The subcommittee met at 10:25 a.m. in room SD-192, Dirksen Senate Office Building, Hon. Robert W. Kasten, Jr. (chairman), presiding.

Present: Senators Kasten, Hatfield, Specter, Inouye, Johnston, and Leahy.

DEPARTMENT OF STATE

SECRETARY OF STATE

STATEMENT OF HON. GEORGE P. SHULTZ, SECRETARY OF STATE
ACCOMPANIED BY:

PETER MCPHERSON, ADMINISTRATOR, AID

WILLIAM SCHNEIDER, UNDER SECRETARY FOR SECURITY ASSISTANCE, SCIENCE AND TECHNOLOGY

BIPARTISAN COOPERATION FROM SUBCOMMITTEE

Senator KASTEN. The subcommittee will come to order. This morning we will begin our regular budgetary hearings on the administration's foreign assistance requests for fiscal year 1984 and to hear testimony on the fiscal year 1983 supplemental request.

Hon. George P. Shultz, Secretary of State is our witness this morning, and he will provide us with an overview of the foreign assistance program and the policies driving that program.

Mr. Secretary, this is your first appearance before our subcommittee, and we are pleased to have you with us. We look forward to a fruitful year, to a productive year as we work together to try to solve the many problems that are associated with foreign policy.

This subcommittee has a long history of bipartisanship and cooperation with the executive branch, and Senator Inouye, who will join us momentarily, and I will continue that approach.

Mr. Secretary, I know that your written statement goes on at length justifying the IMF quota increase. I do not plan to get into that question in great detail personally. I want to assure members of the subcommittee that the whole question of the IMF will be

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explored in a separate set of hearings that we intend to have in this subcommittee, once the ideas are further developed in the authorizing committees. But we certainly appreciate your views being laid on the record in the written statement, and I hope that we can put off a lot of discussion on that issue until a further date.

I look forward to your testimony here today. Senator Inouye may have some opening comments, and we will ask him to make those comments when he arrives. I know that your time is short, so please proceed, and I am pleased to have you with us here today.

SECURITY AND ECONOMIC DEVELOPMENT PROGRAM

Secretary SHULTZ. Thank you, Mr. Chairman.

I appreciate your opening comments and your reference to the bipartisan approach of this committee. I am familiar with the way you have gone about things, and I appreciate it very much. So I especially welcome this chance to start our dialog on the President's fiscal 1984 security and economic development program.

As you noted, you have my lengthier statement, and I am not going to read it. I would like to make some comments emphasizing the highlights and ask that the full statement be placed in the record.

GOALS OF FOREIGN ASSISTANCE

The premise behind this program is that the United States cannot realize its fundamental goals with peace, prosperity and freedom unless there is economic growth and political stability in the developing countries. This program is an essential instrument of our foreign policy. It is directly linked to the security and wellbeing of every citizen in the United States.

We saw clearly last year with war in Lebanon and the acceleration of the debt problem in developing countries how events in the Third World can affect our country's economic prospects and aspirations for peace.

But let me explain these relationships more systematically.

IMPORTANCE OF DEVELOPING COUNTRIES

Over the past 15 years the developing countries have become increasingly important to our economy and those of our allies.

In 1980 developing countries purchased about 40 percent of U.S. exports, more than bought by Western Europe, Eastern Europe, the Soviet Union, and China combined. The developing countries have accounted for about half the growth in our exports since 1975; at this juncture 1 out of every 20 workers in our manufacturing plants and 1 out of every 5 acres of our farmland produce for Third World markets. And I might say that if you were talking agricultural exports as a whole, it would be 2 out of 5 acres.

The current worldwide recession has painfully highlighted these relationships. In the past several years growth rates in developing countries have dropped from over 5 percent per year to around 2 percent. Partly as a result, our exports to these countries, which

were increasing at more than 30 percent a year in the late 1970's, have tapered off.

If you turn to the chart at the beginning of my longer statement, you will see this rise and decline of exports. To give specific examples, in the first 8 months of 1982 U.S. exports to Mexico dropped 26 percent, to Chile 59 percent, and to Thailand 25 percent. According to one estimate, every $1 billion decline in U.S. exports has erased 60,000 to 70,000 U.S. jobs.

