PETER FLANIGAN REQUEST FOR NORTH-SOUTH ANALYSIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R002300020028-9
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 28
• Document Creation Date: December 20, 2016
• Sequence Number: 28
• Content Type: MEMO

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(23 July 1981)
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NAME AND ADDRESS
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ACTION
DIRECT REPLY
PREPARE REPLY
APPROVAL
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RECOMMENDATION
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CONCURRENCE
INFORMATION
SIGNATURE
Remarks:
The attached package responds to
the DCI's request for information and
analysis on selected aspects of the
North-South dialogue. It was sent
to Peter Flanigan of the President's
Economic Advisory Council.
FOLD HERE TO RETURN TO SENDER
FROM: NAME, ADDRESS AND PHONE NO.
DATE
Maurice Ernst, D/OER, 4R71,
CONFIDENTIAL
SECIIET
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2 3 JUL 1981
MEMORANDUM FOR: Director of Central Intelligence
Deputy Director of Central Intelligence
VIA Director, National Foreign Assessment Center
FROM Maurice C. Ernst
Director of Economic Research
SUBJECT Peter Flanigan Request for
North-South Analysis
1. Action Requested: None; for your information only. (U)
2. Background: The attached papers were sent to Peter
Flanigan of the President's Economic Advisory Council. He
had asked for our analysis of selected aspects of the "North
South Dialogue" to prepare a position paper for President
Reagan's participation in the 22-23 October Cancun Summit. (OUO)
MAURICE C. ERNST
Attachments:
As stated
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Some Aspects of the North-South Dialogue
This memorandum summarizes several aspects of the North-South
dialogue. It includes an overall perspective and sections on past approaches
to the dialogue, the role and effectiveness of private voluntary aid in
fostering economic development, information on commodity agreements,
and selected applications of aid to market economies.
Perspective
The industrialized states, with varying degrees of reluctance, have accommodated
several of the South's demands made in the context of the North-South dialogue. The
North has committed itself to increasing funds for development assistance and has
agreed to a limited system of trade preferences for LDC products. The industrialized
nations participate in several producer-consumer commodity organizations that attempt
to insulate developing countries from sudden fluctuations in the production of or demand
for specific LDC exports. Because of its greater economic power, however, the North
retains the ability to control North-South discussions so long as the dialogue is restricted
to the transfer of economic resources and takes place in limited forums. If the North-
South dialogue were viewed solely in terms of economic objectives attainable in these
forums, then economic development would continue to be contingent upon the generosity
and healthy expansion of the economies of the industrialized states. In this case,
confrontation between North and South ultimately would be counterproductive for the
LDCs.
The North-South dialogue, however, involves more than the substantive issues of
economic development; the South also has a political strategy designed to enhance its
bargaining leverage in and influence over international negotiations. Because the
industrialized states possess such overwhelming economic might, the South has
concentrated its efforts on gaining control of the procedural aspects of the dialogue in
order to influence the outcome of negotiations.
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Past Approaches to the Dialogue
The Non-Aligned Movement
The first LDC effort to form a global negotiating bloc was the formal creation of
the Nonaligned Movement (NAM) in 1961. The Movement is characterized only by a
series of meetings and declarations, and has no internal mechanism to implement
resolutions. Even though it has no real power, the NAM has, nonetheless, been able to
influence the tone and priorities of the dialogue simply by constantly dunning world
leaders with the positions of the LDCs. For example,.the NAM originated the call for a
New International Economic Order (NIEO) and was the driving force behind the creation
of the UN Conference on Trade and Development (UNCTAD). Although the NAM
includes most of the LDCs, it is not identical with the Group of 77, which evolved out of
the first UNCTAD in 1964 and which continues to be the principal caucus of LDCs on
economic issues. The NAM, however, offers a forum for the LDCs to comment on
political and military affairs as well.
The role of the NAM is diluted by the fractious political, economic, and military
differences among LDCs that have effectively prevented unified action in every large
LDC coalition. Tensions over priorities, policy direction, and the very meaning of
nonalignment are common. While eschewing client status, many members are openly tied
to either the United States or the. Soviet Union. Even though it frequently displays a
leftward bias, at any given time the NAM has either favored or discouraged both pro-
Western and pro-Soviet policies. The tensions generated by the clashes of NAM radicals
and moderates test the Movement's unity. Even so, the members' shared sense of ill-
treatment by the industrial and military powers encourage them to continue to try to
restructure the international system.
