LETTER TO WILLIAM J. CASEY FROM HARLAN K. ULLMAN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00759R000100060012-8
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: May 3, 2010
• Sequence Number: 12
• Publication Date: April 29, 1985
• Content Type: LETTER

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Center for Strategic & International Studies
Georgetown University ? Washington DC
April 29, 1985
The Honorable William J. Casey
Director
Central Intelligence Agency
Washington, DC 20505
1223
Dear Mr. Casey:
For nearly four decades, reports of the impending demise of
the Western alliance have tended to be greatly exaggerated.
Despite the alliance's resilience, however, the broad range of
enduring and emerging challenges are not slackening and, in some
areas, are increasing. It may well be that at this juncture, the
political basis for the alliance can be most effectively
reinforced through Western economic initiatives.
Previous CSIS Contingency Papers have addressed the nature
and future of the Western alliance. In this paper, John
Yochelson, Director of International Business and Economics at
CSIS, analyzes the trends in the world economy and applies those
findings in prescribing certain policy actions for the alliance.
Regardless of whether or not the alliance can best be reinforced
through economic initiatives, John proposes an important economic
and political context for the May summit meeting in Bonn and
beyond.
Sincerely,
Harlan K. Ullman
Project Director
1800 K Street Northwest, Suite 400 ? Washington, DC 20006 ? Telephone [phone]
Cable Address. CENSTRAT TWX. 7108229583
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C S 1 S
CONTINGENCIES PROJECT
CENTER FOR STRATEGIC &
INTERNATIONAL STUDIES
GEORGETOWN UNIVERSITY
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The Bonn Summit and Beyond:
U.S. Policy Perspectives and Prescriptions
April 29, 1985
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The Bonn Summit and Beyond:
U.S. Policy Perspectives and Prescriptions
In spite of strong improvement in the world economy led by
the United States, heads of Western governments face continuing,
difficult economic challenges. Patterns of growth and trade of
the Organization for Economic Cooperation and Development (OECD)
countries are askew. Global recovery has not eased strains on
the international trading system. Economic growth in developing
states needed to reduce the international debt problem is by no
means assured. The political will to address the economic
agenda of the West has not been actively demonstrated throughout
the Western alliance. Yet, sustained economic recovery is a
political and economic necessity.
This year's Bonn Summit, to be held in early May, could be
of pivotal significance if the West is to meet these challenges
effectively. U.S. resurgence dominates the global economy and
shapes the setting of this year's summit. U.S. economic
performance in 1963-19814 produced impressive gains in real GNP
growth, productivity, and capital investment. Inflation was held
below 3.5 percent and unemployment dropped steeply. Current
estimates forecast continuing real U.S. GNP growth in 1965
without renewed inflation, although the level of that growth is
by no means certain.
On the positive side for the West, the strength of the U.S.
economy has reinforced the U.S. leadership position not only on
international economic issues but also in broaaer political
terms. The seemingly inevitable U.S. economic decline that
prevailed in the 1970s has been reversed.
In addition, U.S. economic recovery has pumped timely and
vitally needed demand into the world economy. Since mid-1962, the
United States has absorbed more than 65 percent of the increase
in non-OPEC developing country exports and almost 65 percent of
the increase in Latin American imports. At the same time, the
surge in U.S. demand has provided a tremendous boost to the
advanced industrial economies.
The dynamism of the U.S. economy has also eased certain
longer-term internal structural adjustment problems. The
creation of more than 6 million new jobs since 1931 has offset a
decline in manufacturing employment and speeded the shift of
resources from the goods-producing to the services sector.
Strong gains in output, productivity, and employment have been
registered in high technology industries.
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Nevertheless, there has been a negati . aspect to U.S.
economic resurgence. The soaring dollar has put U.S. industry
under relentless pressure from international competition. From
1983 to 1984, the U.S. trade deficit increased by nearly 80
percent to $123 billion. Longstanding surpluses in sectors of
comparative U.S. advantage -- agriculture, advanced technology,
and services -- have either declined or collapsed altogether. The
U.S. share of foreign markets shrank, while a 30 percent increase
in imports cut heavily into the U.S. domestic market because of
the dollar's strength.
The
strong
dollar has also constrained U.S. trading
partners,
putting
them under pressure to keep interest rates high
enough to
stem
capital outflow. The rising value of U.S.
currency
has
increased costs of key dollar-denominated
commodities. Relatively high U.S. interest rates have added to
the debt-servicing burden of the developing countries because
much of their debt is denominated in dollars.
