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For Release Washington AM f S F r i d a y , J u l y 24, 1970 ECONOMIC TRENDS IN THE UNITED STATES AND THE OUTLOOK FOR DEVELOPING COUNTRIES Remarks By Andrew F 0 Brimmer Member Board o f Governors o f the F e d e r a l Reserve System B e f o r e a Dinner M e e t i n g of the Chamber of Commerce Monrovia, Liberia Thursday, J u l y 23, 1970 ECONOMIC TRENDS IN THE UNITED STATES AND THE OUTLOOK FOR DEVELOPING COUNTRIES By Andrew F . Brimmer* I am f l a t t e r e d by the o p p o r t u n i t y to address t h i s assembly o f L i b e r i a n b u s i n e s s and p r o f e s s i o n a l men and Government o f f i c i a l s . e s p e c i a l l y p l e a s e d t o see so many Americans i n the a u d i e n c e . Unlike many American Negroes who have o n l y r e c e n t l y d i s c o v e r e d the r i c h t i o n s w h i c h have bound our c o u n t r i e s together was i n t r o d u c e d t o L i b e r i a as a s m a l l c h i l d . I am tradi- f o r n e a r l y 150 y e a r s , I l e a r n e d o f your legacy n o t s i m p l y as a s t o r y o f b l a c k people r e t u r n i n g to A f r i c a but as romance o f an e p i c j o u r n e y from s l a v e r y to freedom. I the So f o r a number o f y e a r s , I have l o o k e d forward t o the day when I c o u l d v i s i t this land. I have l o n g been aware o f the c l o s e economic t i e s between our countries. Today, I would l i k e to r e f l e c t on the l i n k s between the p r e s e n t and p r o s p e c t i v e c o n t o u r s o f economic t r e n d s i n the U n i t e d S t a t e s and o t h e r i n d u s t r i a l i z e d n a t i o n s and the f u t u r e course o f p r o b a b l e development L i b e r i a and o t h e r d e v e l o p i n g c o u n t r i e s . in C l e a r l y the p r o s p e r i t y and growth o f these n a t i o n s depend h e a v i l y on the s u s t a i n e d economic growth o f the advanced c o u n t r i e s w h i c h p r o v i d e the major e x p o r t markets as w e l l as the p r i n c i p a l source o f c a p i t a l and t e c h n o l o g i c a l r e s o u r c e s r a p i d economic development. Therefore, it is i m p o r t a n t t h a t the advanced c o u n t r i e s m a i n t a i n t h e i r own economic s t r e n g t h , the a s p i r a t i o n s o f the d e v e l o p i n g to promote if they a r e to support countries. *Member, Board o f Governors o f the F e d e r a l Reserve System. I am g r a t e f u l t o M e s s r s . Murray Wernick and Samuel P i z e r o f the B o a r d ' s s t a f f f o r a s s i s t a n c e i n the p r e p a r a t i o n o f these remarks. -2I am f u l l y c o n s c i o u s o f the c r u c i a l r o l e o f the U n i t e d i n a i d i n g the growth o f our r e s p o n s i b i l i t i e s the i n f l a t i o n a r y This is the d e v e l o p i n g c o u n t r i e s . i n this respect require pressures which are s t i l l A t the p r e s e n t States time, t h a t we b r i n g an end to p r e s e n t i n our own economy. p r o v i n g to be a l o n g e r and more d i f f i c u l t t a s k than some o f us had hoped. Even a b r i e f provides a reasonably survey o f the economic scene i n the U n i t e d S t a t e s firm basis f o r a s s e s s i n g the o u t l o o k f o r the next few y e a r s : The American economy i s f i n a l l y r e s p o n d i n g to the r e s t r i c t i v e monetary and f i s c a l p o l i c i e s f o l l o w e d f o r the l a s t year or so, and we a r e making genuine p r o g r e s s i n m o d e r a t i n g an overheated economy. Y e t , s t r o n g upward p r e s s u r e s on c o s t s and p r i c e s are s t i l l evident. Thus, the time has n o t come f o r us t o g i v e up the campaign a g a i n s t i n f l a t i o n . - W h i l e the d i s t o r t i o n s produced by i n f l a t i o n a r e s t i l l being corrected, several i n d i c a t i o n s suggest t h a t moderate economic e x p a n s i o n w i l l resume i n the near f u t u r e . For example, the o u t p u t o f goods and s e r v i c e s ( c o r r e c t e d f o r p r i c e changes) a p p a r e n t l y r o s e s l i g h t l y i n the l a s t q u a r t e r - - a f t e r d e c l i n i n g d u r i n g the p r e c e d i n g s i x months. L o o k i n g f a r t h e r ahead over the n e x t two or t h r e e y e a r s , we can expect c o n t i n u e d s t r o n g demands f o r goods and s e r v i c e s i n the U n i t e d States. I n f a c t , i t seems h i g h l y l i k e l y t h a t t o t a l demands on the American economy w i l l f a r exceed the economy's p o t e n t i a l . Thus, the shadow o f p e r s i s t e n t i n f l a t i o n a r y p r e s s u r e s w i l l c o n t i n u e to c l o u d the o u t l o o k . C o n s e q u e n t l y , we w i l l have t o c o n t i n u e our r e l i a n c e on s t a b i l i z a t i o n p o l i c i e s t o keep i n f l a t i o n under c o n t r o l . -3- Moreover, i t appears t h a t the U n i t e d S t a t e s w i l l n o t f a c e these d i f f i c u l t i e s a l o n e . Most o f the o t h e r major i n d u s t r i a l c o u n t r i e s may a l s o have to cope w i t h the same k i n d s o f demands on r e s o u r c e s - - w h i c h might generate the same k i n d s o f upward p r e s s u r e s on p r i c e s and i n t e r e s t rates. Under these c i r c u m s t a n c e s , the road ahead f o r d e v e l o p i n g c o u n t r i e s may be a d i f f i c u l t one to travel. W h i l e they w i l l f a c e i n c r e a s i n g l y s t r o n g needs t o l i f t t h e i r standards o f l i v i n g , the a v a i l a b i l i t y o f f i n a n c i a l and o t h e r r e s o u r c e s from developed c o u n t r i e s to a s s i s t them may be c o n s i d e r a b l y l e s s than r e q u i r e d . Expanding demand i n i n d u s t r i a l c o u n t r i e s may p r o v i d e a growing market f o r the e x p o r t s o f developing countries. However, there i s a r e a l