How Foreign Economic Policy Might Be More Effectively
Organized
Foreign economic policy is a problem area not only in terms of substance
but of organization as well. Aside from the inherent difficulties of
economic policies cutting across domestic and foreign interests, and
varying in circumstance from one part of the world to another, there has
been a particular lack of clarity about the State Department role in
this field. The Treasury, the Office of the Special Trade Representative
(STR), Commerce, and White House
staffs have all staked out claims to primacy over certain aspects of
foreign economic policy, while State’s role has steadily waned.2 The
result has been fragmentation, lack of direction, and often economic
issues being decided on essentially a technical or domestic basis
alone.
To orient you better as to how State—and the Executive Branch in broader
terms—might improve the formulation and implementation of foreign
economic policy, I asked Ernie
Preeg, a member of my staff, to lay out various
possibilities for changes in the organizational structure in this field.
Ernie has had long and varied experience in economic work and is
particularly well qualified to think this subject through. The attached
memorandum is the result. This is strictly an in-house effort and has
not had the benefit of comments from others in the building. I think it
provides useful grist for discussions you will want to have with your
top people on these issues.
While the memorandum is basically a neutral exposition of various
options, I would oppose the suggestions pointing toward a [Page 571] semi-autonomous Department of
Foreign Economic Affairs, even if it were under your broad jurisdiction.
Rather, I believe we should be moving toward greater integration between
the economic and the non-economic aspects of foreign policy, and, more
specifically, giving greater political direction to economic
policies.
Tab A
Memorandum From Ernest H. Preeg of the Policy Planning Staff to
the Director of the Policy Planning Staff (Lord)3
Washington, November 16,
1973.
SUBJECT
- How the Implementation of Foreign Economic Policy Might be
More Effectively Organized
Introduction
The organization of foreign economic policy within the Executive
Branch has been the bane of policy coordinators for years. The many
interests, domestic and foreign, and the corresponding diversified
responsibilities within the government, create a very complicated
power structure. Moreover, frequent changes in organizational
structure have tended to confuse the issue of who is really in
charge of foreign economic policy—or of particular parts of it.
Foreign economic policy is often separated out from other areas of
foreign policy (principally national security policy) for two
reasons: first, the links with domestic interests are more important
and diverse, and second, the existence of a “multilateral system” in
the economic field is more elaborate than elsewhere, increasing the
need for a global, functional approach cutting across the various
geographic relationships. Nevertheless, the fundamental
organizational problem of dealing with policies that affect domestic
as well as foreign interests, and have bilateral as well as
multilateral applications, cannot be fully resolved: any resolution
will be nothing more than the optimum compromise between competing
objectives.
In this context, the following should be viewed as opening again the
question of whether the present organization of foreign economic
policy is the best possible compromise—in terms of overall national
interests—or whether certain changes might improve the existing
situa[Page 572]tion. The time
framework considered is that of the next two to three years. The
suggestions concentrate on improving the performance of the State
Department, although they are not limited just to this agency, and
deal with the overall Executive Branch structure as well. The
suggestions are put forward in terms of three categories of possible
changes:
1. Limited changes within State, preserving the existing
organizational structure.
2. Major changes within State, but without fundamental change in the
interagency relationship.
3. Reform of the Executive Branch structure.
Before proceeding to the specific suggestions in each of these
categories, however, a brief discussion of two underlying issues
should be useful: the need and best location for overall
coordination of foreign economic policy; and some apparent trends in
the substance of foreign economic policy bearing on organizational
change.
Who coordinates foreign economic policy?
There has been almost continuous discussion in recent years as to who
in the Executive Branch—below the President—is or should be in
charge of coordinating foreign economic policy. At this point there
seem to be only three realistic candidates: the Secretary of State,
the Secretary of the Treasury, and some form of Special Assistant to
the President. Without elaborating the pros and cons for each, it
should be noted that, over the past four years, each has had some
claim to be the chief coordinator: in the original implementation of
the Council on International Economic Policy (CIEP) in 1970, the Secretary of State
was named to chair the Council in the absence of the President; and
the present dual role of Secretary Shultz as Secretary of the Treasury and White House
top coordinator, supports the claims of the second and third
alternatives.
