Second Revision

July 16, 1958

ECONOMIC COOPERATION FOR GROWTH AND FREEDOM

Main Elements of a Stronger Foreign Economic Policy

## Introduction

The time is more than ripe for new initiatives in foreign economic policy, designed to strengthen the position and confidence of the free world and to reassert the effective leadership of the United States. The climate of opinion, official and unofficial, here and abroad, appears to be developing favorably to such initiatives. Several factors contribute to this. There is increased concern regarding Soviet economic challenges. There is the belief in some advanced countries that present arrangements limit their opportunities for growth or endanger their stability. New regional trading arrangements threaten to cut across established patterns and demand reconsideration of established policies. Underdeveloped countries bent on accelerated development see the gap between them and the West widening rather than narrowing. The recession in most commodity markets gives many of them an urgent sense of crisis, in some cases near panic. To others the Communist techniques of development look increasingly attractive.

If the changing climate of opinion does indeed make new initiatives possible, what are the outstanding problems and what are the main elements of a stronger foreign economic policy?

## I. The Stakes

It is commonplace to say that a sound foreign economic policy is "vital to our survival," but not so common to explain what's survival is

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threatened or precisely how. To do so adequately would require an essay on foreign policy in general, of which foreign economic policy must be an integral part.

Suffice it to say here that the stakes are not a mere matter of physical survival, which we could ensure by surrendering to the Kremlin. Nor are they simply continued access to raw material supplies. The United States is, to be sure, becoming steadily more dependent on foreign sources of materials, and control of those sources by an unfriendly power would raise very serious problems for us. Yet they hardly involve survival in a literal sense, since the truly essential materials might be provided adequately, although inconveniently and at great cost, within a Fortress North America or a Fortress Western Hemisphere if not within a Fortress United States. The stakes do involve physical defense, materials, and markets, but they also involve basic individual freedom and human values.

The overriding danger is that this country, perhaps in company with its immediate neighbors, may become an increasingly isolated island in a rising totalitarian sea. In such an environment, freedom would wither. A tolerable future for us requires a world preponderance of free partners and friends (not necessarily military allies) - of other communities based on popular control of governments, freedom of political organization, protection of civil liberties, and a substantial dispersion of economic power. This in turn requires economic relationships which foster the growth of the free communities and which demonstrate to peoples at large and to their natural leaders that under free institutions they can secure both the basic necessities and opportunities for advancement.

Present international economic relationships do not adequately meet this test. Even if there were no Soviet challenge, this would be

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sufficiently serious. Growing frustration of the developmental aspirations of the underdeveloped world majority, combined with increasing economic tensions among the advanced industrial free nations, would not bode well for our own future. Since there is also a growing Soviet challenge, we are left no choice but to set about now in strengthening our foreign economic policy. And there are indications in Latin America, in Canada, in Western Europe, and elsewhere that a fresh American lead would be welcomed with enthusiasm.

## II. The Approach

One common line of approach to diagnosis and prescription in the international economic field is to focus on institutions and the international economic order. This approach normally starts with a grossly oversimplified and rather sentimental view of the nineteenth century "system" - gold standard, sterling-dominated, London-centered, imperially buttressed - and asks what should be built in the twentieth century to replace this bygone system. As a starting point, this approach has the major disadvantage of tending to glamourize institutional arrangements almost for their own sake, whether or not they are really relevant to the critical problems. Regionalism has achieved this kind of glamour, which has led many people to expect it to solve everything and thus freed them from hard thinking about the many issues which regional institutions cannot touch.

A more fruitful approach may emerge from a review of the significant economic problems which are susceptible to international attack, whether that attack is through new policies implemented by present institutions, adaptation of those institutions, or creation of new ones. While any classification is arbitrary, the main problems can be conveniently broken down into three categories: industrialized free nations, underdeveloped free

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nations, and Soviet economic activities. The U. S. has a major involvement in all three, as the largest factor in world trade, the possessor of most of the world's gold supply, the largest supplier of export capital, the largest market for most internationally traded raw materials, and the leader of the free world in the cold war.

