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other areas off the Oregon-Washington coast
measures would be taken, jointly and sepa-
rately, to protect stocks of fish. Additional
protection would be provided for the fishing
gear of U.S. halibut fishermen in areas near
Kodiak Island, Alaska, early in the halibut
season. Under the agreement, Soviet vessels
would transfer cargoes in several designated
areas off Washington and Oregon and off
Alaska in the 9-mile zone contiguous to the
U.S. territorial sea. Soviet vessels would
also continue to fish within the 9-mile zone
for the duration of the agreement in two
areas of the central and western Aleutians
and a smaller area in the northern Gulf of
Alaska.

The agreement also provides for coopera-



tion in scientific research, exchange of scien-
tific data and personnel, exchanges of fisher-
men or their representatives aboard vessels
of the two countries, and general proce-
dures for reducing conflicts between vessels
and gear of the two countries.

The draft agreements are now under con-
sideration by governments. It is expected
that formal signature may take place within
2 weeks.

The U.S. delegation for the talks was
headed by Ambassador Donald L. McKernan,
Special Assistant for Fisheries and Wildlife
to the Secretary of State. The Soviet delega-
tion, consisting of six persons, was headed
by Deputy Minister of Fisheries M. N.
Sukhoruchenko. Ambassador McKernan was
assisted by advisers from Federal and State
fishery agencies and from the sport and com-
mercial fisheries of Alaska, Washington,
Oregon, California, Rhode Island, New York,
and New Jersey.



332



DEPARTMENT OF STATE BULLETIN



THE CONGRESS



International Economic Policies



ECONOMIC REPORT OF THE PRESIDENT AND ANNUAL REPORT OF THE COUNCIL
OF ECONOMIC ADVISERS (EXCERPTS)



Folloiving are the introductory paragraphs
(page 3) and the section entitled "Interna-
tional Economic Policies" (pages 13-16)
from the Economic Report of the President,^
together with the portion of the Anmcal Re-
port of the Council of Economic Advisers
which deals with growth and balance in the
world economy (chapter 5, pages 170-197).



affluence. The sacrifices required of most of
today's generation are not of income or
security; rather we are called on to renounce
prejudice, impatience, apathy, weakness, and
weariness.

In purely material terms, most Americans
are better off than ever before. That fact
expands our responsibilities, as it enlarges
our resources to meet them.



ECONOMIC REPORT OF THE PRESIDENT

To the Congress of the United States:

A healthy and productive economy is a bul-
wark of freedom.

Around the world and here at home, our
trials of strength, our works of peace, our
quest for justice, our search for knowledge
and understanding, our efforts to enrich our
environment are buttressed by an amazing
productive power.

Americans have confronted many chal-
lenges in this century. The ones we face in
1967 are as trying of men's spirits as any we
have known. But the overwhelming majority
of us face our challenges in comfort, if not



' Economic Report of the President Transmitted
to the Congress January 1967, Together With the
Annual Report of the Council of Economic Advisers
(H. Doc. 28, 90th Cong., 1st sess.; transmitted on
Jan. 26), for sale by the Superintendent of Docu-
ments, U.S. Government Printing Office, Washing-
ton, D.C., 20402 ($1.25).



INTERNATIONAL ECONOMIC POLICIES

The current year is a critical one for our
international economic policies and for the
economic progress of the world community.

As the largest single market and source of
capital, the United States carries special
responsibilities.

Trade

This Administration is committed to re-
ducing barriers to international trade, as
demonstrated by my recent action terminat-
ing the 1954 escape clause action on watches,^
and rolling back the special tariff on imports
of glass.8

The Kennedy Round of trade negotiations
is now entering its final and most critical



' Bulletin of Feb. 6, 1967, p. 217.
»76id.,p. 216.



FEBRUARY 27, 1967



333



phase. I emphasize once more how important
this great attempt to liberalize world trade is
for all the developed and developing nations
of the free world.

After more than 4 years of discussion, it
is essential that the participants now resolve
the many complex problems that still remain.
It would indeed be a tragedy if the wide
authority granted to the President by the
Trade Expansion Act of 1962 were allowed
to lapse unused. Never before has there been
such a splendid opportunity to increase world
trade. It must not be lost.