Only two points are made here about overall coordination of foreign
economic policy as bearing on the substance of this memo:
1. The purported need for such coordination has been exaggerated.
There are major questions as to who has or should have primary
responsibility for specific areas of foreign economic policy, such
as trade policy or expropriation policy or East-West economic
relations, but decision issues concerning broad interrelationships
among the various component parts of foreign economic policy are
still relatively infrequent. Moreover, depending largely on how some
current economic issues evolve, it is not clear whether overall
coordination problems will grow or diminish in the years ahead.
2. Short of major reorganization as described in category 3 below,
overall coordination, to the extent needed, should best reside with
a [Page 573] White House coordinator.
However, this would not preclude a greatly reduced role for the
White House staff, particularly if clearer lines of authority are
established over particular areas of foreign economic policy.
Indeed, a more logical designation and regrouping of authorities in
the most appropriate agencies could go a long way to simplifying
what are now perceived to be highly complicated White House
coordination problems.
Trends in the substance of foreign economic
policy bearing on organizational structure
Organizational structure should be designed to support the realities
of the policy substance being organized. Similarly, changes in the
substance of policies should be reflected in corresponding changes
in organization. Unfortunately, this is easier said than done, and
this brief discussion is not meant to analyze the changing structure
of foreign economic policy in any detail. Rather it is to make the
point that we need to be aware that there are changes under way as
to the “facts of economic life” which may necessitate changes in the
way we do business. And at times we seem to be fighting the facts
rather than simply using them.
The point can best be made by citing several illustrative examples of
major apparent shifts now under way in the foreign economic policy
field which could affect the way the bureaucracy is organized:
A. The international monetary system. We seem
headed toward a far more flexible and loosely defined international
monetary system, perhaps along the lines of the existing managed
floating rate arrangement. On the one hand, this should reduce the
likelihood of financial crises and indeed the role of central banks
in responding to such crises; on the other hand, it could well lead
to more frequent special policy arrangements between certain
countries, of a largely political character, from simple
consultative procedures to various steps on the road to monetary
union.
B. The economic relationship with developing
countries. The high degree of government intervention in
almost all areas of economic policy in developing countries makes
our economic relationship with these countries more integrated in
character than that with our industrialized trading partners, and
increases the need for a coordinated approach on our part. Such an
approach may also become more highly political, particularly as we
attempt to differentiate the situation in one country or in one part
of the world from another.
C. The global supply/demand relationship for
petroleum, grain and other basic commodities. Recent
problems of adequate world supply of food and fuels points to a
growing need to link more effectively domestic objectives and
requirements with foreign economic relations.
[Page 574]
D. East-West economic relationships. Major
economic dealings with centrally planned economies—in an adversary
political relationship with the United States—present new challenges
to our organizational structure which have not yet been fully
resolved.
Directions of possible change in the
organizational structure of foreign economic policy
With the above factors in mind, the following organizational changes
for improving foreign economic policy formulation and implementation
should be considered. They are discussed in very brief form in this
memo—and in some cases it may be desirable to elaborate them
further—but the gist of the idea should be clear in each case. As
noted above, the suggestions are separated into three
categories.
Category 1: Limited changes within State,
preserving the existing organizational structure.
This category is the most straightforward and therefore can be put in
most specific terms. The order of listing is random and does not
necessarily indicate relatively greater or lesser importance.
1. Congressional liaison. Numerous
Congressional committees are involved in foreign economic policy and
State has only a bare bones organizational response for dealings
with members of the Congress and their staffs. One person in EB spends part time on this, and there
is no one in H assigned principally to economic matters. (AID has its own Congressional liaison
staff.) A stronger and more systematic link with the Congress would
appear useful, and could be located in EB or in H.
2. OECD affairs/economic policy planning. The
Office of OECD Affairs is an
appendage to the European Community Desk in EUR. This does not fully reflect Japan’s role in the
OECD or many North-South
issues raised in the Development Assistance Committee of the OECD. Economic policy planning
(particularly where links exist between monetary, trade and
investment, etc.) is officially located in EB, but the assigned positions are not all filled, and
there is no functional office of this kind actually in operation. A
logical combination would be to take the operational responsibility
for OECD affairs out of EUR and combine it with economic
policy planning in EB. Such an
office might report directly to the Under Secretary and Assistant
Secretary for Economic Affairs.
3.
