THE fact that foreign policy was a dominant issue in the 1960 Presidential election is probably evidence enough that our foreign economic policies should be critically reëxamined, particularly as they apply to the developing countries. The gap between the economic philosophies of the developed and underdeveloped countries seems to be widening and in most of Asia, Africa and Latin America the expectation of rapid economic development has not been fulfilled. The fact that some of the most dedicated and optimistic practitioners of development call for a large increase in economic aid to achieve an average increase in income of only $2 to $6 per head per year in the developing countries is evidence not only of the intractability of the problem but also of a desperate need for drastic changes in our thinking.

A French economist who had been through the best graduate schools both in his own country and in the United States, and who has had several years' experience with the economic development problems of Middle Africa, recently offered a disturbing appraisal. "Nothing that I have learned," he said, "is of the slightest use to meet the problems of economic development of these countries. And most of the present priorities that everybody gives to their problems are wrong." There is indeed considerable evidence to support the view that the critical breakthroughs in this field of knowledge and policy have yet to be made. The following personal observations, some of which will be anathema to my professional colleagues, represent an attempt to point out some new paths of policy.

The goal of foreign economic policy is to contribute to our foreign policy objectives. From this point of view, the most important goals of foreign economic policy are these:

(a) to promote maximum unity, strength and sustained growth in the free world and especially among our strongest allies. These are mainly the Atlantic countries and Japan, which are the great reservoir of capital, technology and skills in the free world;

(b) to influence developing countries in so far as possible toward the kind of liberal economic system of which we are now part, and away from that of the Soviet bloc, by realizing the rapid development which can be derived from coöperation with the liberal system of the West;

(c) to frustrate the Soviet bloc's plans to expand their influence and to put bloc members under pressures which may weaken the ties among them.

To make the maximum progress toward these goals requires that the foreign economic policies of the West and, in particular, of the United States, take at least three different directions. One is suitable for the industrialized countries of the free world, another for the underdeveloped countries and a third for the Communist bloc. In addition to foreign economic policies, defense and research and development policies can make economic contributions to these objectives in ways which cannot be detailed here.

To have three different foreign economic policies is, of course, heterodoxy. Tradition in this field is against the idea. The core of our foreign economic policy has been to ask and to give non-discriminatory, most-favored-nation treatment in trade policy, to frown on international commodity agreements and quota arrangements, and to deal with development assistance on a country-by-country basis, usually bilaterally. These and similar familiar views are, I suggest, entirely inadequate in an era of cold war.

II

Economic relations among the industrialized countries of the free world can best be governed by traditional foreign economic policies, namely: liberal trade relations, convertible exchange at fixed rates, national treatment for private investment without special tax incentives or subsidies, and equal taxation of foreign and domestic businesses. These arrangements are familiar and have now largely been reattained (with certain exceptions, the most notable being the treatment of and by Japan). Their contribution to the growth and prosperity of the West has been demonstrably great, especially in Europe in recent years.[i]

Yet the industrialized countries still lack coördination of their national policies toward each other and toward the rest of the world. One example is the split in Europe. It is coming to be more clearly recognized that the GATT provisions permitting free-trade areas and common markets clearly did not have in mind groups so large or so powerful as the European Economic Community and the European Free Trade Area. The present external tariffs both of the Common Market and of the leading members of EFTA will be highly discriminatory, both against the other group and against third countries, including our own. Moreover, since the E.E.C. is associating the overseas territories of its members, Britain is maintaining imperial preference and Portugal is giving its overseas territories metropolitan treatment, the split will be extended into Africa, Asia and even to some extent into Latin America. In each case, the overseas associates obtain from their "mother" country or group certain privileges not available from outsiders. So long as the discrimination and preferences remain of value to the members and associates of the two groups, neighboring underdeveloped countries of limited size will find little opportunity for unity and severely limited opportunity for development.