danger t h a t s p r e a d i n g p r o t e c t i o n i s t d e v i c e s i n developed c o u n t r i e s - - i n c l u d i n g the U n i t e d S t a t e s - - may undercut the p r o g r e s s a l r e a d y a c h i e v e d a t such s u b s t a n t i a l c o s t s . The heavy demands f o r c a p i t a l on a l l f r o n t s may s e r i o u s l y l i m i t the pace o f development f o r most c o u n t r i e s s t r u g g l i n g t o get ahead. G i v e n the unpromising o u t l o o k i n most advanced c o u n t r i e s f o r f u r t h e r expansions i n o f f i c i a l f o r e i g n a i d , i t appears t h a t d e v e l o p i n g n a t i o n s w i l l have to r e l y i n c r e a s i n g l y on p r i v a t e investment i f they a r e to make genuine headway. Because o f t h i s c o n j u n c t u r e of c i r c u m s t a n c e s , the i n t e r n a t i o n a l f i n a n c i a l p o l i c i e s o f the developed c o u n t r i e s w i l l be o f v i t a l importance to developing areas. I n p a r t i c u l a r , the i n d u s t r i a l n a t i o n s - - i n c l u d i n g the U n i t e d S t a t e s — w i l l have t o ensure t h a t measures taken to p r o t e c t t h e i r own b a l a n c e o f payments do not p l a c e undue burdens on those c o u n t r i e s t r y i n g to e n t e r the mainstream o f economic p r o g r e s s . I n the r e s t o f these remarks, further. these main p o i n t s a r e amplified -4The B a t t l e A g a i n s t I n f l a t i o n i n the U n i t e d For t h i s audience, of the c u r r e n t States t h e r e i s no need to d w e l l on the i n f l a t i o n i n the U n i t e d S t a t e s . It w i l l be origins recalled t h a t i t was p r o p e l l e d by a b u s i n e s s investment boom and the a c c e l e r a t i o n o f the Vietnam War i n mid-1965. a l r e a d y on the eve o f f u l l employment, p o l i c i e s designed to stimulate manpower r e s o u r c e s . A t t h a t time, the economy was pushed forward p a r t l y by p u b l i c f u l l e r use o f the n a t i o n ' s p h y s i c a l and The r a p i d r i s e i n demands f o r goods and s e r v i c e s f o r m i l i t a r y and b u s i n e s s purposes added t o an a l r e a d y expanding economy and r e s u l t e d i n the r a p i d a c c e l e r a t i o n o f i n f l a t i o n we have seen i n the l a s t five years. Over the l a s t y e a r , however, as a r e s u l t monetary and f i s c a l policies, of restrictive we have been making s i g n i f i c a n t i n e l i m i n a t i n g excess demand i n the American economy. progress The r a t e of economic e x p a n s i o n has slowed a p p r e c i a b l y , and some s l a c k has developed i n markets There has been no growth f o r l a b o r and o t h e r r e s o u r c e s . i n r e a l o u t p u t f o r the l a s t n i n e months. Employment has d e c l i n e d , the unemployment r a t e has r i s e n s i g n i f i c a n t l y . c a p a c i t y has i n c r e a s e d , profits have f a l l e n , and equipment has begun t o slow a p p r e c i a b l y . standard, Unused and industrial and investment i n plant Thus, measured by any the economy has been o p e r a t i n g w e l l below i t s potential. However, w h i l e we have succeeded i n e r a s i n g excess demand i n our economy, we a r e s t i l l c o s t s and p r i c e s . e x p e r i e n c i n g s t r o n g upward p r e s s u r e s The d i s t o r t i o n s r e s u l t i n g from the past on persistent -5rise i n p r i c e s have become d e e p l y r o o t e d . businesses, Expectations of consumers, and workers have not yet f u l l y a d j u s t e d to the current b a l a n c e o f aggregate demand and s u p p l y . Progress i n g e t t i n g i n f l a t i o n under c o n t r o l S t a t e s has been slow, and the e f f o r t i n many s e c t o r s o f the economy. we a r e making headway. w h i c h showed l i t t l e This itself i n the U n i t e d has caused difficulties But there i s reason to b e l i e v e that The r a t e o f p r o d u c t i v i t y growth i n m a n u f a c t u r i n g change l a s t year - - i s now improving noticeably. turnaround has been r e f l e c t e d i n a s l o w i n g i n u n i t l a b o r c o s t s w h i c h i n t u r n s h o u l d temper p r i c e r i s e s . There have a l s o been a number o f s i g n s r e c e n t l y o f a moderation o f i n c r e a s e s s e v e r a l major a r e a s . W h o l e s a l e food i n prices p r i c e s have d e c l i n e d , quarters rose s l i g h t l y i n the A p r i l - J u n e months. the economic adjustment efforts of businesses balance w i t h f i n a l plished, replenished. inventories reflected into inventories are l i k e l y both monetary and f i s c a l become somewhat l e s s r e s t r i c t i v e have begun to d e c l i n e . two better T h i s a p p a r e n t l y has been l a r g e l y accom- strengthen, In a d d i t i o n , be To an important t h a t has been underway to b r i n g e x c e s s i v e sales. and as s a l e s t h a t economic progress w i l l R e a l output which d e c l i n e d f o r extent, of a commodities. There a r e a l s o i n d i c a t i o n s resumed i n the near f u t u r e . in and e s p e c i a l l y encouraging has been the s l o w e r r i s e i n the p r i c e s number o f i m p o r t a n t i n d u s t r i a l -- to be policies have i n r e c e n t months, and i n t e r e s t W i t h r a t e s d e c l i n i n g and money more rates readily -- -6available, a s i g n i f i c a n t r e c o v e r y i n home c o n s t r u c t i o n and S t a t e and l o c a l government o u t l a y s s h o u l d become more apparent and s h o u l d a c t t o b o l s t e r a g g r e g a t e demands. able declines to l i m i t in capital i n the near A t the same time, spending and i n defense o u t l a y s should future probserve the upswing. I f we c o n t i n u e and I t h i n k we w i l l , demand p r e s s u r e s confidence, to pursue a p p r o p r i