US, EUROPE AND PERESTROIKA

Dr. Kissinger and Dr. Herrhausen Presentation - Part I
Speeches

The Pierre Hotel, July 10, 1989

CHAIRMAN: Ladies and gentlemen, my name is Christian Strenger, and on behalf of Deutsche Bank Capital Corporation, I should like to extend a warm welcome to all of you.

We have this afternoon a very special meeting with Dr. Henry Kissinger and Dr. Alfred Herrhausen on the subject of U.S., Europe and Perestroika.

Last year, as some of you will remember, we brought you the great support of Dr. Herrhausen who unfortunately could not attend at the last moment but was able to join us today. We had invited European financial leaders to discuss the implications of Europe 1992.

Today's topic has gained ever more importance with the developments in the USSR and China in the past weeks. The contrast between Perestroika making progress in the USSR and the uproar of democracy in China could not be sharper and more telling about the ups and downs that the western world will continue to see in the future.

The implications for the political and economic developments will reach well beyond the year 2000 and therefore we feel very fortunate to have two eminent personalities present us with their insights on this subject.

Both need no particular introduction. On the contrary, trying to do so would take valuable time and risk being incomplete as well. So with their kind permission, I suggest that we get right down to business and start with the speeches, hopefully followed by a very active discussion, but that remains with you.

The gentlemen have agreed that Dr. Kissinger should start and, I therefore call on you, Dr. Kissinger, to do so. Thank you for fitting this event into a very busy schedule after coming from Argentina, as we read this morning in the newspaper, but the subject today is U.S., Europe and Perestroika, so ladies and gentlemen, we are delighted to have Dr. Kissinger with us today.

DR. KISSINGER: Chairman, Alfred, ladies and gentlemen, we had a little discussion prior to the meeting because I told Dr. Herrhausen that I thought he was likely to be more optimistic than I and that the meeting should end on a positive note, and the gentlemen from the Deutsche Bank ... protocol they choose which they thought required me to speak first and I thought it a historical occasion, when the Deutsche Bank accepts second place in any protocol function. So I thought I'd better take advantage of it and tell my grandchildren what happened.

I will talk about the political environment that is created by Perestroika and by developments in the Soviet Union.

I look at it from the point of view of somebody who has had to conduct American foreign policy, and from a very particular perspective, of what I take to be the fundamental problem of American foreign policy which is this.

If you've studied the history of American foreign policy, if you read statements that American Presidents have made about foreign policy, you will find that just taking this century, with one exception, there is no difference between the fundamental views of these American Presidents from Wilson through Reagan. And the fundamental view is that America has no national interest. America conducts its foreign policy on the basis of superior moral principles.

The United States will therefore prevail in contrast to all other nations of which history informs us by its moral domestic performance and its appeal to humanity. The view is that there are no real differences among people, there are no national differences. The differences can be expressed importantly in terms of personality.

And so American foreign policy oscillates between those who think foreign policy is a subdivision of psychiatry and those who think foreign policy is a subdivision of theology. There is a point of view that thinks relations among nations is like relation among people, and that it can be built on the basis of confidence and good will. And there exists another point of view suggesting that relations among states is part of a moral struggle between good and evil in which good must in the end prevail over evil, and evil must be punished.

At certain periods those two viewpoints merge and to see in foreign policy not a problem of balancing interest but a problem of conversion. And so the extreme right and the extreme left in America tends to start from the same premise -- namely, that the purpose of American foreign policy is to convert our opponents to the American point of view.

The liberals say the conversion has already taken place. The conservatives say it has not yet taken place, but it will happen. If the trumpet is blown hard enough, the walls of Jericho will tumble. So periodically America goes through fits of isolation, as in the twenties, saying it is too good for this world. In the seventies, in the Vietnam period, saying it is not yet good enough for this world, but the result is a denial of what I consider to be the fundamental problem of foreign policy, which is that nations have historic interest dictated by geography, by their history, by their governmental structure, by the psychology of their people.

These interests can be influenced and shaped by individuals, but only within limits, and these limits have to be studied and understood. The only American President who acted on that basis was President Nixon. I sometimes say jokingly since President Nixon's faith in the American people was limited, he was not about to trust any foreigner, and therefore he attempted to base his foreign policy on a calculation of the incentives and penalties that would induce certain courses of action which lead him to many directions that were very conciliatory in the field of foreign policy, but it was always attempting to be placed in an objective context.

We see today with respect to China this trend in American policy. What exactly do we want from the Chinese? Do we know what democracy is in China? Do we know what the demonstrators wanted? Do we know what it would have lead to? I don't want to get into that subject because it isn't my subject. I'm using it as an example.

Now with this as a background, I'm always extremely leery about attempts to personalize foreign policy, about efforts to use a historic evolution, to see a historic evolution in personal terms, or to believe that one man can change four hundred years of history all by himself.

I will make one other observation of a general nature before I get to the topic specifically, and it is this. When one looks at European countries, it is the interplay between Americans and Germans that can be particularly deadly from the point of view that I described, because of all the nations in Europe the one with the least developed sense of the national interest strangely enough is Germany.

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Germany became a nation only in 1871. It was a normal nation for less than fifty years. After that, there was the defeat in World War I, then the Hitler period, then the defeat in World War II.

Most of German history has been absorbed in becoming a nation. For hundreds of years, while the other European nations had a perfectly clear sense, the German nation was occupied in forming itself, and if you study German history I think after the period of Bismarck it is really very difficult to figure out exactly what it was that the Germans wanted.

I have often said if somebody had come to the German Emperor on July 1, 1914 and said look, we want you to be happy! Here is a map of Europe. Why don't you draw for us the boundaries which you would like. I am convinced that he would have made few, if any changes. I don't know what it was that Germany wanted before World War I other than to be considered important. And yet, a month later, there was a global war to which everybody contributed, but which couldn't have happened without the particular approach to foreign policy of Germany.

There is a romantic sentimental element in German foreign policy which has a different basis than the American one, which however makes the present situation extremely worrisome. It's in this context that you have to understand my remark.

Now let me turn to Perestroika and Glasnost. First, I have met Gorbachev five times, twice for long private conversations. He's without doubt the most impressive Soviet leader that I have seen. There's no question that he has analyzed the problems of his society with great courage and he has raised very many, very important issues that have started an evolution that can be extremely beneficial -- so I take nothing away from that.

At the same time I believe it is extremely dangerous to base foreign policy on one man, or to permit a nation to sell its foreign policy on the grounds that one leader has to be helped. If the objective factors that induce these policies are not more or less permanent, then one is building on sand. If it is really true that without Gorbachev everything is in danger, then we're in great trouble because he won't be there forever, and indeed what he started may wind up very similar to China because they are ... problems.

Either we can find an objective basis for improving relations, utilizing the factor that of course he's a remarkable man and therefore one may be able to move faster, but the real question we face is is Glasnost and Perestroika by itself enough to produce these, or are the western nations entitled, indeed required, to have foreign policy objectives beyond just supporting Glasnost and Perestroika?

My view, is that whatever you call the Cold War must have had an objective basis, or everything of the last fifty years has been an absurdity. If it has had an objective basis, these elements must be mitigated, eliminated, negotiated, and therefore it isn't enough to wallow in Gorbamania. It isn't even doing Gorbachev a favor in my governmental experience. We had a policy that well before we did anything significant we be able to tell, if it was humanly possible, the Soviets' thinking behind it.

I would see the Soviet Ambassador and say to him I'm thinking out loud so that when you get a complete proposal from us you will understand what our reasoning is. The reason we did this is because we thought that it was better for Brezhnev, who incidentally I don't think was as wicked as he is now described, for Brezhnev to hear from us what we thought than to let some Colonel or Section Chief give him his analogies.