UNCTAD
It is difficult to be optimistic about the prospects for substantial progress in
North-South negotiations in the UNCTAD forum. UNCTAD suffers from the debilitating
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effects of large-scale multilateral diplomacy. With over 140 nations in attendance, with
endless plenary speeches and rhetorical flourishes, and with all the associated publicity,
the chances for serious negotiation are undermined by the session's very structure.
UNCTAD also suffers from a history of confrontational politics. Of all the international
institutions, it is the one most widely perceived by the developed countries - and some
LDCs - as unsuited for serious negotiations on issues of major importance for trade and
development. Whether valid or not, this perception is a serious stumbling block to
mutual accommodation.
The unity of the South began to develop in 1964 at the first session of UNCTAD
when the Group of 77 (G-77), which now numbers over 120 countries, was born. The first
three UNCTAD conferences (1964, 1968, 1972) were characterized by confrontation,
political rhetoric, and unrealistic economic demands for such measures as trade
preferences, unilateral concessions, untied aid, and transfer of defense spending into
economic development programs. The United States and most developed countries voted
against or abstained on mast of these issues because they were one-sided, ill-researched,
and threatened existing institutional and structural arrangements that had been built up
by the West after World War II. The only major accomplishment for the LDCs was
progress on the Generalized System of Preferences (GSP). The idea of preferential
tariffs by industrial countries for LDC exports was formally introduced in UNCTAD I,
agreed in UNCTAD II, and implemented starting in 1971.
From the point of view of the LDCs, the first three UNCTAD meetings obviously
failed to establish a new international order for the conduct of trade and other economic
relations. In particular, they failed to attract any sympathy from the US, which for
reasons of its historical economic evolution, postwar political relations, and basic
principle of nondiscrimination in international trade, was unfairly cast as an arch-
defender of a system believed biased strongly against the LDCs. Moreover, to a great
extent the US served as a scapegoat for the other developed countries (especially those
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of the European Common Market) by carrying the burden of protecting the status quo.
while they could avoid any commitment through vote abstentions.
UNCTAD IV, in Nairobi in 1976, was a watershed in the North-South dialogue. It
marked the first serious attempt to implement some of the goals of the previous
meetings, and was characterized by unusual Southern unity and less confrontation on the
part of the industrialized states. At UNCTAD IV, resolutions were adopted on a variety
of issues that included the Integrated Program for Commodities, the Common Fund,
technology transfer, and debt relief. But, while UNCTAD IV agreed on the issues, it left
detailed negotiations on how to resolve them for other meetings and bodies. Following
UNCTAD IV the LDCs and industrialized countries made little progress in reconciling the
self-interests of both sides beyond framework agreements on the common fund and debt
negotiation.
UNCTAD V (Manila, 1979) assessed the progress of the North-South dialogue and
found it wanting. But it, too, merely put agenda items into the bowels of the UN for
further study. It demonstrated both that LDC unity is difficult to achieve and that the
industrialized states' positions become firmer as general debate moves to consideration
of specific, concrete measures. For the first time, divisions between the interests of
OPEC and non-OPEC members of the G-77 emerged. Because of their oil income, some
of the most important OPEC nations have as much at stake in global economic stability
as they do in a new international economic order. A number of advanced LDCs, such as
Brazil, India, and Mexico, acting in their own self-interest, are taking positions more
consistent with those of the developed countries on such issues as energy, trade, and
technology. As these countries continue their economic development, they will find
fewer reasons to support the radical demands of the G-77.
Still, UNCTAD remains the preferred forum of the majority of the G-77. Some
outstanding issues at UNCTAD that threaten to become future flash points include:
o The future role of UNCTAD in international financial
management and in debt rescheduling.
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The difficulty in establishing the site for UNCTAD VI.
Possible future conflicts with GATT over trade preferences
and structural adjustment issues.
All of these seem to indicate that UNCTAD is likely to become increasingly politicized
and, for the US, bothersome.
The UN General Assembly
Stimulated by the success of the OPEC countries in pressuring the industrialized
states in 1973-74, the G-77 stepped up the pace of its demands for international
economic changes. In 1974 it pushed through over the objection of the industrialized
states UN resolutions calling for a New International Economic Order and a Charter of
Economic Rights and Duties of States. These resolutions brought together a set of
proposals that had previously been put forward unsuccessfully at UNCTAD meetings. In
essence, the proposals called for a redistribution. of global financial and technical
resources through:
o Economic decolonization by LDC industrialization and
absorption of advanced technology.
o Indexation of primary commodity prices to those of developed
country exports.
o Expanded Third World participation in the international
monetary system.
o Compensation for previous "exploitation" of LDC resources
during the colonial era.
o Cancellation of Third World debt due the industrialized
countries.
