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Ronald Reagan Presidential Library
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Collection: Deaver, Michael
Folder Title: Nau, Henry R.-Speeches (2)
Box: 47
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permission of the author.
A DOMESTIC APPROACH TO WORLD ECONOMY:
INTERNATIONAL ECONOMIC POLICY UNDER THE REAGAN ADMINISTRATION
BY
HENRY R. NAU
THE GEORGE WASHINGTON UNIVERSITY
WASHINGTON, D.C.
The world economy is only as good as the national economies that
comprise it. If the major national economies are sound, it is highly
unlikely that international interactions will be perverse. On the other
hand, if national economies are weak, it is doubtful that economic ties
among them will produce anything but a weak world economy.
As self-evident as this proposition is, it was lost from view in the
international economic discussions of the 1970s. In that decade, the pro-
blems of the world economy were traced to the malfunctioning of the
international economic system itself. The increasingly sensitive and com-
plex interactions at the global level, it was argued, overwhelmed national
markets and eluded the understanding and, for sure, the control of national
policymakers. Economic interdependence undermined national independence
in economic policymaking, and national decision-makers could be forgiven
for whatever policies they pursued nationally while they sought their
salvation in the reform or even radical restructuring of the international
economic system.
Surprisingly, this globalist view has received little critical analysis. The
preocupation with international solutions to remedy national policy
dilemmas continues. The international economy, we are told, can no longer
be defined as, or limited to, the mere intersections among national economies.
For all practical purposes the international economy has absorbed national
economies and "it is now the national economies which must be looked upon
as an extension of a global and integrated system with a logic of its
own."1 'Worldeconomy' dominates, and global policymaking has to lay the
foundation for sound domestic policymaking.
1See
Albert Bressand, "Mastering the 'Worldeconomy',
Foreign Affairs, Spring 1983.
2
There is another point of view. It reverses the globalist loyic and
looks at the world economy from a domestic perspective. it reyards sound
domestic policies as the foundation of world economy, and effective
national policymaking as a prerequisite of stable and mutually beneficial
ylobal policymaking. It emphasizes the need for convergence of domestic
economic performance among major countries around a few fundamental indi-
cators--low inflation, flexibility of markets and open international
boundaries. If these conditions exist, interdependence flourishes and
global policymaking reinforces national decisionmaking and domestic
economic growth.
No one questions the growth in the role and importance of the world
economy. World exports in 1960 comprised about 2.5% of total world
output; by 1980 that ratio had grown to almost 17%. Even the latter
figure understates the significance of international exchanges since
traded goods in almost all countries exert a pervasive impact on national
output, including that produced on an exclusively local basis. And
these trade numbers say nothing about the explosion in capital and currency
transactions in world markets that has taken place over the past twenty
years.
Nevertheless, while the expansion of the world economy is unquestioned,
the relative weight of national and international policies in influencing
world economic relations is an issue of some moment. This issue yoes to the
heart of the political economy of international interdependence.
Those who view world economy as the dominant influence on domestic policy
base their case on two fundamental arguments. First, a diagnosis of
contemporary economic problems, they argue, suggests that these problems
derive from the complex interaction and feedback of national policies
upon one another in an open world economic system. These problems further
3
derive from the unmanaged and often inappropriate feedback and interrela-
tionship among various elements of the world economy itself, e.g., a mis-
match of trade and monetary relationships. Since the problems are exogenous
to any national system, they can only be dealt with on a basis going
beyond national policy. Second, it is argued, even if the problems were
to a greater extent within the scope of national action, national decision-
making processes are increasingly pluralized and fragmented and unable to
produce timely and decisive actions to influence international economic
economic problems. The loss of national control, a central theme of the
globalist school of thought, is a consequence of internal atomisation as
well as external absorption. National authorities face increasing paralysis
and loss of legitimacy at home, even as they confront mounting uncertainties
abroad.
Finding national decision making capabilities increasingly ineffective,
globalists turn to international institutions, both existing and especially
new ones, to put the pieces back together again. Paradoxically, they turn
to international sources of power and authority which are even weaker than
national institutions. The 1970s witnessed a never ending series of
international conferences and proposals for new international organizations,
from the Economic Summits of the Industrialized Countries to the U.N.
special sessions and world conferences on food, population, environment
habitat, science and technology, and ultimately Global negotiations, and
from the Common Fund of UNCTAD to an International Seabed Authority and a
World Development Fund. Somehow these fragile and discordant global
"town meetings and offices" were going to muster the resolve and consensus
to solve problems that defied the strongest national government authorities
4
around the world. Even if they failed, we were told, they would generate
a more desirable atmosphere of cooperation and participation, moving away
from the confrontation inspired by national actions.
The globalist case has dominated practical as well as academic
discussions of international economic issues, so much so that a revival
of national authority and a shift in focus from international to national
policy solutions to the world's economic ills under the present U.S. Ad-
ministration has been branded disdainfully, by critics at home as well as
abroad, as economic nationalism or even worse, economic isolationism. Yet
the thrust of economic events in the early 1980s, as well as the initial,
though still uninsured, benefits of the present Administration's policies
for the U.S. and world economies is making the case for a different
approach to influencing world economic interdependence.
This approach, which for lack of better terms I will call a domestic or
domesticist approach, differs from the globalist solution in at least
three important respects. First, it rejects the notion that national
authority is obsolete or in decline and concentrates on reviving consensus
and capacity to act at the national level. Instead of advocating interna-
tional solutions, it seeks to buy time internationally to allow national
authorities to discern the direction of international developments and then
to develop the necessary political consensus at home to revitalize domestic
economic conditions in line with perceived international trends. Second,
while it agrees with much of the globalist's diagnosis of the complexities
of the international system, it is mindful of the open market policies
that created interdependence in the first place and that are hardly
2The terms here are arbitrary. The reader can substitute others if he or
she wishes. Domestic and global, however, seem less emotionally charged
than other dichotomies that have been used such as internationlist and
nationalist or unilateralist and multilateralist.
5
irrelevant to the preservation and further promotion of such interde-
pendence. Interdependence is not to be taken for granted as inevitable
or inexorable. It is no more so today, the domesticist argues, than it
was in the 1930s. Third, it sees international meetings and institutions,
not as functional arenas for directly attacking world economic problems,
but as political fora for exchanging basic views about domestic economy
and defining the range of possible agreement on the interactive aspects
of world economy. International meetings should facilitate national
policymaking not substitute for it. If disagreements are too great, the
issues should be elevated to the most general level or taken up in smaller
groups where the prospects of arriving at a consensus are better. For
the domesticist, world economy starts not in the logic of an integrated
international system but in the logic of domestic politics and economic
policy, extending to interactions among domestic economies but rarely to
the unified globalist, institutional focus championed by world economy
advocates.
The domesticist approach to world economy has much to offer, but its
conceptual underpinnings are all but non-existent in the professional and
public policy literature. 3 This approach would seem to be on much more
solid ground politically than it's globalist alternative. The reliance
on national rather than international authority is realistic. To seek
refuge from national diversity in still greater international diversity
makes little sense and, in time, making more concrete decisions at the
international level will only redirect national divisions to international
3 A rare exception, which however was applied only to so-called global
issues, not world trade and financial relations, was Robert L. Paarlbery.
"Domesticating Global Manasyement," Foreign Affairs, April 1976.
6
fora, further weakening the capacity for response. Can anyone image the
immobilisme that would quickly afflict the Industrialized Country Economic
Summits, if they increasingly made important economic decisions and the
Congress and national parliaments, not to mention special interest groups,
began to insist on a greater role in these decisions. After all, in a
political sense, who do the seven leaders at these meetings represent?
None of them represents the industrialized community of the Seven, let
alone the industrialized countries as a whole. Running the world economy
through Economic Summits or an Economic Security Counci1⁴ would be the
equivalent of running the United States economy through a locally or state
elected Congress without a national Presidency. In the absence of a global
constituency, no international decision-making body that could be effective
would be viewed as representative and any body that was representative
would undoubtedly be ineffective, at least from the point of view of the
health of the world economy. No, national authority remains the bedrock
of international life, and any proposal to institutionalize global economic
policymaking will be ineffective if it is representative (the fear for
example with Global Negotiations) and unacceptable if it is unrepresenta-
tive, especially in a formal institutionalized sense.
The world economic community is neither ready for a global economic
Presidency nor capable of surmounting national differences by end-running
them through international meetings. The best we can hope for in the
foreseeable future is to rely on national authority and an informal (i.e.,
non-institutionalized) international process of shaping consensus on how
this national authority should be applied. International institutions
4 For this suggestion, see Robert D. Muldoon, "Ground Rules for an Open
World Economy," Foreign Affairs, Summer 1973.
7
can follow from the prior existence of such a consensus among national
policymakers, but they cannot force this consensus. Moreover, what
remains critical is the nature of the consensus. The kinds of policies
to be pursued at home as well as in the world economy are more important
than the process or institutions by which these policies are arrived at.
If these policies are conducive to an open world economy, interdependence
and hence world economy will flourish and international institutions can
be built on a solid foundation. If these policies are antithetical to an
open world market, economic interdependence will shrink, even if international
institutions are built.
Thus, a minimum of consensus on what economic policy objectives
national authorities choose to pursue remains a prerequisite of an open
international economy. No world economy can accommodate unlimited national
differences on basic economic policy choices and still remain open. Here
the domesticist is optimistic that, despite conservative, socialist, and
all shades of intermediate approaches to economic choices at the national
level, it is still possible to shape a minimum international consensus on
fundamental economic objectives and performance. As I discuss below,
these objectives and performance criteria are general enough to preserve
the freedom and independence of national decision-making, while specific
enough to constrain the global consequencies and instabilities that would
result without them.
Before leaving this initial discussion of domesticist and globalist
alternatives it is essential to note that neither is exclusively domestic
or global in its orientation. Hence, epithets such as unilateralist or
8
world order type are inappropriate to this discussion. The domesticist
arrives at international imperatives through an analysis of the convergence
or divergence of national policy chocies. The globalist arrives at
domestic imperatives through an analysis of international exigencies.
