19

demand, an overall supply and demand situation, really have as their principal purpose, an assault on the political stability of the moderate oil producers, particularly the Gulf States. The attempt is being made by Iran and other radical producers, an attempt that has, for all practical purposes, succeeded, to make the Gulf States the residual producers and thereby produce a situation in which they must pay the principal burden of the economic cost of sustaining any price or attempting to sustain any price. This, in turn, magnifies the possibilities of dissensions within these countries where, after all, the allocation of resources is partly a personal and partly a bureaucratic issue, and it also reduces the surplus available that these countries have for foreign aid, and above all, for aid to Iraq, which is in a conflict with Iran. And, if Iraq should collapse through a process of attrition, I assure you we would see a very rapid change in the oil market, not because Iraq is producing so much, but because we would live in a new political environment.

Now, when you add to that the fact that in the 80's, North Sea oil will be running out, I think it seems to me that here is a case where the market pressures can actually be misleading and where some kind of national policy is absolutely imperative, and

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where we need at least two aspects. One. I think we
should continue to develop alternative sources even if
they do not look very profitable at the moment. We
should use this period of oil glut as a Godsend to en
able us to get ready for the next oil shock. It would
be absolutely reckless to try to live on what must be a
temporary condition. Secondly, of course, we should
continue to force the conservation both in industries
and as a governmental policy. Third, I think energy
policy is an area where a conscious western hemisphere
policy of cooperation can enable us to create political
and economic structures to deal with what I consider
to be, perhaps, one of our graver economic political
threats, which is the debt problem. And, let me talk
about that and then, come back, let me come back to
the energy issue.

When I was in office, there was a demand by the developing countries for what they called a new economic order to be achieved by the transfer of resources from the developed to the developing nations. It was always rejected as being exorbitant and unjustified. Within the last five years, more resources have been transferred by the private banking system than the wildest radical would ever have dared to propose as a transfer of government resources, and it happened in a

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1 manner that was practically unnoticed. There was no policy decision. There was no industrial policy that produced it. It happened, in fact, as a result of competition, because no bank really wanted to tell its competitor what it was doing. No lender, as the papers represented here so excellently pointed out, no borrower had any incentive or was asked to indicate the scope of this borrowing, in contrast to private borrowing and we now have a debt of something like six hundred billion dollars and present high interest rates, which if the deficit projections are correct, are not going to come down very much before '86, and high interest rates that are -- that make servicing the debt more and more difficult. All of this is really familiar. Now what I would like to put before this group is that I do not believe that the remedial measures that were taken last year have ended the crisis. I think a political crisis that is caused by the debt problem is at least a possibility. I'm not saying a certainty. Let me explain why I think this. None of the major borrowers can service his debt in a normal way. I mean, if you look at the major countries, they pay interest and amortization normally, as a percentage of exports, would be a hundred and seventeen percent for Brazil, a hundred and twenty-six percent for Mexico, a hundred and fifty-four percent for Argentina.

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a hundred and one percent for Venezuela and so on and so forth. It is not durable and, therefore, you get a constant rescheduling of the debts and you have these IMF agreements. These IMF agreements have two components. They impose austerity as a condition for the method and they require the original lenders to continue in a need to increase their lending over the period of the IMF. My argument would be that it is highly improbable that most of these conditions will be sustained over an adequate period of time.

I do not say that the small banks, according to the papers that were presented to this group, pointed out that the smaller banks are going to continue this process and I believe that austerity in the smaller countries is a political challenge of huge magnitude that will be very difficult to sustain, shaking, as it does, the domestic stability of many countries. And, if what we said about debt service and other problems is correct, our recovery will not be rapid enough to raise commodity prices fast enough to overcome the fundamental problem, so that the net result will be that in countries, many of which avow socialist or semi-socialist views, countries that leaders are being asked to sustain austerity programs that are the very rigid application of a kind of free enterprise philosophy that

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[L]

1 in Mexico, for example, is not helped by the political
2 system, or in Argentina or in other countries you could
3 mention.