At its second special session on international economic cooperation in September
1975, the General Assembly specified further measures related to diversifying LDC
production and exports, development financing, technology transfer, and agricultural
production. Unlike the previous year's debate, discussions at this meeting were cool-
headed and program-oriented. In an effort to reduce polemics and begin a productive
dialogue, the General Assembly endorsed in principle continuing the North-South dialogue
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in an ongoing, limited-participation conference outside of the formal UN framework.
While the North did not approve of the G-77 economic proposals, it nevertheless
agreed to talk about them. An initial attempt to enter into a productive discussion with
the South took place in December 1975 when the industrialized countries initiated the
Conference on International Economic Cooperation (CIEC). This was the "mini" North-
South dialogue in which participation was limited yet all sides were represented. Despite
the initial high hopes for the success of this approach, the conference, ended in 1977 with
no real progress and was a disappointment to both sides. As a result of CIEC's failure,
the General Assembly that year affirmed that all further discussions relating to the new
order should take place within the UN system and called for a third special session.
This special session met in New York in August 1980. Having made no progress in
implementing the G-77 programs, the General Assembly turned its attention to launching
a sustained round of "global negotiations" with the active participation of all member
states. The session ended, however, with no agreement on either the procedures or the
agenda for the global round. Despite the stalemate, this session on economic cooperation
helped to firmly establish the General Assembly as a key forum of the North-South
dialogue, and a forum which can easily be manipulated by the G-77, which controls a
majority of the votes.
The Brandt Commission Report
In September 1977, former West German Chancellor Willy Brandt announced that
he was going to implement World Bank President MacNamara's idea for an "Independent
Commission on International Development Issues." The Commission was to examine "the
grave global issues arising from the economic and social disparities of the world
community," and to suggest ways of promoting solutions to the problems involved in
development and in attacking absolute poverty.
Three themes run through the Brandt Report. The first is that all countries have
stronger mutual interests than they recognize. Second, that the IMF and World Bank are
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run by outdated arrangements that favor the North because they do not include most
communist countries and were formed before most LDCs reached independence. The
third theme is that poor countries have no automatic sources of development finance and
must depend on unreliable and quixotic developed countries and capitalist bankers.
The Brandt Report recommends an emergency program and longer term reforms.
The emergency program has four main features:
o A large transfer of financial resources, to the LDCs through
official aid, World Bank lending, and sale of IMF gold.
o An international energy strategy for production, price
indexation, and conservation.
o A comprehensive global food program.
o. Reform of the international monetary system.
The Commission made over 60 proposals for longer term reforms of the global
economy. These can be roughly grouped into four categories:
Measures to boost demand in LDCs.
o Changes in trading arrangements and adoption of commodity
agreements.
o Institutional reform of the IMF, World Bank, and other
specialized organizations.
o A World Development Fund for non-project lending.
The Brandt Report simply lends a prestigious name to old wine in new bottles. It
adopts from the global reformist school the notion that most issues of international
relations should be set in a North-South context, and that poverty and international
disparities can be largely attributed to the unequal distribution of economic power.
The report is in many places inconsistent and contradictory. For example, it
focuses attention on protectionism in the rich countries, but ignores its more severe, and
more damaging, incidence in the South. Moreover, while acknowledging the potential
gains from freer trade, the report announces paradoxically that "economic forces left
entirely to themselves tend to produce growing inequality." The report shows an
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excessive faith in the ability of governments to foresee future trends and to manage
economic processes by direct regulation.
To its credit, however, the Brandt Commission report recognized that global
reform was impractical if the debate resided in such large, political forums as the UN.
Thus, the final recommendation of the report was. for a limited summit to provide a new
focus on global problems and give a new impetus for future negotiations. A year later,
with the UN Global Negotiations deadlocked over procedures and agenda, Austria and
Mexico resurrected the recommendation in the form of the upcoming Cancun Summit.