a t e stabilization t h e r e s h o u l d n o t be any re-emergence o f later t h i s year or i n 1971. Thus, w i t h policies, excessive reasonable I l o o k f o r w a r d t o a resumption o f s u s t a i n a b l e economic growth as w e l l as to f u r t h e r d i m i n u t i o n i n the r a t e o f advance in p r i c e s over the n e x t year and a h a l f . A Longer View o f Economic Prospects L o o k i n g f a r t h e r down the r o a d perhaps two or t h r e e years from now, I see i n t e r n a l demands f o r i m p r o v i n g our s t a n d a r d o f l i v i n g and i n c r e a s i n g our p r o d u c t i v e c a p a c i t y c o n t i n u i n g to p r o v i d e underpinnings t o the U n i t e d S t a t e s 1 economy. strong Of c o u r s e , b o t h internal and e x t e r n a l demands a r e l i m i t e d by the r e a l r a t e o f growth i n the economy. total Over the n e x t few y e a r s , demands on the economy w i l l prospect r a i s e s the need f o r it to keep But i t a l s o means p u b l i c p o l i c y w i l l be f a c e d w i t h e s t a b l i s h i n g p r i o r i t i e s services. This p r e s s u r e s and the c o n t i n u a t i o n o f s t a b i l i z a t i o n p o l i c i e s a v a i l a b l e goods and that f a r exceed the economy's p o t e n t i a l . the s p e c t e r o f c o n t i n u e d i n f l a t i o n a r y t i o n under c o n t r o l . seems h i g h l y l i k e l y infla- continually among those competing f o r the -7I t may be h e l p f u l constraints to get a b e t t e r grasp o f some o f the U n i t e d S t a t e s For t h i s purpose, is likely to f a c e i n the near the future. i t would be u s e f u l to p r e s e n t some rough e s t i m a t e s o f the p o t e n t i a l o u t p u t 3 years from now and some o f the more p r e s s i n g i n t e r n a l demands t h a t we now f o r e s e e . i n output, productivity W i t h a resumption o f r e a l i n the p r i v a t e economy should r e a c h about 3.2 per c e n t per year by 1973. 4 . 0 per c e n t o f the l a b o r f o r c e , n a t i o n a l product I f unemployment i s h e l d to about the p o t e n t i a l growth o f r e a l (GNP) f o r our c o u n t r y i n the next few years i n c r e a s e t o about 4 . 3 per cent a y e a r . 1969 d o l l a r s o f around $1.1 t r i l l i o n . in productivity m I realize t h a t the educational, a r e l i m i t e d by h i g h l a b o r for prospective comparison but i t m a i n l y r e f l e c t s a l a r g e and growing percentage o f p e r s o n a l consumption e x p e n d i t u r e s to medical, should t h i s would mean a GNP i n the U n i t e d S t a t e s may appear low i n w i t h t r e n d s i n some o t h e r c o u n t r i e s , gross By 1973, w i t h a l l o w a n c e the p r e s e n t u n d e r - u t i l i z a t i o n o f r e s o u r c e s , rise growth devoted and p e r s o n a l s e r v i c e s where p r o d u c t i v i t y gains intensity. The p o t e n t i a l growth o f the American economy w i l l a l s o the e x p a n s i o n o f r e s o u r c e s a v a i l a b l e reflect to the Government from what economists have d e f i n e d as a " f i s c a l d i v i d e n d , 1 1 a g a i n i n revenue t h a t automatically accrues, economy grows. even w i t h an unchanged tax s t r u c t u r e , T o t a l receipts of Federal, State, ( e x c l u d i n g g r a n t s - i n - a i d to S t a t e s and l o c a l i t i e s ) and l o c a l as governments a r e expected to i n c r e a s e over the next decade a t an average r a t e o f around 7 per c e n t per the year. -8Savings t h a t might r e s u l t from d e c l i n e s i n d e f e n s e spending i n the n e x t year or two may be used f o r o t h e r s o c i a l programs i n l a t e r y e a r s . ever, likely defense budgets w i l l t o be c o n t i n u o u s p r o b a b l y become s t a b l e and t h e r e a r e not c u t b a c k s i n d e f e n s e spending t h a t might funds f o r a l t e r n a t i v e uses i n the At f i r s t glance, i t would seem t h a t w i t h a l l r e v i e w o f some o f the major c l a i m s on n a t i o n a l o u t p u t our available But a b r i e f (including programs a l r e a d y i n e x i s t e n c e ) may h e l p b r i n g the problem i n t o A projection of the c l a i m s on our n a t i o n a l o u t p u t suggests In great part, these budget p r e s s u r e s a g r e a t e r s o c i a l awareness o f the needs o f because o f advanced age, race, or urban l o c a l i t y reflect these requirements To these demands, i n c r e a s i n g l y adding a high s o c i a l f o r c l e a n a i r and water and the p r e s e r v a t i o n o f our n a t u r a l of a l l i n 1973 - - and funds f o r s e c u r i t y and h e a l t h and w e l f a r e demands. the American p e o p l e a r e a l s o the the d i s a d v a n t a g e d - - whether programs a r e e x p e c t e d t o compete w i t h the more t r a d i t i o n a l of n a t i o n a l public focus. that F e d e r a l Government's budget w i l l most l i k e l y be j u s t as t i g h t as i n the c u r r e n t y e a r . yield longer-run. we c o u l d meet b o t h p u b l i c and p r i v a t e needs. resources, How- priority resources types. These i m p o r t a n t s o c i a l g o a l s , moreover, must compete f o r share o f GNP w i t h s t r o n g p r i v a t e demands. U n i t e d S t a t e s a r e now p a r t i c u l a r l y Demographic f a c t o r s favorable construction a c t i v i t y the to a consumer boom, and the pent-up demand f o r h o u s i n g (which has r e s u l t e d from the in residential in their slowdown i n 1966 and 1969-70) w i l l intensify -9the p r e s s u r e s . Business requirements f o r expanding i n v e n t o r y and p l a n t and equipment e x p e n d i t u r e s a r e a l s o likely outlays t o be e x c e e d i n g l y intense. Thus, p r e s s u r e on r e s o u r c e s and the c u r t a i l m e n t o f demands w i l l have t o be