But the Kennedy Round is not the end of
the road. We must look beyond the negotia-
tions in Geneva to further progress in the
years ahead. \Ye must begin to shape a trade
policy for the next decade that is responsive
to the needs of both the less developed and
the advanced countries.

We should seize every opportunity to build
and enlarge bridges of peaceful exchange
with the countries of Eastern Europe and the
Soviet Union. We should have the ability to
adapt our policies to whatever political cir-
cumstances or commercial opportunities may
present themselves. I again urge the Congress
to provide authority to expand our trade re-
lations with Eastern Europe and the Soviet
Union.

Aid

Although 1966 was a relatively good year
for world economic growth, average output
in developing countries rose by less than $3
a person.

There were, however, encouraging signs of
progress. Developing nations demonstrated
a willingness to take difficult but necessary
steps to help themselves. India, for example,
revised her foreign exchange and agricultural
policies to promote more rapid growth.

Among the wealthier nations, stronger
efforts were made to assist the development
of the poorer countries. Canada and Japan
increased their assistance programs. Major
free world aid donors joined in new groups
to coordinate their flow of aid.



The United States will continue to respond
constructively to the aspirations of the de-
veloping nations. We will give first priority
to fighting the evils of hunger, disease, and
ignorance in those free world countries which
are resolutely committed to helping them-
selves.

There should, however, be increasing
efforts to make both the receiving and giving
of aid a matter for creative international
partnership. We shall therefore

— continue to support enthusiastically, in a
manner consistent with our balance of pay-
ments position, such promising cooperative
regional efforts as the Alliance for Progress,
the Inter-American, the Asian, and the Afri-
can Development Banks, and the Mekong
Development Fund of the United Nations;

— further encourage the coordinated exten-
sion and expansion of aid by the major donor
countries in ways that result in an equitable
sharing of the burden;

— seek the cooperation of other major
donor countries this year in replenishing the
resources of the International Development
Association.

Balance of Payments

We can take some satisfaction in the fact
that our balance of payments in 1966 may
prove to have been in surplus on official re-
serve settlements. Despite the added costs of
the war in Vietnam and the rapid growth of
imports, our deficit on a liquidity basis
increased only slightly in 1966.

But we cannot relax our efforts to seek
further improvement.

Our goal in the coming year is to continue
to move toward balance of payments equi-
librium as rapidly as the foreign exchange
costs of the Vietnam conflict may permit.
This goal will be supported through measures
and policies consistent with healthy growth
at home and our responsibilities abroad.

We already have extended and reinforced
the voluntary restraint programs for corpo-
rate investment abroad and for foreign lend-
ing by financial institutions. I am counting on



334



DEPARTMENT OF STATE BULLETIN



the continued full cooperation of businesses
and banks with these programs in 1967. And
I have instructed all agencies of the Govern-
ment to intensify their efforts to limit the
dollar drain resulting from their activities.

But more is needed. I now recommend the
following steps:

1. The Congress should extend the Interest
Equalization Tax, in strengthened form, to
July 31, 1969. This tax has proved extremely
useful in limiting the borrowing of developed
countries in our capital markets and in rein-
forcing the Federal Reserve voluntary pro-
gram. As we move toward easier money in
the United States, foreign borrowing in our
financial markets may tend to increase. I am
therefore requesting authority to adjust the
rates of the Interest Equalization Tax as
monetary conditions warrant, so that the
effective impact on interest costs can be
varied between zero and 2 percent. This
would replace the present flat 1-percent im-
pact.

Moreover, to ensure against possible
anticipatory increases in foreign borrowing, I
am also requesting that the tax be imposed
at rates which provide an impact of 2 percent
on interest costs while the legislation is under
consideration by Congress.

2. The most satisfactory way to arrest the
increasing gap between American travel
abroad and foreign travel here is not to limit
the former but to stimulate and encourage
the latter. I shall appoint in the near future
a special industry-Government task force to
make specific recommendations by May 1,
1967, on how the Federal Government can
best stimulate foreign travel to the United
States. After a careful review of their advice,
I shall ask the U.S. Travel Service and other
appropriate agencies to take the steps that
seem most promising.

