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Ronald Reagan Presidential Library
Digital Library Collections
This is a PDF of a folder from our textual
collections.
Collection: Deaver, Michael
Folder Title: Nau, Henry R.-Speeches (1)
Box: 47
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visit: https://reaganlibrary.gov/archives/digital-library
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visit: https://reaganlibrary.gov/document-collection
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National Archives
Catalogue: https://catalog.archives.gov/
U.S. Energy Security Policy: The Reagan Administration Has Got It Right
by
Henry R. Nau
Department of Political Science
Graduate Program in Science, Technology, and Public Policy
The George Washington University
Energy security policy in the United States is, at long last, on the
right track. Policy changes since 1979 have reversed the disastrous
direction of U.S. policies adopted in the wake of the first oil crisis.
U.S. defense and hence deterrence posture in the Persian Gulf is stronger
today, even though the threat to that region has become more complex and
unpredictable. U.S. economic policy, particularly moves toward market
pricing of energy supplies, has sharply reduced America's vulnerability to
a new oil supply disruption, at least in contrast to controlled prices
after 1973 which encouraged domestic consumption and discouraged production.
And, finally, the accumulation of a meaningful strategic petroleum reserve
of over 400 m. barrels offers for the first time a viable instrument for
dealing with an actual oil supply crisis without resorting immediately to
economically costly price and allocation controls.
There are still many areas of disagreement in U.S. energy security
policy, even in some areas of broad policy direction, such as market
pricing of natural gas supplies. Nevertheless, the debate since 1979 has
become somewhat less partisan, and the opportunity exists to place U.S.
energy security policies, regardless of who wins the elections in November,
on a sound and sustainable course for the rest of this decade.
The key to achieve this outcome is to understand in broadest context
what the Carter Administration started and the Reagan Administration has
vigorously sought to complete in recent energy security policy. U.S.
policymaking frequently suffers from two debilitating maladies, one
political, the other analytical. The political malady is excessive
partisanship which exaggerates differences and inspires vendettas to
assign blame and credit for various policy outcomes. This malady is
hardly fatal, however, and may be endemic to a vigorous democratic system.
- 2 -
More serious is the analytical malady. Our system, based as it is on
individual and group interests, is prone to define problems too narrowly
and to ignore interrelationships among problems and, even more importantly,
trade-offs among solutions. Some groups, for example, think about energy
security policy almost entirely in terms of emergency preparedness measures
and relatively ignore or even oppose complementary defense and economic
policy initiatives that would reduce the likelihood of an emergency or
lower its long-term costs if it occurred. Others become so preoccuppied
with the economics of market-based energy pricing in the United States or
the politics of the Persian Gulf and Middle East that they neglect
emergency preparedness measures. So it becomes possible in our system to
define energy security, as we did in late 1973, in terms of national
energy independence, without a passing thought to the costs this might
entail by drawing excessive resources away from other worthy economic or
defense pursuits, or the problems it might create for U.S. Alliance and
foreign policy interests.
Today, fortunately, more and more Americans have recognized that
energy security is not primarily (let alone exclusively) a matter of
reducing dependence. Reducing dependence beyond levels dictated by the
marketplace involves opportunity costs (assuming the dependence reflects
comparative advantage). While the costs of reducing U.S. dependence on
oil imports might be tolerable (although inevitably harmful to other U.S.
objectives), costs of reducing Western dependence would be prohibitive.
U.S. energy security therefore should be based on levels of oil or
other energy imports consistent with market forces. It should then seek to
- 3 -
"secure" these market-related import levels by means of an appropriate insurance
policy, the cost of which must always be weighed against other desirable
non-energy goals in a real world environment of inevitably limited resources.
The insurance policy must also be broadly conceived. It consists
of three major areas of attention and effort, all of which are interrelated
and can work to reinforce one another, or, if one area is given too much
attention and priority, to defeat one another.
1. safeguarding dependence by a diplomacy and defense policy that deters
disruptions and restores supplies as soon as possible after a disruption.
2. reducing vulnerability to a possible disruption by diversifying foreign
supplies, encouraging domestic supplies and developing alternatives
preferably at minimum cost by relying on market forces and eliminating
market impediments rather than subsidizing to compensate for market
impediments.