The coincidence of record budget and trade deficits has
raised questions about the sustainability of the U.S. recovery.
Thus far, worst case scenarios have, fortunately, been far off
the mark. But there is still concern that projected budget and
trade deficits will crowd out domestic investment and push the
United States into a net debtor position internationally --
undermining confidence in the U.S. economy and touching off a
destabilizing run on the dollar.
On balance, the benefits of U.S. resurgence substantially
outweigh the problems associated with it, provided the United
States can sustain the projected 3.5 percent growth rate in 1965
and beyond. Thus, substantial growth in the U.S. economy remains
central to OECD economic health.
Toward Balanced Growth: OECD Countries
Clearly, expansion in the United States alone cannot carry
the global economy. More balanced growth by the advanced
industrial economies is essential to bring gown the dollar and
improve the prospects of the developing countries.
With rare exception, Japan has outperformed other OECD
economies since the early 19bOs, and its industrial weiut has
been increasingly on a global basis. This pattern will continue
in 1965. The investment and export-driven character of the
Japanese economy, however, diminishes its imports of manufactures
goods; the locomotive power of the Japanese economy will not be
fully realized until its large current account surplus is
substantially reduced.
More worrisome is the slow pace of OECD Europe's recovery,
which will be less than 2.5 percent overall this calendar year.
Europe's modest cyclical recovery reflects longer-term structural
problems. OECD Europe has consistently underperformed both the
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United States an.. Japan since the 1973-1974 it embargo. The
size of the European work force has remained flat since then.
The inability to generate new jobs has created an oversupply of
labor, leaving severe problems of youth and longer-term
unemployment. Lags in investment and the rigidity of labor
markets have contributed to a pattern of sustained stagnation.
Resistance to change has been particularly strong in basic
industries, while Europe's high technology base has not
developed as rapidly as that of the United States or Japan.
Europe has shown signs of addressing the challenge of its
revitalization. Governments of all political colors have put
increasing the mobility of labor and capital, cutting the
structural budget deficits, and tapping the energies of the
private sector higher on their agendas. Many Europeans now
acknowledge the need to reduce remaining barriers to economic
growth within the European Community.
No development would be more beneficial for the world
economy and the West than sustained European resurgence. The
erosion of European self-confidence -- reflected in persistent
capital flight and the increased appeal in some parts of Europe
of protectionist approaches to trade and investment -- remains a
serious threat to the long-term interests of Europe and its
trading partners.
The recovery of Canada is of special importance to the
United States because of the interdependence of the two
economies. The strong growth that Canada achieved in 1964 was
led by an increase in exports, particularly to the U.S. market.
Despite this cyclical upturn, Canadian unemployment remains high,
business investment sluggish, and budget deficits at historic
levels.
Clearly, lasting disparities of growth and trade are as much
a political as an economic threat to the West. They are bouna
to call into question basic issues of fairness and to reshape
public attitudes on all sides. They cannot help but spill over
into the political arena. One measure of the danger is the fact
that the bilateral agendas of the advanced industrial economies
have rarely been more crowded with contentious issues.
Resuming Growth: Developing Countries
The long-term health of the world economy depends as much on
the resumption of LDC growth as it does on the vitality of the
advanced industrial countries.
Some have suggested, on the basis of progress durin; the
past year, that the less developed country's (LDC) debt crisis of
19b2-19b3 has passed. Several of the key debtor countries, most
notably Brazil and Mexico, have achieved remarkable economic
turnarounds -- especially in their trade balances -- by
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implementing austei.Lty measures. The Interns onal Monetary Fund
(IMF) has played a decisive role in the introduction of
stabilization programs that, in turn, have led to the successful
conclusion of a series of difficult rescheduling negotiations.
Lending banks have not cut and run but rather have accepted some
narrowing of their margins of profit. The moderation of U.S.
interest rates has relieved some of the pressure on the debtors,
while the U.S. market has absorbed the lion's share of their
exports.
Nevertheless, a return to the 1970s era of mutually
reinforcing LDC and OECD growth is certainly not at hand. There
have been notable exceptions to the strong performances of some
developing countries. Virtually all the developing countries were
unable to contain inflation within targeted levels. The inability
of several major debtors states to meet the belt-tightening and
restructuring conditions set by the IMF has renewed widespread
concern over their political cup/u~',ity iu undertake needed
economic measures. Furthermore, increased inflows of private
sector capital failed to materialize, capital flight remained a
problem, and the continuation of depressed commodity prices
reduced LDC export earnings.