### III. Main Problems - Industrialized Free Nations

Free world trade has been doing remarkably well for ten years, despite the continued maze of tariffs, quotas, and exchange controls. Post-war policies and institutions - the GATT, the IMF, the Marshall Plan, intra-European trade liberalization, the EPU, the Sterling Area, the Schuman Plan, the promise of the European Common Market, heavy American overseas official expenditures, and expanded private investment - have all played constructive parts in making this possible. Nonetheless, there is a great and widespread sense of insecurity, amounting in some quarters to fear of a world liquidity crisis entailing another collapse akin to 1931. Major advanced countries, especially the U. K. and France, suffer periodically from heavy drains on their reserves of foreign exchange, each of which is a threat to the maintenance of international trade. The primary producing countries go through their regular cycles of inflationary feast and foreign exchange famine, each downswing requiring disruptive trade and exchange restrictions to keep the famine within bounds. Taken as a whole, this system still leaves much to be desired.

The central problem of the other free industrialized nations (Western Europe and Japan) is their vulnerability to international economic circumstances beyond their control. For them, unlike the United States, the balance of payments is a direct limit on their growth rates. For political and economic reasons alike they must maintain high employment and

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substantial domestic investment. In most countries this means at least occasional inflationary pressure and the risk of repeated balance-of-payments crises. If reserves are inadequate, these crises can be controlled only through deflationary policies jeopardizing employment and investment levels, or through import restrictions jeopardizing the whole structure of world trade and at second remove also undermining investment, output, and employment.

This is one half or perhaps three quarters of the so-called "liquidity problem." (The rest has to do with primary product market fluctuations.) It is in part clearly a problem of domestic economic policy in the various countries. But the problem also has a large international component, for which substantial remedies could be provided through international arrangements for bolstering reserves directly, through automatic or discretionary stand-by credits, and through closer coordination of fiscal and monetary policies. In Europe, and perhaps to a limited extent in Latin America, this problem could also be somewhat eased by regional arrangements enlarging markets and monetary areas, assuming that such arrangements included special provisions for intra-regional credit. It is in this way that the Sterling Area and the European Payments Union and OEEC trade liberalization system have made large contributions to international liquidity and expanded international trade during the last decade.

But it is certainly not in our interest to encourage the non-dollar free world as a whole to combat an unnecessary "dollar shortage" by organizing systematically to discriminate against us. Better means can surely be found of making the dollar, the pound, the Deutschemark, the yen, and the French, Swiss, and Belgian francs lie down together. The goal of any new international arrangements must be to offset the external limitations

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on legitimate growth and investment rates without becoming an open-ended invitation for weak-minded countries (or politically unstable ones) to improve their living standards simply by drawing on the resources of others.

In the class B postwar tradition, there is also a special problem of vulnerability of other industrial nations to American recessions. The direct effects of the 1953-54 recession and the 1957-58 one so far cast doubts on this tradition. The indirect effects may be more significant, i.e., the temporary improvement of the industrial countries' terms of trade followed by a serious loss of markets in underdeveloped countries as the shrinkage of primary product markets is reflected in the purchasing power of the latter group.

There is one further major problem in the dependence of the industrial free nations on fuel and raw materials from underdeveloped countries and on markets in those countries. These could be jeopardized either by Soviet domination or by aggressive anti-Western nationalism. This constitutes a particularly urgent reason for action to promote the long-run identification of interest of these underdeveloped countries with the West.

#### IV. Main Problems - Underdeveloped Free Nations

Here the prime problem is obviously the inadequacy of growth rates, especially in relation to population increases. The reasons are familiar. They include inadequate organization, skills, and entrepreneurship; internal social and political cleavage, including frequent class conflict and insufficient consensus on national objectives; inadequate domestic capital formation; inadequate application of domestic savings to productive enterprise; insufficient control of the inflationary effects of efforts to accelerate development; shortages of foreign exchange; and inadequate supplies of

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imported capital, both public and private. Although the diagnosis is familiar and the remedial action is already substantial, it is very far from being sufficient. The gaps between lesser developed and advanced countries are probably increasing. Population pressures continue to mount. The Soviets are becoming increasingly active in this field. There is certainly not among the leading groups in underdeveloped countries a sense of a satisfactory growth environment. These problems become more acute with the passage of time. This, incidentally, is the main area for a substantially expanded role for private business.