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Now, let me discuss briefly my assessment of Perestroika and Glasnost and my view on foreign policy, and at about seven o'clock Dr. Herrhausen will get the floor.

I'm very disciplined. I will stay more or less within the time limit that has been given to me, keeping in mind that of course this isn't a German audience so I -- in 1955, the first time I went to Germany after the period of occupation -- I was supposed to give some speeches and I asked a German student at Harvard what recommendations she had to make. She said two things. Don't begin with a joke because they'll take it seriously, and she said, don't speak for less than an hour or they won't take you seriously. That had sort of a dramatic effect on me.

Let me say something about Perestroika and Glasnost. One, the transformation from a centrally planned Stalinist type economy to a market economy has not been successfully undertaken by any major country. In fact, the Chinese came closest to it of anybody on the economic level. But the very success leads you into a period in which for a while the worst aspects of a planned economy and of a market economy are combined.

A centrally planned economy must produce corruption. It cannot do anything else. When there are no markets, no credit system, no objective criteria by which you can measure performance, when all decisions are in the hands of tens of thousands, sometimes millions of bureaucrats, the black market, the corrupt market, is the only free market that exists. It is the only way you can reflect economic realities.

It is unavoidable, except by a horrible reign of terror, and in this sense Stalin and Mao understood their societies. They knew that some new Mandarin class would emerge unless they cut their heads off at regular intervals. It's an inhumane system. But when the terror eases, corruption increases.

Then when you go to a market economy, the problem for a while becomes worse. Nobody can go from a planned economy to a market economy in one jump. And when you go from a planned economy to a market economy, that means there's a dual price system in existence, and therefore people can buy in one market and sell in another market, and if they have special access to the bureaucracy they can make huge windfall profits on top of the windfall profits that come with the early stages of capitalism, even in purely capitalist societies. So Perestroika must lead the political instability for a while.

What Gorbachev has done better than the Chinese, is that the Chinese thought that they could start economic evolution first, and that politics would come afterwards.

Gorbachev seems to have understood that that isn't possible, and what is going on in the Soviet Union right now in my view is not democracy, but it is the shift of legitimacy from the Central Committee of the Communist Party to the governmental mechanism. And the so-called elections that are taking place are the substitute for Stalin's purchase. They get rid of the opponents of Gorbachev, and more important than that, they give him a legitimate base in the Supreme Soviet which makes it impossible or difficult for the Central Committee of the Communist Party to remove him like they did the last reformer.

On the other hand, he hasn't really started the economic reform yet. And the big test of the economic reform will come when he does what the Chinese tried last year, namely implementing price reform, to have real economic prices.

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I was in China twice last year. In May I met with Dung and those of you who have seen him as you have undoubtedly, Alfred, television usually comes in at the beginning and he makes some station which has nothing to do with you, but which they then put into the newspapers and he said then my colleagues are not courageous enough. They don't dare to go far enough and we need more reform, we need more openness, we need realistic prices.

Six weeks later I saw Xiao Yong and he said I'm now implementing what the Chairman said and his price reform in effect was that all subsidies would be eliminated over a period of two to three years, and I asked him how long can you stand this politically? He said we can stand it until monetary and fiscal policy can take over. In fact, they could stand it for exactly seven weeks.

And this was in July -- by the end of August they panicked and put on price controls which made it worse. And we don't know yet what's going to happen in the Soviet Union. They have a better political structure for containing unrest but then they have a worse economic structure because they have nobody with economic experience of an entrepreneurial system.

The Chinese are a homogenous country culturally. They have Taiwan, Singapore, Hong Kong, overseas Chinese, and Communism has been there only forty years, so they still have some living entrepreneurs. None of this exists in the Soviet Union. On the contrary, the political reforms of Gorbachev are not really generating all that much support for him, but they are generating a great drive for autonomy among the nationalities of that huge empire. So he has problems.

Now let me apply that to foreign policy. The fundamental question is, to me, is Perestroika and Glasnost enough? Can the West just relax and say, so occupied now with their domestic things, we've got to help them and in helping them, automatically there will be peace.

This is where I part company with many of the current views. It is a novel approach to foreign policy that argues that a strong adversary is safer than a relatively weak adversary. Now I'm not saying we should keep the Soviet Union weak. I believe, in fact, that we should give them every reasonable assurance within their national boundaries -- and I was attacked violently in this country a few weeks ago for allegedly advocating a new Yalta -- I don't want to get into that. It's nonsense. It's not my view.

But my view is that the Soviets are entitled to reasonable security, but if one looks at four hundred years of Russian history, one faces the phenomenon that that country has spread from the area around Moscow to Vladivostok to the center of Europe to the gates of India, and it didn't get there by plebiscite. When European countries won a war, they took a province. When Russia won a war, it took the country.

Russia has never felt secure unless it was in physical possession of a territory, or at least until it disintegrated any power center near its border -- Sweden, Poland, Turkey, the Austria-Hungarian empire, the territories in Central Asia.

Oftentimes they were given an opportunity by attacks from these countries, but if you look at Russian foreign policy over the centuries, you find the one thing that has been consistent -- if you read the accounts of European travelers in Russia in the sixteenth, in the seventeenth, eighteenth and nineteenth centuries, they will always say it's a barbaric country, cruel, backward, inefficient. Yet during that period, they managed to expand.

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Not like Hitler, with the idea that they must achieve something within one man's lifetime, but still persistently. If you look at the proposals that Molotov made to Hitler in 1940, they are hard to distinguish from the ideas of Russian foreign ministers in the nineteenth century, and were literally carried out vis à vis in the post-World War II period.

So there is a theme here. Now what is the challenge? The challenge for the western nations is not to overthrow the Communist system -- that may happen or may not happen -- the challenge to us is whether we can come to some understanding on a concrete and realistic basis, based on a concept of equilibrium.

Now, in my mind this means that most of the arms control negotiations now going on are of secondary importance. Nobody understands them. None of the heads of state have spent as many hours on them as the experts have spent years, and the experts disagree among each other.

Every time an arms control proposal is put before a parliament, it is done so with the argument that it leaves the military situation unchanged. Then why are we so excited? They have a political significance. I think they should be continued, ingition should ..., they should be let of their room every six months and some symbolic agreement can be signed -- I have no objection to it.

I find it very difficult to tell you any agreement, including the ones I negotiated, that made any significant military difference, but a number of them have made significant political differences.

Now, the pity is in the present situation. One puts oneself in Gorbachev's position. What I have in mind requires a revision of traditional Russian foreign policy. How can he put that forward when he's already changing much of his domestic policy? How can he be asked to make an enemy out of the army and the secret police on top of making opponents of the party and the managerial group?

So, unless the West says to him this is our idea of what should be done, which has a component of Russian national security, but also a component of change, he will do what he is doing, which is to pursue measures that reduce the threat to the Soviet Union, and sort of wallow in psychology.

He will sell his personality. He will propose arms control schemes whose practical consequence is to reduce, if not eliminate, the American nuclear presence in Europe, which is disadvantageous to the West because the Soviet nuclear presence is inherent in their geographic location.

It makes no difference, in terms of the Soviet capacity, to conduct nuclear war, whether they launch it from Soviet territory or from Poland. It makes a huge difference whether the United States has to initiate it from America or whether the NATO commander is perceived to have some flexibility. That's the only issue in the I&F agreement, which is the only issue in this current debate.

If we were one nation it wouldn't make any difference where the weapons are, but we're not. So I feel that the current trend is at least towards the neutralization of Germany. I hear endless quotes where every German Minister says this isn't so. And I have every confidence in the German Chancellor that he has no such intention. But I'm talking about trends, I'm not talking about intentions.