3. As part of our long-run balance of pay-
ments program, I shall also

— request continuation and expansion by
$4.5 billion of the lending authority of the
Export-Import Bank in order to support the
expansion of exports;



— continue to urge other countries to par-
ticipate in the development of better means
both of sharing the resource burdens and of
neutralizing the balance of payments effect
arising from the common defense and foreign
assistance efforts.

4. For the longer run strength of our pay-
ments balance, we should intensify efforts to

— stimulate exporters' interest in supply-
ing foreign markets;

— enlist the support of the financial com-
munity to attract additional foreign invest-
ment in the United States;

— encourage further development of foreign
capital markets.

'Improving the International Monetary System

In 1966, significant progress was made
toward a better international monetary sys-
tem. Through close consultation and coopera-
tion among the financial authorities of major
countries, temporary strains were met
promptly and effectively.

Two large forward steps were taken on the
road to international monetary reform: wide
consensus was reached on basic principles for
the deliberate creation of additional reserve
assets; and the negotiations advanced to a
second stage in which all members of the
International Monetary Fund are par-
ticipating.

An even greater effort must be made in
the coming year to improve our monetary
system. In particular, I urge that

— all countries participate in the continu-
ing task of strengthening the basic monetary
arrangements that have served the world so
well;

— both surplus and deficit countries assume
their full responsibility for proper adjust-
ment of international payments imbalances,
and cooperate in efforts to lower world
interest rates;

— full agreement be reached on a construc-
tive contingency plan for the adequate and
orderly growth of world monetary reserves.



FEBRUARY 27, 1967



335



REPORT OF COUNCIL OF ECONOMIC ADVISERS

Chapter 5 — Growth and Balance in the World
Economy

World economic expansion in the first half of the
1960's has been sustained and rapid. The pace has
probably been surpassed only during the period of
recovery from World War II. Moreover, since the
end of the war, the extreme fluctuations of earlier
years have not been repeated.

But continued economic progress is not assured.
Many problems remain. The most difficult and im-
portant is that of overcoming poverty in many of
the less developed countries of Africa, Asia, and
Latin America. A major problem for the developed
countries is to cope with international financial im-
balances in ways which do not inhibit sound eco-
nomic growth.

This chapter records the economic progress in
both the developed and less developed countries dur-
ing the first part of the 1960's and outlines some
major issues for international consideration during
the remainder of this decade. It deals especially with
the policy issues facing the United States and other
developed countries in their efforts to achieve a bet-
ter international balance and to pursue national
policies that promote world economic progress. The
worldwide economic impact of their national policies
places a special responsibility on the major devel-
oped countries.

WORLD ECONOMIC GROWTH IN THE 1960's

Two quantitative goals for economic growth in
the 1960's have been fixed by international organiza-
tions :

The United Nations has set 5 percent a year as
the minimum growth rate for the less developed
countries over the 1960's, calling this the "Develop-
ment Decade."

The Organization for Economic Cooperation and
Development (OECD), which includes the countries
of Western Europe, the United States, Canada, and
Japan, has called for an increase in aggregate out-
put of all member countries combined, amounting to
50 percent over the decade or an average annual
growth rate of 4.1 percent.

As can be seen from Table 29, the expansion of
real output in the less developed countries, estimated
at 4% percent a year, so far has fallen somewhat
short of the UN target on average, and far below it
in several of the largest of these countries. How-
ever, the table also shows that output in the OECD
countries has been exceeding the growth rate of the
OECD target.



Table 29. — Changes in total and per capita real

GNP in OECD and less developed countries

since 1955



Country



OECD countries: Total

United States

Total excluding United
States



Germany

United Kingdom

France

Japan

Italy

Spain

Greece



Less developed countries :
Total



Africa

Nigeria

Ghana

Latin America

Brazil

Argentina

Mexico

Asia

Middle East _
Other Asia __

India

Pakistan —



Share
of

total
output

(per-
cent) 1



100.0
63.3

46.7
8.6
7.7
7.3
5.4
4.1
1.4
.4

100.0
12.5

1.3
.7
50.1
11.6
10.7
10.7
37.4

6.4
31.0
16.3

3.7



Percentage increase per year



Total real
GNP



1955

to
1960



3.2

2.2

5.0
2 6.3
2.8
4.6
9.7
5.5
4.3
5.4

< 4.5

(5)