The second critical problem area has to do with market instability for most primary products and chronic surplus for some. The diagnosis on market instability again is familiar, having been elaborately documented by the U.N. It is a favorite theme of Secretary-General Hammarskjold that these fluctuations involve income and foreign exchange losses for underdeveloped countries in amounts far exceeding all the international aid programs put together. Fluctuations are bad for the producing countries on both the up and down sides; they are almost fatally disruptive of orderly plans for development. Consumers as well as producers could benefit from smaller fluctuations. But no really satisfactory means of limiting fluctuations has yet been devised or tried which does not mix up the stabilization question with efforts to raise the average market price, which avoids undesirable side effects in freezing production and market patterns or introducing complex internal quota control systems, or which avoids the risk of breakdown through noncooperation of some parties after a period in which the noncooperators are given a free ride to expand their production at a "stabilized" high price. Yet it is also hard to believe that ingenuity has been exhausted on this

subject, since until recently doctrinaire objections have prevented American
official participation even in studying the problem, except for the wheat
and sugar cases where we are ourselves a surplus producer. It might help
to distinguish the fluctuation cases, such as nonferrous metals, from the
apparent chronic surplus cases, such as wheat, cotton, coffee, and possibly
sugar.

V. Main Problems Arising from Soviet Economic Activities

In analyzing this range of problems, it is important to avoid the
assumption that all Soviet foreign economic activities are ipso facto bad
for the free world. Some are dangerous; many are neutral; a few may be bene-
ficial. All may have to be taken increasingly into account, but only the
first group requires active counteraction.

As to trade, I see little advantage in seeking to curtail Soviet
trade in general. Sometimes this has appeared to be one objective of the
strategic control system, but it is dubious as a means of substantially
retarding Soviet growth and it is in any case impossible to secure the
necessary cooperation of other potential Soviet trading partners. There is
at the same time no need to go out of our way to finance trade with the
Soviets or to encourage it. If there are sound economic arrangements in
the free world, there is no reason either for us or for our allies to be
so eager for Soviet bloc materials or markets as to make special governmental
efforts to secure them. On the other side of the coin, while maintenance of
the strategic limitations on East-West trade may have a few dividends left,
the importance and effects of this program have always been grossly exaggerated.

The real problems of Soviet trade arise mainly from the danger of
excessive market dependence of free exporting countries, with a consequent
liability to political control. This danger results from Soviet bartering

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for burdensome surpluses, either chronic or temporary. Even a few strategically-timed purchases can be made into major propaganda assets for the Soviets. The best counter would appear to be free world arrangements which reduce the burdensome surplus problem in general.

There have recently been allegations of deliberate Soviet efforts to undermine free world markets by "dumping," e.g., in tin, aluminum, and perhaps petroleum. There is conflicting evidence as to whether these allegations have real substance. If so, they certainly raise problems for any market stabilizing devices. On the other hand, they could hardly be countered without some form of internationally organized market control.

Soviet aid and investments are probably a much larger area for justified concern. All Soviet aid is not necessarily objectionable. For example, if Indian development is conducive to long-run maintenance of free institutions there, and if the principal bottlenecks in development are shortages of capital and of foreign exchange, then Soviet financing of a steel mill in India might actually promote free world objectives. Here again, the basic problem is to avoid undue dependence and undue propaganda advantage for the Soviets, and the main line of response would appear to be an adequate free world effort. On the other hand, this effort can hardly disregard specific Soviet activities. Competitive bidding by neutral countries is a fact, and the existence of Soviet offers does add to their bargaining power in the economic just as in the political field. There will doubtless have to be some departures from the desirable patterns of free world aid and investment, and there will be a lessened ability on our part to impose certain types of conditions of aid, e.g., in limiting state enterprise. But it is hard to see why, if we make proper use of our vast superiority of resources, we should be seriously outbargained.

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Finally, there is the basic problem of comparative growth rates between the Soviet Union and the advanced countries of the West. If this is a serious threat, it can hardly be remedied by holding the Soviets down. The only feasible course of action is to avoid impediments to growth in the free world. The question has been raised in some quarters whether it really matters if the Soviets catch up with us or surpass us in material production. I believe that it does, both in its effects on the available margin of resources for the arms race and also in its effects on the basic allegiance of underdeveloped countries or their choice of means for promoting their own development. They would probably prefer both results and freedom, and might even sacrifice some material results to maintain freedom, but it would be dangerous to let the choice pose itself for them in that form.

## VI. Essential Characteristics of an Action Program

This diagnosis calls for a series of coordinated new initiatives on a broad front - what might be called "a program of free world economic cooperation for growth and freedom."

To achieve maximum effectiveness, and to have maximum public appeal, an action program should be comprehensive. It should deal with trade, finance, public investment, private investment, and the Soviet problem, and it should have a place for both free world-wide and for regional arrangements. It should promote a complementary rather than a competitive relationship between governmental and private action.

It must also have flexibility - not because lip service is always paid to flexibility - but because of the nature of the problems. Two examples will make this clear. The Sterling Area arrangements have played a major constructive role in the postwar world by providing a very large area of

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currency convertibility, freedom of capital movements, and relative (although
by no means absolute) freedom of trade. Sterling has been a most important
currency for secondary reserves and for financing international trade, and
its use in this way has helped prevent the loss in the purchasing power of
gold from becoming a serious limitation on world trade. The sterling system
has been tided over various crises by the Anglo-American loan of 1946, the
Marshall Plan, the EPU system of automatic credits, drawings on the Interna-
tional Monetary Fund, and the post-Guez line of credit from the Export-Import
Bank. These were wise investments in the world financial order, and they
have been paying off. Nonetheless, doubts persist in many quarters whether
the Sterling Area can continue indefinitely on its present basis, especially
as sovereignty for the surplus dollar earning members such as Ghana, Nigeria,
and Malaya may lead them to adopt more independent economic policies. Its
survival depends partly on the U.K.'s ability to make it worth while for all
the participants. The stronger international arrangements discussed here
should continue to support the Sterling Area as long as it seems advantageous
to the participants, but the free world system must also have sufficient
flexibility to carry on its constructive functions if the Sterling Area proves
not to be viable and gradually gives way.

Secondly, flexibility is clearly called for by the nature of the
Russian economic challenge. It is essential to be able to deal quickly with
dangerous gambits in economic warfare. This is not to say that every Soviet
trading or aiding offer requires an immediate Western reaction. But there
must be the ability to react promptly, and the machinery of consultation to
concert reactions, when a genuine threat to freedom is involved.

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## VII. Elements of an Action Program

Most of the problems outlined above have to do with the framework set by governmental policy. Remedies must therefore be found primarily in governmental policy and institutions. The role of business for the most part is to operate effectively within that framework in accordance with sound business standards. On the side of development, investment, and the transfer of management skills, however, there may be opportunities for greatly enlarged private business activity as agents of public policy, provided that proper incentives can be devised.

### A. Trade and Commercial Policy

As stated before, free world trade has been remarkably flourishing, notwithstanding the distortions and hindrances arising from widespread import barriers and exchange controls. There has been in fact a downward trend in trade barriers for almost a decade. The most urgent requirement is to strengthen the financial underpinnings of world trade sufficiently to prevent a new wave of spiraling restrictions and to reinvigorate the movement for additional liberalization (see section B below).

On the commercial policy side, the five-year Reciprocal Trade Agreement Extension, assuming that it passes the Senate, is a step in the right direction but not enough in itself. We need a clearer policy on the European Common Market and Free Trade Area, on other incident regional trade arrangements, and on our own evolving position in a free world trading system.

Some see an answer to this problem in the complete abandonment of the most-favored-nation principle in favor of some form of regionalism, with the United States itself becoming part of a regional system. For example, the Rockefeller report recommends American membership in a Western Hemisphere

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common market; former Canadian Foreign Minister Pearson recommends an Atlantic Community free trade area. In my judgment, the importance of regionalism outside of Europe as a key to expanded international trade has been greatly exaggerated. Moreover, whatever regional developments may take place, there must be a strong global system to contain them and to prevent them from becoming devices for the restriction of interregional trade.

In Western Europe, a regional trading system has a great deal to offer, and we have been right to support the European Common Market. But a wider European trading system would be more efficient internally and much more conducive to expanding world trade generally. We should therefore give vigorous support to the efforts to negotiate an OEEC-wide free trade area.

In Latin America, a common market (or perhaps three or four common markets in Central America, northern South America, and southern South America, none necessarily including Brazil) would help to provide investment opportunities matching a reasonable scale for industrialization. Plans of this type, however, even if adopted in the near future, are relevant to the long-run development of the Latin American economy - the Latin America of 1980 or 1990. They will not stimulate significant additions to the paltry present volume of intra-Latin American trade during the next decade or so.

The notion of American membership in some common market, whether Western Hemisphere or Atlantic Community, is simply unfeasible. It would be rejected by the others concerned as frustrating their own deeply desired hopes for accelerated industrialization. Nor can we be in a position of systematically discriminating in favor of any part of the free world and against all other parts. The central drive of American policy in this field, therefore, should be to tie together all free countries, some of which may

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be regionally grouped, with a maximum free world-wide liberalization of trade.
Our own greatest direct contribution to this can be through continued nondis-
criminatory trade barrier reduction, by negotiation through the GATT and
otherwise. Ratification of the Organization for Trade Cooperation would
clearly contribute to this objective. If we were prepared to adopt some
means of assisting the adjustment of affected domestic enterprises, a goal
of American free trade in industry (agriculture is obviously a separate type
of problem), to be achieved over a generation, should not be unthinkable.
Meanwhile, we should seek more flexible means of negotiating reductions, for
example, through global percentage reductions on the average duties on cate-
gories of products, each participating country being free to select the
individual products within the category. (This is the technique used in
the Common Market transitional period and also applied by the OEEC in its
trade liberalization program.) In certain fields where import quotas have
become internationally accepted as restrictive devices for other than balance-
of-payments reasons, e.g., in agriculture, in promoting economic development,
and in protecting "defense-essential" industries, we should be in a position
to bargain tariff reductions against quota expansions if quotas are the effec-
tive restrictions on our own exports. Given the increased commercial negoti-
ating power of the European Common Market, we will need maximum flexibility
to do an effective bargaining job with that important evolving region over
the next several years. If NATO could be made a forum for negotiating
reductions in barriers based on "defense essentiality," so much the better.

## B. Finance

Improved financial arrangements are even more essential, especially
in the short run. International financial disaster has been narrowly averted

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several times since World War II (the last occasion being less than a year ago), but the present system does not provide enough confidence to permit sustained policies of investment for long-run growth or enduring commitments to further trade liberalization. Unused International Monetary Fund resources ($1.4 billion of gold and $1.1 billion of convertible currencies) are now too small for this purpose, and the emergency extension of Export-Import lines of credit is too much of a makeshift to underpin a strong international structure. To see the potential magnitudes involved, it should be noted that in the first quarter of 1957 the rest of the world was losing gold and dollar reserves at the rate of $3.1 billion a year; in the first quarter of 1958, they were gaining at the rate of $1.6 billion - a swing of $4.7 billion a year.

The best remedy to this weakness is a massive increase in IMF resources - perhaps doubling their original scale. The IMF has made a great contribution to world financial stability in the last few years, and the administration of Per Jacobsson has greatly enhanced its standing. But the IMF should not become an investment bank. It is needed in its basic function of supplementing foreign exchange reserves by financing medium-term swings in the volume of member countries' international transactions. It has now matured sufficiently so that the additional resources could well be used on a discretionary basis rather than be subject to automatic drawing rights. Their use should be related to the adjustment of monetary and fiscal policies of the countries concerned and the Board of Governors should become a more effective forum for mutual exchange of information and consultation on monetary and financial policies.

Moreover, if regional trading arrangements are accompanied by special regional financial arrangements, such as the EPU and possibly a

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clearing system among Latin American currencies, it would be well for them
to draw part of their working capital from the IMF - in effect, to become
regional agents of the IMF, but supplementing its resources through special
intraregional credits.

To the extent that period exchange crises have been due to specu-
lation against such currencies as sterling, not because British prices were
out of line but simply because British reserves were inadequate to resist a
heavy bear movement, the very existence of larger IMF resources should go far
to eliminate such pressures. By the same token, a stronger IMF could facili-
tate the development of the new kinds of regional monetary arrangements which
will be essential to accompany the European Common Market and any other re-
gional trading arrangements.

C. Development - Public Investment

On the governmental side, the main problems here are the insuffi-
ciency of resources and the weakness of administration. The Development Loan
Fund, put forward last year as a major new instrument for assisting under-
developed countries, has obviously not fired the imagination of the American
public or Congress or of the potential beneficiaries. Had the Loan Fund
been initiated with the vigor and salesmanship of the ECA in 1948, things
might have turned out differently. As it is, the Export-Import Bank is now
doing much more public investment for development than is done under the
Mutual Security Program. The expansion of Export-Import Bank activities
has been very constructive, but they are unable to cover the whole field,
especially in the politically weaker and more vulnerable areas. The volume
of Mutual Security funds going into true development is still only a few
hundred million dollars a year. The available evidence, such as it is,
all points to a need for doubling or trebling this volume.

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The most urgent immediate need in this field is to enlarge the
Development Loan Fund. Whatever can be done on this front, however,
additional means must also be found for injecting the necessary infusion
of new drive and additional resources into public international investment.
To this end, the most hopeful proposal is the creation of an International
Development Authority as a soft-loan affiliate of the International Bank for
Reconstruction and Development. Such an institution would take advantage of
Eugene Black's high standing in this country and elsewhere and make use of
the IBRD's drawing power for talented personnel. It would have the recognized
political advantages of an international institution in dealing with other
countries. The World Bank has apparently abandoned its former inhibitions
against entering the "soft-loan" business, and now sees fruitful opportunities
for combining packages of soft and hard loan funds for the financing of partic-
tular projects.

Any such new multilateral agency should have an initial capitaliza-
tion of at least $1 billion and provision for substantial annual increments
to its resources. Most of its funds would have to come from the United States,
but it should also be able to secure contributions from Western Europe, especi-
ally Germany, Switzerland, and Belgium, and from Canada, Australia, New Zealand,
and South Africa. (It should, however, be borne in mind that, on balance,
Canada and Australia are large capital importers and Europe is likely to be
so during the transition to realization of the Common Market.) Means should
be explored for providing at least part of the U.S. financing without annual
appropriations.

A new multilateral agency of this type would by no means eliminate
the need for bilateral American soft-loan development financing, any more

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than the World Bank has eliminated the need or usefulness of the Export-Import Bank. Military and political considerations alike make it important for the U.S. to have substantial reserves of funds for these purposes.

On the side of development, as in the cases of trade and finance, regional authorities may also have a useful part to play. This is especially the case with transportation and water-control projects which are inherently more than national in scale. A new World Bank affiliate should certainly be authorized to make loans through such agencies as well as to national governments or private concerns. It would, however, create more friction than positive development to attempt to channel all public investment funds through regional development authorities.

### D. Development - Private Investment

Opinions differ as to the amount of additional private investment which could be stimulated by proper incentives, but the needs are very great indeed and the opportunities have certainly not been fully tried. Private foreign investment, both direct and portfolio, has expanded greatly in the last five years. In 1956, American direct foreign investment alone, including the reinvestment of subsidiary earnings, amounted to $2.8 billion, and in 1957 the amount was probably even higher. (Details for 1957 are not yet available.) But over half the 1956 amount was in advanced countries - Canada and Western Europe. Of the other half, two thirds was in extractive industries - petroleum and mining. Extractive investment has important beneficial effects for the countries concerned, including increased incomes, development of labor skills, and earnings of foreign exchange and tax revenues which can finance other forms of development. Yet the greatest need for expansion of international private investment is in the nonextractive industries - in

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manufacturing, agriculture, trade, and other services for local markets.
In 1956, American direct investment in these categories in the less developed countries was only $469 million. It should not be an impossible goal to treble or quadruple this figure over five to ten years.

Tax incentives have the disadvantage of involving large windfalls to some taxpayers, and they are not readily susceptible to a selective emphasis on particular areas or fields of investment. Nevertheless the main tax incentives which have been seriously considered would cost little and might be of real advantage. They include generalizing the fourteen-point Western Hemisphere preference, deferring taxes on foreign branches as well as foreign incorporated subsidiaries until profits are repatriated, giving tax credits for foreign-waived taxes, expanding the range of foreign taxes eligible for credit, and permitting the taxpayer to choose between per country and over-all limitations in computing tax credits. Guarantees against currency depreciation in the event of expropriation might well be added to presently covered risks. Bilateral or multilateral investment treaties are potentially useful, a new World Bank affiliate might be the sponsor of a multilateral treaty.

Perhaps the most hopeful devices involve the wider use of government funds for the partial financing of private ventures, especially by permitting a high debt-equity ratio. This field requires careful technical exploration including means of avoiding government-subsidized windfalls. Convertible debentures on lines being developed by the International Finance Corporation might be the best means of handling this problem. Devices of this kind could be applied selectively, and used to encourage joint ventures with local participation as well as purely American ones. Part of the local currency funds accumulated from agricultural surplus sales could be used along with dollars.

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In addition, it should be possible to find means of getting management skills transferred without accompanying investment. Educational efforts are one such device. Private business licensing could probably be pushed a good deal further. If antitrust inhibitions are now a serious limitation on foreign licensing, some limited waiver might well be in the national interest. A similar modification of antitrust inhibitions against joint ventures should be explored.

Apart from governmental incentives, there is much for private business to do directly in improving its performance as an agent for promoting economic development. There has been a veritable revolution in overseas operations management practice during the last decade or two, including policies toward the development of foreign executive personnel, training of American employees for overseas service, cultivation of healthy local community, public, and governmental relations, and other means for developing the conviction of mutuality of interests. But the practice of the best companies in these regards is by no means yet universal, and departures from the best practice continue to sour opinion leaders in some regions against private enterprise in general and American business in particular.

## E. Agricultural Surpluses

As long as they are generated anyway, it would be foolish not to make the best possible use of agricultural surpluses to promote economic development. The experience under Public Law 480 has already obtained major positive results. Nor has it involved as much disruption of the markets of friendly foreign countries as other suppliers have feared.

Nevertheless, it would remove an important source of friction in the free world, especially between the U.S. and Canada, if the use of chronic

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agricultural surpluses for promoting economic development were handled on
a cooperative international basis. The U.S. should take the lead in organizing such cooperation among the principal free world surplus producers of
the major commodities concerned.

## F. Commodity Market Stabilization

Recent official pronouncements have suggested that income stabilization through an enlarged IMF is the best approach to this problem. It is clearly better than nothing. It is also much better than waiting until a producing country is in a severe slump, has imposed massive import restrictions and frozen its commercial accounts payable, and has entered on a major economic depression, and then undertaking a last-minute rescue operation through the Export-Import Bank. IMF income stabilization, however, may nonetheless be inadequate to the problem. The problem is admittedly one of the most thorny in this whole field.

Where price and demand fluctuations are involved, rather than chronic tendencies to surplus, it should be possible to organize effective international buffer stocks. This would apply to such items as tin, copper, lead, and zinc. The practical alternative for the United States may turn out to be a more costly and less efficient unilateral job, in the form of copper stockpiling and subsidization of lead and zinc production. For items of this type, an international stabilization plan would have little or no need for production controls.

For the chronic surplus items, there is the very much tougher problem of production control. All that can be said without further study is that, if countries are going to undertake production control anyway, they might do a better job under international cooperation than in its absence.

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## G. Countering Soviet Efforts

As suggested above, the major lines of action called for here are sound U.S. and free world policies. But it would be naive to suppose that Soviet activities can simply be ignored. Whether we like it or not, aid programs will require some modification in view of Soviet action, and small countries may occasionally have to be bailed out of surpluses otherwise offering major opportunities for Soviet intervention. Where this involves international discussion, NATO is the right place for conducting the necessary secret consultations, but action in this field clearly does not call for new formal international institutions.

## VIII. Next Steps

Under Secretary of State Dillon is apparently already thinking along the lines of some elements of the program outlined above. As publicly reported, this thinking includes the strengthening of the IMF and the creation of a new development authority affiliated with the World Bank.

In these circumstances, the immediate actions open to private citizens concerned with a stronger foreign economic policy appear to be as follows:

1. To work with the Administration to round out its program, filling in missing elements, bolstering its efforts, and making them a minimum rather than a maximum to be emasculated by the usual process of haggling within the Executive Branch and subsequent legislative bargaining.

2. To help organize public opinion and Congressional support for an adequate program.

3. To support the necessary technical work to develop sound methods of detail to implement agreed general principles.

4. When reasonable assurance of U.S. leadership is forthcoming, to promote organized cooperation among like-minded private citizens of other free countries. There should also be seriously considered a call on the governments to sponsor a free world-wide economic conference to take up the unfinished work of Havana and Bretton Woods.

Lincoln Gordon