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It is inherent in these proposals, when I keep talking about this idea of the common
European house it is an intellectual absurdity -- what is a house from the Europes to the
Atlantic? The division in the Soviet Union isn't North -South, but East-West.

If the Soviet Union is in Europe, it is in Europe from Vladivostok. It can't be in
Europe just from the Europes. If the Soviet Union is part of Europe and the United States
is not, that creates a fundamental premise that over a period of years and decades will
lead to a separation, no matter how many statements are made.

When the German Chancellor and the Soviet President made a joint statement that
America can be part of that Europe, that's already a sign of the problem. There hasn't
been a joint statement between the American President and the German Chancellor that
the Soviet Union can be part of Europe. It already elaborates a distinction.

So I believe that what is needed is a serious conversation with Gorbachev that puts,
in the field of foreign policy, before him the same perspectives as he has put before
himself in the field of domestic policy. There is the problem of the future of Eastern
Europe. I think it is very dangerous when Gorbachev runs around in Germany protesting
that he doesn't want to take it away from the United States, but objectively promotes
neutralism.

And President Bush is running around Hungary and Poland protesting that he isn't
trying to take it away from the Soviet Union, but objectively promotes the separation.
I'm in favor of the evolution that is going on in Poland and Hungary, but we'd be naive to
believe that there is no security concern to the Soviet Union, and therefore the future of
Europe needs to be discussed from the borders of the Soviet Union to the Atlantic. And
they're all defined for the United States and the Soviet Union, compatible with both of
the security interests.

Similar situations exist in Asia and comparable situations in the Middle East. I don't
want to get into that much detail because I'm running out of time. If we were making
progress with the political solution, if a situation would evolve in which I would feel that
the real causes of tension are being dealt with, I would feel that helping the Soviet Union
in its economic field would be appropriate and indeed desirable.

But if economic assistance to the Soviet Union becomes a substitute for a political
approach, if we think that Gorbachev is the Dao secsmakina(?) who by his personality will
solve all our problems, then we are running the huge risk that explosions will occur,
maybe inside the Soviet Union, maybe at the borders of the Soviet Union, of incalculable
consequences.

If the question is, am I against what normal economic motives would produce, then
no. But normal economic incentives will produce a very low level of trade because I don't
believe that on a strictly economic basis there are such great opportunities -- I'm talking
now about the Soviet Union.

But if we are talking about credits that are justified on economic grounds, but that
really have a political intention, then I'm extremely uneasy. I think it's an evasion and
anyone who wants to do it should urge his government to try to come to some political
understanding.

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Now I must tell you, I have talked to Gorbachev at considerable length. I do not think that this approach would necessarily be rejected by him, but I also do not think he can volunteer it. Why should he say, please solve the four hundred year problem of Russian expansion for me?

I believe he would understand it if it were made soberly and in a friendly fashion. I don't apply this to Eastern Europe. In Eastern Europe I believe it is in everybody's interest to promote stronger economic ties. I also believe it is necessary to talk to the Soviet Union about their security concerns in an area which they cannot be permitted to identify with the imposing regimes.

But that's the most useful function for the arms control negotiations. That's a worthwhile topic for arms control rather than the numbers game of counting tanks and counting missiles in a huge empire.

So these are my general views -- maybe a little academic and abstract and I would sum them up by saying the key to foreign policy is to see whether one can reduce big problems to little problems. To do that on the basis of an analysis of trends that is realistic. I don't mean to say that individuals cannot make a difference. Individuals can make a difference, but they have a range within which they can make a difference.

The art of foreign policy is to operate at the outer limit of what is possible to achieve. That is I think -- for this Gorbachev gives us an opportunity but I warn against using either his personality or pure economics as a solution to a fundamentally historic and political problem.

But on the other hand I want to point out that we have an opportunity that is unique, certainly the best opportunity in the post-war period, to create a world in which the huge problems are gradually reduced to manageable ones.

Thank you very much.

END HAL PRESENTATION

DR. HERRHAUSEN: Mr. Chairman, Henry, ladies and gentlemen, let me first say how pleased I am that so many of you have accepted our invitation. I think this gathering is a positive response to your thinking and my thinking and our thinking that a discussion like the one we have today is worthwhile because we all can learn from it, and learning to Henry Kissinger means learning a great deal, when we listen thoroughly.

I'm very pleased that I have a chance to, together with him, touch upon questions and tendencies and developments that can be seen in the Eastern bloc countries toward which we, the Germans, have reason to have a slightly different attitude, because we are the closest to them, whatever that may mean, politically, economically, historically.

I decided to leave aside my paper and rather touch upon a few concrete points which I think are important, given the background of the development that is going on in the Soviet Union. But since we are not in Germany, but in the United States, I would like to start with a joke to induce you to take me --

-- a story that has to do with Henry. Ten years or twelve years ago we had an international monetary conference in Mexico City which I attended in the capacity of a member of the Management Board of the Deutsche Bank.

And the chairman of this conference was David Rockefeller, who had invited Henry to talk about foreign policy and political affairs important at that time and relevant to our considerations. And when he introduced Henry, he of course described at length all his merits and achievements.

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And then Henry stood up and addressed the audience by saying well, David, I thank you very much for your kind introduction and I must admit you come very close to my own judgment.

I never forget this nice story, and that's why I wanted to tell you.

Well, ladies and gentlemen, as Henry said, I have had many opportunities to travel to Eastern bloc countries and I've done so on a more or less regular basis, and I saw over the last two years many of the leading politicians in the Soviet Union and in China -- in the Soviet Union including Mr. Gorbachev, with whom I have spoken three times at length, about Perestroika and Glasnost the last time he visited Bonn, a couple of weeks ago.

And in the course of this last visit in Bonn I was telephoned by Professor Arbatov, who is a member of the Academy of Science in Moskow and a close advisor to Mr. Gorbachev, who wanted Mr. Arbatov to talk to me. And we met in a hotel in Bonn for one and a half hours, and after having greeted him I asked him what his desires and wishes were, and he said well, Mr. Gorbachev asks me to ask you what kind of mistakes we make economically.

And I responded -- you might be surprised, Mr. Arbatov, but I can't tell what kind of mistakes you make, and I'll tell you why. Because, in spite of all my discussions, which I had in Moscow and in Leningrad and in Bonn and other places, so far nobody was able to tell me what concept you want to realize and to implement. What is your concept, your economic concept?

And as long as I don't know what concept you want to implement, you want to realize, I really am not in a position to tell you what kind of mistakes you make, where the contradictions are, whether step number one contradicts with step number two, vice versa, etc.

And then to my surprise he said well, that's right, and I'll tell you the truth, quite openly and frankly, we don't have a consistent concept. And that's why we see so many difficulties emerging and occurring without having been able to find the right answer.

The only concept, and this goes in the direction that Henry has gone, namely politics, the only concept we have, and I don't know, he said, whether this deserves the name concept, is that we want to be and to remain a world super power. And we have realized that this can only be achieved on the basis of economic strength. To be militarily strong is not enough. What we have to realize is that we have to be economically strong, otherwise there's no chance to remain a world super power, and this might have to do with what Henry mentioned with respect to their national interests.

The question that we dealt with in the course of our discussion was how can the Soviet Union become economically strong. I leave aside all the political aspects -- that's Henry's job -- without having a concrete concept by which you can describe what kind of steps and measures have to be taken in order to bring about a better economic development.

Now let me give you some examples in order to demonstrate in what desperate situation they are with respect to this economic concept.

I had a very interesting discussion when I was in Moscow a couple of weeks ago with Mr. Yakovlev. Mr. Yakovlev is very close to Mr. Gorbachev in the ... and dealing with economic questions and foreign policy questions, and he too asked me what we can do with respect to the urgent cause of price reform, what we need in the context of a price reform when it comes to further market developments, to further developments towards free market procedures.