It is in the economic interest of the United States and of all third countries to bring the E.E.C. and EFTA together in a way which will minimize the degree of discrimination. (The political value of healing the split is obvious.) This requires the calculation of a nice balance between allowing sufficient discrimination to carry out the original purpose of the association and being so discriminatory as to split the industrialized nations of the world and their associated overseas countries into separate trading blocs. I have suggested, pending more complete knowledge of the average external tariffs in all of the areas affected, that an allround reduction of the average tariff on industrial products to about 10 percent might strike this balance so far as the industrial countries are concerned.[ii]

To achieve an average tariff level on industrial products of not in excess of 10 percent would require cuts in the external tariff of the Common Market, of Britain and of the United States of probably between one-third and one-half. Moreover, the kind of tariff cutting now required would seem to call for a change in the method of negotiating trade agreements. The United States should have, as the Common Market and the EFTA now have, the freedom to negotiate a reduction in the average of its tariff level by categories of products, preferably throughout the whole of its industrial classification.

If the United States is to be a leader in reducing tariffs to the extent required, it must give up the "no damage" rule in making tariff adjustments. This means that it must have machinery available, as the Common Market countries and Britain now have, for dealing with problems of distress resulting from import competition. In as much as the United States needs this machinery for dealing with much larger domestic problems of technological change, changes in demand and shifts in industrial location, the special provision dealing with damage due to import competition could probably be incorporated into a general measure dealing with distressed areas and displaced workers.

In leveling down tariffs and in implementing the proposed treatment of underdeveloped countries some special attention will have to be given to the competition of low-wage countries which concentrate on a narrow range of products. Within organized labor it is being proposed that a fair labor standards provision be used for this purpose. It would apply to imports produced by workers who are paid less than the prevailing wages in the exporting country. As export industries are usually high-wage industries, this provision is not likely to cause much trouble and it may be better than many alternatives that are being discussed.

But this provision, along with the adjustment program previously mentioned, will still leave a few intractable problems--such as certain lines of Asian textiles which are giving special trouble to the United States and Britain. These problems call for aid by all the leading industrial nations, the burden being more readily borne if it is shared. For just such problems as this, we now have the Organization for Economic Coöperation and Development, the first organization to be roughly coextensive with the sources of Western economic strength and to have as its purpose coördination of that strength in all important fields. Through special task forces working with representatives of the exporting countries, the O.E.C.D. should be able to develop proposals for common treatment in such cases by all the developed countries. The explosive effects of advanced technology in a country with extremely low wages can be damaging to all--to the exporting country because it overexpands and to importing countries because they cannot move people and resources out of damaged industries fast enough. Controlling the most serious of these cases by means of agreed quotas, which are temporary and expandable, may be the only reasonable alternative to the disruption of the whole trading system of the West. Fortunately, such cases are the exception: low-wage countries generally buy more than they sell; it is not they whose gold and dollar reserves are gaining; and, like Japan, they maintain high tariffs because they cannot meet world competition in their own home markets.

Another problem of the West is that in seeking to help the underdeveloped parts of the world, the absence of coördination has led to useless competition and misdirected effort. For better or worse, the grant programs and most of the investment programs of the West have been directed--both at the granting and at the receiving ends--by governments or by official agencies. While private investment can be coördinated through the market, official aid and investment must be coördinated by conscious effort. Decisions in several fields must be related. Grantor nations should maintain trade policies which do not frustrate their official aid and investment policies, and should have tax policies which are at least neutral with respect to their private investors in underdeveloped areas. Policies of the United States have not fully met either test. Products which are the result of our foreign investment have been subjected to quotas, as in petroleum, copper and textiles. Equal tax treatment for all foreign investment automatically channels private investment to "safe" areas and away from those subject to greater risks.

The most important decision, however, is whether to pursue bilateral or multilateral aid programs, or both. National lending and aid programs, especially from the West, are looked on with suspicion by underdeveloped countries as expressions of a new form of colonialism or imperialism. Competition among the various national and international agencies serves only to undermine credit standards and to dissipate money unwisely. "Projects," rather than development programs, are the result of the present lack of coördination.

It should long ago have become obvious that only the West is genuinely interested in development rather than political influence, and that therefore multilateralization of aid, which cleanses it of imperialist or subversive taint, is clearly to our advantage and to the disadvantage of the Soviets. One is tempted also to add that in the present state of the world, it is probably easier to achieve the advantages of a maximum private participation through a multilateral than through a national program (which in socialist eyes may be imperialist). This last possibility assumes, of course, that the directors of the multilateral agencies both desire and know how to get private participation.