The 1975 Kissinger Speech
Secretary of State Kissinger's September 1975 speech to the UN General Assembly
marked the first US commitment to negotiate seriously for major changes in the world
economic structure. This tactical change in position probably came about because of the
perception at the time that OPEC was in harmonious unity with.both itself and the other
LDCs, and that together the threat of their strong, unified action would make it
increasingly costly for the US to delay action on North-South issues. Kissinger addressed
many of the LDC demands for new economic arrangements, but did not come close to
meeting their radical conditions. Moreover, his intent was to offer a willingness to
cooperate, but to avert any systemic changes, channel North-South rhetoric into specific
issues rather than general themes, and restrict actual negotiations to forums io which the
US still had a large measure of control. Thus, for instance, he
o Rejected the UNCTAD price stabilization schemes for primary
exports in favor of an expansion of the IMF's compensatory
financing facility to stabilize export earnings.
Rejected indexing of prices of developed country exports but
offered a program of trade reforms to be negotiated through
GATT.
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The Kissinger development strategy was a combination of what the North could do
for the South and what the South could do for itself. What the North could do was
outlined in five key areas:
o Try to protect the LDCs from economic shocks such as sharp
declines in export earnings, natural disasters, and food
shortages.
o Accelerate LDC growth through improved access to capital
markets, adaptation of new technology, and foreign
investment.
o Improve the world trading system so LDC.s can make their way
by trade, not aid.
o Improve production and trade of key commodities.
o Address the special needs of the world's poorest.
Kissinger noted, however, that the determination of the LDCs to mobilize their
own efforts is indispensable. He stated that there is no substitute for LDC policies that
call forth savings, institute land reform, apply aid and other external capital efficiently,
allocate national resources wisely, and promote family planning. The essence was.a
cooperative approach to problem solving with a view that-US proposals are not charity
and should not be received as if due.
The point of the need for LDC cooperation among themselves has not been lost on
the. South. For example, at the instigation of the NAM the G-77 convened a meeting in
May 81 on Economic Cooperation Among Developing Countries (ECDC). The ECDC
recommended measures to enhance LDC development that included the need for
coordinated energy relief measures, mutual trading preferences, LDC financial
cooperation, and LDC programs for food security and storage. It remains to be seen
whether the LDCs can make this realization a reality.
The Role of Private Voluntary Aid
US private aid is modest in the larger context of development aid. Grants from
US private voluntary organizations (PVOs) totaled some $1 billion in 1979, a decline in
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real terms compared with the 1975 figure of $800 million. The US government itself
provided an additional $600 million to PVOs in 1979 for support of their aid programs.
The next largest developed country private donors were West Germany ($400 million) and
Canada ($100 million). PVOs account for about 6 percent of total US foreign aid, the
largest share among major OECD donors. Dollar terms understate the value of PVO aid
by as much as one-half because of the large volunteer component of their
administration. Private US aid has been distributed widely throughout the developing
world in the past several years, with much of the aid centered on key countries such as
India, Morocco, Chile, Peru, and Bangladesh. The major portion of this aid has been
targeted for food and medical treatment.
Few private organizations have undertaken any evaluation of the efficiency and
effectiveness of their aid programs. While the US Government certainly examines the
PVOs it supports for malfeasance and waste, most PVOs guard their books closely and are
not put under a highly critical lens. In general, private groups are usually, though not
always, distinguished from their government analogs by their smaller size, greater
flexibility, and lower operating costs. Their aid bucket is less leaky than the massive and
bureaucratized channels of government.
On the other hand, it is not at all clear how much PVOs contribute to LDC
economic development.
o Their unstable funding disrupts the continuity of even
narrowly-focused programs.
Those that start out as relief efforts can quickly become
welfare programs that reduce the initiative for self-help.
o The PVOs' parochialism - arrogance in the extreme - leads
them to overestimate the worth of their small programs and
subject aid recipients to unique values that may be counter to
national development goals and traditional cultures.
o Private organizations themselves become bogged down in
bureaucratic procedure, are often primarily interested in
justifying and extending their existence, clamoring for grants
from any source, and perpetuating paternalism and dependency
through emotional appeals.
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In any event, the limited evidence does not permit much judgment about whether the
PVOs could administer aid programs much larger than the current. $1-2 billion without
encountering substantial inefficiences.
Private aid may not be better received than official development assistance.
Research suggests that aid recipients are very concerned about the intentions of the
donors. Many PVOs are heavily supported by money from - and identified with the
policies of - the United States Government. These agencies, such as CARE and Catholic
Relief Services, must swing with the foreign policies of the US government, for better or
worse. Non-government-funded programs present another set of problems. Their
independence - such as that of the American Friends Service Committee - frequently
puts them at odds with US Government policies even though the recipients of their aid
may be no less needy.