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And I replied, what do you mean by price reform? Is price reform in the sense of your political thinking, setting prices differently, different from the way you have up to the present? Do you mean that the bureaucrats, the authorities, the political and administrative authorities decide on prices differently in the future compared to the past? Or does price reform mean freeing the prices completely and letting the market forces decide where the prices should be and where they should go?

And I said no, of course not. Price reform in the sense we use it, would have nothing to do, at least so far, has nothing to do with really freeing the prices so that the market forces can do their work. Of course we mean, when we talk about price reform, setting them in the market place by our authorities, by our bureaucrats, though in a different manner from the present procedures. From our point of view, this has nothing to do with price reform, I said to him. When you want a real price reform, then you have to forget about the bureaucrats and the authorities. Then you have to stick to the market forces.

And then he said well, this is going to be very dangerous because it would mean risking inflation, and a high inflation rate results because there's too much money around and not enough consumer goods and other goods that our consumers want to buy, which means scarcity, and scarcity leads to inflation when we have free prices.

So I guess price reform in the Soviet Union will not occur in the foreseeable future. It might occur in the nineties, but I don't foresee that price reform will take effect very soon.

Another example -- I had the pleasure of delivering a speech in Moscow in the course of my recent trip with the Academy for Economics, where the students were managers of Soviet Corporations. You know that those corporations are, today, more independent than in the past and that managers of those corporations should have -- and this is the political and economic intention -- more rights and more competence and more room for decision making, independent decision making, than in recent years.

And they complained that all the developments, especially in the field of joint ventures, had not come to the positive results they had expected, and that they do not foresee that this will be achieved in a rather short period of time. And they asked me what I would think the reasons might be for this unsatisfying development.

Well, I tried to describe it as follows. When western companies or corporations look out for partners, they try to inform themselves, get all the information from which they can learn about those potential partners, from which they can know what partners might suit them, what the companies and the corporations do, in what markets they are active, what their past and forthcoming developments look like, what results they achieve, how strong they are in their market place, and what they can bring into the joint venture in terms of results -- good and positive results -- for both parties.

And I asked them, what can we learn about you and what can we know about you? Almost nothing. You can get any information you want when you want to inform yourself about a German company, because a German company must, as prescribed by law, publish a profit and loss account, a balance sheet, an annual report, a German corporation has to arrange annual meetings with the shareholders, has to communicate to the press, has to deliver all kinds of information from which the public can know and learn about this particular company.

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What do you deliver? How do you measure your success? What kind of information
can a German company or a Western company get when it looks around for partners?
Almost nothing.

And they agreed. And as an answer to my question, how do you measure your
success, they said well, by counting the number of products we have manufactured in a
given period of time. And I said well, that's interesting, but it has nothing to do with
economic results because you don't ask yourself how expensive those products are. You
don't ask yourself where they go. You don't ask yourself whether they are needed. You
think they are needed because the plan prescribes that you manufacture those products.
You don't ask what the technological standard, what the quality of those products might
be. And they again agreed, yes, that's right.

In other words, there's no system for obtaining information which we could use in
order to inform ourselves about those companies with which we would like to perhaps
enter into joint ventures.

When it comes to credits, I don't know whether you have watched what was going on
in the Duputeerden Congress. I was there, sitting there for a couple of hours and
listening to what was said and reported. It was easy because it was simultaneously
translated into English, into German, into Spanish, into Italian, into French -- surprisingly
so -- and the whole world could watch it on TV. It was on the TV screen from the very
beginning to the end of the day, starting at eight o'clock in the morning and ending at
seven or eight o'clock in the evening. Everybody could watch it, and everybody watched
it in Moscow. Nobody was working. They were all listening, they were all watching TV.

And I was sitting in the Congress room and listening to the reports and the speeches,
very interestingly so. And one day Mr. Shmelyov, who is a famous professor for
economics in Moscow and also close to the government and close to Mr. Gorbachev,
talked about credits, and suggested that the Soviet Union should go to the international
markets and borrow money up to thirty billion dollars and use that money for imports of
consumer goods -- those goods which are urgently needed because the people in the
Soviet Union are almost starving. And a couple of minutes later Mr. Ryzhkov, who is
head of the government, as you know, opposed Mr. Shmelyov and said we cannot afford to
borrow money in this quantity of thirty billion dollars, because we are already highly
indebted.

Here again, you see, no preconditions are fulfilled for the western countries to
correctly judge and assess the situation in which they are because they themselves don't
even know exactly in what situation they are.

Currency reform -- I had a very interesting discussion on currency reform, and the
convertibility of rouble with the people of the administration, and Mr. Silayev, who is
Deputy Chief of the Government, and he said to me, we would like to decide in favor of a
currency reform. What do you think of it?

We have studied what happened in the fellow Republic of Germany in 1948, and we
saw that the whole process that leads to what was called afterwards the German miracle,
started with a currency reform. Can we do the same or can't we?

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And I asked him, what do you think, what kind of preconditions have to be fulfilled in order to make it a success? And he said well, I think when we make a currency reform and introduce a new currency to the market, introduce it to the society, introduce it to the economy, as you did when you went from the Reichsmark to the Deutschemark, people have to believe in this new currency. Well, that's right, I answered. But how can you make them believe in the new currency?

Only when the people are able to buy with the new currency what they want to buy. Do you think that this precondition can be fulfilled? He said no. And of course my answer was then, forget about currency reform. As long as you have only the new currency, and not the goods and services to offer to the holders of a new currency, it will never be a success.

Exactly this had happened in 1948, when we, in the Federal Republic introduced the currency reform. The very next day people could buy what they wanted to buy, and that's why the currency reform in Germany was a success. Again, that is not the basis and that's why they have such difficulty.

One further example before I come to a conclusion. I had an interesting discussion with Mr. Silayev on the Economic Center that is planned for Moscow as a joint venture between the Soviet authorities and a couple of German companies; an Economic Center that should provide room for Congress and meeting rooms and hotel facilities, offices, office space for German companies coming to the Soviet Union and which do business in and with the Soviet Union.

It's going to be built in the nineties -- starting in '91, perhaps even '90 and it will be finished in '92 or '93 in Moscow in a very prominent place. And we had to discuss and to negotiate the contract which is the basis for this Economic Center, a twin of which will be built in Germany as a Soviet Economic Center.

Mr. Silayev described at length his ideas and the necessary corrections that we would have to accept in the contract. It took him an hour or an hour and fifteen minutes. I was sitting here with the interpreter and he was sitting there together with seven other colleagues and associates.

After one hour and fifteen minutes he had finished, and asked me, okay, I would be very happy to learn your views. What do you think about it? And I said well, I noticed that you want to change five or six points in the draft of the contract we had submitted to him. Let's do it this way. First, second, third, fourth, fifth, sixth.

We finished within five minutes, or ten perhaps. He was surprised, looked at me and said to me tell me, can you decide here what kinds of corrections are acceptable for you in the contract? I said yes. Don't you have to ask your people at home? I said no, that's why I'm here. I'm here to negotiate the contract, and of course I can decide.

Okay, he said, that's unusual for us. I said well, I know, that's unusual for you, but what's the problem? He said well, see, in two hours we are scheduled for the signing ceremony, but we cannot change the draft within this short period of time. I will never get my people to do it within two hours, and I said well, that's no problem. I will take the paper, go into my office, and have it rewritten within half an hour and then we can sign it.

This was impossible. He didn't accept. It was impossible. So it wasn't signed. We waited another six months. This took place in October of last year and we signed the contract when he came to Bonn in the course of Gorbachev's visit a couple of weeks ago.