S/PC Deputy for Economic
Affairs. There are three S/PC Deputies, but no clear line as to who is
responsible for economic matters. The designation of one Deputy as
economic, with supervisory responsibilities for other S/PC members working in economic and
related functional fields, would establish a better focus for
economic staff support to the Principals.
[Page 575]
4. INR economic research.
INR has beefed up its economic
staff considerably in size over the past year, but this operation
presently lacks an in-depth professional expertise, largely because
it is completely dominated by FSOs.
Either the number one or number two person should be a professional
research economist, preferably from outside the government on
limited tour. Perhaps half of the entire complement of officers
should be FSRU research analysts or outside academic economists.
5. Asian regional economic analysis. There are
many regional links developing in Asia, particularly between Japan
and neighboring countries. But there is no regional economic office
to analyze these issues, comparable to those in EUR and ARA. There is also little regional focus in the field
(except for one relatively junior officer in Tokyo and the Bangkok
operation described below). This situation could be improved on both
ends. In the field, the regional office in Bangkok could broaden
from its present AID and ECAFE
concentration, to do in-depth policy analysis of economic
developments throughout the region; even better would be to split
this operation between Bangkok and Tokyo, with frequent interaction.
An appropriate Washington backstop would complement this effort in
the field.
6. East-West economic relationships. Support
for our economic relations with communist countries is split within
the building, including major division within EB. At a minimum EB should pull together all
responsibility for East-West economic affairs in one place. Once
this is done it would probably lead to a more central leadership
role for EB relative to EUR and other interested parts of the
building.
7. Food policy. Food policy will almost
certainly grow in relative importance over the next few years.
Responsibility in the Department is now split, however, between
EB and AID, and a single focus of operational responsibility
would probably be an improvement.
Category 2: Major changes within State, but
without fundamental change in the interagency relationship.
Various proposals have been put forward to reorganize State in a
major way, which can be described in terms of three generic forms,
listed in order of the degree of change involved.
1. Enlarged 7th Floor staff. This approach was
used during the tenure of Douglas
Dillon as Under Secretary.4 It would
basically involve directing the daily operations of AID as well as trade and other
economic policies from the Under Secretary’s office. The size of
such a staff might be in the order of 10 to 20 officers, or
certainly much larger [Page 576] than
the two or three members of S/PC
primarily engaged in economic work.
2. Integrate EB,
AID, and parts of IO and other bureaus. This
would in effect bring together all operational resources in the
economic field under a single command. It might be possible to
utilize the statutory high level position of AID Administrator as head of this
organization—perhaps as Deputy Under Secretary to the existing Under
Secretary for Economic Affairs. With the restructuring of
development assistance toward multilateral institutions and smaller,
“low visibility,” overseas aid missions, this integration would be
in line with the emerging State role in the development assistance
field. In fact, AID has been merged
with the economic sections of embassies in a number of overseas
posts in recent years. However, such amalgamation would require
careful consultation with members of the Congress to ensure them
that short-term political objectives will not become excessively
overriding in our development efforts. Therefore, the new integrated
bureau might best be separated to some extent from the rest of State
as a semi-independent Department of Foreign Economic Affairs—but
responsible to the Secretary of State much as AID now is.
3. Restructure the bureaus along the lines of
political economic systems rather than geography. The
bureau structure could be reorganized into three categories of
countries: industrialized, communist, and developing countries. This
breakdown would supersede the present five geographically defined
regional bureaus. This approach would follow the lines of the three
main “chess boards” of foreign relationships frequently analyzed,
but would raise new problems when dealing with issues of a local
geographic character. Under this revised structure, many economic
policies could be placed in one bureau or another, although a small
core of EB would still be necessary
for handling issues not lending themselves to such a breakdown and
for coordination of some aspects of economic policy among
bureaus.
Category 3: Reform of the Executive Branch
structure.