Both care intensively about the world economy. Both believe that a sound
world economy and a sound U.S. economy go hand in hand. Both are activist
in seeking this objective. But they differ in how to reach this state of
affairs. The domesticist believes more of the answer lies in sound
domestic choices, the globalist in mastering the independent logic of an
integrated "worldeconomy."
********
The domesticist view is rooted in an evaluation of the success and
shortcomings of the postwar international economic system. This system,
for all of its faults, is credited with the achievement of higher,
sustained rates of growth and development than in any comparable period
in history. Briefly, world trade and output from 1948 to 1973 grew at
average annual rates of 7 per cent and 5 per cent respectively, almost
triple the average annual rates for the thirty-five years prior to 1948.
In the process world output tripled and income per capita in the world as
a whole doubled, despite a 50 per cent increase in the world's population.
The benefits of this unprecedented growth were more widely spread
than is commonly recognized. According to recent World Bank statistics,
average annual real growth of GNP from 1950 to 1980 was approximately the
same in some sixty (60) middle-income developing countries (per capita
income greater than $370 in 1979) as in the industrial countries--3.1 per
cent versus 3.2 per cent respectively. Real per capita incomes in these
9
two groups of countries also increased by the same amount--some two and
a half times from 1950 to 1980. And, when comparative purchasing power
is taken into account, real per capita income in the middle income
developing countries actually grew five times or twice as fast as that in
the industrial countries.
These are scarcely trivial or ho-hum outcomes, even if they did not pre-
clude an increase in the gap between absolute incomes in these two groups
of countries. The absurdity, of course, of expecting the absolute gap to
close at this stage of development, is illustrated by some simple mathematics.
If, to take some hypothetical numbers, per capital income in the industrial
countries averaged $10,000 and in the middle income countries $500, it
would require a growth rate in the middle income countries twenty times
that in the industrial countries to close the absolute gap. Such a
growth rate is simply unachievable. The important point is that, even at
a real growth rate in terms of purchasing power of only two times that of
industrial countries, the middle income countries can eventually close
the absolute gap if this rate is sustained. The proper conclusion,
therefore, the domesticist contends, is not to despair over the shortcomings
of the postwar system but to seek a better understanding of how to sustain
and improve this system.
From 1950 to 1980, the low income (per capita income less than $370
in 1979) developing countries, comprising some 90 remaining third world
nations, did not fare as well as the industrial or middle income countries.
For them, real per capita incomes rose by less than one-half or less than
one-fifth the increase in the industrial and middle income developing
countries. Even after adjustment for purchasing power, these rates show
10
a relative decline in the fortunes of these countries. Yet these results
are tempered somewhat by the significant gains made by many low income
countries in areas of basic human needs. From 1950 to 1979, literacy
rates in these countries increased from 20 to 51 percent, life expectancy
went up from 41 to 57 years, and child mortality declined from 28 to 12
deaths per thousand. Again these achievements are unprecedented by
historical standards. Nevertheless, the continued plight of the world's
poor leads the domesticist back to a careful examination of what was
right about the postwar system, why the poor make relatively fewer gains,
and how that system can be improved.
Growth rates in the postwar period were greatest in the 1950's and
1960's, slowing in the 1970's by half in the industrial countries, by a
quarter in the middle income developing countries, and by two thirds in
the poorest African developing countries. It is customary to attribute
the high growth in the earlier period to postwar reconstruction and the
existence of enormous unused resources and capacity. But, in almost all
war-torn countries, prewar levels of output had already been achieved
by the mid-1950's. Moreover, the existence of unused resources is by no
means a guarantee these resources will be used. Look at the devastating
record of the 1930's. Policies established under the postwar international
economic system, the domesticist concludes, must have had something to do
with the vastly superior record of this period.
The domesticist is unwilling to assume that the growth of the world
economy and its contribution to unprecedented prosperity in the postwar
period was simply a matter of historical inevitability, a product of in-
eluctable modernization and the march of modern technology. 5 Rather, the
5 For an alternative view, see Edward L. Morse, Modernization and the Trans-
formation of International Relations, The Free Press, 1976.
11
domesticist argues, it was a consequence of deliberate policies. Three
basic policy directions, in particular, were crucial. Indeed alterations
in these policy directions in the 1970's led to the slower growth of this
later decade. Thus according to the domesticist analysis of postwar world
economy, the problems and complexities of the 1970's, rather than sug-
gesting the need for totally new policy directions, confirm the wisdom
of earlier directions and the imperative need to refit these directions
to a different and admittedly more complex political universe of the
1980's.
First, the postwar system gave pride of place to the role of sound
domestic policies in world economic growth and stability. This priority
was reflected in two sets of commitments -- the commitment by all other
countries besides the United States to a fixed exchange rate vis-a-vis
the dollar, and a commitment by the United States to maintain the value
of the dollar in terms of gold. The fundamental commitment underlying
the entire system, therefore, was the U.S. commitment to price stability,
especially after the dollar acquired in the course of the 1950's and early
1960's the uncontested role of principal international reserve currency.
Until roughly 1960, the United States held gold reserves sufficient to
cover outstanding liabilities against the dollar. During the 1960's,
however, these liabilities grew to many times the value of U.S. gold re-
serves, and the willingness to hold dollars depended increasingly on the
price competitiveness of U.S. goods and capital assets. From the domes-
ticist's point of view, it was the loss of this competitiveness as perceived
from abroad, due to the inflationary "guns and butter" policies of the
U.S. government in the late 1960's, that eventually led to the collapse
of confidence in the U.S. dollar and the end of the fixed exchange rate
system.
12
But we are getting ahead of our domesticist's analysis of postwar
economic successes and shortcomings. The second fundamental policy com-
mitment in the postwar system was the commitment to liberalize trade, at
least in manufactured goods. The decision to allow comparative advantage
to work at the margins, as governments moved toward lower trade barriers,
was decisive in terms of enhancing efficiency in the allocation of national
and world resources in the postwar period. This commitment made the dif-
ference between the postwar and prewar systems, since the latter avoided
price inflation, albeit at the expense of prosperity. The commitment to
freer (and I stress freer rather than free because the commitment was
never to eliminate all government influences on trade or even to extend
the practice of freer trade to certain sectors such as agriculture) trade
was also a necessary corollary of the commitment to price stability,
fixed exchange rates, and domestic policy discipline. The idea was that
countries, when faced with balance of payments deficits or surpluses,
would not be allowed, in the main, to alter their exchange rate (except in
circumstances of fundamental disequilibrium) or to impose new barriers
on trade at the border (except under limited escape clause provisions of
the GATT). This meant they would either have to finance deficits or
absorb surpluses through reserve losses or accumulations, or eventually
(since reserves were limited) alter the domestic policies that were con-
tributing to loss of export competitiveness or to insufficient domestic
demand and, hence, lagging imports. (An often noted imbalance, of course,
existed between the pressures on a deficit country to adjust and those
on a surplus country, which could accumulate reserves indefinitely.)
13
The commitments to price stability and liberalized trade in manufactured
goods also embraced indirectly a third commitment. That was to preserve
a relatively flexible domestic economy, tilting at the margins toward
market forces and market pricing to facilitate the movement of resources
from one sector to another and from the domestic or non-traded goods
sector to the international or traded goods sector. Under the system,
domestic adjustment would have to be fairly continuous given the fact that
the international means of adjustments -- available reserves and exchange
rate or trade controls -- were relatively constrained. The primary role
of government was to facilitate this adjustment by preserving and enhancing
the market environment through appropriate macroeconomic policies. The
commitment was less to limit direct government participation, which could
be expected to vary depending on domestic political choices, than to pro-
mote market forces and flexibility, whether applied to private or public
actors.
As the domesticist sees it, the commitments to price stability, freer
trade and market forces worked together to ensure sound domestic policies.
That was the essence of the postwar system and thus the secret of unprece-
dented postwar growth and development.
What went wrong in the 1970's? The most common explanation is that
offered by the globalists. The unique conditions of the early post-
war period, they argue, disappeared. The U.S. economic position inevit-
ably declined, as postwar allies and erstwhile enemies benefited from a
new and more efficient capital stock, a more organized government-led
approach to technological and industrial development and restructuring,
and fewer defense and other foreign policy obligations and costs which
14
fell disproportionately on the shoulders of the superpower. U.S. com-
petitiveness was bound to suffer. Despite heroic U.S. efforts to per-
suade other, specifically surplus, countries to revalue their currencies,
stable agreements could not be achieved. Differences on fundamental
economic policy objectives, such as acceptable levels of inflation,
unemployment, and government intervention, were now too great among the
highly competitive economies of the industrialized North; and these dif-
ferences, which could not be resolved at the bargaining table (where the
U.S. was no longer dominant) would have to be accommodated by greater
flexibility in the marketplace. Domestic flexibility, which ensured
adjustment under the old system, would have to give way to greater inter-
national flexibility, which would now absorb some of the requirements for
domestic adjustment. Floating exchange rates were the obvious answer.
Further, it is argued, the move to floating exchange rates was not
only logical but timely. No sooner had it been taken than the world ex-
perienced the first of two serious and also historically unprecedented
oil shocks. Varying national responses to these stocks only exacerbated
the differences in fundamental policy objectives and preferred policy
mechanisms. Massive petrodollar flows and the accompanying growth of in-
ternational financial and currency markets could have never been accom-
modated without a shift to floating exchange rates. Indeed, as the argument
continues, while protectionism also grew and was unavoidable to some
extent, as nations wrestled with massive and rapid current account move-
ments, protectionism would have grown much more if exchange rates and
capital flows had not accommodated more of the differences in national
priorities.