Commodity Agreements
International agreements to raise and stabilize the prices of raw materials
exported by the LDCs have been a prominent theme of the North-South dialogue,
especially in UNCTAD. The resulting UNCTAD Integrated Program for Commodities
(IPC) has not succeeded in significantly altering the terms of trade for commodity
producers, and little prospect remains that it will succeed in doing so. Prior-experience
with the financing of buffer stocks - the heart of the Common Fund price stabilization
scheme - also raises questions about the chances for success. Specifically, the IMF has
had a Buffer Stock Financing Facility (BSF) available since 1969 but it has seen only
limited use. There has been no sign that either side in the dialogue is considering
expanding or liberalizing this facility, even though it appears to meet some of the needs
Raising commodity prices above market-clearing levels attracts added production,
both from agreement members and from non-members. It also discourages consumption
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and encourages substitution. These powerful reactions all work toward creating surpluses
of targeted commodities and explain why commodity agreements have been unable to
sustain higher price levels. In fact, even price stabilization efforts at or near market
levels-can stimulate output if producers believe that their long term risk of lower prices
has been decreased.
Recent commodity agreements have tried to deal with market competition
problems by several means such as modest price goals, inclusion of all major producers,
and agreements that importer nations not increase purchases from non-members. It has
been a practical impossibility, however, to include all producers and potential producers
of major commodities. It has also been difficult to get importers to agree with producers
on appropriate stabilization mechanisms and price levels for the commodity
arrangements. Competition from synthetics and substitutes has been an even more
intractable problem.
UNCTAD's Integrated Program for Commodities includes five for which
international stabilization agreements exist or are projected. These are coffee and
sugar, rubber (in the process of ratification), cocoa (recently renegotiated but excludes
the major producer and consumer) and tin (which was just renegotiated and is now in the
ratification process). Discussions on other commodities are embryonic at best.
Coffee - The first coffee agreement dates from World War II, but it was not until
1964 that both producers and consumers were brought into a comprehensive agreement.
It clearly favored the LDCs -- the agreement transferred $600 million annually from
consumers to producers in the late 1960s-early 1970s. It broke down when producers
refused to use substantial stocks to moderate abnormally steep price rises beginning in
1972. The current agreement dates from 1976. It relies exclusively on export quotas to
protect prices. Because the Brazilian frost of 1975 kept the price of coffee well above
the stipulated range, quotas were never put into. effect. Renegotiated provisions with
higher prices became effective in October 1980; now, however, the agreement may not
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be able to defend the current $1.15 floor in the face of projected increases in coffee
production in the 1980s.
When the International Coffee Organization hosts the annual meeting of producers
and consumers in London this September, there will be tremendous pressure for higher
quotas from some producing countries who feel they are suffering under the present
quota arrangement. Many of the smaller nations facing high oil import bills and
dependent on coffee for a large segment of export earnings simply cannot afford to rein
in exports even at depressed prices.
Sugar - Sugar was one of the first commodities for which control via
international agreement was tried as early as 1931. The current International Sugar
Agreement (ISA) went into effect in 1978 and comprises 59 producing and consuming
nations, including the US. Producer nations agree to apply export quotas when prices are
low and release stocks when prices are high. Low stocks are now keeping sugar prices
well above agreed levels. Price control has been difficult because:
o Production varies unpredictably with weather and crop
diseases.
o Supply response is lagged because of the long lead times to get
new crops underway.
o Demand for sugar is inelastic and only a small share of world
production passes through international markets.
Despite broad producer and consumer membership, the ISA faces serious
problems. Expanded production of high-fructose corn sweetener will displace a large
part of the world market in years ahead. The EEC is likely to continue major exports of
subsidized beet sugar in the world markets because it will be reluctant to join the ISA
without a quota that recognizes those exports. In addition, the World Bank projects that
sugar production will increase more rapidly than consumption in the LDCs over the next
decade.
Rubber - This commodity has a long history of international control. A new
International Rubber Agreement was negotiated in 1979 under UNCTAD's integrated
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program, but is not binding until ratified by enough countries to constitute 80 percent
each of world imports and exports of rubber. Final ratification is likely because
countries totaling well over 70 percent of imports and exports have either accepted the
arrangement, as the United States, or agreed to apply it on a provisional basis. One
reason for the successful negotiation of the rubber agreement is resurgent rubber
demand. Increased prices for petroleum-based rubber synthetics have brought consuming
countries into line on the need for more price stability for natural rubber.