This category covers a multitude of possible changes within the
Executive Branch, and the discussion here is limited to two types of
suggestions: first, a number of limited changes that would clarify
and simplify the present arrangement; and second, a few broadly
sketched possibilities for revision of the present CIEP structure. Under the first
grouping, the following would seem the most useful:
1. Development Council. The North-South
economic relationship is badly splintered within the Washington
bureaucracy, and suggestions frequently recur to establish some form
of Development Council within the US
Government. Such a council could be chaired by State, AID, or a White House coordinator. The
apparent direction of the [Page 577]
overall policy relationship with most developing countries would
probably tilt toward a State chaired council, but much depends on
how the State/AID relationship
evolves, as US development efforts
shift more and more toward multilateral aid and less direct
involvement in recipient countries. The reorganization of AID contained in the House Foreign
Affairs Committee initiative earlier this year (which has not been
adopted) provided for a council of this sort chaired by the newly
established aid organization.
2. US representation to the World Bank and regional
development banks. Instructions to the development banks
are now under the control of the Treasury, with State participation
merely in an advisory capacity to the Treasury within the National
Advisory Council chaired by Treasury. Since our policy toward
development banks is becoming increasingly political, a coequal
State role with Treasury would seem appropriate. In fact, until a
few years ago the number two person in the US representation to the development banks was normally
from State, but more recently Treasury has filled both positions.
State might also play an active role in Congressional presentations
in support of funds for multilateral development institutions.
3. Bilateral US-Canadian Council. This idea has been discussed
in great detail within the US
Government over the past two years. Essentially it would consist of
a bilateral umbrella framework to bring together the myriad of
official bilateral contacts. It could perhaps include a joint
secretariat, and would probably best be located in Washington. State
is the most appropriate candidate to chair such a commission,
although with strong and active participation by the other agencies
involved. The objective would be to develop a more coherent and
consistent strategy in our complex political/economic dealings with
Canada.
4. Joint East-West commercial service. The
State–Commerce cooperation both in Washington and in the field for
promoting US commercial interests in
communist countries could be developed in a much closer and more
systematic way. Difficulties for businessmen dealing in centrally
planned economies, as well as language problems in the Soviet Union
and East Europe, might indicate a need to develop a corps of
specialized commercial officers in this area. A more integrated
response by State and Commerce at the Washington end would
complement such an effort in the field.
5. US Government organizational response to
monetary reform. Until two years ago State was the official
US Deputy Governor to the IMF (with Treasury as the Governor).
We have since given up this position to the Federal Reserve. It
would seem, however, as the evolution of the monetary system—and
related policies—becomes more political, particularly with regard to
West Europe and Japan, that State should assert growing interest in
this field. This could be done through official desig[Page 578]nation in our representation to the
IMF, or perhaps through more
active interagency participation via the kind of OECD/Economic Policy office described
earlier.
Such changes would define more clearly agency roles in a number of
areas. A more fundamental restructuring of the CIEP appears less feasible at this
time, but could be undertaken in various ways, such as:
1. Designate the Under Secretary for Economic Affairs as Deputy to
Secretary Shultz in running
the CIEP, and make the Operations
Group (which is chaired by the Under Secretary) the principal
interagency operating body.
2. Reduce the size (and therefore the unwieldly character) of the
CIEP by combining the domestic
agencies into a single participant. This would leave State,
Treasury, the domestic representative and STR as the four permanent operational bodies on the
Council.
3. Combine the EB/AID arrangement described in Category
2 above with STR to form a truly
comprehensive Department of Foreign Economic Affairs. With this more
drastic change, it would be particularly important that the head of
such an agency act with independence from the State
politically-oriented regional bureaus, although it would still
appear possible that such a Department could be within the State
framework (again with analogy to the existing AID). One result of this change would
be a much smaller White House coordination staff, which might be put
back within the NSC staff, or an
appropriately renamed foreign affairs wing of the White House
staff.
The suggestions put forward in this third broad category—reform of
the Executive Branch structure—lean heavily in the direction of a
stronger State Department role. This may reflect to some extent
irrepressible bureaucratic prejudices on my part, but it is also a
conscious reaction to the waning position of the State Department in
recent years. Some criticisms of State’s performance in the foreign
economic policy field a decade or two ago were undoubtedly
justified, and if State is to reassert a primary role in this field
it must be able to follow a balanced course, taking full account of
domestic as well as foreign interests. But this area of policy needs
to be implemented in a consistent and assertive way. Such
implementation now appears lacking in important respects. And the
least bad alternative, if that is the appropriate phrase, would
appear to be a stronger and more central responsibility for the
State Department. The apparent changes underway in the international
political economy clearly support this judgment.