(S)
6.1
4.8
5.8
2.6
6.1
4.&
6.1
4.2
4.4
3.5



1960

to

1965



5.0

4.7

5.3

3 4.8
3.3
5.1
9.7
6.1
9.2
8.7

4.6
3.3
5.0
4.0
4.4
3.3
3.0
6.9
3.9
6.1
3.4
2.9
5.4



Per capita
real GNP



1955

to
1960



2.0
.4

3.7
2 5.1
2.2
3.7
8.9
4.9
3.4
4.3



(5)
(5)



3.5
2.0
2.7
.9
3.0
2.4
3.7
2.1
2.3
1.2



1960

to
1966



3.7
3.2

4.2
33.6
2.6
3.7
8.5
4.3
8.3
8.1

2.2
1.1
3.0
1.3
1.5

.2
1.3
2.8
1.6
3.7
1.0

.4
2.8



< Share in 1963 for OECD countries and in 1960 for less de-
veloped countries.

~ Excludes Saar and West Berlin.
3 Includes Saar and West Berlin.
■* Estimates.
5 Not available.

Note. — Totals include countries not shown separately.

Detail will not necessarily add to totals because of rounding.

Sources : Organization for Economic Cooperation and Develop-
ment (OECD). Agency for International Development (AID),
and Council of Economic Advisers.



Developed Countries

In the first half of the 1960's, real output in
Western Europe and Japan increased by more than
5 percent a year. Contributing to the rapid expan-
sion were government policies directed toward
achieving and maintaining high levels of employ-
ment with reasonable price stability, stimulating the
movement of labor from low to high productivity
employment, reducing barriers to foreign trade, and
encouraging the more efficient utilization of re-
sources in other ways.

A high rate of capital formation helped to
achieve this rapid growth. Investment averaged 18
percent of gross national product (GNP) in the
OECD countries other than the United States; it



336



DEPARTMENT OF STATE BULLETIN



ranged from almost 30 percent in Japan to less than
14 percent in the United Kingdom. While much of
the increase in output comes from investment in
physical capital and from the incorporation of tech-
nological advances, a good deal also comes from in-
vestment in human capital — in raising the education,
skills, and health of the population.

The growth of output is also benefiting from the
movement of labor out of activities of low produc-
tivity to those of higher productivity. There has been
a large-scale movement of labor from Southern Eu-
rope to Northwestern Europe — from areas of low
productivity, low incomes, and high unemployment
to areas where productivity and incomes are high
and unemployment low. Within countries, the major
shift has been out of employment in agriculture. The
OECD estimates that this latter shift alone ac-
counted for between 10 and 15 percent of the in-
crease in productivity during the first half of the
1960's in France, Germany, Italy, and Japan. The
United Kingdom, which by 1960 already had only a
small agricultural sector, did not have this source
of expanding productivity.

Internal shifts of labor have been stimulated and
facilitated by the expansion of foreign trade, which
has far exceeded the growth of output. The rapid
growth of trade has resulted, in part, from the re-
duction of trade barriers, especially vdthin the two
regional groupings — the European Economic Com-
munity (EEC) and the European Free Trade Asso-
ciation (EFTA).

For a number of European countries and Japan,
a rapid rise in exports has also directly stimulated
the grovvi,h of GNP. In addition, when domestic ex-
pansion is led by export growth, the resulting rise in
imports can be readily financed; there is less chance
that the government will need to apply the brakes
to reverse a developing balance of payments deficit.

Less Developed Countries

The achievement of an adequate rate of self-
sustaining growth in the less developed countries
remains an urgent world economic problem. Over
half of the 4% percent annual growth of total out-
put for the less developed areas has been needed just
to maintain their low level of living, since their
populations have been rising by 2V^ percent an-
nually. The yearly increase in per capita output has
been only 2 percent, or barely $3 a person.

Achieving rapid and sustainable growth in these
countries is by no means a hopeless task, however.
Self-sustaining growth has been attained in certain
less developed countries — including Israel, Malaysia,
Mexico, Taiwan, Venezuela, and some Central Amer-
ican countries. Others — such as Pakistan, South
Korea, Thailand, and Turkey — are approaching that
objective.



