Full text of Economic Review (Federal Reserve Bank of San Francisco) : Supplement Fall 1977 : Ninth Pacific Trade and Development Conference: Mineral Resources in the Pacific Area

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MINERAL RESOURCES
IN THE PACIFIC AREA
Page

Part I -

Summary of Conference

Summary

Lawrence B. Krause

Part II -

5

Abstracts of Papers

A. The Economics and Politics of Natural Resources

18

The Raw Material Cycle - Stephen P. Magee and Norman I. Robins
Mineral Trade and Investment Patterns in the Pacific Area - Nickolas M. Switucha
Resource Trade and the Development Process in Developing Countries
- Ross Garnaut
Ocean Mining in the Pacific Basin: Stimulus and Response - Michael Gorham

B. National Case Studies in Natural Resource Problems

22

Australia: Resource-Rich Developed Country - Ben Smith
Japan: Resource-Poor Developed Country - Yasuhiro Murata
Chile: Resource-Rich Developing Country - Ernesto Tironi
Korea: Resource-Poor Developing Country - Wontack Hong

C. Political Economy of Mineral Resources: Policy Alternatives
The Wider Context of Bilateral Resource Exploitation: Arrangements Between
the LDCs and DCs - Miguel Wionczek
Commodity Trade From a North-South Perspective -Jose Piiiera
Japan's Resource Security and Foreign Investment in the Pacific: A Case Study
- Kiyoshi Kojima
International Commodity Control-The Tin Experience - Mohamed Ariff
An Organization for Pacific Trade, Aid and Development: Regional Arrangements
for the Resource Trade - Peter Drysdale

26

PUBLICAnON NOTE

The Pacific area's mineral resources, and their relationship to global economics and politics,
constituted the major topics of discussion at the Ninth Pacific Trade and Development Conference, which was held August 22-26, 1977 at the Federal Reserve Bank of San Francisco. The
participants included about 40 policy-oriented academic and business economists and government officials (in their private capacities) representing a wide range of resource-rich and
resource-poor Pacific Basin countries. The conference was organized by a U.S. steering committee consisting of Michael W. Keran (Federal Reserve Bank of San Francisco), Lawrence B.
Krause (Brookings Institution), and Hugh T. Patrick (Yale University).
This publication contains a summary of the conference prepared by Lawrence B. Krause, and
abstracts of the individual authors' papers. The full proceedings, including all the conference
papers and discussion notes, will be published early in 1978 by the Federal Reserve Bank of San
Francisco. Reply cards are included with this publication for those readers who are interested in
obtaining copies of the complete proceedings.

Lawrence B. Krause*
The Ninth Pacific Trade and Development
Conference held at the Federal Reserve Bank
of San Francisco, August 22-26, 1977, was directed to the theme of mineral resources in the
Pacific area. Thirteen papers were prepared

for the conference organized as follows: the
economics and politics of natural resources;
national case studies in natural resource problems; and the political economy of mineral resources (policy alternatives).

The Economics and Politics of Natural Resources
I. The Raw Material Cycle-Stephen P.
Magee and Norman I. Robins (United States).
The paper presents an interesting extension
of the dynamic theory of international trade
and adds to our understanding of shifting
comparative advantage. The theory answers
in part the question, "What comparative advantage will be found in developed countries
after labor intensive manufactures are established in and aging technology-intensive products are transferred to developing countries?"
The answer is new production of synthetics
that replace raw materials.
The theory envisions an evolution in stages
in the spirit of Raymond Vernon's product
cycle for manufactures. A stage theory formulation can easily be misunderstood and misused. It need not apply to all commodities nor
inevitably follow the stage sequence as presented, and thus counter examples are not
damaging to the theory. Rather the theory is a
conceptualization of forces that should follow
one another, and the fact that some empirical
verification has been uncovered (in particular
for rubber, tin, and industrial diamonds) is
evidence that the theory is useful. It does not
attempt to explain all of reality, but merely
adds to our understanding of some of it.

The first stage is characterized by a boom in
demand for natural resources derived from a
new end-use, possibly resulting from technologica'l developments. Increased demand
leads to a rise in relative prices because of the
inelasticity of the old supply schedule and the
new demand curve. World trade patterns are
altered as old and new producers of the product increase production and exporters cash in
on the economic rents created.
The second stage is marked by the beginning of an adjustment as the higher relative
price leads to conservation in the use of raw
materials and to the expansion of nontraditional sources of supply. Thus trade patterns might shift further. At this point relative
prices might stabilize or even decline somewhat.
In the third stage the market is disturbed
again in a movement counter to stage one as
research and development set off by the high
relative price succeeds in sharply reduced
need or outright replacement of the raw material by a synthetic. Then relative prices decline sharply. Such an adjustment process has
likely started in response to the jump in petroleum prices.
It follows, therefore, that (1) concern over
eventual exhaustion of raw materials is misplaced, (2) technological change is the significant factor determining relative raw material prices, (3) there is a tendency for long-run

* The author is senior fellow at the Brookings Institution.
The views are his own and should not be attributed to
other staff members, officers, or trustees ofthe Brookings
Institution.

5

II. Mineral Trade and Investment Patterns
in the Pacific Area-Nickolas M. Switucha
(Canada).
The paper is extremely comprehensive in its
coverage and amassing of useful information
concerning mineral industries. The characteristics common to recent mineral development include the need for increasingly larger
capital expenditures and greater dependence
on complex and advanced management, technology and marketing skills. The role of government is becoming greater, both singly and
in combination in producers associations.
New government policies are being formed by
consuming nations; interferences by host
countries in production are increasing; and
governments are even involved in direct investment abroad, particularly in Canada. An
implication of this is the creation of a significant deterrent to new investment of private
enterprises and redirection of investment to
developed countries, which are now getting 70
to 80 percent of all new exploration and development expenditures.
Discussant: Francis Chan (Singapore). The
paper does not include technical factors in the
discussion of anticipated changes in trade patterns. Nor are the prospects for resource poor
LDCs (like Singapore) addressed. Such prospects are not very attractive. The paper does
not properly recognize the importance oftin in
Malaysia because tin production has high
labor content.
Discussant: Sirman Widiatmo (Indonesia).
The paper fails to appreciate the destabilizing
effects of the U.S. stockpile program and
policies for metals. Barriers in LDCs for new
investment are not very severe. Some deterrent to new inyestment comes from uncertainties caused by substitutes and technological
changes.
General discussion. Governments not only
are, but should be involved in minerals development. Technical characteristics of mining prevent competitive market solutions, and
thus the resulting oligopolistic structures of
industries require government oversight to
bring about closer-to-competitive solutions.

constancy of raw material terms of trade, (4)
technological change may be anti-trade biased
and (5) there is continuity of change from one
product cycle to the next because technological change is endogenously determined.
Discussant: N arongchai Akrasanee (Thailand). The theory is not very comforting from
the point of view of LDCs because of the bias
in advanced countries towards synthetics
which hurts LDC exporters. Also the theory
does not deal with short-run price instability
questions, which are of great concern in addition to the long-term trend of prices.
Discussant: Danny Leipziger (AID). Welfare and policy implications cannot be determined until the theory is extended to include
factor requirements and availabilities. As a
general rule, any disturbance that requires adjustment may injure LDCs because of their
lack of diversification, which gives them less
ability to adjust. This last proposition, however, overlooks the fact that LDCs also lack
the resources to avoid adjustment, and thus do
relatively rather well in response to external
shocks.
General discussion. The theory in stage two
lumps together conservation in use and expansion of supplies, but the former reduces pressure for Rand D while the latter does not.
Furthermore Rand D may be generated
within the natural resource industry to reduce
the cost of the natural product, as with rubber.
Also the anti-trade observation may seem to
imply a lessening of the long term gains from
international trade, but the inference is incorrect since Rand D efforts themselves need a
large market to be profitable, which suggests
that the cost of autarchy (or self sufficiency) is
still great. Concentrating on technological
change implies that the net barter terms of
trade is not a significant concept for measuring
welfare gains from trade and that its long-term
trend is of little interest. In any event, the
paper opened up many new avenues for future
economic research.

* * *

6

Furthermore there are obvious external economies such as the creation of infrastructure,
and diseconomies such as pollution, which
should be dealt with by government. Finally
the existence of economic rent not only provides an opportunity for distortion-free taxation, but often requires such taxation to avoid
resource misallocation. But just establishing
the existence of a role for government, does
not ensure that the role will be well exercised.
Through ignorance and misdirected political
pressures, governments often make mistakes.
They can dissipate rents in inefficiency, let
them be captured by labor groups, or waste
them in indulgent expenditures. Furthermore
actual taxation may well distort investment
and production, even though it need not have
that result.
A question arises as to where to process raw
materials, and many variables are involved in
the determination. They include certain technical considerations of the size and quality of
the ore body in relation to scale requirements
in production; costs and availabilities of factors of production, broadly considered to include labor, capital, management and technical skills, energy, and transportation; the
structure of the industry, including ownership
patterns and the existence, location and capacity of installed facilities; the tariff structure of
importing countries; and the tax and subsidy
provisions of exporting countries. Because of
the complexity of the question, research is required to answer the normative question of
where processing should occur. It is certain
that the naive view, that the more value added
the better for a country, is incorrect given the
capital intensity of the processing stage.

gated is the general development process resulting from natural resource development.
The process is initiated when new export possibilities of natural resources cause a constructive disturbance, which results in domestic
growth but which will be limited by certain
constraints. Certain functional relations come
to light as follows: the more isolated the ore
deposit, the larger the scale needed for development; the higher the capital intensity, the
larger the share of overhead in total costs and
the greater the scope for price instability; and
the greater the discontinuity of the investment
process and the wider the fluctuations in export prices and volumes, the greater the instability of incomes and domestic activity.
The paper noted that new resource development will require import of skills from
abroad since they will not be available locally.
But since they are likely to be expensive on
the outside, they will reduce the amount of
economic rent. This observation may require
an adjustment in the theory of exhaustible resources as it applies to the optimum time for a
country to exploit its resources. Up to now it
was considered a question of the social rate of
discount in relation to the expected rise in
prices of the output, but this paper suggests
that the expected supply schedule of complementary skills should also be considered.
There are direct linkages to domestic
growth via payment for locally supplied factor
inputs, the production of social overhead
facilities, the supplying of locally produced
food and building materials, and the possibility
of forward linkages via processing activities.
Nevertheless these are of lesser importance.
Rather it is on the indirect linkages from larger
incomes and the creation of rents that greater
stress is laid. Thus much of the paper is devoted to a discussion of potential rents and
how they might be dissipated, and to realized
rents and how they can be identified, measured, increased and efficiently taxed. The
most important factor in the process of growth
is the ability ofthe government to maximize its
receipts from economic rent and then spend
them in a growth promoting fashion.

