Dane Carlton

Eco 357L

C. Fred Bergsten, “The Threat is Real”, Foreign Policy

Main Point:

Fred Bergsten wrote this article as a rebuttal towards an article Stephen Krasner wrote because Mr. Bergsten believes that Mr. Krasner tried to minimize his work in a previous article entitled “The Threat from the Third World”. In Mr. Krasner’s article, he wrote, “The Third World is not in a position to squeeze [the primary product needs of the industrialized countries] very hard, because petroleum in the exception, not the rule.”

Mr. Bergsten, unfortunately, believes that for the consuming countries, Krasner is wrong.

Bergsten believes collusion could work and “could add dramatically to both the raging inflation and rising unemployment which are spreading rapidly across most of the globe.”

Summary:

Mr. Bergsten believes that there are a number of economic issues other than natural resources in which the Third World can hold the industrialized countries up (i.e.: investments, markets, supplies of manufactured goods, agreement on monetary reform and trade liberation, environmental protection, etc.). For the first time in almost fifty years, shortages of supply have replaced shortages of demand as the dominant force in world economics, so the power position of suppliers and consumers has thus changed dramatically. Bergsten currently believes that there is a very real and growing threat from the Third World unless the industrialized countries (particularly the U.S.) stand up to the producer cartels and begin to adopt far more cooperative policies toward it.

The Foreign Exchange Argument

Mr. Bergsten believes the Foreign Exchange Argument fails for four reasons:

1. some of the key oil producers are not flush

2. some of the leaders of other potential cartels are flush

3. reserve holdings do not tell the whole story of a country’s ability to risk failure in a cartelization effort

4. none of these considerations is very important if the likelihood of successful cartelization is high

Reserve levels need not be high for even the most important cartel members to succeed. The reason is that oil is the setup for cartelization, with very little risk involved. This same situation holds for other commodities as well, but a country can undertake a risky cartelization effort for a particular commodity if its over-all economic position is strong enough to stand failure. The risks are much lower if the potential cartelizer has a highly diversified economy. There is the possibility, however, that cartelization efforts can be underwritten by foreign loans as well as by national reserves and ongoing earnings from other exports of goods and services.

Shared Values

The issue of ‘shared values’ is even more easily disposed of. OPEC is composed of countries with sharp political differences, yet has been highly successful well over two years before the latest war submerged at least some of the differences. The only political prerequisite for producer cartels is the absence of overt hostility, and none seems to exist among the members of any of the potential emulators of OPEC. Very few of those countries have any reason even to talk to each other except for their common interest in maximizing their economic returns from a commodity which they happen to have in common. So, needless to say, ‘shared values’ hardly set OPEC apart. I continue to fear that oil is only the beginning in the new trend of cartelization. This is partly due to the wide effect of OPEC’s success and the utter failure of the consuming countries to respond with common action of their own.