l i m i t e d by a p p r o p r i a t e monetary and excess fiscal policies. P e r s o n a l consumption. Significant c o m p o s i t i o n o f the p o p u l a t i o n and l a b o r will contribute changes i n the age f o r c e over the next few years t o a h i g h r a t e o f economic growth. time they a r e l i k e l y to a f f e c t p a t t e r n s But a t the same o f household consumption as w e l l as the l e v e l o f investment i n p l a n t and equipment, residential construction, be g i v e n h i g h p r i o r i t y . and the types o f p u b l i c programs w h i c h Because o f a l a r g e i n c r e a s e i n b i r t h s immediate p o s t - W o r l d War I I y e a r s , 20 and 35 i s pensity i n the the l a b o r i n the growth o f I n the f i v e years ending i n 1973, force, labor the e x p e c t e d increases f o r c e from an average o f 1.2 m i l - The number o f m a r r i a g e s w i l l a l s o i n c r e a s e s h a r p l y , as a consequence, 20 per cent. in Most o f these young a d u l t s a f a c t which explains the c i v i l i a n the number l i o n per year i n the 1960 r s to 1.5 m i l l i o n per year i n the decade the 1 9 7 0 f s . of i n c r e a s i n g r a p i d l y - - an age group w i t h a v e r y h i g h pro- to consume. enter will the p o p u l a t i o n between the ages t h i s age group may i n c r e a s e by 7.5 m i l l i o n . will the volume o f of and n e t h o u s e h o l d f o r m a t i o n i s e x p e c t e d to jump by almost -10These demographic changes p r o b a b l y mean n o t o n l y a h i g h e r p r o p e n s i t y t o consume but a l s o a lower s a v i n g r a t i o than we have experienced i n recent years. despite more a l t r u i s t i c appliances, ideals, furniture, w h i c h an a f f l u e n t probably r e s u l t These young f a m i l i e s , f o r the most p a r t w i l l r e c r e a t i o n and a l l their s t i l l want new c a r s , the o t h e r goods and s e r v i c e s s o c i e t y has l e a d them t o e x p e c t . These o u t l a y s will i n a h i g h e r percentage o f d i s p o s a b l e income b e i n g devoted t o d u r a b l e goods and a somewhat lower percentage to nondurables and s a v i n g s . B u s i n e s s investment i n p l a n t and equipment. r e a l p r i v a t e business investment o u t l a y s The growth in i n the U n i t e d S t a t e s has been v e r y r a p i d , a v e r a g i n g about 6.5 per cent a n n u a l l y i n the I960 1 s - - w e l l above the 2.7 per cent a n n u a l growth i n f i x e d investment d u r i n g the I n 1969, r e a l p l a n t and equipment e x p e n d i t u r e s 1950fs. i n c r e a s e d by 7.0 per cent. P a r t o f t h i s u n u s u a l l y l a r g e volume o f investment i n years i s undoubtedly a t t r i b u t a b l e to i n f l a t i o n a r y r a p i d r i s e i n the p r i c e o f p l a n t and equipment, struction costs, has caused b u s i n e s s However, this especially was not u r g e n t . source of s t i m u l u s s h o u l d s t r o n g consumer demand sector i n con- (particularly As p r i c e in- fade. (especially w i t h t h e i r g r e a t e r c a p i t a l investment r e q u i r e m e n t s ) , demand from the p u b l i c The to push ahead w i t h new programs, even when the need f o r these f a c i l i t i e s c r e a s e s moderate, psychology. recent f o r urban for durables the expected transportation -11systems), and r e q u i r e m e n t s f o r changes i n the p r o d u c t i o n which w i l l c u r t a i l p o l l u t i o n o f the environment w i l l generate l a r g e c a p i t a l r e q u i r e m e n t s . up w i t h a c c e l e r a t i n g In a d d i t i o n , t e c h n o l o g i c a l advances i m p l i e s c a p i t a l expenditures. process undoubtedly the need t o keep large Moreover, businessmen seem t o be future increasingly aware o f l o n g - t e r m t r e n d s i n the economy and a r e p l a n n i n g their investments a c c o r d i n g l y , w i t h l e s s r e g a r d than p r e v i o u s l y t o short- term f l u c t u a t i o n s , and g r e a t e r a t t e n t i o n to the p r o s p e c t i v e r i s e unit All labor costs. t h i s suggests heavy demands f o r c a p i t a l and c o n t i n u i n g p r e s s u r e on c a p i t a l Residential construction. are equally impressive, in funds markets. The g o a l s o f the h o u s i n g industry and they have been c l e a r l y d e f i n e d by our Housing and Urban Development A c t o f 1968. This l e g i s l a t i o n f o r the c o n s t r u c t i o n o f 26 m i l l i o n new homes over a 10 year the r e h a b i l i t a t i o n o f scores o f urban c e n t e r s and the c r e a t i o n o f 110 new c i t i e s . calls period; throughout the country, These r e q u i r e m e n t s r e f l e c t the b a c k l o g o f h o u s i n g demand from the severe c u r t a i l m e n t o f home b u i l d i n g i n 1966 and a g a i n i n 1969-70 due to r e s t r i c t i v e monetary policies, the l a r g e i n c r e a s e i n household f o r m a t i o n and r i s i n g incomes. l e g i s l a t i o n was a l s o i n f l u e n c e d by the r e c o g n i t i o n t h a t u r b a n s p r a w l would c r e a t e almost insurmountable difficulties. farther F o r some time y e t , workers w i l l The continued transportation c o n t i n u e t o move from t h e i r work i n t o the suburbs, and i n some c a s e s , plants -12and s e r v i c e facilities have moved out t o these workers - - but r e h a b i l i t a t i o n o f c e n t e r c i t y h o u s i n g must be p a r t o f the The p u b l i c all levels sector. As I have mentioned, the solution. governments at i n the U n i t e d S t a t e s a r e under g r e a t p r e s s u r e to expand e x i s t i n g s o c i a l programs and t o embark on new ones. Yet, without new changes i n our tax l a w s , demands f o r p e r s o n a l consumption and p r i v a t e domestic investment a r e l i k e l y