A formidable set of conditions must still be met to put the
developing countries on a path toward healthy growth.
o The LDCs will not only have to stay the course of
austerity through further cuts in public sector expenditures but
shift resources to more productive uses, widen the scope for
private sector initiative, increase incentives to attract foreign
investment, and reduce barriers to imports while expanding
exports.
o The advanced industrial economies will have to
ensure continued access to their home markets, not just for LDC
commodities but for the manufactured goods that have put old-
line industries in the OECD countries under intense pressure. The
advancea economies will also have to support the key multilateral
lending institutions, the IMF and the World Bank, whose role will
remain central.
0 The IMF will have to provide continued surveillance
of LDC economic performance and serve as the key broker between
debtors and private bank lenders -- exerting the leverage ana
creating the incentives for both sets of parties to cooperate.
These tasks are likely to translate into new Ii'IF funding
requirements.
0 The World Bank will have to continue its shift of
emphasis away from long-term capital projects toward the near and
medium-term restructuring of LDC economies. The ',V'orld Lank and
the It-IF must cooperate more closely in their country activities.
o Additional resources will have to be secured for the
lower-tier LDCs, many of which face bleak prospects mace worse
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by severe famine.
o Commercial banks will have to lend in sufficient
volume to sustain the process of debt rescheduling.
o U.S. interest rates will have to remain relatively
low to keep the debt burden within tolerable limits.
o Energy prices will also have to stay relatively
stable because sharp fluctuations will adversely affect either
oil-producing or oil-importing LDCs.
The International Trading System
Concern over the future of the international trading system
may be at a postwar hizh despite the present global economic
upturn. The trauiig sy6Lem is no longer regarded as the primary
engine of economic growth. But the trading system carryies a
greater burden than ever as the linchpin of any strategy to
overcome the international debt problem. This anomaly should
give much pause to Western leaders.
A number of factors account for increasingly sober Western
perspectives on the international trading system.
First, enormous financial flows have affected the trading
system dramatically through their impact on exchange rates.
These financial flows, estimated by the U.S. Treasury to be at
least 15 times greater than the $1.8 trillion value of world
trade in 1984, have swamped trade surpluses and deficits in
determining rates of exchange between currencies -- as the 50
percent rise of the dollar relative to other currencies since
1961 has shown. Coordinated efforts to stabilize exchange rates
have been temporarily effective at best, given the scale of the
international capital market. The competitive positions of
Western economies are thus being decisively shaped by powerful
yet elusive forces.
Second, pressures on governments to intervene in trade
matters continue to rise. The integration of international
markets has exposed vulnerabilities and created opportunities
that have increasingly involved national authorities for wide-
ranging reasons: to shield declining industries or protect newly
established ones, to boost export earnings, to secure
competitive advantage in overseas markets, and to overcome
foreign exchange shortages. The practice of managed trade has
become more a norm than an exception in constraining market
forces in every major sector of international commerce.
Third, Japan's current account surplus, which reached :;35
billion with the United States alone in 1984, has become a
major flashpoint. The world envies the strengths of the Japanese
economy that underlie its superior trade performance. But
successive Japanese initiatives to reduce tarir'fs,
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internationalize t. yen, and improve market 3ess in other ways
have failed to shake the widely held view that the Japanese
market is less open than those of other advanced economies.
Fourth, the newly industrializing countries (NICs) have
generally resisted the adjustment of their positions within the
international trading system to reflect new realities. The NICs
have pressed their advantage in technologically simpler, labor-
intensive industries, such as steel, textiles, and shipbuilding
-- increasing global capacity in these industries far more
rapidly than demand. The NICs seek expanded access to overseas
markets in these basic industries, but they also maintain
barriers around their own domestic markets. The combination of
aggressive export policies and domestic protectionism has been a
particular source of stress, especially as regards the large
trade surpluses that have been built up by the Pacific Rim NICs.
Fifth, the trading system is not generating the anticipated
growth. By most accounts, the extraordinary expansion of U.S.
imports should have spurred stronger and more rapid recoveries
for trading partners than it has. Although export capacity has
been built up to respond to increasing U.S. demand, the
relatively weak transmission of this demand into overseas growth
has raised questions about leakage elsewhere in the world
economy.