But the problems are formidable. Further efforts
by both the developed and the less developed coun-
tries are required. The rapid growth of population
in many less developed countries, already over-
populated in relation to their economic resources,
must be slowed. A number of these nations have
adopted measures to induce their citizens to limit
the size of their families. Some of these programs —
in Hong Kong, Singapore, and Taiwan — have al-
ready shown signs of success. Nevertheless, the
growth rate of population in the less developed coun-
tries as a group is still rising.

Another major problem area is agriculture. Agri-
cultural output has grown so slowly that food out-
put per person in many countries is below pre- World
War II levels. Unless a vigorous effort is made to
redress the situation, it is likely to deteriorate fur-
ther as population and need for food continue to
grow rapidly. Moreover, in at least some of the less
developed countries, agricultural development may
be a key to general economic growth. The applica-
tion of improved farming techniques can substan-
tially improve agricultural productivity with rela-
tively small increments of capital; increased agri-
cultural output can be a major substitute for im-
ports; rising farm income can provide an expanding
market for domestic industrial output.

The developed countries can do much to help by
providing technical assistance, food, fertilizers, agri-
cultural equipment, and financing. But the basic
responsibility rests on the less developed countries
themselves. They must, among other things, improve
the incentives for farmers to increase output.

Education also is a major field in which improve-
ment is essential. Economic progress requires liter-
acy. A modern and expanding economy needs much
more — people trained to operate farm machinery,
run a lathe, operate a retail store, and keep ac-
counts. In recognition of the importance of educa-
tion, the less developed countries have in recent
years increased their education budgets by 15 per-
cent annually. This effort has long been supported
by the United States. More Agency for International
Development (AID) technicians working abroad are
employed in educational projects than in any other
field. Moreover, beginning in fiscal year 1967, AID
is sharply increasing its educational aid effort, as
well as its work in agriculture and health. The edu-
cational efforts of our Peace Corps workers are also
welcomed throughout the less developed world.

The Need for Capital

The developing countries also need capital. About
one-fourth of their domestic investment is financed
by capital imports. From 1961 to 1965, the net
amount of this capital inflow rose by only 5 percent
a year in money terms and less in real terms. Some
increase continued into 1966. Since 1963, the entire



FEBRUARY 27, 1967



337



increase from abroad has been in private capital
flows.

This investment, to be sure, benefits the recipient
countries, and the United States has taken steps to
encourage it. But it has gone mainly to the extrac-
tive industries, particularly oil. Thus, it is unevenly
distributed among countries. Further, investment in
technologically advanced, sometimes highly auto-
mated, extractive processes does not have the same
stimulating effects on general economic activity as
does investment in local manufacturing. It does,
however, provide much needed foreign exchange and
technological know-how for those countries fortunate
enough to be well-endowed vvrith minerals.

For many developing nations, a growing burden
of interest and amortization payments on external
debt absorbs a large and rising proportion of gross
aid receipts. In 1960, debt service charges amounted
to 13 percent of the official bilateral aid receipts of
less developed countries; today the figure is 19 per-
cent. India's debt service charges on government
assistance for the period of its Third Plan amounted
to 26 percent of its foreign aid. In Turkey, debt serv-
ice during 1963-66 was more than half as large as
gross foreign aid.

For the net inflow of aid merely to remain con-
stant, the gross inflow must rise to cover growing
debt service. In fact, the gross flow of government
aid from the developed countries has been rising just
enough to keep net aid inflow on a plateau since
1963. Future prospects are even less encouraging.
Bilateral aid commitments— pledges of actual aid
disbursements to be made in the future — declined in
1965. This could foreshadow a decline in net and
even in gross official aid disbursements in the years
to come.

The stagnation in the net flow of official capital
to the less developed countries has come at the very
time that the industrial countries have reached new
heights of prosperity. And it comes at a time when
the pace of economic expansion achieved by the less
developed countries as a group is encouraging. They
are developing the skills required for a modern econ-
omy. They are capable of using more capital than
they can raise domestically or borrow abroad on com-
mercial terms. For this and other reasons, foreign
aid, both bilateral and multilateral, should have a
high priority claim on the resources of high-income
countries.

One of the most fruitful avenues for increased aid
to the less developed countries is through the multi-



Online LibraryUnited States. Dept. of State. Office of Public CoDepartment of State bulletin (Volume v. 56, Jan- Mar 1967) → online text (page 59 of 90)