t o absorb most o f the i n r e a l GNP w h i c h may a c c r u e through 1973. increase When the C o u n c i l of Economic A d v i s e r s added up competing demands on o u t p u t e a r l i e r year, it found t h a t - - even w i t h no i n c r e a s e i n p u b l i c expenditures by governments - - c l a i m s a g a i n s t our p o t e n t i a l GNP would j u s t e q u a l g r o s s n a t i o n a l p r o d u c t i n 1972. suggest t h a t an a n t i c i p a t e d r i s e b i l l i o n m i g h t be p o s s i b l e . Only i n 1973 d i d the Council this is that with GNP below p o t e n t i a l and because o f the l o s s o f revenue due t o modest n e t g a i n i n revenue u n t i l about i n p u b l i c e x p e n d i t u r e s o f $3 to $4 The r e a s o n f o r changes i n the tax law i n 1969, this there w i l l 1973. actual the be - - a t b e s t - - o n l y a I n the i n t e r i m , most o f the a d d i t i o n a l F e d e r a l funds f o r s o c i a l and e n v i r o n m e n t a l problems must come from the p r o j e c t e d d e c l i n e I n these p r o j e c t i o n s , foresaw a s h i f t governments. of i n defense spending. the C o u n c i l o f Economic A d v i s e r s funds from F e d e r a l e x p e n d i t u r e s to S t a t e and also local -13D e s p i t e an i n c r e a s e i n F e d e r a l a i d t o the S t a t e and governments, w h i c h have p r i m a r y r e s p o n s i b i l i t y t r a t i o n o f many i m p o r t a n t s o c i a l programs, local f o r the a d m i n i s - the S t a t e s s e l v e s w i l l have t o r a i s e c o n s i d e r a b l y more f u n d s . them- About one-third o f the p r o j e c t e d i n c r e a s e i n e s t i m a t e d e x p e n d i t u r e s w i l l be d i r e c t l y attributable to p o p u l a t i o n i n c r e a s e s , and the remainder was a l l o c a t e d toward h i g h e r r e a l per c a p i t a s e r v i c e s p r o v i d e d by the S t a t e and governments. local T h i s p r o j e c t e d i n c r e a s e i n q u a l i t y , however, i s l e s s than the a c t u a l i n c r e a s e from 1962-1968, and i t considerable pressure for a d d i t i o n a l l i v i n g o f poor f a m i l i e s , is c e r t a i n that there w i l l be funds t o improve the s t a n d a r d o f t o m i t i g a t e the h a r d s h i p s o f the urban e n v i r o n - ment, and to p r e s e r v e our n a t u r a l environment f o r our expanding p o p u l a tion. All together, o f p u b l i c spending, despite the s u b s t a n t i a l r i s e expected i n the t h i s package w i l l Outlook f o r Developing l e a v e most Americans disappointed. Countries I n the f a c e o f this i n e v i t a b l e and u n i v e r s a l p r e s s u r e demands f o r goods and s e r v i c e s o f a l l other i n d u s t r i a l nations, of types i n the U n i t e d S t a t e s and t h e r e w i l l be even s t r o n g e r d e s i r e s g r e a t e r needs f o r improvements i n the l i v i n g standards o f countries. level and developing What can we say about the ways i n w h i c h f l o w s of r e a l and f i n a n c i a l r e s o u r c e s between the developed and l e s s - d e v e l o p e d w o r l d s w i l l be i n f l u e n c e d by these i n t e n s i f i e d demands? L e t me s t r e s s a t the o u t s e t t h a t , I am aware o f i n these g e n e r a l the g r e a t d i f f e r e n c e s among the d e v e l o p i n g remarks, countries. -14Some w i l l be i n a b e t t e r p o s i t i o n than o t h e r s to b e n e f i t from grow- i n g f o r e i g n markets or t o take c a r e o f t h e i r own developmental On t h i s o c c a s i o n , my p r i m a r y purpose i s implications needs. t o a s s e s s i n broad terms f o r d e v e l o p i n g a r e a s over the n e x t few years o f the trends t h a t a r e a l r e a d y under way i n the i n d u s t r i a l r e g i o n s o f the w o r l d . Foreign trade. industrial materials As f a r as t r a d e f l o w s a r e concerned, c o u n t r i e s w i l l need much g r e a t e r q u a n t i t i e s produced i n the r e s t o f the w o r l d , commodities a r e l i k e l y to r i s e s u b s t a n t i a l l y . Moreover, f l o w o f manufactures i f we a r e countries, i n t o these from the c o u n t r i e s where such r e s o u r c e s a r e underemployed. come back to t h i s these o f l a b o r and t o meet f u t u r e demands i n the i n d u s t r i a l we s h o u l d e n v i s a g e a r i s i n g primary and the p r i c e s o f c o r r e c t about the i n t e n s e p r e s s u r e on the a v a i l a b i l i t y other resources of the countries I will p o i n t i n a moment. Meanwhile, the d e v e l o p i n g c o u n t r i e s w i l l have f a s t e r population growth than the i n d u s t r i a l n a t i o n s and a much g r e a t e r a b s o l u t e gap between needs and r e s o u r c e s - - and they w i l l have an a c c e l e r a t i n g demand f o r p r o d u c t s o f the i n d u s t r i a l n a t i o n s . the C o n s e q u e n t l y , i t would seem l i k e l y t h a t n e t merchandise imports o f the d e v e l o p i n g c o u n t r i e s as a group s h o u l d be expected to r i s e . T h i s i s s i m p l y a n o t h e r way o f s a y i n g t h a t developed c o u n t r i e s as a whole w i l l encounter a r i s i n g demand t o p r o v i d e p a r t o f the r e a l needed f o r economic p r o g r e s s i n the l e s s - d e v e l o p e d areas. We a r e v e r y much concerned i n the U n i t e d S t a t e s t h a t developed c o u n t r i e s resources the o f the w o r l d r e c o g n i z e t h a t these development needs -15have t o be accommodated w i t h i n t h e i r o v e r a l l b a l a n c e o f payments o b j e c t i v e s . It seems to me t h a t i f we a r e n o t c a r e f u l the measures taken t o deal w i t h our e x c e s s i v e domestic demands, and t o g e n e r a t e b a l a n c e o f s u r p l u s e s , may c o n f l i