One of the functions which the O.E.C.D. should perform is to coördinate policies of both national and international suppliers of aid, loan and investment funds to underdeveloped areas. But before examining this possibility, let us look at the elements of a foreign economic policy toward developing nations.

III

Because the problems of growth faced by developing countries are so different from those of the older industrial nations, policies toward them should probably be different too. Policies appropriate for underdeveloped countries must take into account two very important facts. The first is that the capital, know-how and technical assistance for rapid development can be supplied only by the industrialized nations and preferably those of the free world. The second fact is that an approach calling for liberal trade, convertible currency and development mainly through private investment is not currently practiced or popular in most of the underdeveloped countries of the world. To depart from these institutions in our treatment of the underdeveloped world is to give up very little. Moreover, our past insistence upon them has led to a widely believed charge that they work for the developed nations but against the underdeveloped. On these matters we must move our thinking out of the nineteenth century and see the world as it is. We can maintain old principles in relations with developed countries, but we need to give even more favorable terms to the underdeveloped.

The most important privilege which the industrialized nations of the free world can offer to the underdeveloped countries is one-way free trade. This means that underdeveloped countries would be permitted to establish tariffs to encourage their own development but would be granted free trade treatment by the industrial countries. They could earn as much foreign exchange for their development as free markets permitted.

The one-way free trade treatment which is proposed is essentially the same as that granted by the Common Market to its associated territories and by the British imperial preference system to underdeveloped parts of the Commonwealth. Such treatment, when accorded on so partial a basis, is likely to provoke resentment; more important, it prevents former colonial areas from joining together into common markets which are a pre-requisite for economic development. If one-way free trade is offered by all the industrialized countries, it removes one of the worst aspects of discrimination created by the Common Market and maintained by Britain as a carry-over from earlier times. It gives the former colonial areas an alternative to binding themselves to the former mother country, but an alternative which provides still greater attraction for staying within the economic system of the West.

Once the unconditional most-favored-nation principle is breached, the use of another device which will be extremely helpful to the development of underdeveloped countries becomes possible. That is to make the free trade treatment by industrial countries conditional upon non-discriminatory tariff treatment by underdeveloped countries grouped together to provide a market large enough to support development. One-way free trade would be offered not to single countries, except possibly Brazil and India which may be large enough entities for development, but only to groups of countries practicing free trade among their members but maintaining a non-discriminatory external tariff in the interest of their own development. One-way free trade should thus be conditional, and should aim ultimately at bringing the underdeveloped region into full membership in the open, lowtariff system of the advanced countries. This is yet another task which can best be coördinated by the O.E.C.D.

It is too little recognized, especially by the new political leaders, that modern industrial development is heavily dependent upon what economists call "economies of scale" and "external economies." The first of these pertains to the size, and therefore potential output, of a plant. Most of the commonplace goods associated with a high standard of living (and high productivity) cannot be made in small plants and workshops. The reasonably economic size of a flat-rolled steel-products mill is about a million tons per year; for a bar mill, about half that. Similarly, petroleum refineries, automobile tire and synthetic rubber plants, automobile and tractor plants, all require large outputs to achieve reasonably low cost. The low income of underdeveloped countries and their low level of development make almost all of them too small a market to support such plants.[iii] Without forming large customs unions among themselves, their development will be limited for a very long time to agriculture and the extractive industries, to the earlier stages of processing of their products for export markets, and to a few small-scale local industries (bricks, slaughtering) whose products enjoy the protection of high transport costs or perishability. This is precisely the kind of economy that their political leaders wish to escape from. Politically as well as economically, it is important that we help them to find avenues of escape that lead somewhere other than to the Soviet Union.

"External economies" are advantages which result from having a concentration of industries using similar services and products. Just as use of automobiles and trucks attracts facilities for repair, replacement and servicing, so machinery-using industries become more efficient when there is enough business to attract establishments specializing in repair, parts replacement and manufacture of machinery. Industrial complexes capable of generating significant external economies can be achieved only in large markets, and underdeveloped countries cannot furnish large markets except by combining their present tiny markets.