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[i]

One final example -- management education. When I delivered this speech, which I mentioned already, for the Academy for Economics to the managers of the Soviet corporations, I noticed that not even the fundamental criteria, factors or terms were known. Those managers knew about their technical situation and they knew about, as I mentioned already, they knew about their statistics of the number of products manufactured.

They had concept of costs. They had no concept of prices. They had no concept of demand in the market place, or of the forthcoming developments, the consumers or their balance sheet.

All this has to be learned by the present generation, but in addition to being learned, it has to be wanted, too, and here I think doubts are justified, as to whether they really want it. Why? Because they have never been accustomed to making decisions. All the decisions they made were prescribed in the plans they got from the authorities.

When they have the freedom to decide independently, then for a long period of time they are at a loss because they have never learned what it means to decide under uncertain circumstances, and to do so is what the market is all about. We have to make our decisions not knowing exactly, correctly, and firmly what the development will be in the forthcoming year, so we decide based upon uncertainties, and they have never learned this. They have never done so. They are not at all accustomed to it. They have no idea what it means.

And this is understandable, because in the Soviet Union people never had what we call the free market system, not even before 1970. They can't recall it like the Chinese can, at least to some degree. The Soviets cannot. It hasn't been a part of their history, and that's where they really have to learn, from scratch, from the bottom.

I give you all these examples, ladies and gentlemen, not because I want to be pessimistic or to relay a pessimistic message. I am rather optimistic, perhaps a little bit more than Henry because I think that Mr. Gorbachev, though not Mr. Gorbachev alone, but also those supporting him, really mean it. They really want to bring about a reform.

But of course there are many bureaucrats who would, in the course of the reform, however they interpret it, lose their privileges, lose their capacities, lose their positions, and these are the people who may oppose it, these are the people who may fight against it, these are the people who may try as hard as they can to prevent a reform, of the sort that Gorbachev and his colleagues might have in mind, from coming about.

And yet, what should be the right reaction on the Western side? From a German point of view, I think it's right to accept and to try to implement what your President, Mr. Bush said, when he last visited Germany: He said Glasnost might be a Soviet word, but it's a Western concept.

And the Germans think that we should also try to live by this Western concept in our communication, connection and core operation with the Soviet Union and the other Eastern bloc countries, and here of course I have to mention Hungary and Poland.

We feel that it is worthwhile to try to develop normal business connections with the Soviets. That's why we were ready to open a credit line for them, as you all have read in the paper, of three billion Deutschemarks, which can be used and will be used for financing German exports for the Soviet Union or Soviet imports from Germany, favoring the consumer goods industry.

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We will try to develop joint ventures with them in order to bring them the knowledge, not only the technological knowledge but also the knowledge of economic terms and economic features and economic factors, in order to enable them to really develop more economic strength and well being.

We think it is worthwhile to stay in constant contact with the politicians, the managers and the bankers to exchange views on the various problems and the various developments and the various ideas and concepts in order to make sure that they learn more about the way we think, the way we do business, the way we develop our societies and our economies.

We think it is worthwhile and it is a historic opportunity that we should take to provide help, self-help so to speak, to provide a basis for the realization and implementation of their ideas, even if they don't have, as I said at least for the time being, a consistent concept.

Perhaps we might be able to help them to develop a concept, but in accordance with what Henry said let me repeat what I, in the course of an international conference said, the Billiver Conference, which we attended, Henry and myself, two years ago, when we talked about Perestroika and Glasnost, when we talked about the Soviet development, when we talked about the Eastern bloc countries: There are always two sides of the coin -- the one being okay, let's try to cooperate in the economic field as intensely, as closely as possible in order to bring about a better economic development which of course is favorable to all the people living in the Soviet Union and in the Eastern bloc countries.

But let us at the same time be very cautious, politically and especially militarily, because a developed country, as history has taught us, is not peaceful because it is developed. There are many instances and many cases, which teach us that even developed countries have fought against each other very intensely, very strongly and very severely.

And that's why I would stress the necessity and the urgency to do as much as we can in the economic field in terms of cooperation, in terms of developing their system, in terms of bringing about the free market procedures and seeing for it that the individuals have more freedom in making their independent decisions, and at the same time be very cautious when it comes to political and military consequences.

The question that bothers me is this -- I read it in the paper, in a German newspaper, after Gorbachev's visit to Bonn. It was said that Gorbachev has, to the present, been a hope for the West. From now on, the West is a hope for Gorbachev.

I think that's basically right. Without our help, he will not be able to bring about a tendency that makes Perestroika and Glasnost credible and plausible for the average men in the street, and when you talk to them, people in Moscow, Leningrad and Kiev, keep saying, well we have gone through those periods several times. Our political leaders have told us since 1917 that it's going to be better, and we'll benefit from the development. Please allow us to proceed. It never turned out to be that way, and that's why we are skeptical. We just sit back and wait but as soon as they notice a tendency toward the better Perestroika and Glasnost will win credibility and plausibility, and this is from my personal point of view also, in the interest of the west.

Well, ladies and gentlemen, this was what I had in mind to tell you, apart from my paper. Let me summarize.

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We are facing a great number, even a growing number, of concrete problems and difficulties. We are at the same time facing the strong desire of the leaders in the Soviet Union to improve the system, to bring about more economic strengths and to do more for the people in the countries of the Soviet Union.

I think this has to do with global tendencies, global developments, which we develop
ourselves into, whether we like it or not, into what I keep calling the one word context.

The global problems which we are confronted with, and with that I would like to finish, cannot be solved unless on the basis of a global solidarity. That is the Pacific Basin and the Japanese conquering of the world, that is Perestroika and Glasnost in the Eastern bloc countries, that is Europe 1992 and the following decades, the European union, the monetary union and the economic union, that is the international debt crisis which we have to deal with in order to help Latin America and many other important and relevant countries back on their feet, taking into account that the world economy needs these regions for their own positive development, and that is of course perhaps the center of all our problems, the environmental question which might be the determiner for the further development of world economy to a greater extent.

I think all those problems can only be solved on the basis of international and global cooperation. Even when we take into account the different national interests, though with respect to those problems I think our national interests are more or less identical.

Thank you very much.

US, EUROPE AND PERESTROIKA

Dr. Kissinger and Dr. Herrhausen Presentation - Part II
Open Discussion

CHAIRMAN: Thank you Dr. Kissinger and Dr. Herrhausen for giving us what I would call a very realistic account. Some might even call it a sobering account, having read so many good things that could come out of Perestroika.

Nevertheless, if you consider that only three percent of the Western European trade is presently with the East bloc countries of Europe, we see that there might be a lot of hope but not that much reality. Nevertheless, there will be many questions, and both Dr. Kissinger and Dr. Herrhausen have kindly agreed to be available for a discussion. I hope that there will be many good questions, leading in various directions.

I could well foresee that some of you might be interested in what that means for the United States economy, as the companies who, according to a newspaper article, have last year spent fifty million dollars just for PR in order to perhaps catch a share of the business that could be won from the Russians.

So the floor is open. We'll have microphones which are available for you, so if you raise your hand, state your name and the name of your firm, you'll help us all. Thank you. Please.

Q: My name is Barbara Jacobs, I'm with CREF. Dr. Kissinger, you mentioned briefly the questions that you didn't have answers for about China, about what the students wanted, what the implications were. Could you possibly speculate on some of the answers to those questions.

DR. KISSINGER: I think in China you had the coming together of many phenomena. One, clearly many of the students had been heavily influenced by what they had learned in the West about democratic values and principles. And I believe that this was the original impetus of the protest.

However, that protest would have remained a largely academic one if it had not been joined by at least two other forces.

Another, the general discontent that was produced by price reform, which lead exactly to what the Soviets said to Dr. Herrhausen, namely rampant inflation. And then when they put on price controls, it got even worse because then goods disappeared, causing some real dissatisfactions, especially among the working population.