The globalist explanation of the malaise of world economy in the 1970s
15
has much to recommend it. But, for the domesticist, it overlooks and indeed
perhaps excuses the central reason for the loss of U.S. competitiveness
and more broadly the collapse of domestic discipline in domestic economic
policymaking around the world. The culprit was U.S. domestic economic
policies, specifically the growing budget deficits and accelerating money
growth in the U.S. beginning in the late 1960's. In 1968, the federal
deficit swelled to $25 billion compared to $8.7 billion in 1967 and an
average of $4.4 billion per year from 1961-1966. After a small surplus
in 1969, it never saw black ink again for the next decade, increasing to
$23 billion per year in 1971-72 and $60 billion in the subsequent business
cycles of 1976 and 1980. Money growth meanwhile showed similar expansion.
MI exploded in 1967 and 1968 by 6.6 and 7.7 percent respectively, compared
to an average of 3.4 percent per year from 1961-1966. After 1968, MI
fell below the average for the early 1960's only once and overall from
1969-1979 averaged 6.3 percent per year.
This disintegration of the cornerstone of the postwar international
economic system, namely domestic discipline in the world's leading economic
and currency country, was clearly evident in U.S. performance. U.S.
average annual inflation increased from 1.8 percent in 1960-1967 to 4.5
percent in 1967-1973 and to 7.9 percent in 1973-1980. Over the same period,
U.S. unemployment accelerated from an average of 4.4 percent per year in
the 1960's to an average of 6.1 percent per year in the 1970's.
According to the domesticist, this decline in U.S. policy discipline
and performance did not result so much from a decline in U.S. power
vis-a-vis its competitors as it contributed to inflation and instability
in the international system which also strongly impacted U.S. competitors.
Contrary to the decline argument, the role of the U.S. economy in the
world economy was not significantly different in 1970 than in the middle
16
to late 1950's. In 1955, U.S. GNP represented 36.2 percent of total
world output; in 1970, this figure was 30.2 percent. In 1960, U.S.
exports represented 14.9 percent of total world exports and in 1970 12.8
percent. In 1971, the United States still accounted for 52 percent of
the stock of all foreign direct investment, and the dollar's share of
total world reserves actually increased from 1955 to 1970. In light of
these facts, it is difficult to account for U.S. decline beginning in the
1970's primarily in terms of external forces outside U.S. control? Much
more likely, the domesticist argues, U.S. domestic policies badly managed
by U.S. policymakers bear an important part of the responsibility for the
decline in world economic performance during the period.
Indeed, these policies in turn negatively impacted the world economy.
Inflation was exported and then compounded by the two world oil price
shocks. For the 1970s as a whole, average annual inflation rates in both
the developed and developing worlds tripled, in comparison to the 1960s,
to levels of 8.5 per cent and 26.5 per cent respectively. Unemployment
in the Group 10 industrial countries steadily increased from 1974 to 1982
from 3.7 to 8.1 per cent.
The breakdown of price stability made it harder to resist the creeping
tide of protectionism. As it became clear that floating exchange rates
did not provide for the insulation from policy differences they were
initially expected to provide, and as daily movements of capital in finan-
cial and currency markets reached elephantine proportions, many countries,
including the United States, found ready excuses to reestablish new
barriers to trade. Tariff barriers continued to decline under the agree-
ments of the Tokyo Round, but non-tariff measures, including quotas and
especially more pervasive domestic policy measures aimed at subsidizing
17
declining industries and developing new high technology industries, began
to spread across the anatomy of international trade relations. New
doctrines emerged, declaring free trade an anachronism and ordering up
generous doses of government stimulus and direct intervention to expand
production in certain sectors critical for national employment (e.g.,
steel), or to create comparative advantage in high technology areas where
none existed, or to carve up international trade according to new static
principles of managed markets. Little wonder, the domesticist concludes,
that at the margins trade patterns no longer contributed to greater
efficiency in the allocation of national and world resources.
The collapse of price stability and the erosion of free trade commit-
ments both facilitated and reflected the loss of an implied commitment to
market forces and flexibility. Through the 1970s the expansion in the
role of government, as citizens demanded more and more from their public
authorities, was phenomenal. In the industrialized countries, public ex-
penditures grew inexorably, while tax revenues, given slower growth
lagged. In 1973, a third of the industrial countries ran budget surpluses,
by 1982, all of them were in deficit. The combined maynitude of these
deficits was twice as large in relation to GNP as it was in 1973. For
the seven major industrial countries, the ratio of total public expendi-
tures to GDP rose from 29 per cent in 1967 to around 37 per cent by the
early 1980s. In individual countries, such as Canada, Gennany, Italy, Japan,
Spain and the United Kingdom this ratio increased by more than 10 percentage
points; in Belgium, the Netherlands, Norway, Portugal, Swedan, Luxemburg, and
Ireland, it rose more than 15 percentage points. In developing countries,
whose governments miyht be expected to play a larger role, the expansion was
nevertheless equally dramatic. Central government revenue as a percentage of
GDP grew in the middle income developing countries from 18 per cent in 1970 to
26 per cent in 1980. State-owned enterprises, frequently required to pursue
18
public policy as well as market objectives, swelled -- in Brazil from
fewer than 150 to almost 500, in Mexico from under 200 to over 500, in
Tanzania from under 100 to 400. By 1980, the budgets of these enterprises
in Tanzania, for example, consumed 4% of GDP, up from about .5% in 1969.
In Brazil, the operating deficits of state-owned enterprises accounted in
1979 and 1980 for 76 and 66 per cent respectively of the federal budget
deficit. All of these developments, as seen by the domesticist, weakened
the role of market forces and market pricing, reducing further the ability
of the national and world economies in the 1970s to use resources more
efficiently at the margins.
To the domesticist, the future is not so much a consequence of the
past as a construction of the present informed by the past. The postwar
economic experience was unprecedented. About that, there could be no doubt.
But was it unique? Did it follow from the unusual political conditions of
the period, particularly the political dominance of the United States?
After all, the globalist might retort, was it not, for all practical pur-
poses, the United States and Great Britain that ruled at Bretton Woods?
And ultimately, was it not the United States that won out against the British
on the provision of limited international reserves, which together with
fixed exchange rates ensured that adjustment would have to be achieved
largely through the maintenance of sustainable domestic policies? Moreover,
was it not the United States which also succeeded in overriding imperial
Britain with its Commonwealth preferences on the key principle of most-
favored-nation trade liberalization?
In the 1980's, the United States does not exercise such preponderant
political power in the world economy, even while it continues to exercise
a disproportionate economic influence due to the size of its economy,
19
share of world trade, and especially the role of the dollar. How then
might it reestablish and sustain consensus on the principal economic
ingredients of postwar success sound domestic policies, freer trade and,
at the margins, a bias toward market forces? The question is particularly
acute given the much greater political diversity and complexity of the
international system.
For the domesticist, the answer lies partly in the disjuncture between
U.S. economic and political power. U.S. power in the international market-
place remains much greater than its power at the bargaining table (a fact
which frequently irritates our allies). Even in 1980, the U.S. economy
continues to account for 35 per cent of free world GNP, 20 per cent of
OECD trade, and 85 percent of international reserves held in dollar
assets. If the U.S. economy therefore could be revitalized and put on a
course that reestablished the premises of price stability, market incentives,
and freer trade, the world economy might be induced in a similar direction.
At some point, the altered economic conditions might make it easier for
the United States to apply its reduced political influence to secure re-
newed formal commitments to a reconstituted international economic system.
********
The domesticist approach underlies many of the perceptions and policies
pursued in the United States since 1981 by the Reagan Administration. This
is not to say that the premises of this approach are shared consciously
or in full by individual Reagan Administration officials or even by the
President himself. This Administration has been particularly remiss in
developing a consistent intellectual framework for most of its policies,
20
including international economic policy. Its domestic economic program
was eclectic and even, some believed, contradictory. And most of its of-
ficials, by temperament and training, are not inclined to explain policy in
a broad historical or conceptual framework.
Yet it is also hyperbole to argue that this Administration has had no
international economic policy. The fact that some critics make this charge
repeatedly and get away with it reflects the dominance of the globalist
approach in our thinking about international economic policy. This
approach, as we noted earlier, tends to view domestic reactions to world
economy as essentially counterproductive. Such reactions are quickly
labeled nationalist, neomercantilist, unilateralist, or ideological. By
definition, they cannot be helpful in dealing with the world economy
because the problems lie outside the nation-state and the fragmentation
of national authority within the nation-state ensures either that there will
be no response or that the most reactionary forces will determine domestic
policies. Thus, an emphasis on domestic policies must inevitably reflect
a repudiation of international policies, if not of the world economy
itself.
Yet the Administration's policy has consistently emphasized the pri-
mary importance and role of domestic economic policies as the key to stable
and prosperous international economic relations, not as an end in them-
selves. In this respect, restoring sound U.S. domestic policies was the
fulcrum for restoring the proper emphasis on price stability and market
incentives in the world economy as a whole. Almost immediately, at the
Ottawa and Cancun Summits, the Administration made clear that the focus
on domestic policies was not intended as an "America First" strategy, but
as a reminder to all countries that the world economy could only be as
good as its members' economies. As domestic economic performance improved,
21
it argued, international economic relationships would stabilize and begin
once again, if organized round the concept of freer trade, to produce pos-
itive feedback for domestic growth and development. Above all, it was
policies that mattered, not just process. The issue was not interdepen-
dence or international cooperation for its own sake. If policies were
wrong, as they had been, for example, in the 1930's, interdependence pro-
duced negative feedback; and international cooperation, such as the ill-
fated London Economic Conference in 1933, could actually make matters worse.
If the Administration shares, unknowingly in part, many of the premises
of a domesticist's approach to world economy, how do its policies fare
against a critique from the domesticist perspective? Such an evaluation
could be particularly useful, because while this Administration has achieved
remarkable success in revitalizing U.S. and, to a lesser extent, world re-
covery and growth, its policies fall short in a number of important ways
of its own standards and certainly those of a domesticist. This evaluation
is also likely to be more enlightening than the internationalist critique,
which by denying the existence of an international economic policy under
this Administration, essentially ends the argument.