To bring about such arrangements will require a concerted effort and a great deal of sweetening in terms of external financing. Fortunately, the plan can be started with a single group of countries, which, by the visible acceleration of its development, could become a "demonstration area." It seems logical that the O.E.C.D. should take upon itself the task of developing the information and the recommendations that would be required to bring about both appropriate groupings of underdeveloped countries and appropriate development programs for the areas encompassed by the common tariffs. To do this job adequately the O.E.C.D. would have to establish a more or less permanent team of experts to be associated with each area for which a development program seemed appropriate. The area or regional team would be needed not only to advise O.E.C.D.; it would also provide a means for coördinating loans and aid by the international financial institutions, and for attracting private capital and skills. In this way, the attack on the economic problems of a particular country could be made far more systematic and therefore more attractive to lending agencies and investors.

Use of an O.E.C.D. team, rather than a mixed team made up of "borrowers" and "lenders" or the various economic commissions of the United Nations, may not be the most popular way to coördinate assistance to underdeveloped regions, but it is likely to be the most practical. It assigns certain responsibilities to the "banker," and certain to the "borrower," but does not mix them up. It is the method which experience demonstrates to be the right one for expensive and long-range undertakings. It does not preclude--it requires--consultation and agreement with the recipients; it merely puts final decision in the hands of those with the power and means to implement decisions.

Mixed systems of public and private investment seem to be desired by most of the underdeveloped countries, and this should be recognized at the outset. However, enlargement of the market by formation of regional customs unions may make private investment to develop competition more feasible; the virtual necessity of giving a private foreign investor a monopoly in small countries has been a major obstacle to private development. The "contract approach" to development so persuasively advanced by Donald K. David, providing for private organizations to do a full package job, could be used effectively.

It is not recommended that the United States or other industrialized countries grant tax concessions to their nationals for investment in underdeveloped countries. Such an approach encounters domestic difficulties best summed up in the expression, "We are subsidizing the export of American jobs." Also, to the underdeveloped country a program of subsidized investment resembles imperialism and is therefore less welcome. It is suggested, however, that underdeveloped countries be encouraged to grant tax concessions to private investors and that these be recognized by tax treaties, which will ensure that the margin of preference granted by the underdeveloped country to the private investor will in fact be received and not taxed away by the private investor's own government.

With respect to investment funds supplied by the governments of the developed countries, it is strongly recommended that these funds be channeled through multilateral agencies to the maximum extent possible. Among other advantages, aid supplied through a multilateral agency serves dramatically to highlight the difference between aid from the West and aid from the Soviet bloc, which tends always to be on a bilateral basis.

In time, with a sufficiently large and successful aid program conducted by the West on a multilateral basis, the Soviet bloc will come under pressure to modify its own program, preferably in the direction of joining multilateral institutions. Therefore, while the West still has complete freedom of action, it should develop multilateral aid arrangements on a basis which will promote a liberal and open trade and payments system. No political strings should be tied to aid and the economic conditions should be dictated only by economic considerations.

Customs unions of underdeveloped areas will also help to stabilize foreign exchange earnings to some extent, but probably not enough. The problem of price instability of primary products should be met mainly in two ways. First, some of the difficulty will be overcome by the diversification which will follow from the grouping of countries into customs unions. The grouping by itself will serve to diversify the foreign exchange earnings of the area encompassed by the customs union; a country heavily dependent on copper, for example, may be combined with others which produce bananas, cocoa or coffee.

Second, with respect to mineral producers, probably the best remedy for instability would be to establish a scheme of international buffer stocks--specifically for copper, lead and zinc. These commodities do not presently enjoy a free market anyway, thanks to the United States quota system. If the buffer-stock scheme costs money it is money which would probably be spent for the benefit of the supplying countries anyway. The United States can improve its competitive position by giving up its national schemes in favor of an international one. The West would be well advised to refrain from price support schemes that it is not prepared to extend to all producing countries.

For foods and agricultural raw materials, buffer stocks may be ruled out by the nature of the commodity. It may well be that the ultimate relief for countries specializing in one or two exports of this type is diversification of agriculture which would occur under conditions of successful economic development. There remains, however, the problem of agricultural products of the industrial nations which are also produced by the underdeveloped--commodities like sugar, cotton, rice and wheat--which are subject to national price-support programs. The mere naming of examples calls to mind the complexities involved in altering national programs to offset their damage to the conduct of a sensible foreign economic policy. Some national policies, like our cotton price support program, have provided powerful incentives to development of foreign production. Others, such as the disposal of U. S. surpluses under P.L. 480, may have contributed to development programs of other types but hardly to agricultural development in the recipient country or its traditional suppliers.

