South capital and technology flows, lower charges on technoolgy transfer, more job creation in developing countries, and increased developing-country exports to the North.

In the field of technology transfer, Southern objectives include Northern financing earmarked for the creation, expansion, and modernization of Southern scientific and technological institutions, Northern support in "persuading” multinational corporations to adapt their technology to host-country development needs, and international support for changes in patent laws and other measures which will lower the costs of techology transfers to the South.

Finally with regard to the international monetary system, the developing countries continue to demand (a) a greater voice in the reform and management of that system; and (b) an international reserve-creation process which enhances Southern access to global production by distributing a far greater portion of the special drawing rights to Southern countries than they receive under present International Monetary Fund arrangements.

Most of these demands will elicit a sense of déjà vu among followers of North-South economic debates over the past decade. There are, however, others which will seem novel both in the range of their ambition and the forcefulness of their tone. Most prominent among these newer goals are the following :

(1) A much greater role for the Southern countries in the process of international economic decision making (within the IMF, the World Bank, the General Agreement on Tariffs and Trade, and elsewhere)-a role which would, for example, ensure a greater automaticity in many types of NorthSouth transfers;

(2) A consciously programmed relocation of international economic production which will swiftly increase the relative share of global industrial output originating in developing countries;

(3) Support for a far greater degree of cooperation among developing countries (or "collective self-reliance" in the South's own terminology) designed to strengthen both the Southern economic base and its bargaining position vis-a-vis industrialized countries (including international support

For a fuller discussion of these issues, see Guy F. Erb. "Trade Initiatives and Resource Bargaining." in James W Howe and the staff of the Overseas Development Council. The U.S. and the Developing World: Agenda for Action, 1975 (New York: Praeger Publishers, Inc.. 1975), pp. 87-104.

7 For a discussion of the shortcomings of the present distribution of the IMF's Special Drawing Rights, see James W. Howe. Special Drawing Rights and Development: $10 Billion for Whom?, Development Paper No. 9 (Washington, D.C.: Overseas Development Council, 1972). Reprinted from Foreign Policy.

for all developing-world raw-material producer groups, preferential trade arrangements among developing countries, intra-South payments unions to increase trade among developing countries etc.); and

(4) Explicit statements that since "colonial injustice" and "neo-imperialism" are in great part responsible for the present inequities in the global distribution of income (a ratio favoring the North by about 20:1 in real per capita terms at the present time), the North must provide increased net resource transfers to the South in all the areas noted above in order to close the present income gap.

As the list of Southern demands is analyzed, it becomes manifest that the calls for a new and "equitable" international economic order are at heart political, not economic. For almost all Southern economic arguments (and supporting empirical analysis) justifying major reform, equally erudite Northern analytical responses can be produced in defense of the present system. Whether the subject is North-South terms of trade, a cost-benefit analysis of the impact of multinational corporations on developing countries, or the role of aid in the development process, economic analysis is generally inconclusive in its attempts to measure the developmental impact of present international economic regimes. And for better or worse, economic analysis is increasingly irrelevant to many participants in the present debate except to the extent that it includes considerations of "equity," whether defined as gloal income distribution, the global location of industry, or a mutual vulnerability of Northern and Southern economies to each other. Presumably, this latter condition will be more likely to produce "positive-sum" situations in international economic relations—ones from which all participants may gain-than was true of the pre-OPEC set of asymmetrical interdependencies in which the North was generally perceived as minimally dependent upon the South in an economic sense, while the South was very dependent on the North (for markets, capital, technology, etc.). Thus the present North-South conflict in the economic arena is essentially focused upon equity in all of its diverse forms, ranging from the distribution of global income to the distribution of power in international economic institutions. And here one encounters a fundamental stumbling block to a constructive NorthSouth dialogue. Issues of equity are better examined by the philosopher than the economist; they involve the analytically vexing question of "justice" to which the economist brings no self-evident comparative advantage. Therefore, as long as the elements in the present North-South conflict over the new international economic order are treated by protagonists from either camp as economic issues alone, the sterility of the present debate is likely to be assured.

The rapidly escalating rhetorical demands of the developing countries are in great part a reflection of their perceptions of a changing power balance in the world's political economy. They are aware of the growing restraints on the Northern use of force in North-South conflicts, they have witnessed the fissures within the Northern bloc as industrialized countries and corporations have competed for special economic arrangements with resource-rich developing countries, and they have observed the success of the OPEC countries in quintupling the price of oil in less than two years. The very fact that more than ten producer cartels among the developing countries were formed or strengthened in the aftermath of OPEC's actions in 1973 suggests the speed with which Southern perceptions are changing-as to Southern willingness to contemplate a series of Southern unilateral actions to achieve the goals stated in the pronouncements noted above.

