NOV 12 '86 20:26 INIZIATIVA ME.T.A. ROMA

P.2

HENRY KISSINGER'S SPEECH

My friend Mario Schimberni apologized for speaking with an accent. I don't have his excuses. I can only say that my brother, who arrived in the United States at the same time I did, speaks without an accent and when he was asked to explain that strange phenomenon said, "I'm the Kissinger who listens".

For several months various Montedison emissaries have approached me with insistent charm or charming insistence to tell me under no circumstances to speak for more than 15 minutes because with this distinguished audience discussion had to start at 10.45. I told them not to worry about me - not that I wouldn't speak for more than 15 minutes but that when the time came for me to speak there would be only 15 minutes left if I knew my colleagues, all of whom have spoken with great wisdom and with all of whom I substantially agree.

Before you find it out through my remarks, I am not an economist, nor have I been a finance minister so I am, on the technical level, not as competent as any of my fellow panelists. On the other hand, I've had a number of experiences in government that sort of traumatized me about economists and about finance ministers not present here. For example, I was at a meeting in 1969 in the office of our Secretary of the Treasury in which there was some German currency problem, the nature of which I have now forgotten and I said why don't we devalue. I was treated as if I had told a dirty joke in church - with total contempt! It was explained to me that it was technically

P.3

impossible to devalue a reserve currency: it was immoral, it was impractical, it was impossible, and I thought they all knew something that I didn't know and very uncharacteristically subsided. Two weeks later while I was in Paris negotiating with the Vietnamese I returned on the Sunday evening and Secretary Connolly called on me and told me that, in the absence of the national security advisor, they had all decided to close the gold window and float their exchange rates. I said, that in my judgement this would not work as a permanent system because it would tempt everyone to shift his problems to another country. I was treated with total contempt. And it was explained to me that quite the contrary, these currencies would correct themselves automatically, no decisions would need to be taken, the market would take care of stability and well. . . you know the arguments. This indicates that there is some difficulty in the contemporary world about relating technical issues to political problems and about the relationship between immediate problems and long-term problems. From what has been said before it seems to me that there are a number of major incompatible trends existing in the world today. Never before has world economics been more interdependent. At the same time, rarely before has there been such a premium on conducting nationalist policies. There is a whole host of issues mentioned by Helmut Schmidt that can only be dealt with on a long-term basis and yet, the incentives of most leaders in government and, depending on the country, in many businesses, is to deal with them on a very short-term basis. Those of you who know baseball (which probably isn't very many) will know the slogan of a famous American

NOV 12 '86 20:27 INIZIATIVA ME.T.A. ROMA

P.4

CJD

baseball manager called Leo Derosja, who used to say his philosophy was, "Use your best pitcher today because tomorrow it may rain". That seems to me to be more and more the incentive of most political leaders and, depending on their term in office, of many corporate leaders. When I was Secretary of State and had to deal with some energy companies, I was struck by some decisions they took that seemed to me not in their long-term interest and for which I found no ready explanation. Then I had an assistant give me the average term in office of the CEO of these companies and I found that it was six years and less and it became much more obvious why they would take whatever they could get when they were in rather than take a decision that was immediately painful but would benefit someone in the long-term - their successor.

What is true in business is also true in politics and it is compounded by the fact that in politics in democratic countries and non-democratic countries as well (maybe even more so) the qualities it takes to reach high office are less and less the qualities that are needed to exercise high office, or not necessarily the same qualities. Achieving high office has become such a time-consuming enterprise that people stagger into their offices in a state of intellectual exhaustion sometimes and therefore find it very difficult to take the long-term views.

There is a myth in America that people learn in office. The only thing one learns in political office is how to manipulate the bureaucracy. If you have not thought about substantive problems before you reach high office you do not have the time to learn them when you are in high office. These are some of the dilemmas of the modern period. Now, let me apply them to some of the

NOV 12 '86 20:28 INIZIATIVA ME.T.A. ROMA

P.5

CYJ

current problems that have already been mentioned.

Business leaders and political leaders have to operate in an
environment in which they are advised by experts that, at best,
are familiar with what exists and yet, the key decisions depend
on assumptions about the future and about trends that are
probably quite different from the environment in which we find
ourselves. This creates a big disparity between slogans and
emerging realities. Let us take the case of energy which Helmut
has mentioned. Everybody knows that even now, during what we
consider an oil glut, the world each year is consuming more oil
than it is discovering. About that there is no dispute
whatsoever. Therefore, even if there are no unexpected
developments, it is mathematically certain that the oil shortage
of the seventies and early eighties must return and yet there is
no concerted effort whatsoever to deal with this certainty - you
can't even say contingency. On the contrary, in the United
States there were 4,000 plus rigs exploring for oil a few years
ago; there are about 500-600 exploring for oil today. If you
project the oil market you know that the supply of oil in the
United States will almost certainly diminish by two million
barrels a day in two or three years. One million of these will
be irretrievable as a result of strip wells being closed down
that cannot be opened again because it is too costly. Another
million will be lost due to lack of exploration which is caused
by the take-over mania and the take over mania has come about
partly because the incentives of an industrial leader today are
not necessarily to expand his manufacturing capabilities but to
play it safe, to use his resources either to buy his own stock to

NOV 12 '00 20:20 INIZIATIVA MC.T.A. ROMA

r.g

bring up the price or to acquire some other company but not to create real wealth.