In its first year, the Administration concentrated on its domestic
economic program to restore price stability (stable, moderate growth of
the money supply) and to renew growth incentives (reducing taxes, expen-
ditures, and excessive regulation). It also conducted, however, an active
year of international economic diplomancy, albeit of a domesticist rather
than globalist variety. At the Ottawa Summit in Canada in July and the
Cancun Summit in Mexico in October, it urged all countries, in the wake
of the excessive inflation and growth of government intervention in the
1970's, also to consider policies to lower inflation, liberalize trade,
22
restore market incentives and pay more attention to the private sector.
While globalist critics dismissed these early exhortations as ideology
or exported Reagonomics and indeed as interference in domestic sovereignty,
the appeal for domestic policies to reconverye, at least at the margins,
around the essential premises of an expanding, open world economy betrayed
an underlying premise of the domesticist approach. Seen from the domesticist
perspective, there is a limit to the divergence of domestic economic
performance among countries in areas such as inflation, deficit spending,
etc., if international markets are to be kept open and if stability and
growth are to be achieved under these circumstances.
The fight against inflation which was subsequently identified with
tight U.S. money policies and resulting high interest rates, was not
original with the Reagan Adminisration. Jimmy Carter and Margaret Thatcher
had already taken up this fight. What was unique to the Reagan Adminis-
tration was the idea that growth could take place simultaneously with
disinflation and that, for this reason, there would be no need to buffer
the impact of disinflation either on the domestic economy or on the
world economy.
Moreover, this program was now to be pursued in a more flexible in-
ternational economic environment involving floating exchange rates. Even
if both aspects of this program -- disinflation and growth -- had succeed-
ed, there may have been more volatile international repercussions than in
earlier periods. The transition from a fixed to a floating rate system
in the early 1970's had been partially buffered, at least until March
1973, by the requirement to negotiate exchange rate changes. Now, a tran-
sition back to more predictable price performance and stable exchange
rates would be attempted in an international environment which, because
23
it was more flexible, did not automatically require similar intergovern-
mental coordination at the bargaining table. The Reagan Administration
may not have sufficiently appreciated this difference, although it it had,
it may have made little difference since the Administration was determined
to let its policies work their way out in the marketplace rather than be
the subject of international negotiations at the bargaining table.
Ironically, it was the flexibility of the floating rate system that
permitted the United States to pursue anti-inflation policies that ultimately
contributed to a sharp appreciation of the dollar.
Nevertheless, had growth accompanied disinflation in the U.S. economy,
the international repercussions may have been quite tolerable. This was
the expectation of many Reagan officials, at least through the first part
of 1981. Under these assumptions, it was reasonable and appropriate to
discontinue daily and sustained exchange market intervention. There was
no desire to buffer the impact of U.S. disinflation on the world economy
since the United States was emphasizing the need for other countries also
to disinflate, reducing the sharp divergence of domestic performance in
this area during the 1970's. If U.S. economic changes, acting through the
marketplace, put pressure on other countries to disinflate, this made the task
of reestablishing an international consensus on the importance of price stability
somewhat easier. It would have been much more difficult to make the case
for disinflation politically at the bargaining table. Moreover, to inter-
vene to buffer the decline of foreign currencies being devalued by infla-
tionary policies would have contradicted U.S. domestic policy objectives
and signaled a lack of resolve on the part of the U.S. Administration, for
foreign policy reasons, to lead the fight against the inflationary tendencies
of the 1970's.
On the basis of a return to sound domestic policies, the Administration
24
also championed the second key principle of the domesticist's approach to
world economy, free or more accurately, freer trade. In freer trade, the
Administration saw the chief economic rationale for having a world economy.
Lowering trade barriers at the margins (not necessarily eliminating them)
made possible greater efficiency and growth. Without that possibility,
trade created no new growth, and pursuing it for non-economic reasons risked
doing little more than dividing up existing growth. International finance and
investment also made less economic sense if trade were increasingly restric-
ted at the margins. Under such circumstances, capital transfers could not
be secured with the prospect of more cost effective transfers of real goods
and services. Thus, freer trade was the cornerstone of the world economic
system. Finance was there to facilitate it, and even non-trade related
finance ultimately depended on freer trade to contribute to new growth. 6
The concern with inflation and improved market incentives for growth
were also at the heart of the Administration's policy toward the Inter-
national Monetary Fund (IMF) and the international development institutions.
The IMF was perceived as drifting away from its primary role as lender of
last resort. By making longer-term financing available to countries ex-
periencing early problems of disequilibrium, it was weakening its leverage
and recipient country incentives to promote domestic policy adjustment.
There was a need, especially in the inherited world of the 1970s of high
6 Thus, when foreign concern about non-trade related capital flows led to
suggestions for less open trade and financial markets, Administration
officials saw a contradiction. The remedy for speculative capital flows
was more efficient, meaning more open, world trade and capital markets.
25
inflation and debt, to preserve an institution whose role in the area of
domestic policy adjustment was far more indispensable than its role in
international financing. For the Administration, which had doubts about
the policy directions of the IMF in the late 1970s, it made good sense to
reserve on financing issues until a new policy course had been struck.
The emphasis on improved market incentives became the leading theme of
the Administration's position on development issues at Cancun. 7 It un-
derlay the skepticism the Administration expressed about the policies of
the international development institutions. An early evaluation of these
institutions by the Administration confirmed their value for American
foreign policy interests but also urged a more complementary view of the
relationship between private and public finance and the needs of some countries
at higher stages of development for less of the lowest cost concessional
finance available through these institutions. Public funds should not
substitute for private funds, as it was feared in the case of the then
proposed World Bank Energy Affiliate; and the resources of the World
Bank's soft loan window, the International Development Association (IDA),
should be reserved for the poorest countries of the world, while middle
income and more advanced developing countries met their needs increasingly
through hard window loans (closer to market rates) and eventually through
commercial financing in world private capital markets.
7 The emphasis on the private sector drew useful attention to the 50 percent
or more of production in developing countries generated in the nongovern-
mental sector. It has led to improved analysis, for example in recent
World Bank Development Reports, of how public and private sector activities
can more effectively complement one another and how market incentives can
be applied irrespective of whether ownership is private, public, or para-
statal.
26
********
By domesticist standards, early Administration views of the world
economy were on target. Objectives of domestic adjustment and freer
trade took precedence over international aid and finance. Informal dis-
cussions of policy took precedence over the formalized procedures of
global institutions, especially new ones. (An ad hoc limited Cancum Summit
was a better alternative than Global negotiations.) And the United States
would use its weight in the international market place to alter conditions
and gradually facilitate bargaining and consensus at the negotiating table.
The approach was activist toward resolving international economic ills of
the 1970s, but from a domestic starting point in the U.S. as well as
other partner countries.
How did these views fare in practice? The assessments of Reagan
Administration economic policies are already numerous and conflicting,
and the argument has probably only begun. Given the passions that afflict
this debate, it is unreasonable to expect it to be resolved soon. The im-
portant point to keep in mind is that this Administration, like all others,
has adapted it policies as it has gone along, and it would seem more useful
to review the key choices it has made at each point along the way and to
assess the general direction of its international economic policy against
domesticist standards. These standards, as I argued, come closest to this
Administration's economic instincts, yet they too are exacting and may there-
fore be the most appropriate means for holding this Administration accountable
in international economic policy. Let's look at the Administration's approach
to domestic economic policy coordination, trade and financial issues through
the domesticist prism.
27
In 1981 Reagonomics over-succeeded in one of its objectives -- controlling
money -- succeeded in two other objectives, cutting taxes and regulations
-- and failed in a fourth -- cutting expenditures sufficiently to meet its
preferred level of tax rates (or as the critics might put it, also over-
succeeded in cutting taxes). The result in late 1981 and 1982, through
whatever causal sequence (let the debate continue!), was large current
and projected budget deficits, high nominal and real interest rates, a
high dollar, a decline in exports and general economic activity, and
lower inflation at the cost of sharply increased unemployment.
The issue for the Administration in 1982 was whether, now that it was
clear disinflation would hurt, disinflation should have been stretched
out or discontinued. The issue, of course, was foremost a domestic one.
If the answer was no and the Administration was prepared to accept the
economic pain and potential political risk at home (incurred eventually
in the 1982 Congressional elections), it had little reason to intervene
to alleviate these costs abroad. Doing so would have weakened the impact
of U.S. market power, slowed the process of disinflation abroad and
ultimately retarded this process in the United States. In early 1982,
inflation was still at double digit levels in several advanced countries
and continuing to accelerate in many developing countries. Intervening in
exchange markets to bolster currencies suffering from comparatively over-
inflated domestic economics would have permitted policies of inflation in
these countries to persist. Moreover, doing something about the witch's
brew of tight money and loose fiscal policy, seen by many as the source
of voodoo economics, was both economically risky for the U.S. and world economy
(if it involved primarily higher taxes and delayed recovery indefinitely and
politically difficult if not duplicitous (as it was, the tax legislation
28
in 1982 walked back at the margins the Administration's budget gains in 1981).
Ultimately, the Administration concluded, disinflation without growth is either
accomplished quickly in the United States and politically active societies or
not at all.
