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166. Information Memorandum From the Director of the Policy Planning Staff (Lord) to Secretary of State Kissinger 1

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

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.

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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.

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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.

  1. Source: National Archives, RG 59, Records of the Policy Planning Staff, Director’s Files (Winston Lord) 1969–77, Entry 5027, Box 346, Chronological Files, November 1973. Limited Official Use. Kissinger had been confirmed by the Senate as Secretary of State on September 21.
  2. For more on the rivalry between the Department of State and the Department of Commerce for control over various aspects of international economic policymaking during the Nixon administration’s first term, see Foreign Relations, 1969–1976, vol. II, Organization and Management of U.S. Foreign Policy, 1969–1972, Documents 349, 351356, 358, and 361368. In February 1972, President Nixon directed the Office of Management and Budget to prepare a study of U.S. economic and commercial representation overseas. Following the study’s completion in April 1973, Nixon announced on May 29 that the Department of State and the Foreign Service would retain their existing responsibilities for representing the country’s economic and commercial interests and that he would “continue to look to the Secretary of State” to oversee these activities at Embassies and Consulates. For the text of Nixon’s announcement, see the Department of State Newsletter, June 1973, p. 6.
  3. Limited Official Use.
  4. C. Douglas Dillon served as Under Secretary of State from 1959 to 1961.