It is quite possible that present Southern perceptions exaggerate the South's real strength. OPEC may prove to be the singular case in which a producer cartel can exercise significant and long-term price leverage. The degree of developingcountry unity required to accomplish basic changes in the ground rules of today's international economic system may simply be beyond the reach of the Group of 77 at the present time. Exaggerated or not, the perception of a major change in the balance of political and economic power that now animates most Third World governments will to a considerable degree determine the course of NorthSouth economic relationships over the next several years if not longer.

For a particularly lucid discussion of the inconclusiveness of the empirical evidence in two major areas of North-South controversy. see Robert O. Keohane and Van Doorn Ooms, "The Multinational Firm and International Regulation" and Charles R. Frank, Jr., and Mary Baird. "Foreign Aid: Its Speckled Past and Future Prospects," International Organization, Vol. 29, No. 1 (Winter 1975).

Developing-country elites are clearly aware of the need for "Southern solidarity" if the developing countries are to make major systemic gains in upcoming negotiations in the United Nations, the General Agreement on Tariffs and Trade, the IMF, and elsewhere. And they are equally aware of how closely their fate is tied to the action of the OPEC nations. In the declarations emanating from the recent series of developing-country conclaves-for example, the conferences held in Dakar in February 1975 and in Algiers later that same month-the developing countries recognized repeatedly that, barring Northern changes in policy, OPEC funding of developing-country commodity schemes, regional banks, technological institutes, and other ingredients of a new international economic order would be critical to their efforts." If OPEC funding in ever increasing amounts is not forthcoming, a major North-South economic confrontation carries serious risks for many of the poorer states of the South. Yet the degree of frustration within many developing countries resulting in good part from the unfulfilled Northern commitments to the development process within the South-together with the Southern perception of the exising international system's inequitiesmay continue to move the present confrontation from rhetoric to reality regardless of future OPEC policies toward the developing world. And even if further attempts at raw-material producer cartels fail, if policies such as expropriation and defaults on loans should prove self-defeating in the long run, and if other unilateral and multilateral Southern efforts fail to usher in a more “equitable" international economic order, a great deal of damage may well accompany such efforts damage which surely will affect the North as well as the South if confrontation politics begins to seriously distort international trade, investment, and technology flows.

As the sketch of developing-country demands for reforming existing international economic systems presented in this section indicates, the scope of the South's agenda for negotiation is vast. Nevertheless, some sense of Southern priorities is perhaps best captured by the Group of 77's provisional list of “action" topics submitted to the June meeting of the Preparatory Committee for the U.N. General Assembly's Seventh Special Session:

(1) International trade (regulation of raw-material and commodity markets through an integrated multi-commodity approach including buffer stocks, intervention prices, etc.; indexation of the prices of developing-country commodity and raw-material exports to the prices of their imports from developed countries; and access to markets of developed countries for raw materials, commodities, and manufactures and semimanufactures of developing countries);

(2) Transfer of real resources for financing the growth of developing countries (including international monetary-reform schemes which would increase North-South real resource flows);

(3) Science and technology (measures and programs designed to expand the capability of developing countries to apply science and technology to development);

(4) Industrialization (plans to implement the March 1975 Lima Declaration of the U.N. Industrial Development Organization which set the goal of 25 per cent of the global industrial output-compared to 7-8 per cent at present to be produced in the developing countries by the year 2000).

INITIAL U.S. REACTIONS

As of July 1975, the U.S. response to the developing-countries' demands has been unenthusiastic at best. On trade issues the United States has continued its traditional opposition to commodity agreements "except on a case-by-case basis,” and has pointedly opposed the concept of indexing developing-country commodity exports to the prices of their imports from developed countries.

On the general subject of the transfer of resources and any automatic link between international monetary reform and aid flows, the U.S. position also has remained rigid. With regard to resource transfers, the United States contributed

0 Individual Southern countries, especially those which are resource rich and have large internal markets, may make major gains without any Southern solidarity. But the developing world as a whole can make major gains only through systemic reforms. In order to achieve such reforms, a great deal of "Southern solidarity" will be needed in a series of international negotiating arenas.

10 OPEC commitments to the developing countries approximated $8 billion in 1974; disbursements probably exceeded $2.5 billion.