If growth could not be achieved with disinflation, as was hoped in
1981, it would now be achieved through disinflation. The lack of early
success through the impact of a revitalized U.S. market on the world economy
led to an acceleration of Administration diplomacy. At the Versailles Summit in
June 1982, the Administration participated in substantive and significant dis-
cussions, unlike the more genial, public relations - oriented encounter of
Reagonomics and French socialism at the Ottawa Summit (where little else was
possible given an American Administration that was six months old and a
French Administration only six weeks old). It elaborated its concept of
sound domestic economic policies in the major currency countries converging
around common performance indicators of low inflation and greater market
flexibility over the medium term (a 2-3 year time prespective). As
a coordination vehicle, it recommended the new process of multilateral surveil-
lance bringing together the five major currency or SDR countries -- United
States, United Kingdom, France, Japan and West Germany -- and on an informal
basis, the Managing Director of the IMF. Under a monetary agreement reached
at the first Economic Summit in Ramboulliet, France in 1975, the IMF had
initiated on an annual basis a process of bilateral surveillance of the
economic policies of member countries. This one-on-one consultative
mechanism between each country individually and an international institution
had done relatively little, however, to impress upon the major industrial
countries the disproportionate effects of their domestic economic policies
on one another and on world economic conditions as a whole. The multila-
29
teral surveillance process, to be conducted initially on a semi-annual
basis, was designed to supplement this bilateral process for the major
currency countries. The relationships among domestic economic conditions
in these countries, which account for 65 per cent of the free world's GNP
and the three principal international reserve currencies, are especially
critical for world economic well-being. These countries lacked a direct,
multilateral consultative mechamism at the highest polictical levels to
appraise the likely impact of their existing policies on the other countries
and to assess the international feedback of trade, capital and currency
flows, which might, if international markets were kept open, undermine or
at at least significantly affect their own domestic economic programs.
Organizing this process under the broad auspices of the informal Economic
Summits gave it more political significance than existing Finance Minister
meetings in the G5, G-10 or the OECD. And including the IMF Director
informally with the responsibility to present the initial assessment of
member country policies and their interrelated impact insured the presence
in the discussions of an impartial yet aggressive referee, without incurring
the disadvantages of formal institutional involvement on the part of the
IMF.
The multilateral surveillance or, as it was also called, convergence
exercise represented an important, incremental step in the reform of the
international monetary system begun at Ramboulliet. It balanced the pre-
occupation in the floating rate system with exchange market intervention
and gave practical expression to the view that convergence of domestic
economic performance among the major currency countries was the best way
to achieve fundamental and lasting exchange rate stability. Indeed, it re-
cognized that, whatever exchange rate system existed, a necessary condition
30
for exchange rate stability was price stability! It differed from earlier
globalist prescriptions for active coordination of economic policies
(e.g., the Bonn Summit mode1⁸) by focusing on mediumterm domestic objectives
and outcomes of policy rather than on short-term fine-tuning of the
policies themselves.
In this respect, the proposal conformed to the domesticist view of
how to manage world economy. Summits were not for policymaking, since these
meetings did not represent any truly international constituency. Indeed,
from the perspective of the world community, the leaders present at the
Summit were self-elected and had no real political mandate from their own
domestic constituencies or a larger international constituency to make
policy at the Summits. 9 The best that could be achieved at these meetings
was the education of domestically-accountable leaders to the international
consequences of their economic actions. If these meetings succeeded,
domestic leaders, over time and by a series of successive approximations
in domestic policymaking, would modify their actions and close the gap in
domestic economic objectives and performance that produced undesired
instabilities in international economic relationships. Industrial
countries did not necessarily have to achieve these objectives by the
8 See George de Menil and Anthony Solomon, Economic Summitry, Council on
Foreign Relations, 1983.
9 To acquire such a mandate, Congress and Parliaments would have to become
much more involved in Economic Summits than they are currently as Congress
is for example in arms control and other international conferences.
That would of course defeat the original and only real purpose of the
meetings in providing the leaders with a relatively free and unconstrained
environment for a frank exchange of views.
31
same policies. Hence, at Versailles, the famous confrontation of conservative
and socialist economic policies that produced so much drama at Ottawa was
resolved in the common recognition by France, the U.S. and other Summit
countries that, regardless of their ideological or institutional preferences,
they all had an interest in converging domestic economic outcomes of low
inflation, greater flexibility in their economies, and maintenance of
open market. 10
Has the multilateral surveillance initiative mattered? Initially, it
was lost amidst the furor of controversy over high U.S. interest rates,
intervention in exchange markets and especially, in the aftermath of
Versailles, the Soviet gas pipeline and the debt crisis of summer and
fall 1982. Nevertheless, after Versailles, U.S. policy adjusted in one
important respect, albeit in a way that seemed to contradict Administration
priorities. The Federal Reserve sharply accelerated the growth of the
money supply, largely in response to domestic and international credit
pressures. U.S. interest rates declined, and the immediate international
financial crisis was weathered. But the fundamental fiscal imbalance in
the U.S. remained, threatening over time the ability to sustain an easier
monetary policy without reigniting inflation. Following Versailles, French
policy also adjusted. In March 1983, the Mitterrand government introduced
austerity measures to end the long French love affair with inflation. In
addition, during the winter of 1982-1983, more conservative governments came
to power in Germany and Japan
10 Some Administration officials foresaw an eventual association of the
GATT Director with the multilateral surveillance process to integrate
trade and domestic policy considerations more effectively.
32
The result was to narrow fundamental differences in basic economic
objectives among the major currency countries and set the staye for the
large degree of consensus on objectives and, to the surprise of many,
also specific policies (such as reducing government expenditures) that
emerged at the Williamsburg Summit. The nascent recovery in the United
States added further lubricant for consensus. Obviously, larger political
and economic forces were driving the Western countries toward improved
economic relations after their sometimes acrimonious exchanges in 1981-82.
In 1984, the process of recovery advanced, with a stronger recovery
than anyone expected in the United States and the long-awaited resumption
of growth in Europe. Whether the recovery in the United States was
keynesian, supplyside or both (it still seems worthwhile to distinguish
between deficits created by cuttiny taxes and those by increasing expenditures),
the Administration yets credit for it. It also takes responsibility, of
course, for persisting imbalances. While the effects of the latter
continue at the moment to be favorable -- through recent increases once
again in U.S. interest rates cloud the picture -- the effects in terms of
medium-term outcomes for relationships among the major currency countries,
pricisely the focus of the Administration initiated multilateral surveillance
exercise, are much more worrisome. U.S. fiscal policy cannot be sustained
indefinitely without either deleterious consequences for growth here and
elsewhere or a sharp resurgence of inflation and rapid decline of the
U.S. dollar. French inflation performance, which has shown some but not
enough improvement, also cannot be sustained without implications for the
franc or for inflation in France's trading partners.
33
Obviously, the multilateral surveillance process cannot claim credit
for any of these achievements. But it does seem to address the right
issues in the right time frame and in a more realistic political perspective.
It compels the key currency countries, especially the United States, to con-
front the international consequences of its domestic policies. It creates
a peer pressure group at the highest political level to achieve this,
which is about as far as one can go in a world based on national sovereignty.
If it works, as contemplated, by successive, albeit slow, domestic policy
adjustments, it accomplishes the same thing as direct coordination of
monetary policies, wheih some have advocated. And it does so without the
enormous political and institutional difficulties that would beset a
formal global mechanism for monetary policymaking in the key industrial
countries. (How, for example, would the developing countries regard such
a mechanism?) By focusing on the medium-term, it promises more than the
fits and starts of short-term fine-tuning of international economic
policies; and by operating in a more realistic political perspective, it
does not try to force international solutions before domestic polictical
changes can be brought about to alter individual country's policies.
The domesticist would certainly urge that the multilateral process be
continued and strengthened. To be more effective, it needs to be
broadened and given greater professional and public visibility without
losing the confidential character of its discussions. The meetings might
become more frequent and commission serious studies of other countries'
policies and their consequences by the participating countries themselves.
Currently, the IMF Director, assisted informally by his staff, prepares
the only analytical paper for the discussions. Having one member country
prepare a paper on another member's economic program and its consequences
34
may be a delicate task to manage, but it would certainly be educational.
The level of sophistication in the G-5 countries about the economies of
the other countries is not as great as one might assume. Too often,
views of other economies are mere projections of how things work within
one's own economy. In addition, Treasury officials, which represent the
United States in these meetings, need to conduct wider and more detailed
briefings on the broad outlines of these discussions. Perhaps the IMF
Director can be authorized to brief the economic press after each session.
Finally, Treasury and its counterparts in foreign governments need to
support discussions and even parallel "multilateral surveillance" seminars
among non-governmental yroups from the five countries to include business,
labor, academic and political party officials. The more these groups
learn about the policies and functioning of the other economies and their
impact on their own economy, the more rapidly and smoothly the process of
converging domestic economic adjustments around common performance
indicators can proceed, even with changes in official governing parties.
To achieve this degree of pervasiveness and effect, nowever, the multi-
lateral surveillance process will have to be cultivated and reinforced
over a perial of ten years or more. What do we do in the meantime? The
economic clock of the business cycle seldom awaits the calendar of domestic
polictical change or elections. Doesn't politics make the medium-term irre-
velant? Will the elections in the United States come in time to make the
needed macroeconomic policy adjustments? Will they crystallize the
political situation sufficiently to permit these changes to be made? Or
will the political deadlock of the past two and a half years persist?
Clearly, if the elections come too late or fail to create a political
35
coalition for responsible change, the opportunity to reestablish the
world economy on the domesticist premises of price stability and greater
reliance on market forces will have been lost. The Reagan Administration
can then be held responsible, not for failing to identify the right
directions and begin the process of world recovery but for being unable
to follow through politically. For an Administration that prides itself
on its political, more so than intellectual, prowess, that would be a
serious indictment.
One might agree with the Administration that it matters greatly, not
only to reduce the deficit, but also how this is done. Reverting back to
indiscriminate and, through de-indexing, automatic tax increases, coupled
once again with special interest, long-rolling, politics increasing
budyet expenditures, coud do as much to return us to the era of inflation
and economic rigidity as continuing large budget deficits. But however
one looks at these deficits, the test of this Administration is whether
it can bring off its preferred approach to reducing the deficit. If it
cannot, it has failed. The present deficit, in terms of the medium-term
consequences it entails for the U.S. as well as the world economy, looks
no different than the U.S. budget deficits of the late 1960s and early
1970s which contributed to the world economic disaster of the 1970s.