One cannot in any brief paper deal with these problems. It is possible, however, to suggest a principle for national agricultural programs which, if followed, would minimize conflict with foreign policy objectives. If the support program cannnot be international--and experience suggests that few such programs are likely to succeed--then the national program should be altered as soon as possible to permit world prices to be effective domestically. To subsidize foreign producers by means of U.S. domestic price supports and crop controls which raise world prices, and then to subsidize foreign buyers by cut-price sales in the world market, as we have done with cotton, seems not only to be bad foreign economic policy but also slow suicide for both domestic producers and users.

IV

The object of the foregoing proposals is to strengthen the industrial countries of the West, to hasten economic growth in the underdeveloped countries while drawing them into the economic system of the West, and to close off as many opportunities as possible for the Communist bloc to make trouble. In general, the economic policy most appropriate for dealing with the Communist bloc is a policy of completely controlled trade and payments subject to a centralized authority. Here again the O.E.C.D. may well provide the appropriate coördinating instrument.

Economic relations with the Soviet Union must be calculated, even as are the bloc's economic relations with the West. This means simply that neither the open trading system characteristic of relations among Western industrial nations, nor the one-way free trade relationship with developing countries, is appropriate for relations with the Soviet bloc. The planning and calculation of the bloc must be met by like means in order to minimize disadvantages or to maximize advantages in East-West trade. The power of decision over these relations cannot, under such circumstances, be left either with private enterprise or with single nations--if the West is to hold its own or to win.

The economic policies sketched in this article attempt to take account of the world situation as it exists today and as it is likely to exist for some time in the future. They explicitly recognize that there is a cold war, that the Soviet bloc is engaged in a battle of production with the West, and that there is a battle for influence in the underdeveloped parts of the world. They aim to make the most of the inherent strength of the West by establishing relationships among the free industrial countries which have demonstrated their capacity to succeed. Mechanisms and policies are suggested for underdeveloped countries which will facilitate their development along lines that will eventually win allegiance to the economic system of the West rather than that of the East.

Implicitly, these suggestions call for an enormous volume of financial and technical aid to the underdeveloped countries, not only because this is required for the development of the underdeveloped countries but because it will put pressure on the Soviet bloc. For each 1 percent of gross national product which the free industrial countries devote to aid, the Soviet bloc would have to devote probably 2 or 3 percent of theirs. Finally, in addition to putting economic pressure on the Communist bloc through raising the ante in the aid game, the rules of the East-West trade game should be stringently tightened.

It should be noted that most of the changes suggested here call for the modification or elimination of government programs which have been instituted for the particular benefit of private pressure groups. Tariffs, price supports, import quotas, tariff preferences in overseas markets and the like are not expressions of the efficiency of a private economic system. They are, in the long run, bars to efficiency. One major task of free governments in the contest with the Soviet Union is to prevent private interests from falling victim to Lenin's prediction that capitalists would sell to socialists the very rope with which socialists intend to hang them.

The basic issue in our foreign economic policy is whether we are going to fight the cold war to win it or not. If we are going to win it, we will have to base our policies upon the facts of today's world rather than upon the economic precepts of the nineteenth century.

[i] Supplementing these traditional liberal arrangements are a number of relatively new international institutions: the International Bank and the Fund, the International Finance Corporation, the International Development Association, the United Nations Special Fund and the Inter-American Bank. Other supplements are supplied by national lending agencies such as our own Export-Import Bank.

[ii] A specific proposal must await the results of comprehensive tariff comparisons now being made in coöperative studies by the British PEP, the Federation of Swedish Industries and the U.S. Committee for Economic Development.

[iii] The purchasing power of Ghana, for example, is about that of Rochester, N.Y., but its market is heavily concentrated in low-income items. Nigeria, the most populous country in Africa, has a purchasing power about that of West Virginia and its market is similarly skewed. It is instructive to consider to what a small extent industry is supported by the local market in places like Rochester or even the whole state of West Virginia.

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  • ALFRED C. NEAL, President, Committee for Economic Development; Research Director, 1953-54, of the Randall Commission on Foreign Economic Policy
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