3. coping with disruptions when they occur by emergency responses
that facilitate adjustment to what are inevitable and unavoidable
economic costs, albeit within politically and socially acceptable limits.
When viewed in this perspective, defense and economic policy are as
much a part of energy security policy as emergency preparedness. Indeed,
the more successful U.S. diplomacy and defense policy is in deterring
disruptions, the lower the probability of a disruption is and hence the less
insurance one needs by way of reducing vulnerability or building up emergency
capabilities. This does not mean that further measures to reduce
vulnerability or establish emergency capabilities are not desirable
especially if they can be achieved by relying on cost-efficient market
forces. But it does set limits on the amounts of insurance one might
wish to buy in these other two areas through non-market measures.
The task of safeguarding dependence not only affects the probability
of disruptions but also determines the long-term costs of disruption. If
supplies can be restored fully and quickly after a disruption, either as
a result of successful diplomatic or military action or both, there will be
- 4 -
no long-term adjustments required by the disruption. If supplies cannot be
fully restored, the extent of vulnerability of the importing nation defines the
potential long-term costs. These costs equal the opportunity costs of
obtaining alternative foreign or domestic supplies or corresspondingly
reducing demand to make up for the permanently-disrupted supplies. Finally,
these long-term costs can be compounded by inappropriate emergency
responses which seek to prevent adjustment to long-term costs or which
magnify short-tem dislocations.
Response to 1973 Crisis
Let's consider for a moment, in the context of this perspective, how
we reacted to the 1973 oil crisis. In my judyment, we vastly overemphasized
the emergency response aspect of our energy security, while simultaneously
neglecting and even making more difficult the tasks of safeguarding dependence
and reducing vulnerability. Our relative neglect of measures to deter
disruption or restore disrupted supplies meant there would be substantial
long-term costs for the U.S. economy, defined by our considerable vulnerability
at the time to cutoffs of Arab OPEC oil. Yet our emergency responses,
rooted in price and allocation controls, prevented adjustment to these
long-term costs and, more seriously, actually increased them by adding
over time to our appetite for oil imports, especially from insecure
sources, and hence our vulnerability.
The 1973 oil crisis came at a time when U.S. foreign and defense
policy was being retrenched. Western strength in the Persian Gulf was on
the wane. The British had withdrawn east of Suez, and the United States
had declined to replace them, searching instead for surrogates in the
area to "defend" Western interests. U.S. diplomacy, preoccupied by the
Vietnam negotiations and then the Year of Europe, was also relatively
- 5 -
inactive in the area. In these circumstances, U.S. policy did little to
deter the 1973 disruption, and even less to restore disrupted supplies,
once production and exports were cut back.1/
This failure of U.S. diplomacy and defense policy meant there would
be a long-term change in the world supply and demand equation for oil.
The U.S. economy would have to adjust to this change. But because our
vulnerability was so high at the time, the costs of this long-term
adjustment promised to be substantial. To absorb these costs in a short
period of time would have been politically difficult if not impossible.
Thus a failure to pay sufficient attention to levels of vulnerability
that could be managed politically in the event of a disruption led to a
third failure of policy in 1973 - emergency measures to control the price
and allocate the demand for oil which prevented adjustment and eventually
increased vulnerability during the period following the first oil crisis.
This increasing vulnerability, in turn, reinforced the prospect of "energy
nightmares" in the Persian Gulf and made the task of deterring disruptions
seem increasingly insurmountable.²/ Inappropriate emergency response policies,
in short, seriously crippled America's efforts in the other two-eneryy
security areas, namely reducing vulnerability and deterring disruptions.
Response to 1979 Crisis
The second oil crisis was possible in good part because America's
energy security policy responses to the first oil crisis were so badly
misdirected. Have we done any better in response to the second oil crisis?
1/See my article, "Securing Energy", The Washington Quarterly.
2/Joseph S. Nue, Jr. "Energy Nightmares", Foreign Policy, No. 40,
Fall 1980, pp. 132-155.