While the Administration has forcefully rejected the policies of this
earlier era, it continues in at least the one important area of fiscal
responsibility to pursue them.
Given the prolonged struggle since 1981 over domestic economic
priorities and their management internationally, the Administration has
36
until recently given less attention to open international trade and
capital markets. In a theoretical sense, this may be consistent with the
domesticist's view that a country's policies toward international trade
and capital flows can at best supplement domestic economic policies or at
worst be irrelevant to them. In a practical sense, however, the Administra-
tive's belated and not always consistent devotion to open market principles
is due to the serious recession of 1981-82, the continuing slow pace of
recovery in Europe, and the draconian cutbacks in imports by many developing
countries in managing their debt burdens. Without growth at home and
abroad, trade policies quickly become victims of expediency. When
confronted by high unemployment, no government can long hold out against the
appeals of import-competing interests for protectionism. In these circum-
stances, the natural allies of free trading governments, exporters who bene-
fit from access to foreign markets, are dormant, especially when foreign
markets appear to be shrinking rather than opening up. In an important
sense, therefore, growth -- and that means in the domesticist view,
domestic policy adjustment -- is a prerequisite of freer trade.
Here we encounter a catch-22, however. If a country is stagnating,
the more protectionism it accepts, the less able it may be to overcome
this stagnation, even while the magnitude of the domestic policy adjustments
needed to grow again may increase because the country is now pursuing very
inefficient trade policies. There is no economic excuse for protectionism
even under conditions of stagnation. The Reagan Administration succumbed
to protectionism in 1981-1982 -- multi-fiber agreement, steel imports, motor-
cycles, etc. -- not because it was unaware that this would retard recovery
but because it was politically weakened by recession. Again an Administra-
tion that sees itself as a master of politics was unable to follow through
37
politically to achieve its preferred policies.
While the Administration struggled in the domestic trap of stagnation
and protectionism, it pressed the case for freer trade internationally.
At the Versailles Summit and then the GATT Ministerial meeting in November
1982, the Administration pushed proposals for new liberalization in trade
that went far beyond anything any other government was ready to accept. Not
only were these other governments caught in similar domestic traps of
stagnation and protectionism, but many of them reflected new attitudes
toward the trading system that had gained prominence in the 1970s.
These attitudes embraced three broad schools of thought. The first
school of thought, entertained by many developing countries, saw the
postwar trading system as unjust and inequitable. Not having participated
in its creation or its successive trade rounds, there countries insisted
on new rules (e.g., preferences rather than the most favored nation
principle) and new institutions (e.g., UNCTAD in place of GATT).
They generally doubted the value of unregulated international trade,
having pursued development policies of import substitutions, and tended
to treat trade largely as another form of foreign aid (advocating one-way pre-
ferences which essentially transfer a portion of tariff revenues to developing
countries).
A second school of thought, represented by some European governments
and industrial policy advocates in the United States, argued that the
basic nature of trade and comparative advantage had changed. Competitiveness
was no longer a consequence chiefly of comparative factor endowments but
now of organizational and technological capabilities that included the
country's ability to decide where it wanted to have a comparative advantage
and to integrate government, industry and research organizations to create
38
this advantage. Competitive industrial strategies, new machinations of
global corporations, and above all leading roles for governments in
establishing competitive capibilities made the old rules of non-intervention
and quasi-judicial settlement of disputes under GATT obsolete. At the
very least, governments had to negotiate more directly to establish a
level playing field and at times to be an active player on that field in
bargaining for market shares.
A third school of thought reflected the growing influence of capital
and exchange markets on trade flows. This school, strong particularly in
France where it merged with a traditional preoccupation with the inter-
national monetary system, argued that prices of internationally traded
goods and services no longer reflected comparative advantage, even compara-
tive advantage determined by government policies. Rather these prices were
increasingly influenced by massive and often speculative capital flows which
overwhelmed currency exchange markets and produced unprecendented volatility
and uncertainties in exchange rates and hence trading patterns. Until some-
thing was done to alter fundamentally the exchange rate system, there was
little point, these countries argued, in pursuing liberalized policies or
market-based prices in world trade.
Attitudes toward the trading system, therefore, reflected fundamentally
different views toward the role of international institutions, the role
of governments in domestic economic and industrial policy and the link
between trade, money and capital flows.
The debt crisis of 1982 gave rise to still another, this time longer
term, perception of the link between trade and debt in future international
economic relations. Debt servicing obligations now added to already
large import requirements in many developing countries, necessitating
39
substantial increases in the exports of these countries if they were
going to successfully manage their debts and redeem financial obligations
through the transfer of real resources. Alternatively, of course, these
countries could drastically reduce imports, as many of them had done in
the short-term adjustment phase. But if carried out over the longer term
this approach meant the shrinkage of developing country import markets, a
corresponding decline in developed country exports, and increasing
resistance in developed countries to granting developing countries new or
even existing access to their markets. The debt problem in the longer-
term seeemed to suggest that markets would have to open up, whatever
specific attitudes were toward international institutions, government
targeting or the monetary system.
In this more differentiated and politicized world of international
trade, is there any hope for the domesticist's view of freer trade as a com-
plement to domestic adjustment policies? To his credit, the President
has continued to make the domesticist case, even while the Administration
has reflected the disparate views on the trading system within its own ranks.
Agreement at the international level will certainly not be swift or
unambiguous. Despite the strong recovery, only halting progress has been
made since Williamsburg where the Summit leaders placed a new round of
trade negotiations on the agenda of the world community. This May, a
significant procedural breakthrough occurred when the so-called Quadri-
lateral group consisting of the United States, Canada, the European Communi-
ty and Japan, which had been meeting alone on a sporadic basis since the
GATT Ministerial, met together for the first time with key developing
countries, including Brazil, India, South Korea, Mexico and the Philippines.
In early June, the London Summit moved another step forward by calling
40
for "an early date" for new negotiations, and Administration officials are
beginning to talk more openly and explicitly about the purposes, content
and politics of a new trade round. 11
The obstacles to freer trade are fed by cynicism about the divorce
between what governments say in tne trade area and what they do. A time
of testing awaits the Reagan Administration this September when it must
decide trade cases in steel, copper and other products which directly and
significantly affect the exports of its industrial country partners and
those of debt-ridden developing countries (e.g., Brazil and South Korea
in steel). The President has to recognize that each of these individual
decisions to provide relief, particularly now that unemployment is
substantially reduced, can drive another nail into the coffin of renewed
free trade negotiations. Even more telling, each such decision reflects
a lack of confidence on the part of the Administration in its own domestic
economic program and a concession that these policies are not yet in
proper balance.
The prospect for freer trade, therefore, is ultimately linked with the
prospect for reducing the domestic economic imbalances that persist in
the United States and among its industrial country partners. If one can
assume responsible and hopefully still timely action to reduce the deficit,
the outlook for freer trade becomes much brighter than that for it alterna-
tives.
11 See U.S. Trade Representative William Brock's "Trade and Debt: The Vital
Linkage," Foreign Affairs, Summer 1984; and Dennis Lamb, Deputy Assistant of
State for Trade Policy, "The Logic and Politics of a New Trade Round"
Address before the World Trade Conference, Chicago, Illinois, April 25,
1984.
41
New global institutions to make world trade more just and equitable
are likely to do just the opposite. The developing countries, particularly
the heavily-indebted ones, are showing less and less interest in such
institutional solutions. So are the industrial countries. At the
London Summit this year, the Western countries, in contrast to their
enthusiasm at the Ottawa and Cancun Summits for Global Negotiations, urged
that North-South discussions be conducted in the smaller, more manageable
arena of the IMF/World Bank Development Committee. In its last two
sessions, this Committee, with limited membership, has given special and,
for it, somewhat unprecedented attention to trade issues. None of this
is to say that the developing countries are now convinced of the virtures
of new trade negotiations, especially ones in which reciprocal redcutions
can be made and the gains in mutual access to markets can go well beyond
what might be possible on the basis of one-way preferences. Nor have
some of them lost their hostility toward the GATT or their affection for
UNCTAD. But informal talks on a new trade round are going forward on a
flexible basis. It should not be beyond the imagination of the participants
to find at some point an agreeable institutional umbrella, perhaps the
GATT or perhaps the GATT and the IMF/World Bank bringing togother domestic
adjustment programs and trade liberalization measures.
The industrial policy advocates, it would seem, face a tougher road
in pressing their view of trade policy, unless the bottom drops out of
world economic recovery. Their call for more direct government involve-
ment in deciding comparative advantage and managing markets actively is
simply impractical. This approach will politicize all, rather than just
major, aspects of commercial relations between countries, severely
straining good will and political ties among these countries. Can one
42
imagine healthy political relations between the United States and Europe
if governments had to negotiate continuously tough trade disputes such as
steel quotas or shares of wheat flour markets? Moreover, the roles of
government and more importantly, institutional structures and political
traditions in individual countries are SO vastly different that it will
be impossible to define meaningful common limits on government domestic
policy actions for trade purposes. How does one establish equivalence
between U.S. government tax policies that affect the allocation of credit
in U.S. venture capital markets and the administrative procedures of
Japanese bureaucracies that funnel credit for commercialization of techno-
logy to Japanese industry? A rule of reason may suggest that policies with
effects on industry in general and those with effects on specific industry
may be distinguished. But in a more politicized universe, these legal
refinements are not likely to be workable. Similarly how does one get
around the fact that an important contributor to U.S. commercial and
technological development is U.S. space and defense programs, which far
exceed anything that exists in any of its trading partners and therefore
must, if taken by itself and even if spin-off is modest, disadvantage our
trading partners in competitive relation with the United States?
We need a more sophisticated way to evaluate single-factor explorations
of comparative advantage in a complex trading environment. Perhaps we
need to look more at how equivalent functions are perfomed in each of our
economies (such as the allocation of capital), seek some general agreement
on broad parameters for handling these functions (such as no discrimination
whatsoever between foreign and domestic capital in our respective markets),
and pay less attention to whether public or private institutions are
performing these functions. There is more common ground in this approach,
43
as the Reagan Administration has found in seeking to open up Japanese
capital markets or in negotiating bilateral investment treaties with
developing countries.
