ISSUES AT THE SPECIAL SESSION OF THE 1975

U.N. GENERAL ASSEMBLY

TUESDAY, JUNE 8, 1975

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERNATIONAL RELATIONS,
SUBCOMMITTEE ON INTERNATIONAL ORGANIZATIONS,

Washington, D.C.

The subcommittee met at 2:07 p.m. in room H-236, the Capitol, Hon. Donald M. Fraser (chairman of the subcommittee) presiding. Mr. FRASER. The subcommittee will come to order.

The Subcommittee on International Organizations today is holding its third day of hearings on the U.N. special session. At the two previous sessions, testimony was received from the academic community and from the Department of State.

The focus of the hearings is on the issues which are likely to be discussed at the special session and the alternative U.S. policy responses. These issues include producer associations, commodity agreements, indexation, resource transfers, industrialization, and the role of developing nations in the international financial institutions.

The impetus for scheduling this series of hearings was a concern. that the United States was not seriously considering the issues raised by the New International Economic Order and that the United States might institutionalize the recommendation of its new Ambassador to the United Nations of "going into opposition" in the various international organizations, a strategy which proved counterproductive at the sixth U.N. special session last year.

The impression left from the hearing with representatives of the Department of State-and from recent speeches by the Secretary of State-is that the Government is now seriously considering specific issues within the New International Economic Order and is searching for policy alternatives, but that search has yet to produce policies which will go very far toward reconciling the U.S. position with that of the Group of 77.

We are pleased to have with us today two representatives from the Department of the Treasury, the other executive department which is principally concerned with foreign economic policy in general and specifically with many of the issues in the New International Economic Order.

Mr. Charles A. Cooper, as Assistant Secretary for International Affairs, is concerned with the broad sweep of issues that will be raised at the special session. Mr. Gerald L. Parsky, who is Assistant Secretary for Trade, Energy, and Financial Resources Policy Coordina

tion, is involved specifically with the critical subjects of commodity agreements, producer associations, and trade. Gentlemen, we welcome. you here today and look forward to your testimony.

STATEMENT OF HON. CHARLES A. COOPER, ASSISTANT SECRETARY OF THE TREASURY FOR INTERNATIONAL AFFAIRS

Mr. COOPER. Would you like us to read the statements that we have prepared, Mr. Chairman?

Mr. FRASER. Well, I leave it up to you as to whether you would rather summarize your statements or read them. If you summarize, we could put the full statement in the record, of course.

Mr. COOPER. Let me try to summarize my statement.

I thought it might be most helpful today if I were to talk about the general background with which we view the problem of developing countries rather than getting into details on specific issues which we can handle in the question period.

I think the most significant fact about the seventh special session is that it is going to be held at a time when there are really two groups of LDC's in the world. One group consists of the members of OPEC that have done very well in the last 2 years economically although they are still part of the developing world in terms of basic social indicators but they are a group of countries for which financial factors have been removed as a constraint in their development in the last 2 years. Some individual OPEC countries are still very poor and some are already spending beyond even their increased income mainly for consumption and military imports.

On the other hand, the non-oil-exporting countries are in a situation where their economic and financial situations have deteriorated very sharply. In considerable degree this was because of the fivefold increased in oil prices which benefited the OPEC countries, the direct and indirect effects of which have become extremely serious in most other LDC's.

I think we have to look a little bit at where developing countries were in 1973 to understand how abrupt a change has occurred. At that time toward the end, as it now turns out, of a long and sustained worldwide boom the external position of developing countries and their growth prospects had been steadily improving; they grew faster than developed countries during the 1960's; their industrial production grew faster than developed countries; their financial position was being strengthened; their export prices and terms of trade improved very substantially.

In general, I think developing countries were doing well in 1973. Growth rates were at record highs and it appeared that this kind of progress was going to be continued. It was, of course, recognized that some of the very high commodity prices were not sustainable and that there was going to be some kind of moderation of developing country prospects but I do not believe it would have been serious for most LDC's.