4 Now, I know it is always said that
5 countries will not default because the penalties to
6 them are too great. And, it is also said that countries
7 always -- that countries never go broke, to which one of
8 our panelists said yesterday, "Countries may not go
9 broke, but their creditors may." A sophisticated analy-
10 sis would go something like this: It is not inconceiv-
11 able that in some countries a radical government will
12 come into office that relates that service to its export
13 earnings and sets aside only a certain percentage of
14 its export earnings for debt service, maybe less than
15 is needed to serve its interest. Would we then throw
16 -- would our banks then throw these countries into de-
17 fault? And, if they get away with it, we will have --
18 it will have encouraged radicalism, and other countries
19 will inevitably follow suit. So, if we want to avoid
20 a radical political solution, at least two measures are
21 necessary. One is an internal measure among the indus-
22 trial democracies, some kind of a safety net for catas-
23 trophies so that the effects of such a major change
24 would not become generalized and a response could be
25 coordinated, some improvement of the system by which at

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least a level of lending is generally known. And, I must say, I was impressed by some of the specific technical proposals made in the paper by Professors Guttentag and Herring, but I don't want to get into those.

I want to get to another point. I want to say it is also important politically for the United States to change the question from the payment of interest to the creation of the economic conditions in which that payment grows out of development, rather than out of purely financial considerations. Austerity is a political liability for the countries concerned, if it is the only measure, and it is not even desirable for us, because it limits our export. And, if the end result of this process is an increase of debt in order to pay interest, I fear that it is politically not sustainable. On the other hand, if we can change the question to a development question, there is at least a chance that we can create incentives in the country.

Now, I believe that in the Western Hemisphere, at least, where also the heaviest debtors are, something like this can be done as part of an energy policy. If we bought more oil than the market would dictate to build up our strategic reserve and maybe, even at a price that we are not pressing very hard, it would certainly help Mexico and Venezuela and

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even Canada. If we made this part of a treadmill trading relationship and economic relationship of some kind of preferences for the Western Hemisphere, there is at least a chance that they can pay their way or at least a chance that the issue does not become one of foreign banks imposing impossible political conditions. This it seems to me, is, and even if my particular solution has its flaws, there are better economic minds than I in this room who could think up other solutions in the context of development, rather than in the context of debt service, which I believe is a hopeless wicket on the political -- from the political point of view over an extended period of time, the chance that every debtor will play that game indefinitely seems to me at least one that we should not take for granted.

Now, I would like to conclude. I've already spoken longer than my assignment, and I am so intimidated by Miss Friedman that I do not dare to violate her injunction. I'd like to get back to my original point. I have made a number of analytical -- I've raised a number of analytical issues to which I don't have the answers. I raised another question to which I may have an answer or at least, the beginning of an answer, but the fundamental problem with which I began remains, in my view, the key problem of our society.

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1 which is, how do you go from a world which is familiar
to a world in which you've never been. Where do you
find leaders either in the corporate field or even more.
4 in the government that can handle this process. The
relationship of men to events is one of our unsolved
problems. All of us who have worked in government in
whatever administration know the obsession of our
political leaders with the comments of evening news
commentators whom they would never ask for advice before
they made a decision. The obsession with the short-
term at the expense of the long-term is one of the
reasons why our leaders in their quests for popularity.
and many Democratic leaders are using up their reserves
of public capital, because strangely enough, the public
does not forgive its leaders for catastrophies, even if
the catastrophies were produced by carrying out the
public's wishes. They expect the leaders to know better
and to tell them the truth. Chamberlain was widely
popular in 1938 at the time of Munich, and destroyed
eighteen months later, nevertheless. Both in our edu-
cational system and in our political experience, and I
suspect, in some respects, in our economic experience.
one tends to get to the top by doing the familiar, as
well as possible, and one lacks experience about the
future. This is compounded by the destruction of inter-

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[Lc]

1 national consensus both with respect to deficits. with
2 respect to defense. and which could be illustrated
3 easily in the field of foreign policy in which I wasn't
4 permitted to speak. And, finally, by a cumbersome
5 bureaucracy: certainly in the government, maybe even in
6 the corporate world in which the management of the
7 bureaucracy absorbs more and more energies so that the
8 questions about where we are trying to go and what we
9 are trying to achieve is very difficult to answer.