Finally, those who advocate monetary policy reform before initiating trade
liberalization are likely to be won over eventually to new trade talks by pro-
gress on the stabilization of exchange rates through domestic policy convergence.
No exchange rate system, whether fixed or flexible, can work well without
underlying price stability in relations among the major currencies.
Domestic policy converyence therefore is a prerequisite for either system
and makes the eventual choice of the exchange rate system a less weighty
matter. As some high level U.S. officials have stated privately, once we
have achieved greater exchange rate stability through lower inflation, we
might throw a blanket of broad exchange rate zones over the system to
help us stay there.
All of this assumes of course that massive capital flows in the new
era of global banking, currency and investment markets will also become
less troublesome once basic economic and political ( as they affect safe-
haven investment flows) parameters in the major currency countries
converge. It is a good premise of policy to assume that markets will
behave rationally but that does not guarantee it. Continuing efforts in
in two directions would help. As a result of the summit study on intervention
in exchange markets commissioned at Versailles, a consensus emerged that
significant effects on exchange rates can be achieved only if underlying
montetary policy is allowed to chnage as a consequence of intervention.
What is still at issue is whether intervention, which can affect rates in
the short-term even without basic monetary policy changes (though at a
possible cost to Finance Ministries) is necessary to smooth overshooting
and undershooting of exchange rates caused by large and volatile capital
44
flows which have little to do with, or at least tend to overcompensate
for shifts in current account positions. It could be useful, as a follow-
up to the Versailles study and the continuing effort to shape a more
stable consensus on the role of government intervention in exchange markets,
to undertake a second study of the influence of international capital flows
on exchange rates. A second useful direction to pursue, as a part of this
same study, would be to examine the effect of national controls and other
policies on capital markets and thus also on international capital
movements and exchange rates. The domesticist bias is to assume that dis-
torting international capital movements may be as much the consequence of
national policies, and specifically policies toward capital markets and
investments assets, as the result of unspecified speculative motivations.
Thus, removing national obstacles to the free flow of capital may help
over the medium-term to stabilize exchange markets. The Reagan Administra-
tion has adopted this premise in its efforts to open Japanese capital
markets. Although some have noted that, in the short-term, liberalization
may have a perverse effect by encouraging borrowing in yen for immediate
conversion into dollars, fewer analysts have noted that this need not be
the case if borrowed yen could be freely invested in yen assets, such as
Japanese companies. The opening of capital markets must include markets
for real as well as financial assets. In the end, liberalizing financial
markets can be effective only to the extent that trade and investment
markets are also liberalized.
********
By comparison with its alternatives, therefore, the case for freer
trade will become increasingly more convincingly, if the United States
and other major currency countries succeed in sustaining world growth.
45
The twin pillars of growth and freer trade are also, in the domesticist
perspective, the key to managing the world debt problem. Unlike the globalist,
who sees the sources of the debt problem in a shortage of liquidity and
foreign exchange, the domesticist traces the problem back to the domestic
and trade policies of both the creditor and debtor countries, impeding the
efficient allocation and use of resources. The leading edge and hence solu-
tion to the debt problem is not finance but policy.
The Reagan Administration's approach to the debt problem betrayed the
domesticist bias. From the beginning, its approach to the IMF and World
Bank was addressed to the policies of these institutions, rather than
their immediate or projected needs for finance. As the policies of the
institutions adapted at the margins in domesticist directions of urging
tougher macroeconomic policy adjustments and greater reliance or market
forces, the Administration responded with support for their financial
needs. The Administration's approach was essentially the same in opting
for a case-by-case handling of individual indebted country situation.
The objective was domestic adjustment and freer trade policies, and since
these policies were unique to each country, a case-by-case approach was
recommended. Rather than putting all developing countries into the
procrustian bed of equally tough conditionality or, at the other extreme,
easily available finance, the case-by-case approach actually allowed more
flexibility. It ensured that no country would be pushed beyond its
political or social capacity to adjust, even while it avoided creating
precedents by pursuing individual cases as part of a more comprehensive
approach. Moreover the case-by-case method need not be limited only to
the short-term. It can be applied also to achieve longer term solutions.
As individual developing countries achieve their goals in the short-term,
46
their debt situations can be renegotiated and extended over the longer-
term. Doing so avoids confusing the terms appropriate to these countries
with the terms applying to other countries that have not made the same
initial progress.
The domesticist is no less concerned about the debt problem. Globalist
critics who charge that the Administration turned a blind eye to the debt
problem until the problem smacked it in the face in mid-1982 are making a
debater's point, not evaluating Administration statements and actions
prior to mid-1982. On the other hand, the Administration did underestimate
the extent to which its fiscal policy, given very restrictive Federal
policies in 1981-82, would rebound via open financial markets to bring
about a much more precipitous appearance of the debt crisis that might
have otherwise occurred.
********
For this Administration, alas, its success in practically every other
field of international economic policy trade, monetary and debt - hinges
critically on its own domestic economic policies and the struggle to
complete the budget program it embarked upon in 1981. The stakes are
high for the Administration as well as for its domesticist intellectual
roots. If it fails, the domesticist's world will be turned on its head.
Rather than domestic policies and freer trade standing as the cornerstones
of the world economy, the financial crisis will come to dominate all else;
and government aid will be needed, either in the form of inflationary
monetary policies in the industrial countries or through legislative
appropriations, to hold a faltering world economy and political community
together.
47
No one could welcome this sequence of events. Higher U.S. interest
rates, either because of crowding out or because of higher monetary growth
and subsequent inflation, will increasingly make debt management impossible
and politically antagonize the developing countries. The latter will
rally, as they have already begun to do this past June at Cartegena, to
force more direct involvement in debt renegotiations by the industrial
country governments. The involvement of industrial country governments
would threaten a revival of North-South confrontation and a sterile,
radicalized global conferencing type of dialogue and negotiation, such as
we experienced at times in the 1970s.
In the end, three prospects are likely, none of which will help solve
the problems of adjustment and further opening of international markets
which the debt problem and world economic health require. Confrontation
may intensive with exclusively negative consequences. North-South debt
talks may yo on long enough and earnestly enough to avoid serious
confrontation, but no significant substantative results will emerge - as
was the case, for all practical purposes with the conference on Interna-
tional Economic Cooperation (CIEC) in the mid-1970s. Or industrial
country governments will be obliyed, either through inflationary monetary
policies or legislative appropriations, to come up with significant aid
to help the commercial banks and developing country governments adjust
their debt obligations on a longer term basis and reduce the short-term
pressure for continuing policy adjustment in the indebted countries.
This outcome, to the extent that economic adjustment remains in complete,
only postpones a later day of reckoning. Admittedly, such delays may be
necessary in certain cases to stave off political and social upheaval.
But then it makes more sense to do this on a country-by-country basis
48
rather than a comprehensive plan that will benefit most those who are
already better off.
The debt problem is not financial but economic. No one should believe
that more credit, without the right policies, will even revive world
trade and growth. It may for a while as we saw in both developed and
developing countries in the 1970s. But eventually the demand for credit
to finance inefficient policies becomes insatiable, and the postponed
adjustments come home to roost.
The domesticist perspective, which is enjoying a revival under the
present U.S. Administration, offers a different outlook for the 1980s
than the globalist perspective of the 1970s. It seeks to exploit, rather
than reject, national authority and to develop a consensus on key domestic
economic performance indicators -- low inflation, market incentives and
freer trade -- which national authority should seek to achieve over the
medium-term. On this basis, it seeks to build informal international
relationships -Economic Summits, multilateral surveillance, Trade Minister
Meetings, etc., -- that help leaders accountable only to their domestic
publics better comprehend the world context in which they are operating.
Most of all, these international deliberations, rather than governing in
some mechamistic or indeed almost fatalistic sense, serve to remind the
leaders that interdependence and the open world economy are constructs of
their own choosing. It is their willingness and ability to preserve and
enhance the basic agreement on more open markets to promote comparative
advantage, on price stability to encourage predictable currency and capital
49
flows, and on market flexibility to accommodate inevitable adjustments
that provides the logic of the world economy. An open world economy
cannot accommodate unlimited diversity on these key fundamentals. That,
the domesticist would argue, is the lesson of the 1970s.
To shape and maintain consensus in the increasingly complex political
universe of the 1980s is, to be sure, a very tall order. The Reagan
Administration has rightfully reasserted U.S. leadership to direct
attention back to the domestic roots of world economic prosperity. But
now that it has done so, it cannot get off the hook with respect to its
own unbalanced domestic policies. It has painted itself into a corner,
and the world awaits to see if, over the medium-term, it will practice
what it preaches. While the political capacity to act to resolve the
budget problem remains the key, the Administration could help itself
politically by recognizing the basic intellectual challenge it is posing
to the globalist perspective of the previous decade. A huge yap remains
between the Administration's tendency to deal with policy, issue by issue,
as if no one cared about a comprehensive overall logic or strategy, and
the critics' tendency to dismiss ad hocery as no policy at all and to
forego a search for larger patterns of explanation. The domesticist
perspective offers a useful template for discerning larger pattern behind
this Administration's international economic policy and for holding this
Administration accountable for its own domestic policies.
The Magic of Hard Work: Foreign
Assistance and the Private
Sector Under the Reagan Administration*
by
Henry R. Nau
Department of Political Science
Graduate Program in Science, Technology
and Public Policy
The George Washington University
The Reagan Administration has sought better balance in international
development and U.S. aid programs. This has meant an incremental shift
in emphasis from:
- economic to security assistance
- multilateral to bilateral and regional assistance
- international policy to LDC domestic policies
- aid to commercial trade, investment and finance
- public to the private or market sector
This approach is strategic, not ideological. It stresses complementarity,
not trade-offs between the various activities listed above. Indeed, in
all cases, there is an effort to look at the second area of activity as
a means to reinforce and leverage the first activity, rather than to
diminish it. Let me explain and then focus on the shift in emphasis to
the private or market sector, which is the subject of this conference.