This picture changed very fundamentally in late 1973. Not only did the increased price of oil place an extreme and unexpected burden on oil importing LDC's but the 1974-75 recession in developed countries— the depth of which was certainly influenced by the timing of the oil

price increase itself as well as increases in the prices of food and fertilizer, occurred at the same time. The combination had a serious effect on the economies of the developing countries.

The effect of the food and fertilizer prices is probably going to look a little more transitory than the oil price increase because those prices are now coming down, as are freight rates which are very important to LDC's. Freight rates are coming down in the face of the worldwide glut of shipping.

Just on the numbers, the oil price rise itself added something like $11 billion to the import bill of the oil importing developing countries, which is equal to all the official concessional aid disbursed by industrial countries to developing countries in 1974. The OPEC countries themselves disbursed roughly some $2.5 billion of aid to other developing countries in 1974, about half of it to the three Middle Eastern countries, Egypt, Syria, and Jordan. For all developing countries taken as a whole, including those three countries, there was something like $8.5 billion net increase in the cost of imports-increased import payments occurring because of the oil price increase less aid disbursement.

In comparison with this $8.5 billion deterioration of their balance with OPEC countries, their current account deficit with industrialized countries increased by only $3 billion in 1974. What essentially happened in 1974 was that the prices of all goods traded in the world went up very substantially and while there was a very massive increase in LDC exports there was also a large increase in their imports. The net effect in their trade with industrialized countries was to add $3 billion to their trade deficit.

It is interesting to consider, in light of some of the comments that have been made about the terms of trade of LDC's, what their terms of trade would have been like if oil prices had not changed. Between 1972 and 1974 we estimate that their terms of trade would have improved by almost 8 percent if oil prices had remained at $3 a barrel. Instead oil prices more than quadrupled and the terms of trade for developing countries deteriorated by 5 percent between those years. So there is something like a 13-percent swing in the terms of trade as a result of the increase in oil prices.

During the same period when the terms of trade, including oil for developing countries, fell by 5 percent the U.S. terms of trade fell by about 15 percent. So I guess if we were as concerned about the terms of trade of countries that have higher levels and higher ratios of imports to GNP and so forth, that 15 percent decline would be extremely sharp.

One of the gratifying things that has occurred in the last year or so is that there has been a very substantial increase in capital flows that were needed to finance the growing deficits of developing countries. Non-OPEC developing countries borrowed some $9 billion in the world currency market in 1974. In short the private sector, including both firms and the capital markets and institutions in the developed countries, financed the increased LDC deficit.

In 1975 the situation is getting tighter. Export earnings of the nonOPEC LDC's will increase only slightly and their imports are going to rise in cost some $6 to $7 billion and their trade balance is going to deteriorate perhaps another $5 billion. At this point I think many

LDC's, particularly middle income LDC's, recognize that it is going to be hard to sustain the increased volume of borrowing needed to cover these kinds of deficits and they are taking actions to reduce the demand for imports. In most cases, particularly for these middle and higher income LDC's, the result is a very significant reduction in recent rates of growth.

So far I have been talking about developing countries as if they were a single group, but, of course, this is very misleading because there are immense differences among developing countries. Some LDC's had an excellent year in 1974-the ones that had large exports. of sugar and phosphate, for example. Others which suffered from a natural disaster such as drought or hurricane in some cases had desperate economic problems.

The United Nations has classified a group of developing countries: as "the most seriously affected." The MSA's are among the poorest countries; many have suffered from natural disasters such as the countries of the Sahel in Africa and many have chronic development problems rooted in their own approach to economic policies. These countries were seriously affected by the increase in prices of oil because there was little margin for cuts in their current consumption levels but they are not necessarily the most seriously affected in terms of the magnitude or overall impact of the higher oil prices and import prices and recession.

