Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

184. Memorandum From the Special Representative for Economic Summits (Owen) to President Carter¹

Washington, December 8, 1978

SUBJECT

• Two Years Down; Two to Go (U)

After each half year in 1977, I sent you an appraisal of the Administration’s foreign policy record.² Two years since you took office may be an even better time to review both the record and the tasks ahead. I haven’t tried to examine the whole field—focusing only on a few salient areas. (U)

1. War and Peace. The main accomplishment of the last two years was in reducing the chances of war in the two most dangerous areas of possible US-Soviet conflict: (C)

a. In the Middle East, there is a greater chance of setting in motion a process that could lead to peace than at any time since the creation of Israel. (C)

b. In Central Europe, a NATO buildup has been launched, which seems likely to restore the military stability that had been called into question by Soviet military programs in the mid-1970s. (C)

These are big improvements. There are still a lot of risks ahead, particularly in unstable countries on the periphery of the USSR, but we’re clearly better off than in December 1976. This improvement was made possible because we had our priorities right: During the campaign you said that the main focus of US foreign policy should be on constructive cooperation with our friends. What we have done to this end in Europe and the Middle East has been more important in reducing risk of war than anything that has been, or could have been, accomplished in direct dealings with the USSR. (C)

Substantial progress has also been made in those dealings, however; the main advantage of SALT–II³ may be in paving the way for a more ambitious SALT–III agreement, in which we can get at the principal cause of nuclear instability: technological change. This argues for seeking a SALT–II whose ratification will not provoke such intense opposition or leave such a residue of bitterness in this country as to prejudice our ability to move quickly to far-reaching follow-on nego-tiations. (C)

2. Prosperity. The second test of a successful foreign policy is whether it helps or hurts our economic well-being. (U)

You worked out a strategy with our partners at Bonn that is bearing fruit: Germany and Japan have taken stimulus measures; the US is giving fighting inflation top priority; and these policies are creating a convergence of economic policies that Jacques de Larosiere, head of the IMF, believes portends a steadily improving world economic situation. (U)

We have also taken a stagnant Multinational Trade Negotiation and brought it to the verge of success. (U)

Energy remains a problem, but we’re moving in the right direction—toward deregulation, which will allow market forces to reduce oil imports and spur oil production. Your recent anti-inflation decisions have strengthened OPEC confidence in the dollar and thus moderated pressures for price increases.⁴ (C)

These achievements create a good prospect for a strong dollar and a continuing reduction in the US external deficit. To fulfill this prospect, we will need in the next two years to: (U)

—press Japan to adopt a more stimulative domestic policy (de Larosiere considers Japan’s failure to fulfill its 7% growth target world economic problem #1);⁵ (C)

—ratify and implement an MTN agreement (an effort that Bob Strauss says will make the Panama Canal look like a picnic);⁶ (C)

—allow the US oil price gradually to rise to world levels, as pledged at Bonn; (U)

—press your export promotion program, even when this conflicts with other US objectives; (C)

—make our exports more competitive, by increasing US investment and productivity—even if this means tax changes and cutting back on otherwise desirable government regulations. (C)

More important than any of these will be how we prosecute the fight on inflation, which is treated under (4) below. (U)

3. North-South. You said in the campaign that you would restore morality to US foreign policy. This means different things to different people. To me, it means helping the one billion people in the world who live in desperate poverty. (U)

Most of these people are not in the middle-income developing countries; these countries, moreover, do not need concessional aid. What they need is a good MTN agreement, and strong multilateral financial institutions from which they can borrow on hard terms. We have moved actively to achieve both. This Administration’s lead in creating the new IMF facility and our progress in making up our World Bank arrearages is in refreshing contrast to past US neglect of these two institutions. The case for thus helping middle-income countries is clear in terms of US self interest: They are increasingly important economic partners. (U)

The case for helping poor developed countries rests on a longer term consideration, our interest in meeting global problems, and on moral grounds: When Bob Lipshutz swore in members of the Hunger Commission,⁷ he referred to a quotation from Matthew; when I had looked it up, it seemed to me the best justification of aid to poor countries that I had read: “In as much as ye have done it unto one of the least of these my brethren, ye have done it unto me.” We’re not ashamed to take moral considerations into account in our private lives; there’s no reason we shouldn’t do so as a nation, as well. (U)