The Overall Emphasis
The previous Administration believed that America's political and
economic advantages could substitute for military power and security
*Address before the Conference on U.S. Corporations and International
Health, Newport Beach, California, December 8-9, 1983
- 2 -
assistance in the third world. There is much to this outlook but it
entails an extraordinarily benign view of the world in which developing
countries exist. The Reagan Administration sees more turbulence and
instability in this world. It stresses security assistance and arrangements
to counter this instability and to preserve or restore the necessary
environment for economic development. If provided early and effectively,
small amounts of security assistance can yield big dividends in improved
prospects for economic development. This is the rationale behind the
Administration's Caribbean Basin program where security assistance is a
small fraction of economic assistance.
Bilateral and regional assistance can be targeted more directly to
countries and areas where an integration of economic and security goals
is essential. The multilateral development institutions operate best
where security can be assumed. Moreover, the advantage of multilateral
institutions lies less in their financing capabilities than in their
capability to exert economic policy leverage. In 1981, the Reagan
Administration reminded the World Bank and the International Monetary
Fund (IMF) that conditionality was the essence of their ability to
catalyze much larger private funds (as in the case of commercial bank
financing following in the wake of IMF adjustment programs) or, where
such funds may not be forthcoming, to ensure sound infrastructure
development policies. How fortunate it was that the IMF got this message
in 1981. When the debt crisis hit in summer 1982, the IMF was in position
to play the critical role it has exerted over the past 18 months. With
more attention to policy, financing followed. The eighth quota increase
for the IMF was approved in February 1983 and ratified last month. I
would expect this same sequence to apply to larger funding for the
- 3 -
World Bank and its soft loan affiliate, the International Development
Association (IDA).
The emphasis on domestic policies of LDCs themselves is a long-
overdue corrective to the preoccupation of the 1970s with the new
international economic order and international policies. Domestic
policies, after all, are the foundation of the international system.
If they are wrong, international policy cannot compensate. If they are
right, international policy will be that much more effective. Hence,
the Reagan Administration stressed sound domestic policies first in the
United States, then other industrial countries and finally the LDCs.
Industrial country policies were subjected to a new process of multilateral
surveillance in which the IMF Managing Director participates. And developing
country policies have come under closer scrutiny in the IMF and in broader
development studies, such as the 1983 World Bank Development Report
devoted exclusively to the economic mangement policies of the LDCs.
Aid has become the smaller part of the international development
process. For non-oil LDCs, whose exports grew at an annual rate of 21
percent in the 1970s, trade earnings dwarf aid flows. Moreover, while
two-thirds of total capital flows to LDCs in 1960 was government funds,
two-thirds today is commercial financing. Any country that wants to
develop today cannot ignore the international economy. What is more,
participating in this economy makes the use of aid more effective, as
South Korea, Taiwan and other successful developing countries have shown.
The Private Sector Emphasis
When Ronald Reagan mentioned in 1981 that the private sector accounted
- 4 -
for over 50 percent of the gross national product of the LDCs, he was
called ideological. Since then, this figure has become part of the
conventional wisdom. I was pleased to note that, in the health sector,
anywhere from 50-80 percent of total health services in developing
countries is provided for by the private sector. The ideologues are
those who would have us to ignore this element of development and who
encourage LDCs to strangle their private sectors with massive regulations
and a shortage of investment capital.
Let's get one thing straight. We're talking about the market sector
when we say private. In the end, who owns the business is a political
issue for each country to decide. Public enterprises can operate on
market principles no less than private ones. Of course, if asked, I do
not think we should apologize for private ownership. In my view, the
right of an individual to own property provides that individual with an
important means to defend his or her political and human rights.
Proposals
Now, how do we achieve greater emphasis on market-based development
policies and programs, both in the U.S. and in developing countries?
First, we take the issue aggressively to the development community,
as this Conference is doing in the health sector. We have a lot of ground
to make up. In the 1970s, government budget deficits ballooned everywhere,
in both developed and developing countries. Parastatals abounded, and
public international development institutions grew exponentially.
Inevitably the development dialogue emphasized public institutions and
- 5 -
policies. The market sector was lost from view. Foreign direct investment
in LDCs, for example, declined as a share of total capital flows from over
20 percent to less than 14 percent. It will take a decade of persistent
discussion to restore a better balance.
Second, it is a balance we seek. As in the other areas I've discussed,
more attention to the market sector will actually reinforce and enhance,
not diminish, the efforts of the public sector. We need not only to
recognize this complementarity but deliberately to cultivate it. Over
the past decade, U.S. aid programs focused increasingly and exclusively
on basic human needs (BHN) or infrastructure activities - -- health,
education, population, etc. These programs are absolutely essential,
especially in the poorest countries, where for example people are not
healthy enough to work even if there are jobs. But such programs are
not sufficient. Their purpose is to put people in a position to work
in productive jobs. To create the productive jobs, A.I.D. and developing
countries need innovative programs that harness private sector resources
to broader public sector macroeconomic and political objectives.
The Reagan Administration has made a start by creating the new
Bureau for Private Sector Enterprise in A.I.D. and establishing this
spring the President's Task Force on International Private Enterprise.
But it has a long way to go. The Bureau of Private Sector Enterprise
is a small enclave in A.I.D. which institutionally still resists a
complementary role for the market sector. The President's Task Force
could make an important contribution but it needs new ideas and energies.
These ideas have to come, in my view, from the market sector.
The U.S. government has no expertise in this area and even less incentive.
- 6 - -
Let me make a suggestion. Why doesn't this conference come up with
specific ideas for the President's Task Force? Let me stretch my own
specific knowledge of the health sector by suggesting two possibilities.
Three years ago, in a piece I wrote for the Council of the Americas,
I suggested that A.I.D. fund private, non-profit activities established
by professional or trade associations to mobilize market sector ideas and
energies within the United States. One problem we face is simply a lack
of knowledge in Washington about what businesses around the country,
especially small businesses, are doing or not doing in development areas.
The point was brought home to me personally in the last few weeks. I am
acquainted with a small center for research and innovation in southern
Mississippi which has recently developed an emergency medical service
and remote cardiac monitoring system which could be applicable in many
developing countries, especially in the Caribbean. I called to inform
them about this conference. Distant from Washington and not dependent
on government funds, they knew nothing about the meeting. How many times
is this example repeated throughout the country? Could the National
Council for International Health (NCIH) itself create an ongoing (rather
than ad hoc, as in the case of this conference) activity or affiliate to
reach more of these groups and to mobilize them to influence A.I.D.,
Congress and developing country policies? Initially, A.I.D. might provide
seed money but eventually the organization could operate on a non-profit
basis for modest membership fees. Today, in Washington, very few non-
profit or, as they are often called in the aid business, private voluntary
organizations exist to promote the role and contribution of businesses,
especially small businesses, in development assistance programs.
- 7 -
What sorts of ideas might come out of such groups? Let me offer
my second possibility as an example. The most serious obstacle to more
market based activities and cooperation in the developing world is
attitudes. Whether justified or not, many developing country officials,
as well as aid officials, feel scarred by private sector ventures that
failed or, more importantly, by the vicious ideological attack in the
1970s on multinational companies. They know little about how market
based organizations operate. Hence, like aid officials, they are unlikely
to take the initiative on their own. Market organizations will have to
do so, if any real change is going to occur.
So what if this new mythical non-profit organization that NCIH has
just established decided to approach a specific developing country
with a plan put together by its business members, those exporting to
or operating in this country or seeking to do so? The plan calls for
establishing a facility in the country funded and staffed collectively
by U.S. health industry firms to provide sector-wide services to the
indigenous health industry - -- suppliers, operators, marketers and educators.
These services would not involve proprietary activities associated with
any one U.S. firm but rather general industry services, such as basic and
refresher training in quality control, hygiene techniques, etc. appropriate
to health industry suppliers, or similar training programs in new medical
research findings appropriate to health industry providers, or in general
management techniques for hospital management companies and so on. Such
a facility might also arrange trips by local official and businessmen to
the United States to observe how the market sector works in this country.
None of these activities interfere with the profit-based activities of
- 8 -
individual firms, yet they enhance the general quality of indigenous skills
available to run a cost effective, high quality health industry in that
country. Most importantly, they offer a presence of foreign health industries
in the developing country that expresses a collective concern for local
development and not just an interest in providing services or supplies for
a profit. This kind of presence could go a long way toward altering the
prejudice against profit and market based activity in developing countries
as well as in our own aid agency. It fosters a better corporate image by
separating the foreign business involvement from a direct relationship
with the individual firm's bottom line, yet indirectly improves that bottom
line by lowering the cost of externalities associated with doing business
in a less developed environment. Indeed, it might not cost foreign
businesses that are already involved in the country anything at all,
Many of them already fund good citizenship activities in these countries
and could simply divert these resources to collective efforts with cther
U.S. (and perhaps other foreign) businesses. Private industry has to
present a new face in developing countries. Earlier corporate image
could be built by firms acting individually: such as Ford building
schools in Mexico. Today it is the corporate community that must show
its concern.
Conclusions
Well, I have exhausted my knowledge of the health sector. So let
me turn it over now to the experts. Keep in mind, however, my major
points. The Reagan Administration has started to open new doors to
viewing development as a broad-based activity requiring the complementarity
- 9 -
of many efforts -- economic and security, multilateral and bilateral,
international and domestic, aid and the commercial economy, and the public
and private sectors. In the case of the latter, the market sector will
have to take the lead. This conference has a chance to do so in the health
sector. I hope you seize the opportunity and submit your suggestions formally
to A.I.D., the President's Task Force, and interested international or foreign
organizations represented at this meeting.