Now when I wrote my memoirs, I reviewed the oil negotiations that were going on between 1969 and 1971 in private companies and which the government did not pay any attention to. And I asked myself, "Where was I when all this was going on?" because when you are reviewing these negotiations you see that the oil companies lost every negotiations and the price went up in every negotiations by 25-50 per cent. The reason I was not paying any attention was because the price was so low that it had no impact. But if we had watched it somebody should have said, "Look! It's gone from $1.10 to $2 and if you project this pretty soon it is going to explode. It has to mean that supply and demand are getting out of hand". There was a historic moment when the Texas Railroad Commission which set the production levels permitted unlimited production in Texas, and in effect in America. This meant we could no longer dump oil in order to keep the price down, which meant that the price had to go up. Not one economic agency and not one oil company called the attention of the American Government to the fact that we had lost control of the market. It was an event of historic significance and here we are in a comparable situation. We know there is going to be an oil crisis in the nineties. If anything else happens, if Iran wins the war against Iraq (which I happen to believe is more likely than not), if there is another Chernobyl (which I am not saying is likely but could happen) then we are going to have an energy crisis worse than in the seventies because in the early seventies there wasn't even an objective supply and demand problem; at that

NOV 12 '86 20:30 INIZIATIVA ME.T.A. ROMA

P.7

time it was a psychological problem because people built up
inventories too rapidly. And the future is going to ask where we
all were - why didn't anyone make provisions for it?

Second, we all talk about protectionism and we deplore it and if
this were an academic seminar I would take a shot at making some
elevated comments about the world community and the division of
resources and similar things. The fact is that political
incentives are all in the direction of protectionism. We make
affirmations of free trade and yet the three major players are
structurally incapable of implementing it: Europe because it is
divided although it probably wouldn't implement it even if it
were united; America because we really have never had an
international economic strategy. We have been focused on our
domestic policies and you can trace all these many changes in our
economic decisions. I don't know whether Martin would agree with
me. It isn't that the impact on the rest of the world was
considered and rejected, the impact on the rest of the world
wasn't even considered because domestic economics are considered
a domestic economic problem. The fact that we can go from a high
dollar and high interest rates to a low dollar and low interest
rates and that we defend each of them with equal fervour, that we
ask Germany and Japan in one administration to be the locomotive,
in another to accept the high dollar and then again to become the
locomotive. There is no forum in which this can be discussed and
our industrialists don't discuss it either very much because they
are focused on their next annual report and their incentive is to
maximize whatever is needed in that report. And Japan, with all
due respect to my old friend the Prime Minister, is, in my view,

NOV 12 '86 20:31 INIZIATIVA ME.T.A. ROMA

P.8

[Y]

not culturally well-equipped to take global positions.

The strength of Japan is its national identity. The skill of Japan lies in the fact that it is so conscious of its national characteristics that it can adjust to almost any change in the international environment. So when the dollar is high they push exports, when the dollar is low they push financial services. When commodities are high they manage to adjust their economy and also when commodities are low. It's a masterful performance but one that makes it very difficult for Japan to relate to the rest of the international community. So Japan, which operates by consensus is not well equipped for dialogue. At international meetings most Japanese delegations make an opening statement and then they take notes on what everyone else says before going home to study it and the next time you meet them they are again one lap ahead of you. I'm not saying this critically, I'm saying that in a world in which we have these tremendous problems there is no player who takes a global view. I think protectionism is an important fact of life for this intellectual reason: I know economists say that under free trade everybody gains and this may be true on the average. I had a banker friend who told me that countries don't go broke which is another truism. I replied that bankers may not go broke but creditors go broke. Now everybody gains in free trade on the average but somebody is bound to lose in the specific - somebody's bound to win and somebody's bound to lose. In industry, when it affects employment and industry, the losers in democracies are going to go to their governmental process and ask for help and that equates with protection. That is a fact of life. There is, however, a difference in the way