These questions and issues cloud the resilience of the
international trading system and generally have placed all
governments on the economic defensive. All concede the net
benefits of open world markets, yet the practical costs of
adhering to that standard are increasingly heavy. Under these
conditions, it is hardly surprising that the credibility of the
General Agreement on Tariffs and Trade (GATT) as a forum for
adressing the current trade agenda has diminished.
The uncertain future of the international trading system
calls for vigorous action at the Bonn Summit and beyond,
especially because the lofty rhetoric of recent summit
declarations has not squared well with the actual practice.
O ;?Yestern leaders should start the process of
beginning a new round of international trade negotiations as
forcefully as possible by setting a specific target date.
o Western leaders should lay out the negotiating
objectives of the new round, namely: (1) to negotiate rules for
key sectors that are uncovered under GATT including services,
advanced technology, and agriculture, l2) to streriotizen the
adjudication process of GATT, (3) to define more specifically
safeguard procedures that allow for temporary relief from GATT
commitments.
It would be unrealistic for the advanced industrial
economies to make all progress in trade negotiations contingent
upon the achievement of a consensus binding the i:iore than l,--U
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signatories of G. 2. Western leaders shoul 7e prepared to lay
down a marker that they will, if necessary, ne6otiate on a more
selective basis with nations that are ready to assume mutual
obligations. Although more selective talks do not represent a
best case solution, they reflect current realities and they may
create helpful momentum for more comprehensive negotiations.
Technology
Technology is perhaps the most dynamic factor affecting all
of these variables. It has proved a decisive Western asset across
th; board: an engine for growth; a link between the advanced
industrial economies; a magnet drawing the developing countries
toward the West; and, in the military sphere, an equalizer of
Soviet numerical superiority. The U.S. Strategic Defense
Initiative (SDI) should be seen as part of a historic pattern of
relying on technology to offset Soviet strengths.
At the same time, however, technology has a clear capacity
to divide the alliance because it cuts to the heart of vital
commerical interests and to the core of the East-West military
balance. Within the West, the progressive blurring of commercial
and military applications of technology has added new
complexities. On the strategic level, SDI has raised important
new issues regarding the development and use of Western
technological leverage in arms talks.
Policy Recommendations
Only a multilateral approach can effectively address current
challenges to the global economy.
The United States should pursue significant and sustained
reductions in its overall budget, preferably through cuts
in government spending. The gradual reduction of the
deficit is integral to the lowering of interest rates and
a soft landing of the dollar. Unilateral U.S. efforts to
deal with its trade deficit -- whether through deflation
or import surcharges -- will only increase prospects for
a destabilizing, hard landing of the dollar.
Europe must overcome serious rigidities in its labor
markets and the inefficiences caused by the failure of the
European Community to develop into a genuine Common
Market. Some leeway exists for a stimulus to domestic
demand in Europe, given stable or falling inflation rates
and rising current account surpluses. Policy shifts to
foster growth and lower unemployment should include a
reduction in tax burdens and a general reform of tax
structures. These policy shifts become especially
important in the context of slowing U.S. growth.
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- Japan must .ict promptly to reduce is massive trade
surplus. To do so, Japan must alter traditional customs
and attitudes that stand in the way of importing more
goods, especially manufactured goods. Although recent
Japanese initiatives to reduce the trade surplus are a
positive step, results are now awaited. Curbing the high
rate of personal savings in Japan and reducing unnecessary
bureaucratic intervention are also essential.
The developing countries must undertake fundamental
revisions of domestic policy that will complement balance
of payments adjustments that have already taken place.
Until a healthier private sector climate develops in the
LDCs and capital flight is correspondingly slowed, the
debtor nations will remain economically fragile and unable
to service their obligations over the long term. The LDCs
must achieve sustained growth through fundamental economic
reforms before banks will resume voluntary lending. Th.:
burden of structural adjustment, however, should not be
thrown exclusively on the LDCs, who require increasing
access to the industrialized countries' markets.
The inauguration of multilateral trade negotiations must
be treated as a top priority.
It is essential that Western leaders deepen their
understanding of the impact of technology on Western
interests.
The Bonn Summit provides an excellent opportunity to
begin that objective over the next two years.
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CENTER FOR STRATEGIC &
INTERNATIONAL STUDIES
GEORGETOWN UNIVERSITY
1800 K Street, N.W.
Suite 400
Washington, D.C. 20006
[phone]
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