c t w i t h the needs o f the d e v e l o p i n g One o b v i o u s l y c o n t r a d i c t o r y domestic attempt to p r o t e c t i n d u s t r i e s payments countries. p o l i c y stand i s from e x t e r n a l c o m p e t i t i o n . the To do so in the f a c e o f a l o n g - t e r m p r o s p e c t o f e x c e s s i v e p r e s s u r e on domestic supply c a p a b i l i t i e s is c l e a r l y counterproductive. It seems t o me t o make a g r e a t d e a l o f sense t o open up our markets t o goods abroad. Beyond t h a t , we s h o u l d make a s p e c i a l e f f o r t c o u n t r i e s w i t h unemployed r e s o u r c e s to encourage to d e v e l o p them more w i t h the p o t e n t i a l o f e x p o r t markets i n the i n d u s t r i a l a c t i n g as an i n c e n t i v e . available effectively, countries I f we c o u l d move t h i s p r o c e s s a l o n g e n o u g h , i t c o u l d h e l p to s o l v e the problems o f b o t h groups o f But e x p e r i e n c e shows t h a t i t w i l l reduce e x i s t i n g barriers fast countries. take determined p o l i c y measures to t r a d e . As you know, it is difficult times - - and the p r e s e n t i s an example - - not to l o s e ground i n movement toward f r e e r can h e l p themselves I do n o t b e l i e v e that i n the l o n g r u n by t r y i n g t o encourage c e r t a i n l y n o t be p o s s i b l e to c r e a t e i n d u s t r i e s It will c a p a b l e o f competing f o r or s a t i s f y i n g domestic requirements a t r e a s o n a b l e i f such i n d u s t r i e s a r e e i t h e r i n h e r e n t l y n o n - c o m p e t i t i v e the less-developed i n d u s t r i a l development b e h i n d a b a r r i c a d e a g a i n s t i m p o r t s . e x p o r t markets, at trade. By the same token, countries to for various cost, -16reasons, or i f materials t h e i r o p e r a t i n g c o s t s a r e r a i s e d by t a r i f f s or equipment they use i n F o r the f o r e s e e a b l e on the production. future, then, we must a n t i c i p a t e that d e v e l o p i n g c o u n t r i e s w i l l be n e t i m p o r t e r s o f goods and s e r v i c e s on a l a r g e s c a l e - - and t h a t i n d i v i d u a l c o u n t r i e s w i l l n o t follow policies to f i l l International of financing. that gap. capital flows. That b r i n g s us t o the problems What we have s a i d about the i n t e n s e demand p r e s s u r e s t o be e x p e c t e d i n the i n d u s t r i a l i z e d s t r o n g demand f o r c a p i t a l . countries s o c i a l needs w i l l be f o r m i d a b l e . will the mounting f l o w o f be r e q u i r e d . implies a continuing The c o s t o f c a p i t a l w i l l be h i g h , and the task of a l l o c a t i n g c a p i t a l a v a i l a b i l i t i e s picture automatically so as to s a t i s f y h i g h I t w i l l n o t be easy to f i t into f i n a n c i n g to d e v e l o p i n g c o u n t r i e s flow of industrial c o u n t r i e s a r e c o n f r o n t e d w i t h aggregate p l a n s f o r e x p e n d i t u r e s require very high l e v e l s of taxation i f b o r r o w i n g i n t h e i r own c a p i t a l markets i s be c o n s i d e r a b l e r e s i s t a n c e foreign that f i n a n c i n g can be g e n e r a t e d . As I s t r e s s e d above, n a t i o n a l governments i n for this U n l e s s s t r e n u o u s e f f o r t s a r e made, I would doubt v e r y much t h a t a s u f f i c i e n t home t h a t w i l l priority t o be a v o i d e d . at inflationary There to i n c l u d i n g i n t h e i r budgets l a r g e r will amounts assistance. According to r e p o r t s o f the Development A s s i s t a n c e Committee o f the OECD, the n e t f l o w o f o f f i c i a l f i n a n c i a l r e s o u r c e s from member c o u n t r i e s averaged a l i t t l e over $6 b i l l i o n a year from 1961 to 1966 and was about $7 b i l l i o n i n 1967 and 1968. There was o n l y a s m a l l upward -17t r e n d over the p e r i o d . I doubt t h a t f i g u r e s for 1969 and 1970, w h i c h a r e not y e t a v a i l a b l e on a g l o b a l b a s i s , w i l l change. T a k i n g i n t o a c c o u n t p r i c e i n c r e a s e s over the p e r i o d , rising interest rather show much o f a charges on t h a t p a r t o f than g r a n t s , the f l o w i n v o l v i n g t h e r e has p r o b a b l y been l i t t l e i n the f i n a n c i n g f l o w i n r e a l terms. i f any and credits increase Over the whole p e r i o d , the share o f the U n i t e d S t a t e s i n the o f f i c i a l r e s o u r c e s p r o v i d e d by the DAC member c o u n t r i e s has been about 50 per c e n t . For a l l DAC members t o g e t h e r , the n e t f l o w o f f i n a n c i a l r e s o u r c e s t o d e v e l o p i n g c o u n t r i e s b o t h o f f i c i a l and p r i v a t e e q u a l l e d about 1 per cent o f t h e i r combined n a t i o n a l incomes i n 1968. There a r e many e f f o r t s a t a l l l e v e l s t o f i n d ways t o i n c r e a s e the o f f i c i a l f l o w — and t o make i t more p r o d u c t i v e . I n the U n i t e d S t a t e s , we would l i k e to see more use o f the m u l t i l a t e r a l a g e n c i e s i n t h i s p r o c e s s , l e s s t y i n g o f a i d to e x p o r t s o f i n d i v i d u a l donor c o u n t r i e s , and more r e c o g n i t i o n o f problems o f debt f i n a n c i n g - - e s p e c i a l l y when c r e d i t s a r e a t i n t e r e s t r a t e s and f o r r e l a t i v e l y to r e c i t e a l l the problems — short m a t u r i t i e s . and the P e t e r s o n R e p o r t , with foreign r e v i e w i n g the U n i t e d S t a t e s 1 that a very great e f f o r t w i l l experience be n e c e s s a r y on the Governments o f the developed c o u n t r i e s citizens in sponsored by the W o r l d Bank, f u t u r e f l o w s o f developmental a s s i s t a n c e . their I do n