Cocoa - This commodity has had one of the most volatile price patterns of any
commodity. Production extremes have overwhelmed cocoa agreements since they were
first negotiated in the early 1960s. The 1980 agreement is clouded by the abstention of
the largest producer (Ivory Coast) and consumer (US). The trend is for rising production
and soft demand to make it physically and financially difficult for buffer stocks to
sustain prices at target levels.
Tin - The first International Tin Agreement (ITA), which included both producer
and consumer nations, was ratified in 1956 and renewed at five year intervals. The
present agreement was scheduled to expire in June 1981 but was extended through June
1982 to allow more negotiating time. The ITA uses both a buffer,stock and export
controls to try to stabilize prices between preset ceiling and floor levels. Although the
ITA is frequently cited as the most successful example of a commodity agreement, its
record is mixed. Because of the small size of the buffer stock relative to world tin
consumption, the ITA has been considerably more successful in defending floor prices
than ceiling prices.
After fifteen months of negotiating, Asian tin producers with the support of Japan
and the EEC have recently concluded a Sixth International Tin Agreement. The new
arrangement, which bears little resemblance to the package sought by the United States,
provides for a normal buffer stock of 30,000 tons to be financed by contributions from
both producers and consumers, an additional buffer stock of 20,000 tons to be financed by
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market borrowing, and the introduction of export controls. The export controls, which
vary with the size of the buffer stocks on hand, will serve as the key instrument of price
stabilization. Like that of rubber, the agreement will be fully in force when 80 percent
each of imports and exports is covered.
Other Commodity Agreements - The difficulty of controlling production,
financing stocks, and, in some cases, adjusting to demand changes in a depressed world
economy, have prevented other commodity agreements from being designed or coming
into force.
o Tea producers had a long-lived International Tea Agreement
from 1933 to 1955. The tea market itself is historically
relatively stable and the irrelevant, agreement was allowed to
expire in 1955 with virtually no impact.
o Jute marketing agreements have been discussed for years with
no results. A recent World Bank study suggests that price
stability may indeed be detrimental to the near-exclusive
suppliers, India and Bangladesh, by encouraging production that
would push down prices and stimulating demand for easily
substitutable synthetics.
Copper is frequently cited as a candidate for international
price stabilization. Previous producer organizations have been
unsuccessful because of their limited control over world
supplies and members' dependence on copper export earnings,
which precludes cutting back production for extended periods.
The world market is so big that the cost of an effective buffer
stock would be a prohibitive $2 billion.
Wheat marketing is covered under an unconventional
International Wheat Agreement (IWA) that serves only as a
voluntary forum in which wheat exporters and importers can
negotiate agreements when they see fit. The last attempt to
negotiate a conventional agreement with automatic supply
adjustment mechanisms to counter price fluctuations failed in
1979. Since then, importers and exporters have been
considering a new, alternative approach that would mean a
much more flexible agreement for wheat than what exists for
other commodities. When world wheat prices fluctuate
sharply, the IWA would have the power to authorize
adjustments in the levels of buffer stocks in order to stabilize
the market. Such adjustments, however, would not be
automatic as happens in other commodity agreements that use
buffer stocks as their price control mechanism. Instead, these
would be determined through consultations with importing and
exporting countries. The exact details of this mechanism still
have to be worked out.
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Other commodity agreements under consideration by UNCTAD are for bananas,
meat, tropical hardwoods, and vegetable oils. Agreements are unlikely because of either
perishability of the commodity (bananas), strong demand that rules out need for
agreements (meat and hardwood), or strong `substitutability (oils).
Where Aid Could Help Market Economies
Substantial opportunities exist for aid to contribute to the economic development
of market economies. Identifying them, however, requires considerable flexibility in the
definition of "market economy." Some, such as India and Pakistan, are largely free-
market even though they have large and powerful state-controlled industries in one or
more sectors. Some, such as Nicaragua, have essentially free markets in many respects,
but are moving decidedly socialist. Others, such as Sri Lanka and Egypt, find it
necessary to heavily subsidize consumer items such as food and fuel even though they
espouse free market principles. Some, such as the Dominican Republic, Honduras, and
Bolivia, maintain strong controls over foreign trade through tariffs and subsidies to
protect infant industries or encourage exports. Some may have economies that are
largely private, but have government structures that are unstable, undemocratic,
unenlightened, or with any number of undesirable attributes.
In a large number of LDCs, economic development is hobbled by poorly developed
or overburdened transportation, power, education, and health systems. As shown in the
following tabulation severe transportation problems exist in several dozen small LDCs.