* * *
III. Resource Trade and the Development
Process in Developing Countries-Ross Garnaut (Australia).
Garnaut's analysis has particular relevance
for Southeast Asian countries with low levels
of industrial production relative to natural resource endowment. The phenomenon investi-

7

Discussant: Kuo-shu Liang (Taiwan). Mineral production may create too great an export
orientation to the detriment of manufactures in
a developing country. The most important factor for success in mineral based development
is the wisdom of the government, and it would
be wise for governments not to demand local
processing now in view of current excess supply conditions.
Discussant: Anthony Scott (Canada). Mineral resources do get exhausted, and thus
some recognition need be made of the ultimate
decline and closure of mineral developments.
The paper should be extended to cover the
variance of openings and closing of mines, factors affecting the economic life of mines, and
the various technological options that exist in
mining.
General Discussion. There are actual cases
of the dissipation of economic rent by host
developing countries, so the theory has some
relevance for the real world. Instability may
be particularly hard on private domestic firms
in LDCs operating in minerals production,
which points up the importance of improving
the performance of capital markets if longterm damage is to be avoided.

greatest for cobalt, manganese and nickel and
decidedly less for copper. The manganese result is somewhat uncertain due to the technical
difficulty of separating out the manganese
from the nodule.
A further technical factor of some significance is that nodules are not exhaustible but
are reproducible. The benefits of nodule mining in the absence of new institutional rules
would flow primarily to industrial countries
having the technological skills to undertake
the mining. The adjustment problems of existing land based mines should not be difficult,
since they could be anticipated and phased out
gradually.
Whether an international regime can be
created to permit seabed mining depends on
the political circumstances involved. Three
types of countries are identified: advanced
countries with strong positive interest; landbased mining countries with a modest negative
interest; and all others, who should be neutral
but could be made supporters if cut in for part
of the economic rent.
Discussant: Leslie V. Castle (New Zealand). The paper is too optimistic concerning
the possibilities for seabed mining, given the
manifold uncertainities of production costs,
political support and institutional framework.
Furthermore, the negative effects on existing
producers may be more than transitory, which
is not an argument against exploitation, but
rather one for adjustment assistance. The
equity reason for sharing economic rents arising from the seabed among all nations is rather
weak. Taxing should be left up to the governments of the countries of the developers.
Discussant: David Hudson (United States).
Taxation of seabed mining could deter its development in view of the massive learning
costs to be covered, and the risks of overruns
on implementation of new as well as old technology. The benefits of seabed mining in terms
of cost reductions will be passed on to all consumers, including those in developed and developing countries alike.
General Discussion. The effects of any tax
may be uncertain in real life, but a tax on rent

* * *
IV. Ocean Mining in the Pacific Basin:
Stimulus and Response-Michael Gorham
(United States).
Seabed mining is of particular importance
now since it is holding up agreement in the
Law-of-the-Sea Conference. Interest in seabed mining has increased because of both a
rise in potential revenues due to price increases and a decline in the expected costs of
mining the ocean floor. Increases in sovereign
risk of land-based natural resource development is also an element promoting seabed development.
Some technical issues are important, including the composition of nodules and the high
ratio of fixed to variable costs in their mining.
The economic consequences for the four
major mineral markets were found to be
8

tion from new investment. Negotiations in the
Law-of-the-Sea Conference involve crossissue bargaining which may not appear rational from the viewpoint of a single issue.

in theory cannot be distorting by definition.
Existing production from land-based mining is
already being distorted by taxes, and an efficient tax should improve the competitive posi-

National Case Studies in Natural Resource Problems
v. Australia: Resource-Rich Developed
Country-Ben Smith (Australia).
The paper is very comprehensive and highlights many problems that arose from the rapid
development of Australia's mineral resources.
The pace had to be rapid because it had to
keep up with Japanese demand or run the risk
of not being economically viable. The strains
created in Australia related to domestic income distribution, degree and form of foreign
involvement, participation in producer cartels,
barriers to trade in processed minerals, environment and resource conservation issues,
plus questions of State and Commonwealth
government relations.
Discussant: Hang-Sheng Cheng (U .S.A.).
The macro-adjustment problem of Australia
- commonly identified as the Gregory thesis
- is that rapid growth of mineral exports developed through capital inflow creates a
balance-of-payments surplus and a policy dilemma. Either the currency could be upvalued, resulting in undermining the competitiveness of secondary manufacturing (which is
more labor intensive than mineral production)
- or the surplus could be absorbed in the expansion of central bank reserves, which would
lead to excessive money creation and domestic inflation, again undermining secondary
manufacturing. One alternative rejected by
both Cheng and Smith was a barrier to further
mineral development. Another alternative,
partialJY endorsed by Smith, was encouragement of capital outflow to build up a stock of
foreign assets. Cheng's preferred alternative
was further liberalization to permit more efficient resource allocation - which, when
combined with capital inflow, should not only
maximize growth, but should also benefit the

least favored factor of production, labor in
secondary manufacturing. If adjustment assistance is necessary, it should be provided to the
disadvantaged factor.
General Discussion A. While this approach
contains strong economic logic, it remains
politically unsatisfying, and economists ought
to re-examine their analysis to see whether
they are missing something. The Smith-Cheng
thesis comes from the economic calculus of
marginal change, but the rapid growth of Australian minerals may constitute a structural
change - a type of discontinuity not suited to
calculus. Economics does not easily handle
structural alternatives, and most of the papers
of this Conference (with one important exception) do not focus on this level of analysis.
What is missing in the Australian analysis is an
answer to the question: If labor adjustment is
required, adjustment to what? The answer is
surely not minerals production, which absorbs
little labor relative to the amount displaced.
What is missing is a view of the kind of society
Australia should become; how the rents from
mineral production should be utilized; and
what contribution the displaced labor can
make to the new societal structure. It has been
learned in the United States that if adjustment
assistance is nothing more than a bribe to become unemployed, then the society will suffer
and the political process will not let the situation continue.
Discussant: H. Edward English (Canada).
Domestic inflation is a much worse alternative
than currency appreciation, because inflation
contains its own internal dynamics that cause
more problems than they solve. Taxation
questions cannot be answered by a country
without considering the tax policies of other
9

sources of supply can't provide security if
Japan continues to increase its already-large
share of world raw material imports. Internally there seem to be no good reasons for
pursuing the policies of the past and some reasons not to, as Japan has sacrificed much of its
culture and quality of life to pursue economic
growth. More importance attaches to the
internal than to the external constraint.
A second option for Japan is to obtain access to raw materials from other countries by
the exercise of geo-political and military
power. This was the option followed in the
1930's and it turned out disastrously. The option has to be rejected out-of-hand.
The third option is to accept and promote
economic stagnation and even decline. Japan
would then not require greater imports of raw
materials and could concentrate on reasserting
its own true culture, which is different from
the West. The true choice lies between option
one and option three, and on balance the author prefers three.
Discussant: Laurence L.C. Chau (Hong
Kong). Japan's choice between options one
and three has implications for developing
countries. Maybe option one has caused problems for Japan and possibly LDC's could
learn from this, but the undesirability of this
option cannot be accepted without much
greater evidence. Furthermore, option three
would not help LDC's as suggested in the
paper. Rather it would create unemployed resources in some LDC raw material producers,
and reduce the income of other LDC's so they
couldn't buy more resources or anything else.
There are more than two options for Japan
which should be explored.
Discussant: Hugh Patrick (United States).
Option three is not a happy one for Japan
since it would cause societal strife. The whole
world would be worse off with a no-growth
Japan. The only thing worse than Japan growing too fast is Japan growing too slow. Japan is
concerned about the long-run energy problem,
which is the cause of much deep-seated pessimism in Japan.
General discussion. Option three may exist

countries, since competition exists in product
markets and will affect the allocation of investment. [Smith responded that Australia
would not enter a tax competition and would
accept foreign government tax concessions as
the equivalent of cheaper costs abroad, which
Australian policy cannot and should not influence.]
General Discussion B. Resource-rich countries seem to have great problems, but these
problems appear easy to a country like Japan
without natural resources. Of course
resource-richness is a relative term, and an
apparent resource-rich country may only be
one that hasn't developed its own industry
sufficiently to absorb locally available raw
materials.
Transfer pricing by multinational corporations mayor may not be a serious problem.
Smith's paper suggests the problem could be
difficult, but capable public administrators can
police the transfer price policy, and the problem is easier to handle in raw material trade
than in manufacturing. Weak administration is
likely to be unable to capture economic rents,
and transfer pricing is only one of many possibly confusing devices.