- 6 -
I think, without doubt, we have. And it is long past time for us to
recognize that the lessons we have learned are not partisan lessons. The
previous Administration started the effort to reverse misguided policies
(which had been initiated by a Republican, not Democratic, Administration)
in the wake of the second oil shock, and the present Administration,
rather than pursuing an ideological approach to energy security, is
actually implementing more resolutely and with greater chance of success
a more balanced combination of energy security efforts that can secure
America's energy future at acceptable economic and political cost.
A primary element of this Administration's energy security policy is
the strengthening of America's defense and diplomatic capabilities.
Rather than retrenching from oil rich regions, U.S. policy, in close
collaboration with allies, is purposefully reasserting American and
Western interests. The policy entails risks to be sure, and a vibrant
democratic community such as our own can safely afford to debate and
disagree on the details. But it would be well for the energy security
policy community in particular to recognize that energy security is at
stake in America's defense debate. It matters whether we have a naval
and amphibious capability to deter closure of the Strait of Hormuz or to
reopen the strait soon after an attempt at closure, particularly in
dispelling nightmares of six-month or year-long "major disruptions" of
Persian Gulf oil supplies, which preoccupied some analysts in the wake of
the 1979 crisis.
A second major element of this Administration's energy security
program is the strengthening of America's economic capability through
policies to reduce spending, taxes, excessive regulations and the rate of
yrowth of the money supply. These broad economic policy yoals were given
- 7 -
priority over specific energy policies not because the latter were any
less important but because the market process was thought to make the
most efficient choices about the allocation of energy resources and demand
consistent with other equally important non-energy economic objectives.
The Carter Administration viewed energy policy as a principal ingredient
of economic policy. The Department of Energy was set up and expanded
because a comprehensive energy policy was seen as contributing to economic
revitalization. What was yood for energy policy, it was argued, would be
yood for economic policy. By contrast, the Reagan Administration views
broad economic policy as the major factor promoting sound energy policy
(or industrial policy or any other sectoral policy). What is good for
the economy is felt to be yood for energy. Hence incentives for energy
production, conservation and emergency preparedness have expanded in the
overall economy, even as incentives for near-market commercial energy
projects have been reduced in government budgets.
Thus, the Administration's principal effort to reduce energy
vulnerability before another crisis is primary reliance on the market
place. This policy is an energy security, no less than an economic,
policy. It is designed to reduce energy vulnerability to the extent
compatible with other economic and defense policy objectives. Given the
previous policies of price and allocation controls, it is succeeding in
substantially reducing America's energy vulnerability. In 1980, a year
when the U.S. economy grew at a nominal rate of 9%, the United States imported
6.9 mbd of crude oil and petroleum products - 62% from OPEC sources, 37% from
Arab OPEC alone, and 38% from non-OPEC sources. In 1983, when the U.S. economy
yrew at a nominal rate of about 8%, the United States imported an average of 4.99
- 8 -
mbd of crude and products - now 63% coming from non-OPEC sources, only 37%
from OPEC, and 12% from Arab OPEC sources.³/ Major efforts to achieve further
reductions in vulnerability remain, such as the effort to deregulate
natural yas and adopt more reasonable policies for encouraging coal
production and use. These efforts should take priority, in my view, over
proposals to place a "security premium" on oil imports. The latter once
again constitutes an attempt to adopt a nonmarket measure in one place to
compensate for continuing nonmarket measures in other places. Put candidly,
the compounding of ill-founded regulatory measures may represent a policy
for social security or equity but not a policy for energy security.
Admittedly, the decline in U.S. imports as well as the shift to non-
OPEC supplies (since OPEC is the marginal supplier) is attributable in
some unknowable measure to the recent recession. But it is also due to
the pass through of market prices, particularly in oil. Production and
consumption have already been affected by these higher prices. Further,
conservation will come in industry if recovery can be sustained and new
investment in more energy efficient plant and capital equipment is
forthcoming. Indeed improvements in energy saving capital could offset a
substantial part of the heightened demand for energy that will accompany
renewed economic expansion. There has been little new investment in the
U.S. economy since 1979 reflecting the price changes brought about by the
second oil crisis.
The third element of the Administration's energy security response has
been perhaps the most misunderstood. It encompasses emergency preparedness
3 /Petroleum Supply Monthly, March 1984.