10 Now, I've just added one other item
11 to our agenda, but I want to end on a relatively hopeful
12 note. If you look at the papers that have been pre-
13 sented here and at the arguments that have been made
14 here, there is an amazing consensus that our system, as
15 a system, could deal with many, if not most of these
16 problems. Everybody agrees that competitiveness gives
17 us an enormous advantage over planned systems, for exam-
18 ple. Everybody agrees, even in the field of human moti-
19 vation, that things can be done to deal with the so-called
20 structural unemployment. So, the real issue before us
21 is that in many ways, we know bits and pieces of what we
22 should do. The question is now whether we can organize
23 ourselves to do it. I'll stop there. Thank you, very
24 much.

25

(Applause.)

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1 MR. YANKELOVICH. We have about fifteen minutes for questions, if someone would like to raise a question. Dr. Kissinger has agreed to take questions for the next fifteen minutes or so.

5 DR. KISSINGER. Either about what I've talked about or any other subject.

7 MR. CONROY: Yes, Dr. Kissinger. My name is Alex Conroy. I recognize what you said. that certainly, the banking institution has made some grevious errors in lending to underdeveloped nations and I think, all of us that are involved --

12 DR. KISSINGER: Would you talk a little louder.

14 MR. CONROY: I recognize what you alluded to in your speech that the banking industry has made some grevious errors in lending to underdeveloped countries, for which all of us who are presently in the marketplace are paying our fair share of their mistake. However, there is, I think, a more serious issue that really relates to the potential defaults that have been bolstered up by the Western nations to the Iron Curtain countries that would have required the support of the Soviet Union. And, I'm principally speaking, for example, of Poland. Would it have been that the default had occurred and that Poland were put under pressure.

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[Lc]

1 and the Soviet Union would've had to intervene. it would
2 have been tying up assets and funds that are presently
3 being deployed in other areas. I would just like your
4 thoughts on that.

5 DR. KISSINGER: Well, first, let me
6 say something in defense of the banks with respect to
7 the lending. The recycling of fewer dollars was con-
8 sidered for a long time by financial experts and uncon-
9 tested by political leaders, as far as I know, a major
10 achievement of the private banking system. And, in the
11 absence of the creation of safety nets for other insti-
12 tutions in 1974 and '75, they performed an essential
13 function. The trouble is that lending -- I know this
14 isn't your question. I'll get to your question, but
15 lending of this magnitude by competitive institutions
16 was probably something that should have been addressed
17 as part of a governmental policy, because nobody had a
18 clear picture as to how much borrowing took place. And,
19 in fact, when the crisis hit last year, even the govern-
20 ments involved had great difficulty finding out the
21 total scope of their domestic private debt. So, one has
22 to pay tribute to the banking system for having eased the
23 recycling problem, but institutionally, it was probably
24 a mistake to permit that degree of lending without any
25 supervision or without somebody at least collecting the

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[Lc]

1 information and making it available to everybody so

2 that the various institutions could have assessed their

3 risks more systematically than their information per-

4 mitted them.

5 Now, with respect to Eastern Europe.

6 I think the question -- the whole economic relationship

7 between east and west is one that requires a much more

8 careful study. I do not believe, for example, that the

9 method that was used last year by the administration

10 with respect to the pipeline will go down in history

11 books as an example of diplomatic finesse. On the other

12 hand, I would say that the administration asked that I

13 question whatever answer one gives. The question is

14 whether assisting by concessional prices or concessional

15 credits, assisting the development of Eastern Europe.

16 contributes to political stability or not. I must say.

17 in my period in office, when banks asked me whether they

18 should lend to Poland, I generally encouraged them,

19 because I thought, at that time, there was a way of in-

20 creasing the margin of independent action by the East

21 European countries. We have since seen that in these

22 totally planned economies, the transfer of resources

23 does not really improve the economic conditions very

24 much or the flexibility of the political leadership.