* * *
VI. Japan: Resource-Poor Developed
Country. - Yasuhiro Murota (Japan).
This paper defined three polar options for
Japan and examined them in historical
perspective. Option one is to buy natural resources on the world market, which maximizes the GNP of Japan. This option, followed since the Second World War, has
helped Japan achieve the goal set for it at the
time of the Meiji Restoration
catching up
with the West. But difficulties have resulted
both externally and internally. Externally,
Japan has become extremely dependent on
other countries, subject to external shocks like
the oil crisis or soybean embargo. Japan also
faces a difficult situation with resource
nationalism abroad and possible worldwide
shortages. Even the strategy of diversifying
10

only in the minds of intellectuals, while
Japanese businesses are still pushing as hard
as ever, possibly making an adjustment by increasing direct investment. The actual macro
adjustment might involve lower, less resource-intensive growth. Europe also seems
to be choosing option three, to the detriment
of itself and others. There has been active and
widespread discussion of option three in the
popular press of Japan, but it is unlikely to be
chosen. Japan requires further growth to raise
the material living standards of the lowermiddle class, and growth will likely continue
above the levels of other industrial countries,
although much slower than Japan's own previous record.

Discussant: Romeo Bautista (Philippines).
The small-scale copper industry in Chile has
expanded faster than the large-scale industry.
Small producers sell ore rather than processed
copper, for which. there has been a growing
market, particularly in Japan. They are responsive to increases in the copper price, but
they have also contracted faster as the copper
price has declined. The only realistic option
for Chile has been to slow down new investment, not to close down copper production.
The variable tariff proposal is not likely to reduce instability and would introduce bias into
the incentive structure, since it wouldn't apply
to capital goods.
Discussant: Danny Leipziger (AID). The
copper sector was analyzed in the paper independent of overall development policy. Significant questions relate to the use of foreign
exchange and government expenditures. The
problem of instability is serious since transitory income is always spent - often in higher
government wages. Furthermore, the alternative use of capital needs to be faced - possibly in processing copper - and if not, it would
be interesting to know why.
General Discussion. Insufficient attention
was given to indirect linkages to growth. The
stabilization problem might best be handled by
government expenditures averaging over time,
with variable tariffs used only as a back-up
policy.
A more optimistic view of the immediate
future of Chile is possible. Chile is rich in
many resources which may become competitive for exports, now that the irrational
import-replacement policy has been ended.
Furthermore, CIPEC can play a long-run
stabilizing role.

* * *
VII. Chile: Resource-Rich Developing
Country. - Ernesto Tironi (Chile).
This paper assumes the goal of Chile to be
the maximization of growth from natural resources. In the immediate future Chile might
rely excessively on such development, which
could cause structural imbalances, external
dependencies and an unstable economy.
Natural resource development may be a siren
song, since it makes the economic growth of a
country depend on factors other than its own
activity. Export instability is a serious consequence of such activity. In the absence of
new external methods for stabilization, certain
internal measures should be tried, such as a
variable tariff on certain imports inversely related to the price of copper. The economic
problem of instability comes from the rigidity
and lack of adjustment capacity to alter structures of the economy, and an even worse problem is the political instability that is created.
The Chilean government progressively has
taken over more of the copper industry and
has satisfactorily demonstrated its ability to
operate the mines. Some uncertainty concerning the technical efficiency of the mines still
remains. Furthermore, nationalization was a
political necessity and could not have been
avoided once the political dynamics had been
set in place.

* * *
VIII. Korea: Resource-Poor Developing
Country - Wontack Hong (Korea).
There are few serious natural resource problems in Korea. Korea has successfully followed an export-oriented growth policy and
attained rapid growth. Thus, from a modest
11

exporter of natural resources in the 1950s,
Korea became a significant importer by the
1970s. No problems were encountered in importing minerals until recently during the oil
crisis. Korea anticipates rapid growth in her
future demand for imported mineral resources, and anticipates paying for those resources by rapid growth of exports, similar to
the way the oil crisis was overcome. In that
case, Korea merely passed the price rise along
in higher export prices. Korea should be all
right as long as she has access to markets on a
non-discriminatory basis and the advanced
countries follow sensible policies, including
avoiding protectionism and resource nationalism. Another raw-material price boom might
be difficult to adjust to, but would not be insurmountable. Korea (like Japan) does have a
balance of payments surplus problem.
Discussant: Francis Chan (Singapore). The
paper may well be too optimistic. More difficulties might be encountered as Korea's dependency rises. Small countries have no bar-

gaining power, and regional groupings may be
desirable to offset this disadvantage.
Discussant: Yashichi Ohata (Japan). Korea
was lucky to be small and able to buy resourCes without upsetting the spot market.
Korea's problems could increase as it grows.
There is danger in excessive export-oriented
growth, which could create structural distortions, such as discouraging agriculture. The
energy price rise in Japan separated industry
into profitable and unprofitable groups, and
Korea could face the same problem when rising wages inhibit Korea's ability to adjust.
General Discussion. Korea seems to show
similarities to Japan's earlier experience.
Korea should avoid one of Japan's mistakes of
protecting processing industries. In fact,
resource-poor countries gain some economic
security by importing processed raw materials
rather than ores, since producing countries are
less likely to want to take the large economic
loss involved in stopping the export of metal.

Political Economy of Mineral Resources:
Policy Alternatives
IX. The Wider Context of Bilateral Resource Exploitation: Arrangements Between
the LDCs and the DCs. - Miguel Wionczek
(Mexico)
Four questions were addressed in the paper
and answered as follows: (1) there will be no
global shortages of raw materials, (2) there will
not be· a serious problem of access to LDC
minerals for developed countries, although not
such free access as in the past, (3) there is no
basic conflict between the resource needs of
an expanding world economy and the New International Economic Order (NIEO), and (4)
relations between LDCs and developed countries, which have been changing over the past
20 years, should be able to accommodate future changes.
It will be desirable to break the link between
exploration and ownership of natural re-

sources. Technology is no longer the exclusive preserve of multinational corporations
(MNCs), but can be purchased in the market.
What remains in the hands of developed countries are capital resources, but even that situation is changing. Income instability problems
of LDC raw material exporters are serious because they lead to political instability. Thus,
achieving stabilization agreements is most important.
Discussant: Romeo. Bautista (Philippines).
It is doubtful that the LDCs have the upper
hand in dealing with MNCs, particularly in
Africa and Asia. The opportunity costs of
using capital in minerals might be so great as
to make it unwise for LDCs to invest their
own capital in mineral development. Greater
access to information by the LDCs does improve their bargaining position with MNCs,
12

thus efforts should be made to obtain more
information.
Discussant: H. Edward English (Canada).
Departures from pure competition are not
new, but there is greater recognition now by
governments of market imperfections. There
is frequent confusion of redistribution objectives in the NIEO. Great difficulty exists in
negotiating a package approach to new commodity arrangements and - other than OPEC
- little opportunity exists for producers to
manipulate markets. Regional approaches
should be considered as a possible alternative.
General Discussion. All the views of developing countries are not alike, and Asian
views in particular differ from those in Latin
America. Export instability has been greater
in Asia than in Latin America, yet Asians
worry less about it. Presumably income instability is less a political problem in Asia. It may
not be wise for LDCs to pay for mineral exploration, since the risk is greatest at that
stage and the risk might better be shouldered
by others.

ceeded in stabilizing resource prices. Futures
markets have short horizons since performance cannot be guaranteed on a long term
contract. Competitive markets might be possible, but are unlikely because of unequal bargaining power between MNCs and LDCs.
Discussion: Seiji Naya (United States).
The paper has a moderate tone; however, the
discussion of the distribution problem, the export instability problem and market performance are not well integrated. Furthermore,
little empirical reality is included. Studies
have shown that export instability is not all
that serious for LDCs, which is true if
economic growth is the sole measure to be
used.
Discussant: Norman I. Robins (United
States). The question of technology transfer is
absent from the paper. Substitutes for raw
materials can be developed, which is a further
reason to disbelieve that price raising schemes
would be successful. However, an alliance between LDCs and MNCs might work. Price
instability might not be bad for LDC resource
exporters, since it might hold down production and raise long-term prices.
General Discussion. Long-term prices
might be raised by instability, but instability is
not a good thing for exporters because it results from insufficient investment. Price instability may distort investment timing, but not
necessarily reduce it, since periods of excessively low prices when investment is deterred
are followed by periods of above average
prices when investment is excessively encouraged. Instability may deter investment more in
LDCs than in developed countries that have
controlled markets, such as for copper in the
United States.
Commodity markets have been politicized,
and stabilization agreements might be the
most efficient channel to direct this political
activity since they contain the potential of benefitting all countries. Government intervention may well continue but it need not be successful. Just because the potential exists for
efficiency gains under an international agreement is no assurance that the gains will actu-

* * *

x. Commodity Trade from a North-South
Perspective. - Jose Pifiera (Chile).
The paper examines the free market regime,
the price-raising regime, the cartel regime and
the commodity agreements regime. The free
trade regime appears to be difficult because of
lack of competition and because of a possibly
unfair distribution of gains. The price-raising
regime would be hopeful if prices were to be
raised only to a competitive-equilibrium level,
but would fail if pushed beyond that level.
Cartel regimes might work in the short run,
but might redistribute income improperly that is, from the poor to the rich - and would
always contain substantial efficiency costs.
The commodity agreements regime would be
hopeful if stabilization goals, which are attainable, are separated from redistributive goals,
which are not. Aid transfers are still the best
method of international redistribution. Futures markets for commodities have not suc13

ally be realized. Politicization of economic
markets may result from a lack of awareness
by economists of how their policy recom.mendations strain the political system. The
point has further relevance in international relations. Demands by one country on another,
no matter how justified, may turn out to be
counterproductive if they overload the other
country's political system. Insistence on nothing but free trade or massive economic stimulation may be current examples.