And also, as price reform took hold, businesses had a chance of failing, so for the first time Chinese workers faced the problem of unemployment. So there was real dissatisfaction, especially in Beijing.

Third, it seems to me that this protest merged with a power struggle within the Communist Party between the Reformist Wing under Dao Gin Yong and the Dung People. The Dung People are also reformers, but not political reformers. Among the top Chinese leaders, I personally like Dao Gin Yong best and he was most sympathetic to the Western value.

Therefore, the struggle had many similarities to the cultural revolution. During the time of the cultural revolution, Mao started a series of student uprisings on the opposite end of the political spectrum in favor of communist orthodoxy. This then created so much chaos that other people who organized themselves also organized the Red Guard, so you had all kinds of Red Guards running around, some pro-Mao, some anti-Mao.

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Some of the so-called students or some of the students on Tiananmen Square were carrying signs of Mao. Others were singing the international, but the fact is that when the central square of the capital of a country is occupied for eight weeks, you are not talking about unarmed student demonstrators holding fort on Jeffersonian democracy. You're talking of something that must produce a political upheaval, because in a country like China, with a population of a billion with a tradition of provincial autonomy, if you cannot control your capital you lose control of the countryside.

So I think it has to be analyzed in terms of an assault on those who held political power. That doesn't justify the action, but it means that it was not simply a student protest. It was something very fundamental, some of the objective causes of which may appeal also to the Soviet Union.

And I find much of the American reaction incomprehensible. I don't know what we want. Is it the American objective to provocate Jeffersonian democracy in China? And what if Dung calls up Bush tomorrow and says what do you want me to do? What exactly should I do now? What should we say? Do we know? Have we any idea what we mean?

And I've known Dung for fifteen years. I think he's a reformer. He didn't understand the political consequences. I believe everything Alfred said about the intentions of the present Soviet leaders, but we should start thinking about what our reaction will be when some of the possible consequences appear within the Soviet Union.

Can we then separate the Western foreign policy interest from the interest in domestic reform? To what extent is it the Western story to reform the domestic structure of every country in the world. It's an important question, and it's sort of a cop out to always think that on the one hand we are told we shouldn't intervene internationally. On the other hand we intervene everywhere -- internationally -- without knowing what we mean.

And that is my concern. I believe that the Chinese will come back to reform, unless such a crisis develops between the western countries and them, that they again withdraw into a shell and go through twenty years of Mao's retrenchment.

AH: ... One, one thought. My concern is that what happened in China can happen or even might happen in the Soviet Union, too, when it comes to an economic ... real economic crisis. When people start starving in the winter, for instance. When they cannot solve their problems, these particular problems, and the question is, what is in our interest? I remember, Henry, when you said also at the Bilderberg conference, there are only two ways or two developments we can foresee. Either Gorbachev fails or he succeeds. What is in our interest? Is it more in our interest that he succeeds, then I think we have to seriously consider this is a very personal view whether we should enable him and his associates to prevent ... avoid the crisis, economic crisis that I tried to briefly describe when I said, when people begin starving, because this could be an inducement for the Soviet citizens to do similar things to what the citizens in China have done in the last few months and that it then would come to similar developments and similar events in the Soviet Union like in China. I think, Henry, that it is necessary and urgent to think about how that can be avoided and prevented, perhaps only when we ourselves try to help them, at least to a certain extent.

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HK: May I make a point of this? I agree with this. I would make either this point, one, the Chinese upheavals which none of us foresaw, none of us who visited China periodically would have thought it possible. The Chinese upheavals occurred in part because the politics succeeded. They accomplished a lot more than the Soviets can even -- have even dreamt of at this moment, so we may not exactly know what produces upheavals. They have enough food. They have infinitely more consumer goods than the Soviet Union so on paper you would have thought they have less reason for economic discontent, but revolutions historically have occurred in countries which were on the way up. France was a relatively rich country in Europe in the 18th Century, not the poorest. So we may not know.

Secondly, I favor what Alfred has said but I think that Gorbachev should be treated as an adult and I think one should say to Gorbachev, here is the danger we foresee for you. We are willing to help you. We are willing to do even more than you've asked us to do. On the other hand, let's stop playing around in foreign policy. You cannot denuclearize Europe. Europe has to return to some familiar pattern in which you get normal military security guarantees but cannot impose your government on countries that clearly don't want it. It is not responsible to sell arms to a country like Iran. If you have reasonable demands of us, make them. There are security concerns. He's entitled to have them. I believe if we cannot have such a dialogue now, when are we ever going to have it?

What I said in Bilderburg was there are two dangers. Alfred was kinder. I said the two dangers are that Gorbachev fails or that he succeeds. If he fails, we have under the present framework we have the problem that Alfred described. If he succeeds and the Soviet Union becomes even like Japan of the 1960's and nothing else has changed in the world, why would they not be more aggressive? When Arbatov says to Alfred, we want to be a superpower, under present ground rules it is the essence of superpowers to intervene globally. That's what has to be settled on the basis of mutual compromise and that's the dialogue that I want to get started now and that is my worry.

In that context, and they don't have to settle all their political problems tomorrow, if I saw real progress towards that I would totally subscribe to Alfred's economic program. Then it's indeed in our interest that they get settled domestically.

AH: We have George Soros who could perhaps introduce a slightly different subject which is capital market solutions, if there are any, they may be farfetched but he's done good work there in Hungary and perhaps your question reflects on that, I don't know, but go ahead, please.

GS: I was going to comment on the two speeches because it struck me, it's very interesting that both speakers presented an almost identical picture, a very somber picture, of the economic reality in the Soviet Union and yet they came to what seems to me diametrically opposed conclusions. And I must say I share Alfred Herrhausen's point of view. It is a much more widespread point of view in Germany than it is in this country and I think that that is very regrettable because it would be a great pity if Germany and the other Western countries really pulled apart on this very critical issue.

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I have to take issue with Henry Kissinger's theoretical framework which has led to his conclusions because -- and I don't want to get into an academic debate, but the framework is such that somehow there are sort of timelessly valid geopolitical considerations that guide national policy or if not timelessly valid, at least long historical trends which are measured perhaps in hundreds of years. Now obviously there are these factors but this framework really doesn't allow you to understand the internal political developments, the changes in society that are occurring, and this is really the essential development in the Soviet Union. There is a discontinuity in domestic and foreign policy in the Soviet Union whereas Henry wants to play the same game as has been played up to the present. And I think that is the wrong thing. I think that the system of government that we know as the Soviet system has actually effectively or is in the process of collapsing and what is at stake is what is going to succeed it.

Now there is, I think, a struggle in the Soviet Union between two major forces. One is represented by Gorbachev, the desire to join, let's say, Europe. And this is a very interesting point about Europe because Henry says, what are the frontiers of Europe? The whole point about Europe I think or a certain concept about Europe is that it has no well-defined frontiers. It's a network of relationships and it's an open system.

Now there's another concept of Europe which could develop and also fortress Europe. So there is also a struggle going on in Europe, what shape Europe is going to take and how the West reacts to the changes in the Soviet Union is going to have considerable impact on what shape Europe is going to be. Now in this respect I think Gorbachev really has a vision that can be endorsed and I think ... which is the concept of an open Europe. This is how he's talking about a European house. A Europe which has a place for America. It's very interesting that the Soviets are emphasizing that they don't want a Europe with America absent from it because that Europe would be too small to accommodate them and it would make Germany too big. So this is the concept of Gorbachev I think in this regard to Europe and whether he succeeds in, let's say, in bringing his vision closer to reality, depends a great deal on Western response. I think that exactly because they are in such desperate economic difficulties, so much lacking in any knowledge of the market economy, they desperately need our help and I don't think it's interference to provide assistance when they ask for it.