Most have poor or non-existent road and rail service, few inland waterways, and
undeveloped seaports or railheads connecting with other countries. While unsuitable
geography often restricts the availability of efficient transportation services, most
countries in this group simply lack the capital required to finance transportation on a
large enough scale to stimulate development. Some countries such as Ghana, India, and
Paraguay, have moderately successful systems, but which become quickly clogged by
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large shipments or unavoidable breakdowns.
Countries With Severe Transportation Problems
Bhutan
Honduras
Rwanda
Bolivia
India
Somalia
Botswana
Lesotho
Sudan
Burundi
Malawi
Swaziland
Cen. Afr. Rep.
Mali
Uganda
Chad
Nicaragua
Upper Volta
Congo, P.R.
Niger
Zaire
Ghana
Oman
Zambia
the smaller
Paraguay
Zimbabwe
Caribbean Islands
Besides transportation problems, most of the poorer LDCs have crying needs for
electricity and other power sources to fuel development. The difficulty here, however, is
that in most cases neither the market nor the political environment is capable of
encouraging much private sector participation in the production and distribution of
electricity. Aid for these targets must instead be designed to spur growth through
linkages with the rest of the economy.
Educational improvements are also ripe for aid financing. The following countries
exhibit especially high needs for investment in their educational systems:
Bangladesh
Malawi
Senegal
Cen. Afr. Rep.
Maldives
Sierra Leone
Chad
Morocco
Somalia
Equitorial Guinea
Nepal
Sudan
Gambia
Niger
Uganda
Guinea-Bissau
Pakistan
Upper Volta
Haiti
SaoTome-Principe
Yemen, Arab
Besides financing national education,
all of these countries
would also benefit from
sending students for training in US schools and from exposure to-US institutions.
A number of smaller LDCs, especially, could use substantial aid programs focused
on health care systems. The following countries have a high need for such aid:
Bangladesh
Chad
Nepal
Niger
Pakistan
Upper Volta
Yemen, Arab
Zaire
The list of countries with large, effective agricultural development programs that
focus on the private sector is short. Coordinated agricultural development programs that
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have the possibility for further success exist in Costa Rica, Guatemala, Trinidad/Tobago,
and Zaire. Other countries with effective programs are Brazil, Mexico, Colombia, and
Venezuela, but they are not in a "high aid need" category. On a smaller scale, programs
to provide credit, training, machinery, and high-technology inputs can work to boost food
output and farm incomes if countries are willing and able to pay the price in terms of
cultural changes, shifts in political and economic power, and wealth distortions. More so
than in any other sector, aid aimed at boosting private agricultural production and
distribution runs headlong into questions of how to do it most efficiently, most fairly, and
on a scale large enough to make a difference to the nation.
In most needy LDCs, the state virtually has to become involved in some aspect of
agricultural production and distribution. Private markets are simply too small and too
embryonic to handle the supply of credit, irrigation, and fertilizer. The very fact that an
agricultural development program exists means the government is going to play a strong
role. Moreover, just as in developed countries, LDC agriculture is subject to powerful
political forces that drive governments to make policies that interfere with the free
market. Finally, LDCs with financial problems frequently find it difficult to resist
controlling the agricultural surplus that is the key to economic development under any
political system. For instance, the Philippine government in the mid-1970s attempted to
get in on the profits to be made from escalating world sugar prices by taking over the,
international marketing of sugar from old-line trading houses. The government
attempted to hold back stocks to force prices..ei, em.higher, then lost when prices fell as a
result of increased marketing from other countries. In terms of economic efficiency, the
private market may have been able to read the future better. In terms of wealth
redistribution, the government gained at the expense of the private houses who had
traditionally handled the trade. The owners of large sugar plantations probably received
slightly less for their crops. In terms of economic development, the status of the typical
Philippine sugar "farmer" changed little in an industry renowned for its exploitation of
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workers regardless of who owns the plantations and controls the marketing.
A more vivid example of the effect of government intrusion into the sugar
industry in an essentially market economy is the Dominican Republic. There,
government purchasing agents contracted with sugar growers at prices less than market
value last year, with the predictable result that sugar production fell.