o t have assistance. My p o i n t i s the p a r t o f high they have r e c e n t l y been a n a l y z e d the r e p o r t s o f the Pearson Commission, the to raise They w i l l have to convince that this i s a high p r i o r i t y national objective; they -18will have to make room i n t i g h t budgets; t o make the a i d p r o c e s s more e f f i c i e n t , they w i l l have t o f i n d ways and they w i l l have to a v o i d the b u i l d - u p o f c r u s h i n g burdens o f debt repayments. F o r my p a r t , I would be p r e p a r e d to work v e r y h a r d to b r i n g about a l a r g e r and more efficient assistance e f f o r t . But 1 a l s o want t o s t r e s s c o u n t r i e s must u n d e r s t a n d t h a t we a r e n o t t a l k i n g about excess r e s o u r c e s , we a r e t a l k i n g about the s h a r i n g o f And t h i s p r o c e s s w i l l it is providing scarce i s a c h i e v i n g i t s developmental g o a l s , t h a t they s h o u l d f i n a n c e the p r o c e s s P r i v a t e c a p i t a l movements. the t o c o n v i n c e our through t h e i r Nevertheless, I think i t b o t h the c o s t s and b e n e f i t s I n the f i r s t by d e v e l o p i n g c o u n t r i e s o f such place, if The p l a c e o f p r i v a t e foreign investment. much more f i n a n c i n g w i l l be needed need t o c u l t i v a t e sources o f p r i v a t e c a p i t a l from member c o u n t r i e s over time, as we i s n e c e s s a r y t o take a f r e s h l o o k a t more than can be counted on from o f f i c i a l capital easier citizens i n the years ahead - - and the i n c r e a s e to the r e p o r t s really t a x payments. f i n a n c i n g f o r development i s a good d e a l more c o n t r o v e r s i a l , Again r e f e r r i n g resources. The more e v i d e n c e we can show f o r us i n the i n d u s t r i a l i z e d c o u n t r i e s a l l know. recipient n o t work a t a l l u n l e s s the r e s o u r c e s a r e put t o work i n the r e c i p i e n t c o u n t r i e s . t h a t the a i d p r o c e s s that sources - to b r i d g e is t h e r e w i l l be a the gap. of the DAC, the n e t f l o w o f to d e v e l o p i n g a r e a s has been private rising from about $3 b i l l i o n on average i n 1960-64 t o $4 billion -19i n 1965-67 and n e a r l y $6 b i l l i o n i n 1968. were o n l y $1 b i l l i o n less 1960-68 p e r i o d p r i v a t e financial than o f f i c i a l I n 1968, n e t p r i v a t e f l o w s , and f o r the whole f l o w s accounted f o r about 40 per c e n t o f f l o w s t o the d e v e l o p i n g c o u n t r i e s Undoubtedly, all from DAC members. t h e r e a r e problems connected w i t h r i s i n g o f p r i v a t e c a p i t a l w i t h w h i c h we have to cope. is flows One obvious flows problem t h a t a r i s i n g p o r t i o n o f the p r i v a t e f l o w seems t o be e x p o r t credits - - many o f w h i c h a r e r e l a t i v e l y high i n t e r e s t rates. short-term with relatively A l t h o u g h a r i s i n g volume o f e x p o r t c r e d i t out- s t a n d i n g i s a normal complement to an e n l a r g e d f l o w o f t r a d e , we must be on our guard t o a v o i d dependence on such c r e d i t s as a substitute for long-term f i n a n c i n g . I f not, b e f o r e l o n g , we w i l l f i n d a l a r g e r and l a r g e r p a r t o f our developmental f l o w s absorbed i n repayment o f commercial c r e d i t s . Frankly, n a t i o n s - - and n o t a l o n e the U n i t e d S t a t e s - - t h a t a r e being industrial supplying l o n g - t e r m developmental c a p i t a l w i l l n o t be happy i f they f i n d a r e m e r e l y f i n a n c i n g the repayment o f e x p o r t c r e d i t s from o t h e r they countries. Another p o t e n t i a l l y developing areas is the p u b l i c c a p i t a l markets. i n t o c o n f l i c t w i t h the f a c t domestic borrowers w i l l ing countries, i m p o r t a n t source o f c a p i t a l for Here we come d i r e c t l y t h a t i n t e r e s t r a t e s even t o w e l l - k n o w n p r o b a b l y remain v e r y h i g h . F o r most d e v e l o p - t h e r e would need to be an e x p e n s i v e and extended effort -20to c r e a t e acceptance of bond i s s u e s by the g e n e r a l p u b l i c i n U n i t e d S t a t e s or European markets. more use o f the m u l t i l a t e r a l borrowing process. Governments o f the market, One way out o f t h i s i s To the e x t e n t the t h e i r debt i s guaranteed by the in they w i l l be a b l e to borrow on terms a t l e a s t as good -- p r i n c i p a l l y Our c a p i t a l markets i n the U n i t e d t o the bond i s s u e s o f these o f the European market f o r increased e f f o r t international the e x t r a o r d i n a r y issues, Here a g a i n , b e s t p o s i t i o n to r a i s e the i n t e r n a t i o n a l growth as w e l l as to open up some n a t i o n a l markets t o I believe organiza- the W o r l d Bank. A n o t h e r h o p e f u l development i s however, in t h e i r members, and they a r e r e c o g n i z e d e n t i t i t e s S t a t e s have been v e r y r e c e p t i v e borrowers. to make o r g a n i z a t i o n s as i n t e r m e d i a r i e s as those o f o t h e r prime b o r r o w e r s . tions the foreign institutions funds on r e a s o n a b l e terms. the are i n the On the whole, i t would be a d v i s a b l e f o r i n d i v i d u a l countries to be v e r y c a u t i o u s about i n c u r r i n g a l a r g e bonded i n d e b t e d n e s s . succeed i n s e l l i n g such i s s u e s , the t e s t o f of a c o u n t r y must be prepared to meet the market - - w h i c h w i l l the c o u n t r y i n a s s e s s i n g the r i s k rates w i l l be h i g h , the proceeds w i l l directly repay debt. l o o k t o the expected performance involved. I n most c a s e s , and I would urge borrowers t o be v e r y sure