- 9 -
measures that emphasize a primary reliance on the market place and government
intervention, if necessary, by bringing new supplies on the market rather than
allocating demand or controlling prices. Part of this misunderstanding derives
from a failure to view these emergency preparedness measures in light of the
other two efforts comprising America's energy security. Because this Administration
gives high priority to safeguarding energy dependence through an active diplomatic
and defense policy and to reducing vulnerability through market-based energy and
economic policies before a crisis, it is not inclined to pull the issue of
emergency preparedness measures out of context or to design emergency measures
which are inconsistent with other energy security efforts.
Standby allocation plans weaken incentives in the marketplace to reduce
vulnerability before a crisis. Private and public users take fewer measures
to reduce or protect against their vulnerability knowing that supplies will
be available to them in a crisis, not only in quantity but also at a preferred
price. Anyone who stockpiles under these circumstances loses. Indeed even
the U.S. government did not stockpile from 1973 to 1979 probably because it
was simply preoccupied with demand and price control schemes but also because
stockpiling was too costly under assumptions of price and allocation controls.
(If such controls prevail when the stockpile is accumulated, the government
will pay a higher price than necessary for the oil because world demand is
excessive; and if such controls apply when it is drawn down, the government
will receive a lower price than would otherwise be the case.) With market
incentives before a crisis, the market situation that prevails at the beginning
of a crisis will also be less flexible than otherwise. Hence standby allocation
controls adopted before a crisis make it that much less likely that the
market will function with least cost in a crisis and therefore more likely
- 10 -
that controls will have to be applied early in the crisis. Moreover,
once applied in a crisis, as we saw in 1973, controls became very difficult
to lift. Adjustment is prevented, vulnerability is increased, and foreign
policy interests, which involve more than energy supplies, may be cut
back to escape heightened vulnerability.
None of this is to deny that in an emergency it may become necessary
to intervene and in some circumstances, which I cannot foresee but which
cannot be ruled out, to allocate demand and control prices (perhaps
to support defense needs after every effort has been made to improve
DOD's capability to compete for supplies in the market place). But
before we plan for that contingency we should do everything humanly
possible to think through and design alternative means of intervention.
And we should leave the eventual design of an allocation scheme, if that
should ever again prove necessary, to be done in the crisis period. We will
not do any worse than we did in 1973, and any allocation scheme is going
to exacerbate costs. The pre-crisis costs of designing one now outweigh
the additional post-crisis costs of designing one then. If this advice
is rejected as politically naive (it being argued that Congress, State
and local governments will insist on pre-crisis discussion, if not
design, of post crisis allocation plans), then I would urge one further
piece of advice on those who think about allocation plans: Include a phase
out and time limit on any allocation scheme. The only possible justification
for such a scheme may be to ease adjustment for politically important
users in a crisis; it can never be to prevent adjustment altogether.
Preoccupation with the allocation issue has meant that the Admin-
istration has not been given sufficient credit in my view for the deter-
mined emergency preparedness measures it has favored and adopted. Since
January 1981, over 300 mb of oil have been added to the Strategic Petroleum
- 11 -
Reserve (SPR) at an approximate total cost of over $10 b. This expenditure
has been undertaken in a period of greater budget pressure than at any
time in the postwar period by an Administration that believes - fanatically,
some would argue - in reducing expenditures. Moreover, the Administration
made the initial decisions to accelerate SPR fill before the recession
and even at the risk (which had deterred the previous Administration) of
adding pressure to world prices through higher demand. The existence of
SPR in usable quantities will now do more to alter our thinking about
emergency responses than anything else.
Work on SPR drawdown scenarios has begun and should be intensified.
In my judgment, none of these exercises should aim at setting firm
post-crisis decisions as to how SPR will be used. Some uncertainty
as to how SPR might be used is exactly what the doctor ordered to enhance
pre-crisis planning and preparation by private actors. But the work on
SPR can lubricate bureaucratic procedures and flesh out policy information
and options for actual consideration in a crisis.
Much less work has been done on the use of monetary and fiscal policy
responses to mitigate the macroeconomic effects of a crisis or on revenue
recycle to cope with social inequities that are bound to arise in a
future crisis. There is a natural reluctance, especially in this
Administration, to subordinate macroeconomic policy to emergency planning.