The disruption caused by the oil price rises and the depth of the OECD recession is greater in the middle- and high-income developing countries although the consequences are less dramatic. In these countries oil is used more widely in the production process than in the MSA's. Moreover, these middle level countries depend more heavily than do the largest subsistance MSA's on growing markets in OECD countries to expand exports of light manufactures. The impact of higher oil prices and recession on these countries shows up as a requirement to slow growth substantially unless large amounts of additional capital can be borrowed.

These countries are particularly important in world, as well as U.S., trade. Korea, Mexico, Taiwan, the Philippines, and Brazil bought over 35 percent of U.S. exports to LDC's last year. In 1974 the current account deficit of Brazil widened by more than $5.5 billion; Korea's by $1.5 billion and Mexico's by $1.4 billion. These deficits were financed by increased foreign borrowings, increased trade credits, and in the case of Brazil by a reserve drawdown of some $1 billion. In most middle-income countries growth rates are being reduced substantially in 1975 in order to reduce the requirement for borrowing.

Absent a reduction in world oil prices which, regrettably, does not appear likely in the near term, economic prospects for non-oil-exporting LDC's in 1975 and 1976 are not favorable. Economic recovery in industrial countries will help increase LDC exports and reduce the balance-of-payments restraint on growth, but only after some lag. Real income growth in most oil-importing LDC's in these years is going to be well below levels of the late 1960's and early 1970's. Middle-income LDC's will continue to hold down growth rates in order to restrain financing requirements, and the poorer LDC's will use concessional assistance largely to sustain present per capita income levels instead. of to increase their productivity and output.

However, these relatively unfavorable short-term prospects in no way imply that the international economic system is somehow biased against developing countries. The plain fact is that LDC's as a group cannot be fully protected against cyclical economic forces in industrial nations. And the LDC's, as well as the industrial countries, are still feeling the consequences of the painful worldwide economic adjustment to the abrupt and massive change in the international oil market. I do not, however, believe the world faces the prospect of prolonged economic stagnation, although a further increase in oil prices could dampen economic prospects. And there is no reason to believe that developing countries cannot share more than proportionally in the benefits of expanding economic activity over the next decade. Their export markets will grow; public and private fund flows will be available in increasing amounts; and in most LDC's output and income levels will substantially improve on a per capita basis. In the future, as in the past, LDC's will differ in their relative rates of progresssome will flourish, others will remain relatively stagnant. Differences in economic performance among LDC's will reflect differing degrees of policy effectiveness and differing domestic priorities just as they have in the past.

Of course, the performance of developed countries will also reflect the same differences. The idea that there are two groups of countriesrich and poor, north and south-is an oversimplification that should rapidly be abandoned. Brazil's current account deficit is larger than Italy's or the United Kingdom's and there are a dozen so-called LDC's which have higher per capita income than several European countries. The idea that the economic prospects of any country depends on whether or not it is classified as a developing country is just plain nonsense with no logical or empirical foundation.

Some developing countries have been pressing in various international organizations for major changes in international economic relationships, away from market forces, private investment and nondiscriminatory trade and commodity policies toward controlled commodity and capital markets, preferential trade and commerce policies and transfers of resources from richer nations as a matter of right.

I agree that the liberal economic arrangements which the United States has traditionally stood for are biased in favor of increasing production and improving efficiency. I would personally like to see more bias of this kind in the world, and there is much all of us can and should do to accomplish this. The proposed New Economic Order, however, is biased in another direction-toward a national redistribution of an existing level of world goods and services. In my view, substantial movement in the directions recommended by some LDC's would in fact reduce their future economic prospects. Such a course might also reduce living standards in developed countries slightly, but the damage would be relatively less. And I doubt that even the redistributional impact would be significant. Shortcomings in the present system certainly exist, and determined efforts to improve that system are needed, but to reject an imperfect system in favor of an implausible one would be foolish.

In considering how the present system might be improved to provide greater support for the development efforts of poorer countries, we will want to keep in mind the following considerations: