US IN GLOBAL ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R001000010012-1
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 38
• Document Creation Date: December 20, 2016
• Sequence Number: 12
• Content Type: MEMO

_~... _ ,
,. .._. ,r.. , , ..,.:.
per:
UNCLASStFI~pr~- r 00~~ IA i~.l~ 01~0~2=1~
ROUTING AND RECCiRD SHEET
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
,~-~
- ~= - .~
THE UlRECTOR OF CENTRAL INTELLIGENCE u
National Intelligence Council
DDI #2676-82
26 March 1982
MEMORANDUt~1 FOR: Director of Central Intel l i gen '
Deputy Director of Central~~r~tel-1 i Bence
ationa me igence Officer at Large
SUBJECT US in Global Economy
1. Attached is the paper I promised you, presenting an alternative,
unabashedly up-beat view of US economic prospects in the 1980s. It
attempts to counter what I regard as unjustifiable anxieties about the
erosion of the US competitive position in the world economy. If it
errs on the side of optimism, that is intentional.
2. In addition to the charts included in the paper, there is
a much larger body of annotated graphic materials that amplifies many
of the points made about the evolving US position in the world economy.
These materials could be published separately or as an annex to the
paper.
Distribution:
1 - DCI
1 - DDCI
1 - Ex. Di r.
1-ER
1 - NIO-at-L/HH
1 - DDI Re w/o attachment
NIO-at-
Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1 ~ 4`~~ -a3
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
26 March 1982
Summary
In assessing the US performance in the global economy, the following
factors are often overlooked:
o The US economic position within the industrial world stabilized
during the 1970s after declining for two decades, and there is
every expectation that it car. sustain its present position
through the 1980s.
o During the 1970s, the United States did quite well in competing
for international markets: It ran a larger cumulative current
account surplus than any other developed country; it did
exceedingly well in selling services and agricultural products;
it even improved somewhat its share of the global market for
manufactures.
o The US had to and did put to work far more people in the 1970s
than other industrial countries, a major factor that contributed
to holding down the growth of US productivity.
o The introduction of flexible exchange rates in the early 1970s
has created a highly cyclical pattern in the international
competitive position of US goods that reverses about every three
years. The period of "non-competitiveness" of US manufactures we
are now entering is more a reflection of this cyclical pattern
than of fundamental factors.
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
The global economy will experience a number of stresses and challenges in
the 1980s, as it has in previous decades. !~!hile these challenges will be
different, there is no reason to believe they ~~~ill be less manageable than the
extraordinary upheavals of the 1970s. The US is particularly well equipped to
adjust. It enjoys:
o A higher degree of flexibility acid resilience than most other
industrial countries;
o greater domestic energy resources and a potential for further
gains in conserva~io~~;
o A large backlog of industrial investment requirements and the
only major investment stimulation program newly put in place;
o A power of attraction to foreign investors that goes beyond
present high interest rates;
o A demographic trend that will reduce unemployment pressures and
stimulate investment in labor saving capital equipment;
o A striking competitive advantage in the dynamic service
industries, particularly in the sector that integrates computers,
communications and knowledge;
o A large-scale R&D and technological innovation effort conducted
across a broad range of economic activities, as well as anew-
found awareness of the need to compete internationally as well as
domestically.
Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
The US Role in the Global Econa;r,y:
An Alternative Perspective
Introduction
This paper examines the perfor~?ance cf the United St~:tes in the arorld
economy in the past decade and looks beyond the present recession toward the
mid-eighties. The perspect ive that emerges is considerably more encouraging
than the gloomy perceptions now gaining wide currency even among well-informed
observers. In particula~~^, it challenges the assertions often made that
o The US is steadily losing its competitive edge in worldwide and
key export markets;
o The downward trend in US productivity growth is a firmly imbedded
phenomenon; and
o Japan's recent dramatic high-technology accomplishments
foreshadow the end of US technological pre-eminence.
Not surprisingly, these and other assertions attesting to the steady
erosion of America's economic strength tend to gain maximum momentum when the
economy is in the trough of a business cycle. Worrisome signals emitted by
adverse economic indicators -- rising unemployment, widening deficits,
negative growth -- tend to focus attention on present transitory troubles and
mask the significance of more favorable longer term trends. In this
atmosphere, observers and forecasters tend to put the most gloomy
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
r is
interpretation on what has transpired. "The US economy lost its elan during
the 1970s" proclaims one prognosticator. "Productivity increases, economic
growth and international competitiveness all dropped 1i'cn stones." If true ,
this wo~aid offer a worrisome prospect, indeed. But a more careful look at the
historic record reveals. a relatively robust US performance in the past decade
and a more favorable prospect for the mid-eighties than is generally assumed.
Specifically, this paper argues that a retrospective look at the troubled
decade of the 1970s can be quite misleading if it fails to take into account
the exceptional nature of the halcyon decades of the fifties and sixties that
preceded it. Those were decades of extraordinary postwar growth during wi~ich
the badly mauled economies of Western Europe and Japan were restored to their
proper place in the world economy, closing the economic gap with the US. The
high growth momentum of those decades could not have been sustained much
longer in any event. A slowing was already apparent in the US after 1966.
But the two OPEC shockwaves of the seventies put an extra-heavy damper on the
performance of all the big capitalist economies. Real growth fell and
inflation and unemployment rose in all of them.
Seen against this backdrop, the US economic performance -- compared to
that of other industrial countries -- remained surprisingly strong throughout
the 1970s.
The 1970s Record
Some highlights of the US performance may help put the US economic
posture in better perspective.
Relative Growth:
o US growth in real output during the 1970s exceeded or at least
matched that of all other industrial countries except Japan.
Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
Although the gro.~~th rate of all of the OECD countries slumped
during the decade, that of the US declined less steeply, thus
enabling it to hold on to its 40% share of the industrial
countries' collective ~iVP (see figure 1).
o The sharp appreciation of foreign currencies against the dollar
in the 1970s created the exchange rate illusion that other
industrial countries were still gaining on the US. In fact, the
exchange rates +~rere merely catching up Frith the real changes that
had occurred earlier. In real terms, the US maintained its
relative economic power position through the 1970s.
Employment and Productivity:
o The way the US achieved its economic gains was by putting people
to work rather than increasing their productivity. Unlike
Western Europe and Japan, where employment grew very little, the
US had to cope with a massive influx of new entrants into the
labor force as the children of the 1950s baby boom shot into the
labor market, along with a large new influx of women and (mostly
Hispanic) immigrants. Almost 19 million new jobs were created --
a net increase in the employed labor force of 239'. With labor
thus relatively cheap, it was more profitable for US firms to-
hire more workers than to invest in new plant and equipment (see
figure 2).
o In sharp contrast, Western European firms, in the face of a much
tighter labor market and higher wage costs, placed greater
emphasis on labor-saving capital investments. The results in
terms of improved productivity were much better. Public pressure
 Approved For Release 2007i04~~-~"'ZeIA~RDP83M00914R001000010012-1
In~~St~~~f Gauntries: EC~~~~C Poorer 5~fts
(~~ore of ~~~' ~~ 1875 Pr~C~s~
Legend
D ~fher
? Japan
? E.C.
? U.S.
150
19SQ
197
1~~0
Approved For Release X007/04112 :CIA-RDP83M00914R001000010012-1
 Approved For Release 2007i041~1~:'-'~~A,~DP83M00914R001000010012-1
w.~ ~ i,++~ ~ ~ ! ~++~ ~ V 1l .nV 1 P ~~ J-+. S a rzr. .f$. /? r- .~ o
,
~ { 4i ~ I
Employment
~?gl Y~~~~_nT
~por ~s~ a'~cg v~ ~~~~y
~ ~ ~t
Rea) Wages
40 -!
30 -i
20 -~~
10 -~~
~~~~-~~n~r ,~#~~~~~~ ~~7~ ~~ 19~t~~
Rea( GNP per Employee
Approved Far Release 2007104/12 :CIA-RDP83M00914R001000010012-1
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
for hiyi~er wages and social welfare benefits, however, pushed up
real wages beyond the productivity gains, undercutting Western
Europe's international competitiveness. Europe also has been
slower than either the US or Japan to move out of mechanically-
based into electronically-based technologies.
o Japan, through a high rate of investment and a remarkably adept
technology development strategy, was able to achieve productivity
growth rapid enough to accommodate a large boast in real wages
without impairing its international competitiveness. The move
toward greater labor-saving investments also reflected a
significant decline in new entrants into Japan's labor force.
This labor trend was the opposite of those that took place in the
US and Western Europe.
Export Performance
o Value versus Volume -- In value terms (undeflated US dollars)
total world exports doubled in the 1950s and doubled again in the
1960s, but increased six-fold in the 1970s. The US share of
world exports, measured in this way, declined modestly in the 50s
and 60s, and fell sharply in the 70s. But again, exchange rate
and price movements (dramatic changes in the value of the dollar,
the huge jump in oil prices) convey a blurred image. When we
correct for these elements to permit a look at the volume of
exports, we find that the US share of world exports actually
increased slightly in the 1970s (see figure 3).
o Looking at manufactures alone, the volume of US exports climbed
almost as rapidly as that of Japan and faster than that of our
Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
 Approved For Release 2007i04112~~1~~C~'83M00914R001000010012-1
~/olume of__In~lustrial Country Exports
(Average c~nnua! gr~t,~~tl~)
~9sas
Approved Far Release 200710.4/12 :CIA-R?P83M00914R001000010012-1
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
European competitors for the decade as a whole. The US share of
OECD exports of manufactures thus aras actually higher in 1980
than at the beginning of the 1970s (see figure 4).
o The US share of exports of manuf actures, measu?r~d in volume
terms, was higher in 1980 than at the beginning of the 1970s in
all markets -- Japan, 4~Jestern Europe, the LDCs, and the Co^~munist
countries. Only in the OPEC countries did the US market share
slip marginally, but that was largely a consequence of the
Iranian upheaval. The US did particularly ,!ell in t"e rapidly
groti~!ing markets of the ne~fllvi in~!ustrializing c~~~ntries ('ICs) --
Mexico, Brazil, South Korea, Tai~r!an, Hong Kong and Singapore.
o The influence of shifts in exchange rates, however, made the US
export performance in manufactures highly erratic during the
decade, with exports growing rapidly during periods of a
depreciating dollar (1971-74 and 1977-80) and exports actually
declining in a period of dollar appreciation (1974-77). The
upswing in the value of the dollar beginning in late 1980 is now
again having an adverse effect on US exports. The continuing
strength of the dollar in 1882 augurs badly for US export
competitiveness for the next year or so, until the cycle reverses
again. The impact of exchange rate fluctuations on the US
balance in manuf actures for the past 12 years is illustrated in
figure 5. In order to demonstrate the impact that changes in US
dollar valuation have on the balance of manuf actures after
several years, we have plotted the two movements with a three
years lag.
Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
Figure 4
~~~~~~~~ c~~~~e 1~~~~ #a ~9~C3)
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
Figure 5
lJ~ Bad ~n~~ ~n ~d~n~~a~~~res
n
Exchange Rd~e Changes
~o~ -, r25
US BALANCE IN
MANUFACTURES
Weighted Average of 14 Industrial Coun#~les
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
o The structure of US trade differs significantly from that of our
OECD partners. Manufactures are far less ~importar~t to the US
than they are to Europe and Japan in balancing the trade
account. The US has had an increasingly favorable position in
foodstuffs since 1973 and has run a near balance in raw
materials, while most other developed countries have large
deficits in these two categories. The US deficit in fuels is
moderated by its large domestic energy resources and by some $5
billion in coal exports (see figure 6).
o Service transactions, moreover,. represent afar more significant
factor in balancing the US current account than is the case for
any other country (see figure.7). In recent years, large US
trade deficits have been more than offset by even larger
surpluses on service account (see figure 8). The steady,
spectacular increase in US service exports over the past five or
six years, and the crucial role these now play in balancing the
US current account is a widely under appreciated area of US
competitive strength. Particularly significant for the early
1980s is the observation that the growth of service exports
appears to be less affected than manufactures by the shifts in
exchange rates that make US merchandise exports so volatile.
In sum, the US overall trade performance in the 1970s was highly
creditable.
o Its current account position alas strongly positive. Over the
past tarelve years, the US earned far more than it payed out in
its current international transactions (goods, services, return
Approved Far Release 2007/04112 :CIA-RDP83M00914R001000010012-1
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
Figure 6
~~ ~~sfri~ ~e~~~~~ ~i~~ ~~~e ~~~ar~~es
b~ ~~~~e~ Commc~~ties~
~9~3~
~~
n ~~~
~
* Imports c.i.f.
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
Figure 7
Cur~~e~# AG~ount Bc~~~n~es, 19~~
~'rad~ vs. ~~~-~f~~s
(Billion $~
~S or e~ r c~
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
Figure 8
Approved For Release X007/04112 :CIA-RDP83M00914R001000010012-1
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
on capital invested abroad, and private remittances). In fact,
its cumulative surpluses for the entire period topped $50
billion, more than those of any other industrial country (see
figure 9).
o Japan, alone among the industrial countries, perfor,,ed better
than the US. But its penetration of ~,vorld export markets is
highly concentrated in a very few commodity categories. Only
five categories -- road motor vehicles,. steel, consumer
electronics, industrial machinery and ships -- make up more than
half of its exports. It is precisel,~ this concentration that
contributes to -- and also limits -- the scope of Japan's
success.
Stresses and Challenges
What does the relatively strong US performance during the 1910s portend
for the ability of the US economy to cope with the stresses and challenges
that now confront it? Some of these stresses are short term and transitory,
others are structural and more enduring.
Recessionary Anxieties
It is not easy to preserve a sense of underlying US economic strength in
the face of two years of sagging economic activity and seven months of f ull-
scale recession. And yet, at some point, the downward slide will be arrested
and reversed. There is now an emerging consensus among economists that the
cyclical low point has just about been reached and an economic upturn will
soon begin. There is much anxiety, however, about how vigorous and how long-
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
Figure 9
` II ~ .F+ ~+~ ~ a~ O^?.J~~ t'om'''
~~~~o ~~ ~~~~
~` Includes goods, s?rvices, and privafs trssns~~rs
Approved For Release 2~007i04112 :CIA-RDP83M00914R001000010012-1
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
lived the expansion will be. The great fear is that growth in 1983 could be
choked off by another rebound i ~i interest rates resulting from the combi r~ati on
of stubbornl,~ high federal d:~i~icits and restrictive monatar4~ policies. ?ut
precisely because this threatening possibility has been so widely advertised,
_~conomic policymukers are likely to adjust their policy mix so as to e,~^?rd
against it. In any event, the long term forces at a~ork -- described in tt~~
last section of this paper -- favor a sustained and a substantial recovery of
the US economy.
Thy Overvalued Dollar
The most immediately troublesome issue affecting near-term US export
performance is the substantial overvaluation of the dollar. in foreign exchange
markets (especially against the yen and the mark). The "strong" dollar has
imposed a competitive handicap on US goods both in world export markets and in
US domestic import-competing industries. As we have already seen, US
merchandise trade perf ormance in the 1970s was alternately boosted and
dampened by cyclical changes in the value of the dollar. The current
overvalued dollar -- overvalued, i.e., in terms of the underlying competitive
relationships between the US and other major industrial countries -- has
substantially weakened the price competitiveness of US goods and caused the US
share of OECD exports of manufactures to slip beginning around mid-1981. This
loss of competitiveness will almost certainly continue well into 1983. The
slipping US trade performance, once it is widely recognized, will be taken as
further confirmation of the already strong belief at home that US manufactures
are no longer competitive and will increase the clamor for protection of US
industries against foreign competition and for stronger efforts to open up
foreign markets.
Approved Far Release 2007104/12 :CIA-RDP83M00914R001000010012-1 --~- --
 Approved--For Release 2007/04112 :CIA-R DF'83M0.0914R001000010012-1
Two factors, however, should be kept in mind. One is ~he likelihood that
U5 export performance in services will be less affected by the current dollar
overvaluation, and will thus be able to attenuate, if not offset, the heavy
deficit on trade account. This was certainly the pattern w? have observed in
earlier strong-dollar/v~eak-competiveness cycles. The other is that a
relatively poor US trade performance will eventually cause t'12 dollar to
depreciate against the yen and the mark. But the automatic adjustment forces
may not come into play quickly or strongly: the demand-pull of high US
interest rates (should they persist) and the cost-push of political
uncertainty in Europe could sustain the dollar's value even though trade
trends call for a depreciating dollar. The longer these two factors encourage
dollar investments in the United States, the longer it will be before the US
can recoup its competitive pricing position in international trade.
Meanwhile, some fundamental factors influencing price competitiveness will
tend to favor the Japanese and Germans. Their inflation rates have for
several years been running below those in the United States and these two
countries may well continue to enjoy faster growth in productivity in the
manuf acturing sector than the US. As a result, the longer the dollar
maintains its strength, the larger will be the cut needed in the dollar's
value to restore the price competitiveness of US goods. Restoration of that
competitiveness, thus, may not be accomplished as quickly this time than in
previous cycles.
Tilting at Japan
The most important mirror image of dollar overvaluation is yen
undervaluation. But the undervalued yen is more than just a mirror image; the
yen is independently depressed by Japan's fiscal-monetary policy mix, which is
Approved Far Release 2'007/04112 :CIA-RDP83M00914R001000010012-1
 Approved-__~t~r-R~efease-~2fl0~-ff3~tg2 : CiP,=RDP83M00914R0~1-OII00'C00=12.-i-
the reverse of that of the US. To stimulate their domestic economy in the
face of sagging demand, the Japanese are combining a tightening fiscal policy
with a loosening monetary policy. The resulting low interest rat^s, of
course, contribute to a weaker yen and to the persistent huge Japanese trade
sur}~luses with the US. It is ~:.orth noting that every major e'~i5^de of US-
Japan economic friction has been preceded by a period of substantial yen
undervaluation -- in the late 1960s, in the mid-1970s, and again right now.
This year, Japan's current account, its overall trade balance, and its
bilateral trade balances with the US and the EC will all reach surpluses of
record proportions. Public outcries against Japan both in the US and in the
EC will be particularly strong in the current distressed economic environment.
If past experience is any guide, the Japanese are unlikely to make
significant enough concessions to disarm the rising trade antagonisms against
them. This could result in an unbridled outbreak of anti-Japan protectionism
that could severely undermine the integrity of the international trading
system of the post-war era. Can such a development be avoided?
The fundamental problem underlying Japan's souring economic relations
with the rest of the industrial world is the longstanding lack of reciprocal
competitive opportunities. While the United States and to a lesser extent
European firms have had to compete head-on with Japanese firms in their
domestic markets and in third country markets, they have been kept out of the
Japanese market. The frustrations are particularly keen because after ten
years of considerable efforts by the United States and the EC to make Japan
open its markets, that country still effectively shields its home market from
foreign competition. US high technology firms are kept from capturing the
Japense market in an early phase of the product cycle, a move which undercuts
US exports and prevents US firms from thr~rarting potential competitors at an
Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
 Approved For Release 2007/04112 :CIA-RDP83M00914R001D00010012-1
early stage. Moreover, the lack of reciprocal competitive opportunities in
Japan diverts some of the rapidly growing exports of ~lICs to other more open
markets, especially the United States.
The problems of resolving these highly caustic trade problems are
particularly difficult because of significant differences that exist b~t~reen
Japan and other industrial countries in regUrd to each side's political-
economic system and bargaining stance.
The Japanese political-economic system functions mainly through an
informal consensus process rather than depending heavily on legal procedures
as do other industrial nations. F,s suvh, Japar, protects its demestic market
mainly through the informal interaction of various interest groups while
tariffs and other statutory trade restrictions play a minimal role. Foreign
firms in Japan must deal with (1) an endless array of nuisance restrictions
involving inspections and .approvals handled by a highly ambiguous bureaucratic
process, (Z) informal cartel arrangements among major producers, and (3}
unwritten guidelines under which buyers purchase goods only from Japanese
firms. As a result foreigners cannot easily pinpoint where and how the
restrictions are being applied.
The trade bargaining process since the late 1960s has been a highly
skewed one which favors Japan. In nearly every instance, foreign governments
have been asking Tokyo to give up something rather than the other way
around. It has been far easier for the Japanese to resist changes in their
well entrenched and highly successful political-economic system, than it has
been for the United States and others to make the Japanese change. The
Japanese leaders also have had an advantage because they could easily blame
the problem on the competitive failures of others, and because they realize
the United States is highly unlikely to use the only really effective leverage
 Approved For Release 2007/04112 :CIA-RDP83M00914R001000010012-1
it has vis-a-vis japan -- clue thn US mar'