25 That wasn't so obvious then, but whether our recommenda-

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tions were right or wrong. I now believe that trade with Eastern Europe and with the Soviet Union should be confined to those matters that are commercially sustainable and that anything else in the way of credit. concessional crisis, concessional credits should be paid for by political restraint. otherwise we will slide into the danger of subsidizing the assault of the international system that is being conducted.

Now, I also believe that we should negotiate seriously with the Soviet Union, but I would relate those two and I would make that part of the package. And, I think our allies are wrong in trying to solve their economic problems in the short term by concessional credits or subsidized prices to the East. It would be much better off doing it through the developing world, if that were to be their policy. or we'd all be better off.

THE AUDIENCE: Dr. Kissinger. you talked earlier about the lack of a national oil policy and the fact that we were misled in 1973 and. perhaps. we're being misled now. What can you, as one of the foremost political leaders and what can we in this room do to make sure that we are not misled again?

DR. KISSINGER: Well, what we can do as economic and political leaders is first of all. make

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[L]

1. sure that the leadership groups in this country out of government, and of course, also into government, if possible, but say, at least, out of the government.
2.
3.
4. have the correct analysis of the problem. And secondly,
5. to come up with some concrete ideas or to support concrete ideas to deal with it. It seems to me very dangerous to coast on the present situation. The present situation has too many elements of instability in it for us to assume that we're going to have an oil glut into the year 2000. That seems, to me, the most unlikely outcome and I think we should build up our -- I read that we are cutting down purchases for our strategic reserves. I would increase the purchases for our strategic reserves now and I would increase them in relation to a general policy for the Western Hemisphere and particularly emphasize purchases from countries like Venezuela and Mexico and other Western Hemisphere nations to do that at this time in return for, perhaps, some more long-range arrangements. I think the conservation effort should be pushed and I think the alternative sources should also be fostered and I'm sure there are a lot of other people who have better ideas. But, this seems, to me, an area in which private efforts play a large role, because there are no huge vested bureaucracies in the government that are working away at it and

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[L]

1 have huge influence.

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THE AUDIENCE: Dr. Kissinger, it seemed to me that one of the highlights of your talk, which had many highlights, was that in dealing with the --

DR. KISSINGER: Don't feel the need to come to your question.

(Laughter.)

THE AUDIENCE: That in dealing with the debt problem, that our emphasis should be a development emphasis, rather than a debt service emphasis.

And, what I wanted to be sure that I understood so that I didn't leave it to my own interpretation is fully what you meant by a development emphasis, what that would involve, bearing in mind that we all want development.

The issue is always how to get to it. So, what fully do you mean by development emphasis and how do you get there?

DR. KISSINGER. Well, the only way that debt can be repaid. really, is to increase the exports of the developing countries, especially of the major debtors. If you analyze these -- I got interested in the debt problem only within the last fifteen months or so, when I started reading about austerity measures. and I know something about some Latin American countries. and I just know that there's a time limit in which you

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1 can do that and that that time limit is likely to be
2 shorter than the economic process which it is supposed
to serve. That's when I started analyzing the problem
3 a little more. Now, at present growth rates. I think
4 it is going to be very difficult, either ours or theirs.
5 it is going to be extremely difficult to me impossible,
6 probably, or certainly very difficult to meet IMF goals.
7 certainly for all of them, impossible for all of them.
8 What I mean is, one concrete thing that has occurred to
9 me is energy. That is where one can increase the ex-
10 ports fairly rapidly by unilateral decisions. The
11 second is, perhaps, an expansion of some of the ideas
12 of the Caribbean Basin initiative, before it was emas-
13 culated, to some of the other Latin American countries,
14 such as Brazil, to enable them to increase their exports.
15 But, you're quite right, nobody has come up with a
16 brilliant solution to the development problem. But it
17 seems to me that if you make the topic development. at
18 least we can engage the cooperation of the debtor
19 nations, while if we keep the issue on debt service, we
20 will, in my view, face a high danger of political crisis
21 somewhere along the line.
22

23 Now, I know, also, there are a number
24 of schemes that I'm familiar with or that I've read
25 about on how to spread the risk and how to handle tech-

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nically the dangers of all that, but I'm not getting into those.