have a p r o d u c t i v e use t h a t w i l l or i n d i r e c t l y -- To t o the f u t u r e a b i l i t y of contribute interest that -- the c o u n t r y to -21Finally, I would l i k e to comment on the o t h e r source of p r i v a t e c a p i t a l - - p r i v a t e d i r e c t r e a l l y more than a source o f financing, investment. principal This is because a l o n g w i t h a i n f l o w comes the a b i l i t y and knowledge t o put i d l e domestic capital resources t o use and t o b r i n g a q u i c k r e t u r n i n the form o f b o t h r i s i n g and b a l a n c e o f payments b e n e f i t s . mixed: sometimes the f o r e i g n a disproportionate I know the h i s t o r i c a l r e c o r d investor has taken out o f the share o f the p r o d u c t o f the e n t e r p r i s e , times t h e r e have been u n d e s i r e d s o c i a l o r p o l i t i c a l But I b e l i e v e incomes is country and some- consequences. the Governments o f the d e v e l o p i n g c o u n t r i e s a r e now b e t t e r a b l e t o see t o i t t h a t these investments a r e o p e r a t e d equitably and m a i n t a i n a p r o p e r r o l e i n the s o c i e t y o f the h o s t c o u n t r y . their part, the d i r e c t i n v e s t o r s have l e a r n e d , long-run i n t e r e s t requires developing countries, developmental r a t h e r t h a t they f i t I believe, i n t o the s o c i e t y o f their the and they r e c o g n i z e t h a t t h e i r r o l e must be than exploitative. D i r e c t i n v e s t o r s are not p h i l a n t h r o p i s t s because a p r o f i t that For - - they w i l l invest can be made w i t h r e a s o n a b l e s e c u r i t y o f c a p i t a l . b e l i e v e the r e c o r d w i l l I show t h a t on the whole such investment makes a major c o n t r i b u t i o n t o f o r e i g n exchange r e s o u r c e s - - even a f t e r d e d u c t i n g r e m i t t a n c e s o f e a r n i n g s - - and t h a t i t s potential g e n e r a t i n g employment, e s p e c i a l l y s k i l l e d employment, I am n o t here t o promote d i r e c t ment problems. But I b e l i e v e i t is investment as a c u r e - a l l for substantial. for develop- has an i m p o r t a n t p l a c e , and t h a t -22developing countries should consider its potentialities, in today's c i r c u m s t a n c e s , w i t h o u t p r e j u d i c e but i n a s t r a i g h t f o r w a r d business- l i k e way. - - and Calculate the c o s t s and b e n e f i t s r e a l i s t i c a l l y remember t o compare these c o s t s and b e n e f i t s w i t h those t h a t must be f a c e d when one borrows abroad, s a v i n g s i n t o the development or when one attempts process. B a l a n c e o f payments c o n s t r a i n t s . fact t o draw domestic I mentioned e a r l i e r the t h a t mounting demands f o r more and b e t t e r goods and s e r v i c e s i n the i n d u s t r i a l i z e d countries w i l l less-developed countries, create opportunities b u t they w i l l a l s o c r e a t e for the difficulties. We f a c e an immediate d i f f i c u l t y i n the U n i t e d S t a t e s ; our b a l a n c e o f payments has been i n d e f i c i t f o r a l o n g time, and p r o g r e s s a stronger balance i s d i s t u r b i n g l y t o improve our t r a d e b a l a n c e , slow. and i t w i l l We have o n l y r e c e n t l y begun take c a r e f u l demand manage- ment i n the y e a r s ahead t o a v o i d d e t e r i o r a t i o n . growing r e l a t i v e t o our GNP - - p a r t i c u l a r l y Imports have been imports o f f i n i s h e d goods and t h i s has a l r e a d y t r i g g e r e d a s t r o n g p r o t e c t i o n i s t had t o put r e s t r a i n t s larger d e f i c i t s . restraints on c a p i t a l Yet, I believe outflows drive. We have i n o r d e r t o a v o i d even we have succeeded i n c o n f i n i n g t o f l o w s t o the o t h e r i n d u s t r i a l n a t i o n s w i t h o u t ing w i t h flows to developing toward the interfer- countries. These a r e immediate problems, b u t they a l s o c a s t a shadow on the p r o s p e c t s for the l o n g e r r u n t h a t we have been d i s c u s s i n g . It -- -23seems to me t h a t o t h e r i n d u s t r i a l c o u n t r i e s have t o r e c o g n i z e the U n i t e d S t a t e s cannot s h o u l d e r a r i s i n g burden o f assistance unless considerably its development e x p o r t s u r p l u s on goods and s e r v i c e s improved. This i s very d i f f i c u l t and r e s i s t exchange r a t e or o t h e r adjustments h e l p to smooth the way f o r smoothly. if and rising t h a t would i n c r e a s i n g w o r l d t r a d e and c a p i t a l Developing countries, i n s e e i n g to i t is to a c c o m p l i s h competing c o u n t r i e s a l s o aim a t r i s i n g e x p o r t s u r p l u s e s , reserves, that therefore, have a d i r e c t flows. interest t h a t the i n t e r n a t i o n a l adjustment process works More s p e c i f i c a l l y , i n d u s t r i a l i z e d countries other than the U n i t e d S t a t e s w i l l have t o be p r e p a r e d i n the years ahead t o finance t h e i r growing t r a d e s u r p l u s e s w i t h l o n g - t e r m f i n a n c i n g on terms t h a t meet the needs o f d e v e l o p i n g Concluding countries. Observations I do n o t want t o l e a v e the i m p r e s s i o n t h a t we w i l l fail t o respond to the needs o f the d e v e l o p i n g c o u n t r i e s i n the decade ahead. in a l l We a l l the w o r l d . resources hope they w i l l be years of progress I do want t o emphasize, however, in sight and t h a t i t w i l l to s a t i s f y the a s p i r a t i o n s of t h a t t h e r e a r e not enough of a l l o f our people, take r e a l statesmanship and d e t e r m i n a t i o n t o about the r e d i s t r i b u t i o n o f r e s o u r c e s t h a t w i l l be c a l l e d parts for. bring
@FedFRASER