position of the supplier is greatest before the
development is undertaken, but bargaining
power then shifts to the Japanese buyers acting as a consortium monopsonist in dealings
with various suppliers.
Discussant: Michael Keran (United States)
The long-term contract essentially extends the
futures market and the bilateral contract is a
way of reducing uncertainty. If renegotiation
is frequent, then the less economically unique
is this form, but it may still be a superior way
of resolving differences between parties in the
event of a change in circumstances.
Discussant: Kuo-shu Liang (Taiwan). With
this form of contract, prices are indeterminant
within the bargaining range, which implies that
a disproportionate share of the efficiency gains
could be captured by the party in the best position. Other significant questions such as conservation, protection of environment and
reinvestment of earnings are not covered by
the contract. Furthermore, the kind of internal
buffer stock operated by Japan may not be
stabilizing to world prices, as witness the effects of Japanese trading companies in pushing
up raw material prices in 1972-73.
General Discussion. If one had a really
conspiratorial view of the world, one might
argue that the Japanese, after securing stable
and low prices for themselves, enter the spot
market to force up the world price to the disadvantage of their competitors. While this
may be fanciful, the concern of competitor
countries, such as Korea, is real. If Japan obtains advantages through stable low prices of
raw materials that are not available to other
countries, then Japan obtains a competitive
advantage. Furthermore, the renegotiation at
times of crisis may obtain stability for the two
countries involved, but only by increasing instability in the rest of the market. Canadian
experience with such agreements with Japan
has been less successful than Australia's experience.
By way of contrast to the developmentcum-long-term contract device, the approach
supposedly preferred by MNCs would have
the MNCs control the resources and utilize

* * *
XI. Japan's Resource Security and Foreign
Investment in the Pacific: A Case StudyKiyoshi Kojima (Japan).
The paper focused on the desirability of differ;ent forms of developing natural resources
and arranging for their production and sale abroad (a subject also discussed by Ben Smith).
The device strongly favored is the
development-cum-Iong-term contract. This
device originated when companies found they
needed firm contracts in order to obtain financing to develop large-scale mineral projects.
The agreement entered into at the outset of a
new development fixes a sales contract for exports to Japan for a number of years at moreor-less fixed prices and quantities. In fact the
agreement is a flexible document that really
only guarantees that the buyer and seller will
continue to do business with each other on
mutually satisfactory terms - which highlights the question of bargaining power over
time. The assurance of markets permits capital to be raised and efficiency to be achieved
by exploiting economies of scale in production
and transportation. The advantages seen for
this device are (1) efficiency gains in production and transportation, (2) the ability to meet
resource nationalism objectives of host countries since equity investment by Japan is not
necessary - although Australia found that
foreign direct investment was still required (as
noted in the Smith paper), (3) the stabilization
of prices to the dominant purchaser, Japan,
which can still diversify its imports by purchasing from other suppliers. The bargaining
14

them internally in the firm through vertical integration. The bargaining power of the host
government is least before the investment is
made, but grows after the MNC has invested
substantial capital. Furthermore, the MNC
might be relatively indifferent to which country processes its ore, while the only rationale
for the Japanese is to bring the ore to Japan to
process there. While certain difficulties might
be recognized with the long term contract device, given large Japanese purchases, it is hard
to imagine a preferred alternative from the
point of view of other countries.

ful in reaching the targets set out. Export earnings may not have been more unstable because
of the agreement than they would have been
otherwise. Furthermore, the concept of a long
run equilibrium price is itself uncertain, and
the agreement may merely have had a redistributive effect toward the LDC producers.
Discussant: Kenji Takeuchi (World Bank).
The agreement should be credited with saving
the industry in the 1930s and working to the
advantage of consumers. If there are difficulties with the agreement, then improvement
can be made.
General Discussion. The price range is also
a significant instrument in operating the
agreement and must be included in the
analySis. Care must be taken in adopting any
new device to help the agreement defend the
ceiling price. Any tin supplies diverted because ofthe agreement at times of shortage are
not going to help the situation unless the tin
would not otherwise have been marketed - a
possibility that would occur only if the tin
came from the U.S. stockpile. This possibility
is thought to be unlikely in view of Congressional control.

* * *
XII. International Commodity Control The Tin Experience Mohamed Ariff
(Malaysia).
All the tin agreements were reviewed from
their inception in the 1930s through their five
reincarnations. In recent years the scheme has
operated a buffer stock, but has also relied on
export quota controls to help defend the floor
price. The agreements were judged to have
been more successful in defending the floor
than the ceiling, since there was no device
comparable to the quota to keep prices from
rising in the face of tin shortages. Thus the
agreement was judged to have a producer's
bias, which is understandable since consumer
countries such as the United States had refused to cooIferate until quite recently.
Tin prices have been pushed up over time-,
but the potential gains to producers have
probably been dissipated by inefficiency. The
agreement may have reduced price fluctuations marginally below what they would
otherwise have been, although the evidence is
very weak on this score. Furthermore, export
earnings were not stabilized, and may have
been destabilized by the agreement. This point
relates to the long-term operation of the
agreement, since quota restraints reduce incentives to invest and make tin unavailable.
When demand expands, prices increase, thus
encouraging substitution and replacement.
Discussant: Laurence L.D. Chau (Hong
Kong). The tin agreement was mainly success-

* * *
XIII. An Organization for Pacific Trade,
Aid and Development: Regional Arrangements for the Resource Trade - Peter Drysdale (Australia).
The paper traces the development of the
OPTAD idea, which is closely bound to the
history of the Pacific Trade and Development
Conference itself. The interest in the idea of a
regional organization arises from the growing
economic power of the region and the spectacular growth of trade among the Pacific
countries. It is striking that 90 percent of all
resource trade (oil aside) arises from within
the region itself, indicating the importance of
the regional perspective. In an era of concern
over resource security, including most notably
energy, a regional organization could reduce
the uncertainty very considerably.
While the interest in an organization arose
in Australia in response to a Japanese initia15

tive, it spread to the other advanced countries
of the Pacific. But in no sense is it confined to
the Pacific Five - rather it encompasses the
developing countries of the region as well.
Only a loosely knit, unbureaucratized organization was being contemplated. The guide for
such an organization might be the OECD in
Europe, but it would not be an exact copy of
the OECD.
A device that could help to reinforce the
resource base interest in such an organization
would be a Pacific Resources Bank that would
provide funds for resource development in the
region. The device as described is less of a
bank and more of a consortium oflenders. The
institution would help overcome the segmentation of capital markets that exists with respect to official lending agencies providing
concessionary loans.
Discussant: Seiji Naya (United States).
The OPTAD proposal should be worthwhile
from the point of view of the developing countries in the Pacific. Much of the paper is devoted to the problems of the developing countries and is a recognition of their importance.
The advantages identified for the developing
countries in the proposal included promoting
research and devising solutions for the problems of protectionism and energy.
Discussant: Saburo Okita (Japan). The proposal is worthy of support from the point of
view of Japan. Some factors point, however,
in a less promising direction. These include
the series of economic summits which emphasize Japan's global rather than regional
role, as well as the new consultations with
ASEAN, which appear to serve the same purpose as OPTAD for Japanese relations with
the developing countries and permit Japan to
sustain the low-profile role so congenial to its
style of diplomacy. On the more positive side
is the proposed means for dealing with the
energy problem, which remains of paramount

concern to Japan. To the degree that petroleum will be replaced in Japan, it will be
from imports of Iiquified natural gas and coal
and from the production of nuclear power. At
least coal and uranium could come principally
from within the region, reinforcing the focus
needed for OPTAD.
Discussant: Hugh Patrick (United States).
From the perspective of the United States the
proposal deserves to be supported, but the
idea might not attract much attention in
Washington. This is part of the vestige of
Washington's viewing the Pacific only through
a geo-political, military prism and ignoring the
economic importance of the region. Furthermore, the U.S. concept of its global role will
stand in the way of regional commitments.
General Discussion. The proposal could ultimately have to face many difficult questions
and criticisms. What role is contemplated for
the micro-mini states of the South Pacific?
The organization might be too powerful to
simply concentrate on research, but not powerful enough to bring about structural accommodations among countries. Canada's interest
in diluting its U. S. connection might make the
OPTAD idea attractive to it, and Europe may
become so inward looking and protectionist as
to force Pacific countries interested in expanding trade into a closer embrace.
The dilemma of Pacific economic relations
was brought out by the discussion. The
economic interests within the region are great
but often unappreciated. An organization
dramatic enough to capture the imagination
and generate regional interest is also likely to
scare the members ofthe region because of the
obligations that might follow and the implicit
discrimination against non-regional countries.
The search for a pragmatic middle ground
must continue and the Drysdale paper is an
important contribution to this end.