MR. YANKELOVICH: I know we can go on all afternoon with these questions, but I'm afraid we don't have time for them. Thank you, very much, Dr. Kissinger.

(Applause.)

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YANKELOVICH,
SKELLY AND
WHITE, INC.

11 January 1983

Dr. Henry A. Kissinger
Park Avenue Plaza
55 East 52nd Street
Suite 1100
New York, New York 10055

Dear Henry:

It was good seeing you again. Everyone is delighted at the prospect of your participation in the second Wharton/Reliance symposium, "Removing Obstacles to Economic Growth" (see memo enclosed). The conference begins on Sunday evening, May 1 and ends on Tuesday May 3 at lunch. It will be held at the University of Pennsylvania.

What follows is a brief description of what we hope you will be able to accomplish:

It is our hope that the symposium will produce some important new ideas for stimulating economic growth. Our thought is that you would attend the full conference, take note of the various papers, and at its conclusion interpret what you had heard. You would be speaking extemporaneously, in part referring to and summarising the themes of the symposium, and in part going beyond the specifically economic proposals to offer your own ideas informed by your unique geo-political sense of what is possible in today's world.

Prior to the conference we will supply you with the various papers and with whatever form of briefing you feel might be helpful in stimulating your thinking. There is, of course, no guarantee that this process will lead to fresh thinking about our economic plight and how to correct it. But I can think of no other approach that has a better chance to do so. The conference is weighted toward the economists' mode of thought, and the participating economists are first rate. But our problems are only partly economic, and even the best of the economists are not at home in the social-political realities in which today's economies are embedded.

575 MADISON AVENUE NEW YORK, N. Y. 10022 (212) 752-7500

All of us share the view that your gift for cutting through the complexities to identify a bold and realistic course of action is ideal for the purpose at hand: interacting with the thought of others the symposium will give you a platform (with high visibility) to express your conclusions. This form of participation by you greatly enhances the chances of the symposium making a valuable contribution.

We have set aside a budget of $50,000 for this activity, plus whatever incidental expenses you may incur. If in the course of thinking about what you may want to say, you would like a sounding board, nothing would give me greater pleasure. I understand that the first of our lunches has been scheduled, and I look forward to it.

Enclosure

THE
WHARTON/RELIANCE
SYMPOSIUM

Conference Framework

May 1-3, 1983

The second Wharton/Reliance Symposium "Removing Obstacles to Economic Growth" is part of a series of symposia to address the problems and opportunities of private enterprise co-sponsored by Reliance Group and the Wharton School of the University of Pennsylvania.

The first symposium, "Toward a New U.S. Industrial Policy?", held in Philadelphia in March of 1981, examined the entire relationship of business to government, and in each area the extent to which government economic policy failure contributed to economic slowdown. From this analysis it is possible to focus on the crucial areas where policy changes will be helpful. Two years later, with the United States in the worst economic slump in 40 years, the second symposium will take a problem solving approach to overcoming critical obstacles to economic growth.

The purpose of the conference is to arrive at a set of policies that will enable the United States economy to break out of the secular economic slowdown of the past decade - and the cyclical business cycle downturn that has affected the economy since 1980. Initial sessions will describe the problem and outline the elements of a growth strategy to mobilize the economy. A set of concurrent sessions will then discuss specific policy recommendations.

Many factors have contributed to the slowdown of the economy. The symposium, however, will focus less on the causes than on remedies. It is important to isolate policies that have an ongoing negative impact as well as to evaluate positive policy options for increasing growth.

It is useful, as a rough approximation, to identify solutions as to whether they primarily impact on labor or capital markets. This utilizes the economic convention of treating a nation's potential output as a function of the quality and quantity of its labor and capital. Factors such as the skill and attitudes of the workers and the technology are explicitly included as components of labor and capital.

We have identified eight areas in which policies are likely to have a major impact on growth. The maintained assumptions of the conference are that increased growth would be of assistance in diminishing the nation's social and economic malaise and that these seven areas can, in turn, be used to increase growth. The focus of the final session then is on developing specific policy options that could be recommended as feasible from a social and political standpoint.