HK: I've really basically stated my view and there's no sense repeating it. I would say that if ... I'm perfectly open-minded about the fact that the Soviet evolution is discontinuous with previous Russian history, not just Soviet history. All I'm saying is let them express it in some concrete way and let us propose it to them in a concrete manner. I don't think it's a question that ought to be settled in a debate between George Soros and me. I think we ought to be able to express our view of a peaceful world and discuss it with the Soviets in a serious manner. That's all I'm asking of them. What I warn against is to believe that if nothing else changes, simply helping economically can solve the foreign policy issues. As a historical phenomenon I might point out I would urge anyone who is really interested in this debate to read what has been said about the Soviet Union in every decade since the 1940's and there's always been a school of thought that they have fundamentally changed and you can ... I can get you a book of quotations on that subject. So the mere fact that this is asserted, doesn't make it so.

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On the other hand, I can foresee situations where I will defend as I'm doing now with China. I don't want to disintegrate the Soviet Union. I don't think that one should break up the national state but I think there needs to be a precise discussion of what is meant by discontinuity and if we live in a discont... there are many areas that Alfred mentioned: Environment, international debt, many issues in which cooperative measures are absolutely essential and which you cannot analyze in terms of history because there was never a global foreign policy before.

AH: Please.

JF: I'm John Friedman from the Ford Foundation. Dr. Kissinger, I'd like to ask you about the future of the Warsaw Pact and specifically the future of Hungarian participation in it. The Hungarians do not border on any NATO country and yet they do border on the Soviet Union and they sit in the very center of the Warsaw Pact. Is it conceivable that the Soviet Union would allow the Hungarians to withdraw from the Warsaw Pact and become in principal a neutral state?

HK: Let me make ... last week Gorbachev said that interference in the domestic affairs of the countries of the Warsaw Pact is absolutely excluded. But he also said that changes have to come from within the country and cannot come from the outside. But if you read his interview with the Washington Post a year ago, he said that the Hungarian, German and Czechoslovak uprisings of the '50s and '60s all were stimulated from the outside, so that by definition any major change in Eastern Europe could be interpreted in this manner.

Now my view is that the Soviet Union is likely to commit a wide evolution of the domestic structures of Eastern Europe but that if the Warsaw Pact is challenged, a different view may arise. In terms of security I think the Soviet Union is primarily interested in Poland and the German Democratic Republic and I think if a way could be found by which Soviet troops could be withdrawn from Hungary without Hungary leaving the Warsaw Pact, that the Soviet Union may well agree to that. Therefore I believe that as part of this discussion that I think should take place, one should not so much challenge the Warsaw Pact as to design arms control in such a way as to require withdrawal from certain categories of countries as part of a general arms control agreement between NATO and the Warsaw Pact which would get Soviet troops out of Hungary, perhaps even Czechoslovakia where they were never before 1968 and then reduce them within Poland and the German Democratic Republic. But if Hungary attempted to leave the Warsaw Pact, I think it would take a very dangerous course for itself. Not because the Soviets particularly need it for their defense but because they don't want to accept the principle that the Warsaw Pact can be broken up.

AH: Fred.

FZ: I might be able to do it without a microphone. I'm Fred Zucker with Chrysler and this is for either Dr. Herrhausen or Dr. Kissinger, perhaps both. Do you envision the possibility of the Wall coming down soon and if so, what quid pro quo should the West be prepared to offer to accelerate the Wall coming down?

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AH: I do not expect this to happen in the next five years or so, perhaps even longer, because it would lead to severe difficulties within the GDR. Many people would try again to do what many people did before the Wall was built, and leave the country, and by leaving the country it will really bring about economic problems and difficulties that nobody could overcome, not even the Soviets, as long as they have their own difficulties. So I come to the conclusion, based on the experience in my daily business and in my connections with the people of the GDR. We see them regularly. They come to West Germany and we travel to the GDR. I come to the conclusion that we best not expect this is to happen very soon. I don't think so. Again, it's a personal view.

HK: I agree with Alfred and I don't think that when it happens it will happen as a result of a negotiation. I think it will happen as a result of an evolution.

AH: Go ahead, Fred.

FN: I'm Fred Nagle from Fairfield Research. Dr. Herrhausen, if things do proceed favorably in places like Poland and Hungary, what do you see as the engines for economic growth in those countries over the next several years?

AH: Those countries are in a different situation. The Hungarians have already introduced many factors, criteria and parts that we would call a free market society. They even have a new corporation law, they even issue shares, they allow you to establish 100 percent owned companies or joint ventures with majority. They introduced the first parts of well-functioning capital markets. They are politically progressing. In Hungary, apart from the fact that they are highly indebted, the economic development is rather promising and I think when they can deal with the debt problem properly, that progress will continue and we'll see the very intense exchange of goods, services and even money and capital between Hungary and the Western countries.

Poland is a different case. Politically, well that's a view that Henry should touch upon. Politically they might be even further progressed than Hungary but economically they are of course in a frustrating situation and I keep asking myself what we can do in order to help them. Apart from the fact that they are part of the Warsaw Pact and apart from the fact that they belong to the Eastern bloc, I think that here being closer to them than to the Soviet Union and having traditional ties between the Federal Republic of Germany and Poland, the question lies on the table and Mr. Bush travels to Poland, the Chancellor will travel to Poland and no Western statesman can travel to Poland without bringing something.

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But the question is what can we bring and Mr. Soros has thought about Poland and come to some proposals. I've thought about Poland and have come up with some proposals. I think there is a thing that I would call an incompatibility between the urgently needed help from the Western countries and what is called the Polish economy. Those two things are not compatible with each other. When we arrange help from the Western countries for Poland, then I think we have to replace what is called Polish economy by a third medium and I have the idea that similar to what happened in Germany after the Second World War when the Marshall Plan was introduced and the (German name - Wiederhoff) was established, that a similar institution could perhaps be established in Poland led by representatives of Germany, of the Western creditor countries and in a minority by the Polish people themselves, an institution that could perhaps try not only to control the money coming from the Western countries that is spent in Poland, but also see to it that it is directed toward the purposes we have in mind and that nothing "gets lost" on the way to where it should be spent. I mean, this was what the Marshall Plan was all about. There was not a single buck lost on the way. And whether we can bring about a procedure and an institutional framework in Poland in order to encourage their development by introducing and implementing and establishing Western help based on Solidarity is an unanswered question for me. But I think, here again, the economic question is decisive because they are willing to progress politically, and in Hungary the political question seems to be more decisive because they have been willing to progress economically. A very similar pattern compared to what we saw in China where they started to progress economically and apparently are not willing, at least not at the present time, to progress politically, and in the Soviet Union where they started to progress politically and are not able at the present time, to proceed economically. This is a very similar pattern that I see, from a personal point of view, and based on my experience with respect to Hungary and Poland.

HK: I agree completely with Alfred about what should be done in Poland. The only point, and I've made one additional point in that connection. I really think that as these institutions develop that I strongly favor, it is necessary to talk quietly to the Soviets to give them some sense of what one is trying to do because otherwise the situation could become much too dangerous. Not to give them a veto but to tell them what one's political objectives are, but otherwise I strongly favor the institution that Alfred has described.

AH: Now we come to Nick Bratt from Scudder Stevens Clark. Nick.

NB: Thanks. I have two related questions for Dr. Kissinger. I haven't been in Moscow recently but I'm told that the most numerous foreigners there at the moment are the Japanese, not the West Germans, and I wonder if you could comment first on the evolution of Japanese foreign policy in general terms and secondly, more specifically, on what progress, if any, is being made by the Japanese with their negotiations on the northern islands.