But there is no escape from trying to understand the implications of pre-
crisis macroeconomic policies on the crisis situation itself, even if
one is reluctant to change pre-existing policy to mitigate effects of the
crisis. Moreover, it is difficult to think about revenue recycle without
knowing the consequences for tax revenues of various disruption scenarios.
And the use of revenue recycle, as distasteful as it might be, may be the
- 12 -
only viable alternative to price and allocation controls once political
pressures build up. With little information about and no experience in
using emergency recycle mechanisms, the temptation will be great to resort
to the more familiar control schemes, even as bad as our experience with
them has been. Politicians will sacrifice memory to expedience to satisfy
distraught constituents.
The rejection of allocation and price controls by the present
Administration also made the Administration's early attitudes toward the
International Energy Agency (IEA) somewhat ambivalent. But it was quickly
recognized that the IEA is more than its emergency programs. It is a
political and institutional deterrent to disruptions, representing the
determination of oil consuming industrial countries to review, discuss
and on occasion decide policies coooperatively before and during disruption
crises. If it works, its programs will never have to be invoked (just
as nuclear weapons will never have to be used if nuclear deterrence works).
Indeed, its main program, the International Emergency Plan (IEP), has
never been invoked even while the IEA has played an important political
role in both oil crises. The IEA's program of course must remain credible
(just as nuclear systems and policies for use of nuclear weapons must remain
credible). Hence it is essential for this Administration to press continuously
and incrementally for modification of IEA's emergency responses toward
greater use of supply side (stockpile) as opposed to demand restraint
measures. These discussions should reflect how seriously we take IEA
programs and thereby serve to strengthen rather than diminish our commitment
to this fundamental multilateral dimension of U.S. energy security policy.
- 13 -
Conclusions
America's energy security policy is back on track. A healthy defense
of our interests in oil rich areas of the world will serve to minimize
the probability of disruptions and by restoring disrupted supplies as
soon as possible, to minimize the long-term adjustment in world markets
necessitated by a crisis. A market-based policy to reduce vulnerability
before a crisis minimizes the opportunity costs consistent with other
goals to make the long-term adjustment should we be unable to avoid such ad-
justment through foreign or defense policy means. And emergency prepared-
ness policies are being designed to permit adjustment within socially and
politically acceptable limits through supply side and possible revenue
transfer measures. Given these policies, the chances of another oil
disruption are less than they would otherwise be, the insurance policy
we have taken out is affordable in terms of our other goals, and
emergency measures are designed to get on with "life after the costs
of an oil disruption" rather than futilely to seek to avoid these costs.
International Technology Transfer:
Security and Economic Consideration Under
the Reagan Administration
by
Henry R. Nau
Professor of Political Science and International Affairs
Graduate Program in Science, Technology, and Public Policy
The George Washington University
My topic today deals with two elusive subjects -- technology and the
Reagan Administration.
Technology is hard to get a handle on. We deal with it through
surrogates -- R&D expenditures and other data on the input side and as
a residue in our output equations. In the end, of course, the techno-
logical activity is a form of human creativity which necessarily remains
elusive. The Reagan Administration too is elusive, and it would be
foolhearty to speak of a single Reagan Administration policy toward
international technology transfer or, for that matter, any subject. This
Administration, like all others -- indeed like the country itself, is
pluralist. Nevertheless, there is an orientation or framework within
which one can understand how this Administration has tilted on issues of
international technology development and transfer. This orientation
doesn't explain every decision but it does suggest the general direction.
To understand this orientation, we need to go back briefly to the
1970s. Technological pessimists ruled the day. The Limits to Growth
Plenary Address before the Conference on Technology Transfer in the Modern
World, Georgia Institute of Technology, Atlanta, April 26-27, 1984
-2-
School contended that the processes of a closed, finite international
system would always dominate over policy in any particular country or
technological advance at any point in the system. Whatever the techno-
logical achievements, the feedback processes of international interdepen-
dence, the model predicted, would eventually overwhelm technological change
and bring about a collapse of the entire global system. The only alterna-
tive, we were told, was to renounce competitive national policies as the
basis of technological and social development in the world system and to
seek a consensus at the international level before we adopted new technol-
ogies.