Policy Conclusions
During the course of the conference it became clear that a degree of agreement existed
among the participants concerning some im-

portant policy issues. It was thought worthwhile to pass these ideas along to policy makers.
16

There was almost a unanimous view that the
world did not face a general shortage of raw
materials. Both natural resources and
technologically inspired synthetics would provide adequately for the world's needs.
Nevertheless, there is a problem of energy
which is very concerning to many countries.
Any threats to existing energy supplies or barriers to new sources of energy, such as nuclear
power,are likely to cause pessimistic reactions in the economies of energy dependent
countries beyond what one might expect. This
reality should be kept in mind by those making
energy policy.
Resource producing and exporting countries are seriously and increasingly affected by
the instability of resource markets. That instability arises from the bunching and then the
dearth of investment, as well as price and volume fluctuations in exports. The resulting income and balance-of-payments fluctuations
cause economic and, even more serious, political problems. Countries will attempt to deal
with this problem through internal policies,
but they will either fail or succeed only by
exporting the instability to others. The best
way to solve the problem is through international stabilization commodity agreements.
This choice was made not because such
agreements are thought easy to negotiate and
operate. Quite the contrary, such agreements
are very difficult to design properly, as the history of the tin agreement indicates. Rather,
the importance of the issue, plus the fact that
all countries would benefit from a successful
agreement, dictates that great efforts be made.
International commodity agreements should
not attempt to redistribute income. Income
redistribution is a legitimate goal but cannot be
achieved by raising commodity prices. The
traditional method of aid transfers is still the
best.
Countries dependent on imports of natural
resources have a legitimate interest in obtaining stable and reasonable prices as well as assured access to supply. The development contract combined with a long term sales contract
has proven to be a useful device for large resource sellers such as Australia and large

buyers such as Japan. The interests of small
importing developing countries must also be
considered so that they can obtain access on a
non-discriminatory basis. Reasonable policies
by the advanced countries of the region should
provide such assurance to them.
All countries were cautioned against relying
excessively on export-led growth, regardless
of whether it is based on natural resources or
on manufactured products. Domestic
economic structures can be distorted if proper
development of domestic markets is overlooked, and problems can be caused for trading partners as well.
Note was taken of the trend toward protec~
tionism in many countries to forestall painful
adjustments. Countries need to be reminded
that adjustments are especially beneficial to a
country when growth rates are low. Adjustment assistance policies may be required, and
countries are reminded that the qest aid to adjustment is adequate aggregate demand.
Countries were urged to take a more relaxed
view toward demands for a New International
Economic Order. Views of developing countries in various regions differ quite considerably, and truly radical ideas that would destroy
efficient markets are unlikely to gain widespread support. Furthermore, the relationship
between developed and developing countries
has been changing constantly over the last
twenty years, and with reasonable effort
further changes can be accommodated without
serious disruption.
Finally, policy makers of Pacific Basin
countries were implored not to be blind to
economic developments in the region. Of
course many so-called "high politics" issues
must be addressed by governments, but attention only to those issues will be a serious mistake. The economic reality is that the Pacific
Basin is the fastest growing area of the world
and the economic interests of the region's
countries are growing closer together.
Economic policy on a regional basis deserves
close attention, and if properly handled can
provide substantial and mutual benefits for all
countries.

17

A. The Economics and Politics of Natural Resources
The Raw Material Cycle
Stephen P. Magee and Norman I. Robins
This paper presents a life cycle for raw
materials, based upon historical regularities
observed in the behavior of one renewable
material (rubber) and two nonrenewable materials (tin and diamonds). We have focused
primarily on materials located in developing
countries which have gone through periods of
shortage in the past. Stage I in this process
may be labeled as "derived demand boom";
Stage II as "diffusion of supply sources and
substitution in demand"; and Stage III as
"synthetic and/or Rand D incursion."
Stage I of the cycle is characterized by a
surge in demand for a final product which requires large amounts of a specific raw material. The development of the automobile
caused a 78-percent rise in the price of rubber
between 1900 and 1910. The development of
automatic canning machinery caused tin
prices to rise 144 percent from 1895 to 1910.
The demand for carbide cutting tools, which
use diamonds as the cutting surface, increased
50-fold between 1936 and 1942.
Stage II is characterized by major shifts in
the location of raw material production as
marginal suppliers enter the market, as possibly cheaper sources are discovered, and as the
original sources of non-renewable materials
are economically exhausted. For tin, Britain,
Malaya/Singapore and Indonesia provided 95
percent of world supplies in 1895 but only 36
percent in 1936, reflecting the rise of new
suppliers in Bolivia, Thailand and Australia.
For rubber, Brazil and India provided 61 percent of world supplies in 1910 but hardly any
in 1930, when Malaya, Ceylon and Indonesia
captured 92 percent of the market.
Again, in the second stage, consuming in-

dustries make two adjustments in the use of
the raw material. The first involves supply
modifications. For rubber, inputs were reduced through recapping, reclamation and oil
dilution, while the development of radial ply
tires and other innovations increased tire life
from 10,000 miles to 50,000 miles. For tin,
secondary recovery increased from 18 percent
to 33 percent of consumption between 1936
and 1945, largely stimulated by wartime shortages. For industrial diamonds, electrostatic
separation processes saved about 10 percent
of consumption in 1962 through the recovery
of diamonds from old cutters.
Stage II also involves a switch to alternative
materials. Tin users switched to containers
made of glass and paper, and later switched to
laboratory-developed items such as aluminum, plastics and low-corrosion tin-free
steels. Diamond users switched to synthesized nitrate and alternative cutting materials,
as well as ultrasonic abrasive grinding materials.
Finally, Stage III involves a major R&D
breakthrough which permits economizing on
the use of the primary material. Examples include the development of the electrolyticplating process in the early 1940s for tin, or the
commercialization of a synthetic as in the case
of diamonds in 1955 and rubber in the 1940s.
We draw several implications from our
analysis of the raw-material cycle. First, physical exhaustion of a primary raw material does
not mean that society will lose the services
which the material provided, because the development of substitutes and R&D breakthroughs provide new alternatives. Second,
raw-material shortages can impose painful ad18

justments in the short- and medium-run but
are not a worrisome prospect in the long-run.
Third, R&D provides developed countries
with an important substitute for raw-material
trade during embargoes, war periods, or cartel
restrictions on trade. Fourth, the terms of
trade of raw-material suppliers rise in Stage I
of the cycle, are constant or declining during
Stage II, and probably fall during Stage III.
Fifth, world production is centered in the developing countries in Stage I, spreads to other

developing countries in Stage II, and spreads
into developed countries in Stage III with the
increase in production of synthetics. This is
exactly the reverse of the movement of new
manufactured-goods production described in
Vernon's product cycle. Finally, the new synthetic material may start through a Vernon
cycle of its own, generating a new rawmaterial cycle for the item used in the
synthetic.

Mineral Trade and Investment Patterns in the Pacific Area
Nickolas M. Switucha
This study reviews the rapid growth of mineral production and trade in fifteen Pacific Rim
countries over the past twenty years. It focuses on fourteen ferrous and non-ferrous
metals and minerals that are of major
economic or technological importance in the
world economy.
The study surveys these developments
against the background of changing investment policies of resource-producing countries
and of a changing international trading environment. It deals with the growing tendency
of resource-producing countries to establish
producers' and exporters' associations in an
attempt to influence international mineral
markets.
Concurrently, the study focuses on the
growing role of governments in determining
national mineral policies and in attempting to
influence mineral investment and trade flows.
It describes the consuming nations' concerns
over long-term security of supply, and the
producing nations' desires to increase their
export returns by exporting metal and mineral
commodities in a higher-processed form. It
highlights the interdependence made inevitable by the uneven distribution of mineral resources among Pacific Rim countries.
While the developing countries of the
Pacific, as a group, are the dominant source of

tin and important producers of copper, nickel,
lead, zinc and tungsten, the two industrialized
countries of Canada and Australia play a
much more significant role and, in most cases,
compete for the same markets. Canada and
Australia are likely to enhance their roles even
further, given their large supply potential for
most major minerals and a generally favorable
investment climate.
The study emphasizes the importance of the
United States and Japan as major consuming
nations and as sources of debt or equity investment capital, along with their growing
mineral supply dependence and resulting
preoccupation with the problems of supply
continuity and diversification of sources.
These factors will, in the future, be even more
important in determining Pacific mineral investment trends and world-wide mineral trade
patterns.
Finally, the study notes the constraints on
future capital flows into large integrated
mining-smelting-refining projects, which are
imposed by the higher risk factors arising from
higher costs, lower profitability and a more
complex investment climate. However, on
balance, Pacific Rim countries will continue to
playa large role - in some cases the dominant
role - in world mineral production and trade.

19

Resource Trade and the Development Process
in Developing Countries
Ross Garnaut

Rapid world industrial growth through the
sixties and early seventies, and the concentration of a large part of that growth in Japan,
created many new opportunities for the expansion of resource-intensive exports from
countries in the Western Pacific region. In response, there was a marked change in the pattern of export specialization of countries in
Southeast Asia and Melanesia, and in Australia and New Zealand.
The "rent for surplus" models developed
by Caves and others provide a useful
framework within which to examine some important aspects of export-led growth of the
type experienced by Western Pacific countries
in recent years. However, the "rent for
surplus" literature draws the conclusion that
the process of growth depends on the particular nature of the linkages between an export
industry and the domestic economy, without
generalizing about these linkages and their effects. We need to examine the relevant linkages in some detail.
The characteristics of minerals and energy
industries in the Western Pacific region have
made direct linkages relatively unimportant.
These industries tend to use complex technology, and to require highly sophisticated business organization. They usually require the
involvement of foreign enterprise, through
direct investment or conceptually similar production sharing arrangements. They are typically highly capital-intensive, using little labor
or other inputs that can be supplied domestically in non-industrial economies.
The most important linkages are the indirect
effects associated with the receipt of resource
rents, especially by the national government.