HK: The Soviets have agreed to negotiate on the northern islands which would indicate to me that they are willing to make some concessions because why offer to negotiate. Now whether any concessions except the return of the islands will satisfy the Japanese I can't judge. They haven't actually, I don't think, started the negotiations yet in any serious way but my estimate is that the Soviets will offer something on the northern islands, the Soviet difficulties being that if they once agreed to give up territory that they acquired at the end of the War, they may face other demands. We have seen today that there are nationalist uprisings in Moldavia, which was taken from Rumania ... or nationalist protests anyway in the Soviet Union.

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[c]

Now, what do I think of the evolution of Japanese foreign policy? I think in the 21st century Japan will be a major and quite uncomfortable player for many. I think Japan will substantially rearm and I think it will become increasingly assertive. I don't say this as a criticism, I say this as a fact, and if our relations with China should deteriorate dramatically I think that will be another element that will accelerate this trend. So in any event, in the 21st century, we will have different foreign policies than -- even as the '90s progress -- we will have different foreign policies because there will be many more centers of decision which will change the assessments of those who thought that their own antagonism was the only factor of international relations and what I said about the Soviet Union is in many respects also true of Japan. How can you integrate a country that thinks of itself as a family and that really doesn't have a concept of cooperative effort, into an international system? It's a problem for Japan and it's a problem for a lot of countries.

AH: We have time for 1 1/2 more questions, so George Soros, is your "half question" answered or you want to bring it up? Then we have Dan Ahearn.

GS: I wanted to comment on Poland because I think it is, at the moment, a very hopeful situation and it's exactly because the economic situation is so bad that it can be dealt with, because first of all, Poland is bankrupt which makes that problem somewhat more easy to tackle. Secondly, you've got an inflation which is still blatant, let's say, in the Soviet Union, and to some extent in Hungary, and is very blatant in Poland. I think you'll have 300 percent in the next 12 months and the black market or the free market rate of the dollar indicates hyperinflation just around the corner and that has the positive result: It doesn't take a great deal of resources to stabilize the currency. The entire budget deficit, which is 3.5 trillion zloty, is less than a billion dollars and the political situation is now favorable. Both sides are eager, anxious to move forward so it's a real opportunity to do something and it won't take the resources that are being talked about. I think $3 billion in the first year, $2 in the second and $1 in the third will do the trick.

And in Hungary, by contrast, I think there is room for actual private investment and there's a First Hungarian Investment Trust being launched which I hope that Deutsche Bank will participate in.

AH: We're seriously considering it. Now we go to Barbara Morrow, and if Dan Ahearn will kindly forgive me for letting her go first; then this is the last question because otherwise we will run out of time. So, Barbara.

BM: I'm Barbara Morrow with the American International Group, AIG. I would guess that the first and most interested in viewing foreign relations on a personality basis would be Gorbachev himself, and my question for Dr. Kissinger is your assessment of him and of Russia today as a forum for making that possible. How do you assess the possibility of being involved in personal vendettas, personal obsessions? How masterful do you think he is at projecting just the personality he wishes to for his objectives? How do you assess him as being clear-minded in what he thinks his personality objectives are? And how likely do you think it is that he will, in fact, survive for five years as a student of history and, (Inaudible) working for an insurance company, I wouldn't insure his life but you know him better than I do.

AH: Thank you, Barbara.

-23-

JUL 14 1989

July 11, 1989

Dr. Henry Kissinger
Kissinger & Associates, Inc.
350 Park Avenue
New York, New York 10022

Dear Dr. Kissinger:

Yesterday, I was deeply moved while listening to your comments on Perestroika and your reaction to Western sentiment concerning the Soviet Union's proposed efforts at political and economic reform. I believe you are correct in diverging from the current attitude of blindly embracing Glasnost and the denuclearization of Europe because of General Secretary Gorbachev's remarkable charm and sense of timing, and I salute your courage in delivering an unpopular yet prudent message. I hope I will have the pleasure of hearing you speak again in the near future.

Warmest personal regards,

Evan S. Yellin
International Mergers & Acquisitions
Deutsche Bank Capital Corporation
31 West 52nd Street
New York, New York 10019
(212) 474-6816

9/28

EDITS

HAK: re Herrhausen Presentation
July - Pierre Hotel

I am told you agreed to being taped
in your presentation with Herrhausen,
as they want to publish the seminar
for distribution to the 100 or so
who attended.

The plan is to publish both remarks
and Q and A materials. Herrhausen
is working on his edits.

Note especially

--"deadly" on p 2

--"worrisome" on p 3

--reference to Bush - p 7

--Reference to preference for
Zhao Ziyang p 22

____ Approve attached edits

____ redo as shown

rosemary

US, EUROPE AND PERESTROIKA

DR. KISSINGER: Chairman, Alfred, ladies and gentlemen, we had a little discussion prior to the meeting because I told Dr. Herrhausen that I thought he was likely to be more optimistic than I and that the meeting should end on a positive note, and the gentlemen from the Deutsche Bank A. protocol they choose which they thought required me to speak first and I thought it a historical occasion when the Deutsche Bank accepts second place in any protocol function. So I thought I'd better take advantage of it and tell my grandchildren what happened.

I look at it from the point of view of somebody who has had to conduct American foreign policy, and from a very particular perspective, of what I take to be the fundamental problem of American foreign policy which is this:

[Y]

The United States will therefore prevail, in contrast to all other nations of which history informs us, by its moral domestic performance and its appeal to humanity. The view is that there are no real differences among people; there are no national differences. The differences can be expressed importantly in terms of personality.

And so American foreign policy oscillates between those who think foreign policy is a subdivision of psychiatry and those who think foreign policy is a subdivision of theology. There is a point of view that thinks relations among nations is like relations among people, and that it can be built on the basis of confidence and good will. And there exists another point of view suggesting that relations among states is part of a moral struggle between good and evil in which good must in the end prevail over evil, and evil must be punished.

At certain periods those two viewpoints merge, and to see in foreign policy not a problem of balancing interest but a problem of conversion. And so the extreme right and the extreme left in America tends to start from the same premise -- namely, that the purpose of American foreign policy is to convert our opponents to the American point of view.

The liberals say the conversion has already taken place. The conservatives say it has not yet taken place, but it will happen; if the trumpet is blown hard enough, the walls of Jericho will tumble. So periodically, America goes through fits of isolation, as in the twenties, saying it is too good for this world; in the seventies, in the Vietnam period, saying it is not yet good enough for this world, but the result is a denial of what I consider to be the fundamental problem of foreign policy, which is that nations have historic interest dictated by geography, by their history, by their governmental structure, by the psychology of their people.

These interests can be influenced and shaped by individuals, but only within limits, and these limits have to be studied and understood. The only American President who acted on that basis was President Nixon. I sometimes say jokingly since President Nixon's faith in the American people was limited, he was not about to trust any foreigner, and therefore he attempted to base his foreign policy on a calculation of the incentives and penalties that would induce certain courses of action, which lead him to many directions that were very conciliatory in the field of foreign policy, but it was always attempting to be placed in an objective context.

We see today with respect to China this trend in American policy: What exactly do we want from the Chinese? Do we know what democracy is in China? Do we know what the demonstrators wanted? Do we know what it would have lead to? I don't want to get into that subject because it isn't my subject. I'm using it as an example.

Now with this as a background, I am always extremely leery about attempts to personalize foreign policy, about efforts to use a historic evolution to see a historic evolution in personal terms, or to believe that one man can change four hundred years of history all by himself.

I will make one other observation of a general nature before I get to the topic specifically, and it is this: When one looks at European countries, it is the interplay between Americans and Germans that can be particularly deadly from the point of view that I described, because of all the nations in Europe, the one with the least developed sense of the national interest strangely enough is Germany.

-2-