The apocalyptic dimensions of this argument stifled the imagination,
and the argument soon lost its public prominence. But its effects on our
way of thinking were more lasting. By the end of the 1970s and continuing
in some circles today, there is a more limited argument that the United
States has entered the geriatric phase of its technological and economic
power. Whatever we might try to do, we face an inevitable loss of strategic
superiority to the Soviet Union, economic prowess to our Western allies,
and technological relevance to the third world.
Let me clear from the outset. This argument draws on two undeniable
facts. America's dominance after World War II was unique and inevitably
temporary. And we live in an open world system, even with our adversaries,
where what we do affects them and vice versa.
However, the Reagan Administration's orientation, as I see it, differs
in two important respects. First, this orientation does not view the
evolution of interdependence in postwar world as historically inevitable
or, looking into the future, as irreversible. We created it, and America's
-3-
farsighted leadership in the 1940s and 1950s had something to do with the
peace and progress achieved, just as American policies in the 1960s and
1970s had something to do with the difficulties subsequently encountered.
Second, while it is fair to argue that "OK we created it but now we must
live with its consequences" the Reagan orientation would argue that American
leadership today must be even more vigorous, indeed sometimes unilateralist,
precisely because we live in a more competitive world in which consensus is
increasingly difficult to achieve without strong leadership. It rejects the
notion that consensus is necessary before action can be taken; it argues
instead that competition must inspire the action essential to achieve con-
sensus. In short, policy counts more than process, both in creating inter-
dependence and maintaining it.
Let me illustrate how this orientation helps to explain the general
direction of Reagan Administration policies toward international technology
transfer in East-West, West-West and North-South relations.
East-West Technology Relations
In East-West relations, the Administration views strategic competition
with the Soviet Union as the only viable foundation for East-West cooperation
and stability. In the 1970s the United States allowed the foundations of
strategic competition to shift, even while it pursued deepening political
and economic cooperation with the East. The Soviet Union rapidly closed
the gap in strategic weaponry and military power projection. Europeans
complained first about this changing strategic situation, probably because
they had the strongest interest in the political and economic cooperation
that could only endure on solid strategic foundations.
-4-
Reagan policies attacked this situation in two ways. They sought to:
1. strengthen the physical balance of capabilities by modernizing
U.S. strategic forces.
2. reinvigorate the psychological balance of resolve by toughening
U.S. foreign policy pronouncements and actions, particularly in
protest of Soviet actions.
These policies had implications for technology development and transfer.
They rejuventated defense and space technology development, and they led
to a predictable tightening of technology flows to the Soviet Union.
The restrictive technology policies toward the Soviet Union were
designed to serve three objectives:
1. First, a tightening of strategic controls was essential to
protect the new technological investment in U.S. defense and
space programs.
2. Second, foreign policy controls would be used as necessary to
signal U.S. intent to contest Soviet actions that threatened
the psychological balance of resolve.
3. Third, a prudent concern about economic vulnerability -- excessive
reliance on Soviet resources or markets -- was necessary to thwart
Soviet foreign policy leverage over the West, especially America's
European allies.
All of these policies presumed allied cooperation. In early 1981,
the Administration initiated consultations with the allies on possible
uses of foreign policy export controls should the Soviets intervene in
Poland. At the Ottawa Summit in July 1981, the President gave priority
to the tightening of COCOM controls, and opposed in principal (that is,
symbolically) but not in practice the implementation of big new projects
that would increase dependence on natural gas from the Soviet Union.
(overruling the Defense Department on this point on embargoing pipeline
equipment).
The allies resisted these initiatives. At the margins, their interests
differ from those of the U.S. They have greater economic interests in East-
-10-
Uncertainties also exist abroad and impede U.S. initiatives to
revitalize world trade. The Europeans, most of all, fear the prospects
of a short-lived recovery. They are reluctant to undertake a new round
of trade negotiations particularly in high technology areas as long as
they face high and perhaps growing levels of domestic unemployment. The
Japanese support a new round, but their enthusiasm lacks credibility as
long as they lag behind Europe and the U.S. in opening their markets to
foreign goods and capital.