Your Administration has significantly increased foreign aid. The biggest increase has been in multilateral aid; this makes sense because one US dollar here mobilizes three dollars from other donors. You have also improved the quality of aid by directing concessional development loans and PL 480 more clearly to the needs of poor people in poor countries—leaving hard loans to meet the needs of middle-income countries and SSA to meet political needs. This maximizes the amount of concessional aid available for the poor. (U)

We have moved toward the developing countries’ views about the Common Fund, although it’s not yet clear whether this will result in agreement. (U)

North-South oratorical tensions persist, and this will continue for some time. But US substantive policies toward LDC’s have improved and this should be reflected in these countries’ attitudes, as well as prospects. (U)

Our main North-South task in the next two years will be to continue these policies. The most important innovation may be creation of the Foundation for International Technical Cooperation with developing countries announced in your Caracas speech.⁸ The Ford and Rockefeller Foundations are so impressed that they have said they might contribute $10 million. (U)

All this may have only a limited political pay-off, at least in the short run; aid recipients are not noted for their gratitude. But it will have a lot to do with what happens to a good many human beings—and thus with whether your effort to restore moral purpose to US foreign policy succeeds. (U)

4. Conclusion. A common thread runs through this memo: Your foreign policy achievements to date have been considerable—more than most Presidents can count in their first two years; ultimate success rests on continuing these policies in the next two years. (U)

But here is the dilemma: Success of your foreign policy also rests on your anti-inflation program achieving its goals. This will probably, as I suggested after the London Summit, have to be our central task for the next several years: Like European countries and Japan in the early 1970’s, we will have to stick to tight fiscal and monetary policies, despite the pressures that slowing growth and rising unemployment may create for premature reflation. (U)

This anti-inflation campaign will, by its nature, call into question some of the other policies described above—e.g., the NATO defense build-up, allowing US oil prices to rise to world levels in 1980, and increasing our aid for developing countries. Posing this dilemma doesn’t tell us what decisions we should make about these problems. But it does suggest how we should make them. When other industrial countries faced similar choices, we were quick to remind them that their decisions affected us and that we wanted to be consulted. The reverse is even more true, given our central position in the alliance. (C)

This won’t be easy: It’s hard enough to make choices within the pluralistic US government, let alone involve other countries. Yet it will be the price of holding together the alliance among industrial democracies on which our security and prosperity depends. A defense program that involves less than a 3% increase, an aid program that doesn’t rise as rapidly as we had hoped, oil prices that reach world levels in 1981 rather than 1980—these changes may be manageable. But only if our allies feel that their views and interests have been taken into account, as we make these hard choices in the next two years. (C)

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Subject Chron File, Box 59, Administration’s Policy: General: 1978. Confidential. Sent for information. Carter wrote at the top of the page: “Generous. J.” Brzezinski also initialed the memorandum.
2. See Document 91.
3. Reference is to the ongoing second round of U.S.-Soviet Strategic Arms Limitation Talks.
4. Blumenthal reported on his November 16–22 trip to Saudi Arabia, the United Arab Emirates, Iran, and Kuwait in a November 24 memorandum to Carter. He noted that “for virtually all Government leaders I saw, the single most important economic event of the recent past has been the dramatic reversal of the fortunes of the dollar. This action has made a deep impression. It is seen as a major event, a specific Carter initiative, greatly benefiting each of the countries involved. Without it, a major (15% or more) price increase might well have been inevitable.” (Carter Library, National Security Affairs, Brzezinski Material, Agency File, Box 22, Treasury Department: 4/78–2/79)
5. See Document 182.
6. Carter underlined the phrase “make the Panama Canal look like a picnic” and wrote in the adjacent margin: “nothing could do this.” See footnote 4, Document 163.
7. See footnote 6, Document 171. Robert Lipshutz was Counsel to the President from January 1977 until October 1979.
8. See Document 311. Carter proposed the initiative in his address to the Venezuelan Congress in Caracas on March 29. For the text of his remarks, see Public Papers of the Presidents of the United States: Jimmy Carter, 1978, Book I, pp. 619–623.