On the other side of the trade ledger, the developing countries supply about 40 to 45 percent of our imports. The Third World supplies more than half of the bauxite, tin, and cobalt used by U.S. industry. For some 11 other strategic metals and minerals, the developing countries supply more than half of all our imports. For some natural products, such as rubber, coffee, cocoa, and hard fibers, the Third World supplies everything we use.

Again, there are charts on pages 4, 5, and 6 of my statement which show our economic relationships with the developing countries.

ECONOMIC PROBLEMS OF DEVELOPING COUNTRIES

Global recession in the past 2 years has brought an abrupt pause in the growth of developing countries' earnings. World trade has stagnated and the prices of nonoil commodities fell 28 percent between 1980 and 1982. This has increased debt service ratios and eroded terms of trade.

The fundamental problem faced by high debt developing countries is one of reviving their exports, an income earning problem rather than a debt problem. But immediately they confront a financing problem as banks have cut back new lending from $47 billion in 1981 to around $20 billion to $25 billion in 1982.

Another severe contraction in lending this year would imperil the recovery of the debtor countries. Moreover, reduced lending would retard our own recovery by contracting imports by developing countries.

In negotiations just concluded, members of the IMF agreed upon a quota increase to $99 billion. The 10 industrial countries that make up the G-10 have also agreed to expand and widen access to funds reserved under the General Agreements to Borrow [GAB].

The point of these measures is not to substitute IMF lending for private bank lending. It is to enable the IMF to support economic recovery policies in debt-plagued developing countries which will permit banks to resume lending.

Indeed, Treasury Department studies show that over the past 5 years IMF stabilization programs have been followed by new bank lending which is on the average four times greater than the funding provided by the IMF.

The fundamental mechanism for alleviating LDC debt problems is economic expansion in both industrial countries and the Third World. It has been estimated that if the GNP of industrial countries of the OECD were to grow by 4 percent in 1983 instead of the projected 1.8 percent, the nonoil developing countries would earn an additional $15 billion from their exports.

The measures we are presenting to the Congress this year, the IMF quota increases and our multilateral and bilateral development programs, are investments in economic growth which directly serve U.S. interests. Sustained U.S. economic growth depends on a healthy and growing world economy.

GOAL OF PEACE AND SECURITY

Beyond the demands of economics, the Third World is fundamental to our aspirations for security and peace. Since 1950, most of the major threats of international stability and the chief opportunities for expansion of the Soviet Union's political reach have come in the Third World. The point is clear. The fault line of global instability runs strongly across the continents of the Third World.

The Soviet Union and its allies are able to feed on this political instability. Some of the most significant uses by the Soviets of military power since World War II have been in the developing world. The Soviet deployment of a deepwater navy, an airlift capacity and mobile ground forces have given them ability to intervene when they perceive targets of opportunity. We cannot ignore this reality. Strategically some of the least secure Third World countries are sources of critical raw materials or lie astride sea lanes which carry our military forces and world commerce. The premier example is the Persian Gulf. About 32 percent of the free world's oil supplies originates there. Even with the recent declines in oil prices, we have an ongoing national interest in assisting countries in this region, and thereby helping to sustain access to those supplies.

As a parenthetical remark, I want to mention my belief that further oil price declines, if they occur, will spur the free world's economic recovery. For some countries, such as Venezuela and Mexico, cheaper oil admittedly means tougher times. But it will be good for most of us. I have seen one estimate that a decline in oil prices to $20 per barrel would boost real growth rates in the industrial countries by up to 11⁄2 percent. A less steep decline would have proportionally positive effects.

What would be harmful over the long term is if oil prices resume the gyrations we have experienced in the last decade. For this reason, the United States has an interest in helping oil importing developing countries, such as the Philippines and Thailand, improve their energy development programs and further disperse the ability to produce energy.

The job of containing the political influence and military reach of the Soviet Union also requires that we maintain military facilities and strengthen indigenous defense forces around the world. The United States cannot defend its interests by operating out of the United States and Europe alone. We need the cooperation of countries in the Third World, and we must be prepared to help these key countries achieve their aspirations for security and economic growth.

The least desirable method for preserving our strategic interests is by using U.S. forces. If we are able to reduce incidents in the future, we need a significant program exercised consistently over time to secure peace and economic well-being in the developing countries.