To succeed internationally, therefore, the Reagan Administration must
sustain the recovery in this country and maintain the campaign to open
the Japanese market. If the Reagan approach fails on either account,
pressures will grow for a more consensual and protectionist industrial
policy approach at the federal level in the U.S. This approach in my
view abandons America's strength in the market in order to imitate countries
that use government structures to compensate for market weaknesses. For
example, the Japanese government allocates credit through the Bank of
Japan and other governmental institutions because Japan lacks the broad
and deep private capital market we have in the U.S. Indeed, I wonder if
the entire fascination with government policies abroad as an allegedly
new factor in international comparative advantage does not err by pulling
governmental factors out of context. If we cry foul because government
structures allocate credit in some economies like the Japanese or the
French, can they cry foul because the U.S. has regulations and tax laws
that encourage the biggest and deepest private financial market in the
Western world, which accomplishes the same end in our economy. Don't
misunderstand me, we need broad rules, especially with the practical dis-
appearance of tariffs, for judging fair and unfair short-term governmental
-11-
governmental policies in international trade competition. But we also
need a broader understanding of what constitute equivalent public and
private structures in different societies that are actually part of and
not antithetical to comparative advantage.
North-South Technology Relations
If competition is the prerequisite of cooperation and consensus in
East-West technology relations and consensus, especially the consensus
that markets work, is the basis of competition in West-West technology
relations, neither competition nor cooperation is sufficient alone to
guide North-South technology relations, according to the Reagan Adminis-
tration orientation. Cooperation is viewed as essential to build the
basis of competition in many poor developing countries which lack essential
physical and human infrastructure to compete. But more competition and
greater involvement in the world economy are also seen as essential for
the newly industrializing countries (NICs) -- and eventually for all
developing countries -- in order to gradually construct and solidify the
consensus that underlies West-West technology relations, namely that
markets work better than manuals.
In viewing competition as the goal of North-South cooperation, the
Reagan orientation broke with the consensual, more international or system-
oriented approach to North-South relations in the 1970s. The proliferation
of global conferences, the emphasis on cartelizing markets, the focus on
aid to the relative exclusion of trade and investment -- all placed too
much stress on international procedures and solutions for what were more
often problems of domestic policy. Import substitution policies which
-12-
may have made sense on a selective and temporary basis to initiate indus-
trialization, had become a way of life in many developing countries, and
national laws and international codes to restrict capital and technology
flows rounded out the failed attempt to develop in isolation of the world
economy. The oil shocks discouraged and delayed adjustment processes in
developing (as they did in industrial) countries, and from one point of
view progress was sustained in the 1970s for some developing countries,
particularly the NICs, only on the basis of the largest international
recycling of financial resources in history, the petro-dollar recycle
phenomenon. The result of course was a mountain of debt which would have
eventually required, even without the recession and high interest rates
of 1981-1982, a systematic redeployment of resources in developing countries
to more efficient export-oriented sectors in agriculture, manufacturing
and, for some NICs, service sectors.
The Reagan response again was to emphasize competitive national
policies rather than international processes. It downplayed the inter-
national institutional aspects of the North-South dialogue -- Global
Negotiations -- and launched a debate about domestic policy adjustment
in the developing countries. It urged
1. disinflation to undo the accumulated distortions of a decade
of "debt-led" growth.
2. greater reliance on the domestic market place to alleviate
pressures on public resources and remove gross disincentives
in the agricultural and import competing industries.
3. integration of developing, particularly the more advanced ones,
into the multilateral trading system.
Once again these broad policy responses have important implications
for technology development and transfer. Policies of disinflation and
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greater efficiency through market mechanisms are far more important to
the development of appropriate technology and improved competitiveness in
developing countries than specific technology policies or laws. The
World Bank Development Report of 1983 found that one third of the variation
in growth performance in thirty-one developing countries could be accounted
for by price distortions. Those countries with the worst distortions
experienced the lowest savings and investment and slowest growth, all
without any evidence of gains in equity, according to the Report. When
developing countries do devote resources to specific technological purposes,
the amounts are often small, hardly sufficient to overcome market distor-
tions, and go to finance an elite scientific or military establishment
rather than the innovative, commercial or agricultural sector. Inappro-
priate technologies result not so much because of the bargaining power
and insensitivity of multinational companies, but because policies in
many developing countries encourage demand for precisely those technologies
that multinationals are best able to provide, namely capital-intensive,
highly sophisticated mining and manufacturing technologies.