Expanded government revenues loosen the
balance of payments and budgetary constraints on domestic expenditure. The amount
and distribution of resource rents depend upon
fiscal policy, in ways that are discussed in the
full paper.
Resource investments can favorably affect
the balance of payments , employment, and the
sectoral composition of activity in the economy as a whole. These effects depend critically on labor market conditions. Three types
of labor market conditions are examined in the
paper: the case in which the supply of labor to
the modern sector of the economy is infinitely
elastic; the case where the supply of labor to
the modern sector is elastic but less than infinitely so; and the case where the supply of
labor to the modern sector is inelastic. Increased domestic expenditure associated with
successful resource investments is likely to
force major structural changes in the second
and third of these cases. Apart from frictional
and structural unemployment of a temporary
kind, there will be no increase in unemployment in any of these cases so long as no large
increases in institutionally set minimum wages
are associated with the strong resourcesexporting performance.
The tendency for resource investments to
come in waves associated with high levels of
world industrial activity creates problems for
the efficient use of opportunities for increased
domestic expenditure. Fluctuations in the
price of resource-intensive commodities also
create major macroeconomic problems, which
can be reduced but not eliminated through
good national economic management.

20

Ocean Mining in the Pacific Basin: Stimulus and Response
Michael Gorham

age 27-percent rate of return to U.S. mining
companies in 1974-75.
While any resource-saving technological
change creates the potential for increasing
world output, political considerations involving the distribution of the costs and benefits
associated with that change can impede the
employment of the new technology. Thus, despite the attractive profitability calculations
and the relatively large expenditures of private
capital on ocean-mining R&D, commercial
seabed mining is now being delayed because
of disagreements in the political sphere. The
perceived distribution of costs and benefits
occurring under the traditional free-access approach to the use of the ocean has created
demands for changing that traditional approach, and has led to several years of unsuccessful negotiations in the continuing Law of
the Sea Conference.
On the basis of certain assumptions about
the magnitude of ocean-mining output (4 to 12
million metric tons of seabed nodules) and the
location of ocean-mineral processing (mainly
the United States), it does not appear that
many countries would suffer from a freeaccess approach to seabed mining. In those
worst-case situations where a single country's
exports to the U.S. are totally displaced by
seabed production, the following temporary
declines in export earnings could be observed:
8 percent for the Dominican Republic and
New Caledonia (due to displaced nickel), 8
percent for Peru (due to displaced copper), 6
percent for Gabon (due to displaced manganese) and 4 percent for Zaire (due to displaced cobalt).
While the greatest costs initially would be
borne by the developing countries, the benefits would likely be skewed heavily toward

Commercial mining for seabed nodules containing at least four industrially important
minerals (nickel, copper, cobalt and manganese) will probably begin in the Pacific
Ocean in the early 1980's. This paper explores
the reasons for the shift from land to ocean
mining, the likely international distribution of
the benefits and costs resulting from such a
shift, and the considerations involved in designing a compromise international agreement
covering the allocation of rights to use the
ocean as a mineral source.
The existence of seabed nodules of minerals
has been known for over a century, but these
resources have never been commercially
exploited because of the high cost of ocean
production, especially when compared to the
relatively low cost of producing minerals from
relatively abundant land-based ores. However, over the past decade the value of the
metals contained in nodules has more than
doubled, rising 50 percent more rapidly than
either the U.S. wholesale-price index or the
I.M.F. index of world-traded goods. At the
same time, technology has improved to the
point where efficient ocean-mining techniques
could be devised, based upon techniques developed by the rapidly growing offshore-oil
industry.
Yet while ocean mining has become potentially cheaper, land-based mining has become
increasingly expensive, due to dramatic declines in ore quality and accessibility and also
to increased infra-structure costs related to the
development of more isolated land-based deposits. The convergence of these factors has
made ocean mining increasingly more attractive over time. According to one recent survey, the average pre-tax rate of return to
ocean mining might be roughly twice the aver-

21

However, a number of theoretical and administrative considerations could impede the
implementation of such a compromise. These
include: the impact of a tax or rent on output
decisions; the harmonization of the oceanmining tax with other taxes; the inadequacy of
a competitive bidding approach to mine-site
allocation because of the small number of potential bidders; the influence of the intra-firm
pricing behavior of vertically-integrated mining firms on the choice of tax rate; and the
higher production costs likely to be incurred
by an international agency as opposed to private mining companies.

the industrialized countries, since their consumption patterns are considerably more mineraI intensive than those of developing countries. A more equal distribution of costs and
benefits might be devised, however, with the
industrialized countries receiving the bulk of
the increased consumer surplus generated by
ocean mining, and the developing countries
taking (through an international tax) the bulk
of the economic rent created. This taxed rent
could in turn be used, in part, for compensation to those countries whose export earnings
suffer from a decline in their land-based production.

B. National Case Studies In
Natural Resource Problems
Australia: Resource-Rich Developed Country
Ben Smith

Australia's rise to prominence as a minerals
producer has been very rapid and really only
commenced in the early 1960s. Although mining is dominated by direct foreign investment,
this has come mostly from European and
American companies. Relatively little has
come from Japan, despite the fact that Japan
purchases half of Australia's exports of minerals and primary metal. Security for the large
investments in new mine developments has
been provided by long-term contracts with
Japanese customers. Recent accelerated inflation, more frequent exchange-rate changes,
and commodity market uncertainties have reduced the security value provided by contracts. While recognizing that long term stability and security in the trade requires that contractual obligations should be interpreted flexibly, the paper suggests that formal contract
prices should be set in real terms, in order to
reduce the need for frequent price renegotiations and in order to set a relatively neutral

frame of reference for future price discussions.
Growth in minerals production has created,
and will continue to create, pressures on the
balance of payments, resolution of which has
adverse effects on other traded-goods activities. The contractual nature of the minerals
trade whould allow much of the payments
pressures to be anticipated and seen in a longterm context. It should be possible for
exchange-rate responses to be more rapid than
in the past, so that inflationary pressures can
be minimised. There is an important need to
examine methods of smoothing the resulting
structural-adjustment problems, but the emphasis should be on promoting change, with
appropriate assistance to those affected adversely, rather than on reducing the pressures
for change. There may be some case for "recycling" a portion of external surpluses resulting from mineral export growth if the pressures for structural change cannot be met, or if

22

future income payable overseas is expected to
result in smaller long-term need for adjustment.
The nature of Federal/State relations
creates several problems for the management
of Australia's resources. In general, there is a
need to develop a uniformity of treatment of
environmental, infrastructure and taxation issues, which would require substantially more
cooperation between the Commonwealth and
States than presently exists. Of major importance is the need to develop taxation arrangements which do not distort investment decisions in exploration and mining, but which ensure that the rents from exploitation of mineral
resources accrue to the community at large.
Such taxation arrangements are particularly
desirable given the large share of foreign
equity in the Australian minerals industry.
The major problem in introducing any Resource Rent Tax arrangement is that the
States will be reluctant to surrender their
rights to tax minerals exploitation. Although
the Commonwealth could introduce such a tax
without the consent of the States, the latter
could set royalty rates to ensure that the Rent
Tax earned no revenue, and this would have
severe efficiency effects on the mining industry. Given the general financial powers of the
Commonwealth, it is likely that a struggle over

resource rents would eventually be won by the
Commonwealth, but the disruption could be
substantial and the States might well be able to
muster sufficient electoral support to redress
the situation.
The major problems relating to foreign investment and trade involve setting appropriate
taxation arrangements for company profits
and ensuring that commodities are exported at
"fair and reasonable" prices. In only a few
products are there problems in policing transfers within multinational companies, and it is
probably sensible to attempt to administer policy on foreign ownership so that control of
minerals production does not lie in the hands
of the purchasers of the output. The major policy goal in determining prices for arms-length
transactions should be to ensure that Australian exporters do not operate in a market
framework which places them at a bargaining
disadvantage relative to overseas purchasers.
Given the consortium purchasing policies of
many Japanese consumers, there is a need to
bring Australian exporters into a relatively
united bargaining stance. However, it is important that this should be done consistently
and quietly, and that it should not have the
effect (or be perceived to have the effect) of
shifting trade bargaining away from the essential commercial framework.

Japan: Resource-Poor Developed Country
Yasuhira Murata
For a country like Japan that lacks natural
resources and possesses a large population,
there are three broad options possible in relation to the resource problem: Buying resources from resource rich countries; controlling resources by military power; or having
slow, or zero, industrial growth and a steadystate economy.
In the 1930s when the world was divided
into separate blocs, Japan chose the second
option. However, this rebounded on Japan in

the form of complete economic collapse
through defeat in World War II.
Postwar, the first option had been adopted.
This, under the stable international environment, brought great success and prosperity to
Japan. As a result, Japan became an economic
giant without an army.
Since the beginning of the 1970s international relations have progressively become
more unstable (e.g. the emergence of
nationalism in the resource rich-countries).
23

pects of "the good life." There is a long
aesthetic tradition in Japan's cultural heritage
which Westernization and growth have at
times submerged, but which continues to exert
an influence. The paper does not advocate a
renunciation of the benefits of technology and
past growth, but rather their integration into a
more humanistic scheme, with growth slowing
during the remainder of this century to a zero
rate in the 21 st century. The results of this are
considered strong positive reasons for pursuing the third option even if the first option continues to be viable.
The population growth rate of Japan is projected to become zero by the beginning of the
21 st century, a factor upon which lower
economic growth could be hinged. A policy
which can support this low economic growth
in terms of resource supply is recycling.
The corning decade can be the turning point
for transition from the first to the third option.
Therefore, policies on natural resources
should be worked out in recognition of this
aim.