The Wharton School

University of Pennsylvania

11/22/82

The eight policy areas are the following:

(1) Improving Skills: The Quality of Labor

The overwhelming majority of workers in the United States economy are highly skilled (by international standards). How can their skills, as well as those of lower skilled workers be shaped so as to mesh with the new economy and technology of the 1980's? If a new growth strategy can be adopted, what additional elements are needed to assure that the greatest percentage of workers are included in the renewed growth? With respect to workers who are currently being displaced by international trade competition and the slumping economy, as well as those who have been out of the employment mainstream because of chronic low skills, how do we deal with the mismatch between job requirements and available skills.

(2) Jobs for Those Who Want to Work: The Quantity of Labor

The demographic changes of the past decade have brought to the foreground the issue of the changing composition of the labor force. The "representative" worker is no longer a prime-age male who is supporting a wife and two or three children. Especially in a recession economy, some argue that it would be better if there were fewer workers. This, however, is a narrow concern fed by high unemployment rates. How do we plan for the demographic realities in terms of providing jobs? Social output is highest when the largest percentage of workers to the total population who want to work are able to work. What new policy strategies can minimize the negative work effects of government tax and transfer programs? More generally, given social mores toward unemployment and the length of the work week, what policies can best achieve the maximum levels of employment and total manhours?

(3) Attitudes Toward Work

It has long been argued, but with little supporting evidence, that the work ethic has been declining. Perhaps, however, the answer is that work incentives are the culprit. The rules of the work place do not encourage or allow workers to fully utilize their skills. How can work incentives be offered so as to mobilize the work ethic? Are these so-called soft elements in the productivity slowdown (i.e. attitudes toward work) closely related with modern technology and management?

(4) Managing Technology

Increasingly, computer-based technologies are being viewed as a principal means of restoring U.S. productivity and competition. These include a wide, and growing, range of new processes -- from robots on the factory floor to automated offices to electronic sales, inventory and communication systems. They promise to have a profound impact on the number and kinds of jobs available, the education and skills required to do the jobs of the future, and the very nature of work and the workplace. This issue is not whether the new technologies should be introduced but, rather, how they can be introduced so as to take full advantage of their

economic benefits while minimizing their negative impact on workers, communities and the society at large. What should be the roles of management, government and individual workers in addressing job security, retraining and benefits? Should government have a role in developing technology - sensitive policies along the lines of those undertaken by Japan, France and West Germany?

(5) Savings

Given the pivotal role of savings in contributing to economic growth, what policies can increase the level of savings that would be forthcoming in a full-employment economy? What impact would across-the-board vs. marginal tax rate reduction have in increasing savings? How can Social Security programs be altered to dampen their negative impact on the total amount of savings? What other policy approaches account for the high savings of other countries relative to the United States?

(6) Investment

The need for additional corporate investment to increase the growth rate of potential output and productivity is perhaps the most widely accepted policy approach to the growth rate decline. What tax expenditure policies would have the maximum effect on investment per dollar of government revenue loss? How can one best balance policy strategy so as to encourage firms to lengthen their planning horizons in seeking growth and to invest more heavily in research and development?

(7) The Government Deficit

How do we avoid crowding-out? What policies can best insure a high employment economy and provide the desired infrastructure without crowding-out or diminishing private sector investment? To what extent can government efforts lower interest rates over the short and long-run and provide healthy and stable financial markets?

(8) Dampening Business Cycles

The United States, along with most industrialized economies has suffered through a series of sharp cyclical swings during the past decade. It is suggested that these cycles have largely resulted from exogenous supply shocks that generated not only economic downturns, but also accelerating inflation. The current recession, the worst since the Great Depression, is attributed to attempts to lower the inflation rate. Can these cyclical swings be avoided or, at least dampened? What are the appropriate countercyclical policies to combat cycles generated by supply shocks or prior overexpansionary demand policies? More fundamentally, is there room for discretionary policies to deal with these fluctuations or does discretion merely worsen the cycles and reduce long-run growth rates?