Trade policies in developing countries, particularly in the NICs,
are a further factor distorting international technology flows. Infant
industry protection is applied indiscriminately across the board from
consumer to intermediate to the most sophisticated high technology. The
pervasiveness of protection tends to push most developing countries out of
their areas of comparative advantage, in labor-intensive or capital-saving
technologies, while pushing industrial countries into their areas of
comparative advantage, namely capital equipment and still more advanced
technology products and engineering services. Trade liberalization which
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has figured prominently in the Administration's approach to development
would reverse these patterns. It would permit, for example, the United
States to export somewhat less sophisticated products to Brazil, where
there is ample competition from other industrial countries and hence
better terms for Brazil, and Brazil to export more apparel, consumer
electronics, and steel to the United States. Moreover, trade negotiations
offer the best hope politically for NICs and eventually second-tier
exporting countries in the developing world to stop creeping protectionism
in the industrial countries in their principal areas of comparative
advantage -- consumer and intermediate products. By offering greater
access to their markets, the developing countries gain a whole set of new
allies in industrial country legislatures and parliaments. These are the
export industries which stand to gain from trade liberalization and thus
countervail the protectionist appeals of the import competing industries.
Integrating the developing countries gradually into the multilateral
trading system is the key, in my view, to renewing and revitalizing inter-
national commitments to long-term development assistance and finance. If
the purpose of development cooperation was perceived more explicitly as
building the capability in developing countries to compete in the world
economy, a new coalition could be found in the U.S. Congress for support
of development funds. More open markets would ensure a more efficient flow
of private capital in international markets, and aid funds would then be
perceived as complementary rather than competitive with private investment.
Conclusions
To sum up, there is a consistent intellectual orientation that helps
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to explain the Reagan Administration's orientation toward international
economic and technology transfer relations. It begins from the premise
that in the 1970s the international community made too much of the processes
of interdependence and too little of the policies that create mutually
beneficial interdependence and maintain it. The processes of detente,
especially economic and political interdependence between East and West,
were stressed, while national policies to maintain strategic competition
and balance, which constitute the only viable foundation for cooperation
between East and West, were allowed to languish. In West-West relations,
interdependence was celebrated, while domestic macroeconomic policies
accommodated inflation, eventually eroding domestic growth and employment
and with it the prospects of sustainable interdependence in trade and
financial relations. Finally in North-South relations, a fascination
with globalism and international institutions distracted attention from
domestic policy adjustment, trade, investment and sustainable financial
relations -- which represent the most dynamic aspects of development --
and did not achieve any gains in equity that might have justified nonmarket
institutions and procedures.
The new orientation, reflected in Reagan Administration policies,
reminds us that competitive policies make good international processes,
not the reverse. Unless erected on sound national policies, international
interdependence can erode rather than enhance mutual good will, as occurred
in the 1930s. Accordingly, in East-West relations, national policies of
strategic competition creating a perceived balance of capabilities and resolve
vis-a-vis the Soviet Union (which no longer existed in the late 1970s even
in Europe) are the prerequisite of international economic and technological
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cooperation. A strengthened commitment among the allies to protect the
technological investment of new defense and space programs is the necessary
counterpart to maintaining market levels of East-West economic and techno-
logical trade. In West-West relations, national policies of competitiveness
based on comparative advantage are the only basis, indeed the only economic
justification, for open international trade and financial relations. (If we
do not want comparative advantage to operate, why have open markets?). While
government institutions and policies contribute to comparative advantage in
different ways in different societies, policies of industrial and technological
targeting are less critical than policies of price stability and broadly open
markets. Finally, in North-South relations, national policies must adapt to
new requirements of world market competition, particularly in the more advanced
developing countries, while international institutions develop the competitive
basis in poorer societies eventually to participate in the open world market.
In every instance, there is as much to be accomplished through improved
and better aligned national capabilities as by international processes and
institutions.