However, the Japanese Government continues to pursue the first option, at least for the
time being.
Examined from a long-term viewpoint, I
doubt whether Japan can continue to choose
the first option. Taking into account the fact
Japan's share in consumption of the world
supply of resources is already very high and
the international situation is rather unstable,
continuation of this policy increases the possibility Japan could be driven into catastrophe.
Recognizing the disadvantages that have accompanied economic growth (urban crowding
and worker alienation, etc.), it follows that the
rationale of pursuing continued growth should
be questioned. It should also be recognized
resources can be more profitably used by
those countries which are beginning to industrialize rather than by a Japan which has already become a wasteful society.
Such negative and altruistic concerns, however, are not the main reason the third option
is considered a viable one. Japan already is
enjoying the material benefits of an affluent
society, and can begin to consider other as-

Chile: Resource-Rich Developing Country
Ernesto Tironi
This paper first analyzes the role of
economic policies in maximizing the contribution of natural resources to the growth of
less-developed countries. Secondly, it
analyzes the pros and cons of a general development strategy based on the intensive
exploitation of natural resources, specifically
in reference to Chile's experience with
copper.
Section I briefly describes general problems
of natural resource development, and presents
the pros and cons of resource-based development strategies. Section 2 describes the
characteristics and importance of copper in

the Chilean economy. Section 3 analyzes the
main copper-mining policies followed in Chile
since World War II and the lessons derived
from that experience. The major point is that
appropriate government policies can support
the contribution of natural resources to
economic devlopment, whether or not the
firms involved are foreign or domestic, private
or public. In contrast, laissez faire or freetrade policies can barely maximize that contribution, and inadequate policies can considerably reduce it. Finally, section 4 discusses
some of the questions raised in connection
with the increased exploitation of a natural re-

24

of its own productive efforts rather than forces
outside its control.
The instability of natural-resource prices in
world markets poses very serious problems
for developing countries. A strong and continuous development effort is often jeopardized by a sudden fall in export revenues, because the latter finances most investment (in
LDCs the export sector is implicitly the
capital-goods sector) and provides a large fraction of Government revenues.
The last section of this paper analyzes several proposals designed to cope with the negative effects of export instability. These include
external actions aimed at reducing price fluctuations as well as internal policies aimed at
compensating for the domestic effects of external price instability.

source '(such as copper) and its impact upon
the long-run development of a small country
(such as Chile).
The main problem a small country encounters with a natural resource~based development strategy is the tendency to end up with a
highly unstable and structurally unbalanced
economy, very dependent on external conditions outside its control. In that sense, the
availability of substantial amounts of natural
resources has often been, and still is, a mixed
blessing - not because economic development could have been greater without those
resources, but because their exploitation may
have prevented a more systematic and balanced domestic development effort. A nation's attitude towards work probably is different when it sees that progress is the result

Korea: Resource-Poor Developing Country
Wontack Hong
Since the Fourth Five-Year Plan (1977-81)
emphasizes structural changes in output and
export patterns towards so-called heavy and
chemical industries - all relatively heavy
users of minerals
total demand for minerals
is expected to grow more rapidly than before.
Furthermore, since the domestic supply is
rather limited, the import demand for minerals
should grow fairly rapidly. Of the $14-billion
projected total of commodity imports in 1981
(in 1975 prices), crude oil should account for
$2.5 billion and other minerals for $1.4 billion.
The latter would include about $0.8 billion in
mineral inputs for the steel industry, and about
$0.6 billion in phosphate, asbestos, sulphur,
copper ore, manganese ore, titanium ore and
tin ore, plus copper, aluminum, zinc and nickel scrap.
Korea was able to surmount the 1974 oil
crisis with a 10-percent growth rate of real
GNP and a 20-percent growth rate of real

Due to a successful export-oriented growth
policy, Korea was able to achieve one of the
highest growth rates in the world during the
1962-76 period. In the fifties, mineral ores and
concentrates accounted for close to half of
total commodity exports. With the rapid expansion of manufactured exports, however,
mineral exports became insignificant by the
seventies. As for imports, non-oil minerals
had been unimportant until quite recently,
whereas crude oil increased from about 3 percent of total imports in 1964 to 6 percent in
1973 and then, due to the oil crisis, jumped to
18 percent in 1976. Previously, given Korea's
stage of industrialization, most of the demand
for minerals could be satisfied by direct imports of processed mineral products. Ferrous,
nonferrous and nonmetallic mineral products
amounted to around 5 percent of total commodity imports during 1953-61 and around 10
percent thereafter.
25

ficult for the Korean economy to adapt to
another round of drastic oil and mineral price
increases. However, if resource-rich countries
like the United States, Canada and Australia
avoid trade policies which exploit the
resource-poor developing countries, and if
these and other advanced countries refrain
from ultra-protectionist policies, there would
not appear to be an imminent danger for the
South Korean economy - other than the
ever-present threat of invasion from the
North.

commodity exports over the following two
years. A resource-poor developing country
like Korea, which has to depend heavily on
imported raw materials for its own consumption and export production, can survive and
even prosper if it continues to adapt quickly to
changing circumstances, for example, by shifting inflation in imported raw-material prices to
its export prices. But in view of the steadily
increasing share of minerals in total commodity imports, which is expected to increase to
30 percent by 1981, it may become more dif-

C. Political Economy of Mineral Resources:
Policy Alternatives
The Wider Context of Bilateral Resource Exploitation:
Arrangements Between the LDCs and DCs
Miguel Wionczek

This paper reaches the following conclusions:
a) There is no growing global scarcity of
mineral resources;
b) The problem of access to LDC mineral
resources can be meaningfully discussed only in terms of changing conditions of access and not of free unconditional access;
c) Developing countries' views regarding
the future use of LDC mineral resources do not conflict with the needs of
an expanding international economy,
and the proposals contained in the
agenda of the "new international
economic
order"
are
hardly
revolutionary;
d) The contractual relations between most
LDC resource-holders and DC
resource-users changed substantially

over the past twenty years, and these
changes began long before the LDCs
coined the concept of the' 'new international economic order" in 1974.
Future bilateral resource arrangements will
be the result of a continuous process of mutual
adjustments interwoven with momentary conflicts of interest. These conflicts will not degenerate into a 'resource war' unless, of
course, the world economy drifts into another
crisis similar to that of the thirties.
It is quite probable that major changes will
take place at both ends of the large spectrum
of interrelated activities of LDC resource holders and DC resource users. At one end of the
spectrum, exploration activities may become
completely divorced from the exploitationprocessing-marketing sequence. Also, LDCs
may demand an increased degree of local processing. Finally, LDCs may exert increas-

26

Apart from any financial arrangements incorporated in future bilateral resource agreements, problems may arise involving the acquisition and pricing of technology, either
when standing alone or when tied to foreign
investment.
In the light of all these considerations, future bilateral resource contracts should contain clear, unequivocal and fairly detailed review clauses, permitting periodic adjustments
which reflect changing conditions in naturalresource industries.

ingly strong pressures to enter as partners into
marketing activities and to buy into
downstream operations whenever the resources trade does not take place under armslength conditions. In the first instance, the
LDCs' objective is to increase their share of
profits by utilizing information about pricing
arrangements and practices at the free end of
the market. In the second case, LDCs attempt
to participate in profits arising from the
transfer-pricing process - an objective which
is practically unattainable through fiscal measures.

Commodity Trade from a North-South Perspective
Jose Pinera
Trade in commodities can be conducted
under different "rules of the game" - or trade
regimes - which will accomplish, in varying
degrees, such goals of international order as
efficiency, income redistribution, stability and
economic security. In this paper, I trace out
the consequences, in terms of these goals, of
some broad categories of commodity-trade arrangements.
Both cartels and redistributive commodity
agreements aim to transfer real resources from
inporting to exporting nations through monopolistic pricing of primary commodities.
They differ in that a cartel involves an attempt
by exporting countries to implement such
schemes unilaterally, while a redistributive
commodity agreement requires importing
countries to collaborate with exporters in
devising and implementing price-raising
schemes.
A cartel regime may generate, especially in
the short run, substantial resource transfers
to Southern commodity-exporting nations.
However, it may also cause large transfers
from poor Southern importing nations to
richer exporters. In a well-designed priceraising cartel, world efficiency costs may not

be very large in view of the short-run inelasticities of the system. The real threat is the
escalation of the conflict through retaliation
especially if it expands beyond the commodity arena. Such a confrontation scenario
heightens instability and does not fulfill the
goal of economic security. Decoupling
strategies will be too costly and will lead to
further fragmentation of the world.
I distinguish between redistributive commodity agreements devised primarily to
transfer real resources from DC importers to
LDC exporters, and stabilization agreements
designed only to smooth short-run price fluctuations around the long-run trend. Redistributive commodity agreements involve an attempt by exporting and importing countries to
compromise on a price between the optimum
monopolistic price and the competitive longrun marginal cost price, but they are extremely difficult to operate in an efficient way.
Moreover, they are highly imperfect substitutes for direct lump-sum transfers by the
North, while requiring the same political will
for the redistribution of income.
Commodity markets normally are subject to
wide price fluctuations as a result of large
27

shifts in both demand and supply, given the
low short-run elasticities involved. Private arbitrage and speculation are unable to reduce
these price fluctuations to an acceptable degree. Price fluctuations originating in demand
shifts - a common case in minerals - destabilize the export earnings of those Southern
countries which are heavily dependent on
commodity exports, and significantly impede
the orderly development of their economies.
Stabilization commodity agreements may
reduce this price instability through the utilization of buffer stocks or other means. Earnings
stabilization is a useful approach since it is
costless from a global perspective. The redistributive and stabilization features of agreements should be kept clearly separate to improve the chances for successful agreements.
Generalized commodity agreements may lead
to a highly visible - and possibly political manipulation of markets, with negative consequences on sovereignty.
Exporting countries tend to restrict exports
as part of their price-raising efforts, on the assumption that the original prices were in fact
competitive. But there is an important (yet almost ignored) situation where both higher
producer prices and higher exports are possible because the original prices were below
competitive levels. In fact, the present freetrade regime exhibits major departures from
the competitive free-market norm, and thus
tends to bias the terms of trade against Southern exports. Oligopolistic, vertically-integrated transnational firms that operate in
commodity markets tend to depress the prices
received by producing nations in order to
capture oligopolistic rents. Information technology also allows these firms to capture
quasi-rents in the marketing and distribution
processes. Transfer pricing practices, by permitting tax avoidance, exacerbate the losses to
exporting countries. Moreover, some governments of importing countries exercise
monopsony power by imposing import and
excise taxes on commodities with inelastic
demand schedules, thus increasing the prices
paid by consumers and lowering those re-