It is difficult to select countries that are both needy and appropriate potential
recipients of aid targeted toward their longer-tern credit institutions. In most cases,
countries with the need for improved and expanded financial institutions are the very
ones lacking the management expertise and sufficiently-developed monetized economies
to make such systems work. Rather than funds that can be simply loaned out, these
countries - which include nearly all of the smaller market economies in Asia, Africa,
and Latin America -- need carefully-constructed programs of technical training in
accounting, project assessment, and other business procedures, and.the physical plant and
equipment that an efficient financial sector demands. A number of LDCs have already
demonstrated sufficient management expertise to improve the success of such an aid
program. These countries include:
Egypt Ivory Coast Costa Rica
Barbados Panama Philippines
Jamaica Paraguay Nigeria
Kenya Peru
The list contains a number of countries that are probably capable of financing their own
financial sector development. (OFFICIAL USE ONLY)
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POLICY ^l_ I CAT I OUS OF THE CANCUN S~1i`?;1IT
1. The Cancun summit is the latest episode in the long-standing and -
continuing N'orth-South dialogue. While the interchange began in the 1960s, it
reached its zenith in the mid-1970s when many LDC leaders thought they could
emulate the clout enjoyed by OPEC and could depend on OPEC for financial and
political support for their cause. OPEC, meanwhile, attempted to divert
global attention away from dramatically rising energy prices by inducing a
linkage between negotiations about energy and negotiations about a "New
International Economic Order" (NIEO). The NIEO calls for a reordering of the
international economic system in a way that would provide LOCs with a greater
political voice in international councils as well as offering them vastly
increased economic benefits.
2. Since the mid 1970s the North-South dialogue has settled back to a
rather routine and less confrontational affair, as many LDCs found that they
lacked both the economic clout and OPEC support that were necessary to acquire
the political influence they desired. Furthermore, many of the original and
more vociferous LDC leaders, such as Mexico's Echeverria and Algeria's
Boumedienne, passed from the scene. The North-South contest would have become
even less prominent had it not been for the persistence of leading members of
the Socialist International, such as Willy Brandt, and their allies. The
Cancun summit is largely the outcome of their endeavors.
3. To date, the North-South dialogue has (not surprisingly) borne little
fruit. There has been a yawning gap between the rhetoric of discussants and
praoi,atic efforts to confront concrete problems. Both developed and less
developed countri_s have induulged in the articulation of sweeping demands anJ
respc?ls;?`., rarely ,i+'ttm l down to bra,,s tacks. There has also hen an
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e.rohasis on process rather than substance, with enormous expenditures of time
and effort expended in debating how to debate issues and in discussing how
best to organize and facilitate discussions of issues. There are several
reasons why rhetoric and generalization have not given way to realism:
-- The most vociferous supporters of the NIEO, both in the Third
World and the West, are captives of strong ideological
predispositions which emphasize socialist utopias rather than
incrementalism and flexibility.
-- There are profound economic and political differences among the
countries of the Third World, differences which can be papered
over only by resort to rhetoric and generalization.
-- Western beliefs in the free market, unfettered trade and
investment, and private enterprise are incompatible with the
socialist and collectivist beliefs of many Third World leaders.
-- There are significant differences in the perceptions and
economic interests of the DCs themselves.
-- With a few exceptions, LDCs are neither politically nor
economically critical to the West.
4. The LDCs are deeply divided among themselves. The most economically-
dynamic (e.g.,South Korea, Taiwan, Singapore have little or no interest in
North-South dialogue. Some, such as the Ivory Coast or Malaysia, are pro-
Western with a free market orientation; others, such as Ethiopia or Angola,
are pro-Soviet with a Marxist-Leninist orientation. Many Third World states
perceive themselves as genuinely non-aligned and are governed by leaders who,
,,ducated in the West, are steeped in tha utopian socialist tradition of tho
.British Fabians. Such leaders -- Julius Nyerere is a leading exairple --
con:sine a naive faith in socialist-collectivist policies with a contempt for
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Western democratic norms and a preference for authoritarian political
institutions. Some Third World states, moreover, are potentially major
regional powers and so have significant aspiraton,s toward regional political
leadership -- Nigeria, India, Brazil -- , and their political outlook is quite
different than that of the majority of LOCs.
5. In economic terms, the LDCs range from wealthy oil-producing states
(e.g., Saudi Arabia, Libya, and Kuwait) through highly efficient
-industrializing states (e.g., Singapore, South Korea, Taiwan,* Hong Kong) to
the extremely poor, agrarian and overpopulated states (e.g., Bangladesh and
Egypt). Consequently, the interests and positions of the LDCs diverge
markedly on individual issues, particularly if explicit and concrete proposals
are offered. Thus, LDCs that are major producers of agricultural commodities
are most interested in boosting and stabilizing prices for their exports; the
rapidly industrializing states are seeking preferred access to Western markets
and want low raw materiel prices; a:14;