ceived by producers. So the present regime is
not neutral with regard to the competitive solution, but entails redistributive transfers from
Southern exporters to Northern importing nations.
Improvements can be made along the following lines: a) eliminating non-tariff barriers
to commodity trade imposed by governments
of importing countries; b) utilizing the funds
obtained through the DCs' import taxes on
commodities for transfers to LDCs through
multilateral institutions; c) strengthening private buffer activity through organized futures
trading, although with greater use of long-term
contracts; d) improving and enlarging financial
schemes for earnings stabilization; e) eliminating barriers (such as escalating tariffs) which
impede exports of processed raw materials.
Commodity trade should be conducted in
competitive markets, but I believe that such a
system cannot be reached without a more
symmetrical structure of market power. An
asymmetrical situation now exists between the
few multinationals and the fragmented exporting countries, so a prerequisite for change may
be the creation of producer associations that
would increase the exporters' bar'gaining
power. A new commodity trade regime should
also provide for guaranteed DC access to
supplies, and guaranteed LDC access to the
markets of DCs for their manufactured exports.
In short, I propose a movement toward
more competitive markets through betterbalanced bargaining power between North
and South, meaningful earnings-stabilization
schemes, modest international intervention to
stabilize prices, and new rules to heighten
economic security. But to be acceptable to
Southern countries, this commodity regime
should include a substantial increase in the
volume of lump-sum transfers from rich to
poor nations, perhaps in the form of a progressive international income tax.
The South cannot impose its goal of a more
equitable world order on the North. The
South's producer power is asymmetrical: it
can damage the North substantially in the

28

than to confrontation. Whatever power
Southern nations may harness from their control of natural resources should be employed
to bring about a more equitable international
economic order.

short run through interruptions to supply, but
it cannot unilaterally obtain a superior position
for itself in the long run. This situation, where
the threat is stronger than the execution,
creates a scenario more suited to negotiation

Japan's Resource Security and Foreign Investment in the Pacific
Kiyoshi Kojima
This paper concludes that Japan's resource
security· is built around an approach which
combines development contracts with longterm sales contracts. Despite the widespread
belief that Japan was forced to adopt this approach because she lacked capital and was a
latecomer in buying and developing resources,
it is a uniquely appropriate method for resource security in the new international political environment. In this respect, it is much
better than the method of captive development
and vertical integration utilized by the European and American multi-national firms.
The merits of the Japanese approach are illustrated by the successful case of iron-ore
trade between Japan and Australia. This
method provides assurances for meeting
lumpy, large increases in Japanese demand,
and also encourages large-scale development
of Australian mineral resources. As a result,
producer and buyer can share in the huge
economies of scale obtained in production,
transportation, and other transaction costs.
This method of development satisfies the resource nationalism of the host country, for J apan's main interests are not in ownership and
profits in upstream operations, but rather in
the importing of products at a reasonable
price.
However, in order to achieve resource security for Japan and the entire Pacific Area,
Japan should respect the role of the resourceholding countries, and at the same time, recognize the important virtues of the interna-

tional joint-venture approach, based on
American multinationals' capital, technology,
and vigorous entrepreneurship, and on
Japanese equity participation as well as discontinuous sharp increases in demand. Cooperation of all concerned is indispensable. In
fact, a cooperative relationship such as this
ought to be extended to Latin Am'erica also.
The Japanese approach of long-term import
contracts creates a "dominant buyer-major
suppliers" relationship. In other words, each
supplier sends Japan more than 50 percent of
the total amount it exports of each product,
but Japan diversifies over three-fourths of her
imports among three or four sources of supply, in such minerals as iron ore, coking coal,
copper, nickel, bauxite, lead, zinc, manganese
and cromium. (This is not true, however, in
the case of refined metals.) This type of relationship gives Japan a favorable bargaining
position in negotiating contract prices, and at
the same time contributes to the stabilization
of world prices of resources because of the
institution of fixed contract prices and buffer
stocks.
The best way for Japan and other advanced
Pacific countries to secure important mineral
resources in the years ahead is to extend the
combined approach of development contracts
and long-term sales contracts throughout the
Pacific region. We investigated the means
utilized in 1973 by the five Pacific advanced
countries, especially Japan and the U.S.A., to
obtain mineral ores and products. We showed
29

ply. For this reason, the establishment of
some group such as the Organization for
Pacific Trade, Aid and Development (OPT AD) is highly desirable.

that, given appropriate cooperation among the
nations concerned, more than 90 percent of
required resources would be available from
the Pacific region - except oil, which involves a different approach to security of sup-

International Commodity Control -

The Tin Experience

Mohamed K. M. Ariff
So far, eight international tin agreements four in the pre-war period and four in the
post-war era - have run their full course. The
present agreement, the ninth in the series, has
been provisionally in force since July 1, 1976.
International tin control, which has historically been considered a weapon against' 'burdensome surpluses," has now assumed a
price-stabilizing role, relying on exportcontrol and buffer-stock operations. Despite
equal consumer representation in the International Tin Council (ITC), there is evidence of
built-in bias in favor of producers.
The two basic criteria against which the performance of international commodity agreements may be gauged are the size of surplus
tin supplies and the degree of price stability.
Judged by the first criterion, international tin
agreements appear to have been fairly successful in dealing with surplus situations.
Based on the stability criterion, however, the
performance of these agreements has not been
very impressive. The agreements have been
unable to maintain prices within the official
price range, but the impact has been rather
asymmetrical because price ceilings could not
be defended as effectively as price floors. In
fact, ITC has passively reacted to rising prices
by adjusting the official price range upward to
follow market prices. Ironically, international
tin control has tended to destabilize output,
employment and export proceeds, mainly because of quota variations under export controls.
The main objection to the quantitative-

control approach is that it entails disruptive
adjustments in productive capacity, and accordingly appears to be a less desirable device
than the buffer-stock mechanism, which tends
to react quickly to market changes without
interfering too much with the market mechanism. However, considerable skepticism
exists concerning the buffer-stock approach,
because of its inability to protect the price ceiling and its tendency to create results like a
profit-maximizing pure speculator. This probably explains why consuming nations have
been reluctant to make sizeable contributions
to tin buffer stocks.
Consuming countries might be more willing
to contribute to the buffer stock ifits structure
could be changed to eliminate "producerbias", which in practical terms means an assurance that the price ceiling will be defended
as well as the price floor. A radical measure
would be to set up twin buffer stocks within
the international tin agreement, one for consumers and one for producers, subject of
course to coordination and supervision by the
ITC.
International commodity control apparently
is not the best means of transferring resources
from rich consuming countries to poor producing countries. Commodity control might be
more effective if its traditional pricestabilizing objective were pursued through the
elimination of short-term fluctuations than
through attempts at price support in the form
of implicit subsidies.

30

An Organization for Pacific Trade, Aid and Development:
Regional Arrangements for the Resource Trade
Peter Drysdale

the terms upon which Pacific resource development can take place, in both developing
countries and developed countries. (Developing countries encounter problems both in the
structure of concessional financial flows and in
the impact of private capital-market imperfections on supply availabilities.) The fourth
point relates to the instability of earnings associated with the resource trade. The fifth
point relates to the means of bringing about
policy change, to reduce those market imperfections which prevent the efficient relocation
of processing activities.
The paper sets out the following agenda:
1. Energy security consultation on
energy policy issues by the Pacific Five
in the form of an Energy Consultative
Group;
2. Resource security - access to markets
and raw materials under stable long-term
arrangements;
3. Resource development
untying of development finance, under arrangements
with individual states or with groups like
the ASEAN group, and improved access
to capital markets through the establishment of a Pacific Resources Bank (or
Association of Bankers);
4. Commodity market stabilization - introduction of an arrangement to insulate
against variable export earnings in developing countries.
5. Trade re-structuring - promotion of resource- and energy-saving industrial relocation, through such crucial means as
the development of a foreign-investment
code that would encourage non-bilateral
investment ties.

The Organization for Pacific Trade Aid and
Development had its genesis in the debate
over the desirability of creating a Pacific freetrade area, which was originally raised at the
First Pacific Trade and Development Conference in 1968. Trade in resources typifies the
high degree of economic interdependence obtained among Pacific countries. Those countries draw over 90 percent of their basic mineral supplies, apart from oil, from the Pacific
region, with the Pacific Five (Australia, Japan, Canada, the United States and New Zealand) accounting for over 50 percent of the total. For non-oil energy materials, such as coal
and uranium, the Pacific focus is strong. And
significantly, Japan's resource-policy interests
are heavily directed towards the Pacific.
This paper suggests that the establishment
of an Organization for Pacific Trade Aid and
Development (OPTAD) could help provide
the framework for broadening and strengthening Asian-Pacific economic cooperation.
Priority must be assigned to those initiatives
which would help secure the interests of both
consumers and suppliers in the resource trade.
The creation of 0 PTAD would not imply
the need for any new and elaborate institutional arrangements. Rather, it would simply
provide an ongoing framework and point of
reference for handling Pacific economic relationships.
In the field of trade, OPTAD could playa
helpful role in several areas. The first relates
to the issue of access to markets for producers
and security of supplies for consumers. The
second relates to the special problems of the
security of energy supplies, with economic
and strategic questions being interwoven in a
complex and special way. The third relates to

31