P.9

this is handled. My impression of Japan and of some European countries, is that the government tries to help the strongest industries and thereby tries to adjust to a future. In America the government tries to help the weaker industries that are already in trouble. This then sets up a situation in which bitterness is bound to be the consequence and in turn magnifies protectionism because when we are already under siege in some industry (usually from Japanese imports) we try to negotiate quotas or other restraints that are not justified by the market. These can only be stopgaps and usually succeed only when the country that exports excessively to the United States has decided to shift to some area thereby setting up another confrontation a year or two down the road. The cumulative effect of all this is that the American labour movement is now protectionist. American farmers are becoming protectionist. Many American industries are becoming protectionist. If I were head of a corporation I would say that we have to think of various possible scenarios. It could be a free trade scenario in which case one has to try to figure out which industries will decline and which will rise and in which country. I personally believe it is more likely (not more desirable but more likely) that we are moving into a mercantilistic period in which political and economic decisions will be much more closely linked. Free traders say that can't work. I think it can work - I'm not saying that it should. I'm saying one should study how these potential trading plans may deal with each other. I'm making this as a morally neutral statement; I'm saying if you want to look at the world this is what might happen and this should be looked at. I believe

NOV 12 '86 20:32 INIZIATIVA ME.T.A. ROMA

P. 10

protectionism will be a huge issue in America, in 1988, in the
presidential campaign. Should it prevail, history will not stop
and it's ridiculous to say that everything will go to hell. Even-
going to hell must have an operational definition that should be
analyzed. Take the issue of LDC debt. Again multinationals are
not only operating in a world in which they are nationally based
but globally affected, they are also operating in a world in
which major events can occur that affect them fundamentally but
that they cannot influence significantly. I agree completely
with Helmut that the worst period of LDC debt is ahead of us.
Whether we are speaking of a free trade world or a trading block
world, if we do not find some way of bringing the growing
developing countries into some relationship with the
industrialized countries we are not going to be in one world, we
are going to be in a revolutionary world which will alter all
premises.

I was at the last IMF meeting and bankers were scurrying around
frantically trying to figure out what would happen in the
negotiations going on between Mexico and the bankers at that
particular moment. I think it was fairly obvious and anyway it
made no difference. If I may quote what Mao Tse Tung said to me
once. He said, "You Americans remind me of swallows that fly up
into the air at the approaching storm and flap your wings but you
and I know that the flapping of the wings does not influence the
coming of the storm". Now I had that impression at that meeting.
The crisis in Mexico isn't going to come this year when you have
an economically well-trained president who has already gone far
down the road on this negotiation. The problem will come next

NOV 12 '86 20:33 INIZIATIVA ME.T.A. ROMA

P.11

time when that president is leaving office, or the time after
when the Mexican institutions are in further process of change
and then both companies and governments have to have some plan.
The conventional argument is that we will then take Mexico to
court and throw them out of the international economic
environment. Ridiculous! Eighty million people cannot be
excluded from the world economy and we cannot have a hostile
neighbour at our border blaming the United States for its misery.
Therefore, the economies of Latin America are going to be very
vulnerable to political decisions in any one of three or four
countries and especially to our reactions to this. If we panic,
if we become confrontational...what then are we going to do?
The only way out is for countries and companies to promote growth
in LDCs and to do it in a way which does not try to co-opt their
markets for national purposes. That is something one can afford
to try to do once the political crisis is over in this round. If
there is any issue on which the industrial nations ought to agree
it is that they should all get these countries back on their feet
toward growth. Afterwards we can compete. But if we compete now
about growth we may blow the whole situation up.

A lot has been said about U.S./Soviet relations and they will
fundamentally affect much of what we are talking about and again,
they take some long-range vision. We have to manoeuvre in such a
way that Soviet leaders do not get the idea that they can do
nothing to affect our behaviour.

Nor should we have them believe that they can so conduct
themselves that they can demoralize us and get for nothing what
they should be negotiating for.

NOV 12 '86 20:34 INIZIATIVA ME.T.A. ROMA.

P.12

Finally, there is a lot of discussion about whether America is
moving its center of gravity from the Atlantic to the Pacific.
I've already mentioned that it could happen that America has to
shift its center of gravity to the Rio Grande if things go very
badly in that country. What one really ought to ask oneself in
addition, is what happens when China succeeds? Or what happens
if China totally fails? It's going to be one or the other. It's
hard for me to see how it can be in the middle. What happens
when India succeeds? What will the world economy look like when
all these countries are trying to export simultaneously? Who is
going to buy all of this? How do we then create a world economy
either on a mercantilistic or on a free trade basis. These are
points that Helmut made. They illustrate the fact that
governments need to have a vision of the future and companies
need to have assumptions about possible futures if they are not
going to be trapped by doing the familiar very well. Remember
that most big upheavals have occurred because the familiar was no
longer relevant.

clc]

HENRY KISSINGER'S SPEECH

AT THE MONTEDISON SEMINAR

"THE GLOBAL COMPANY BETWEEN COMPETITION AND COOPERATION"

(Milan, 16 October 1986)

For several months various Montedison emissaries have approached me with insistent charm or charming insistence to tell me under no circumstances to speak for more than 15 minutes because with this distinguished audience discussion had to start at 10.15. I told them not to worry about me - not that I wouldn't speak for more than 15 minutes but that when the time came for me to speak there would be only 15 minutes left if I knew my colleagues, all of whom have spoken with great wisdom and with all of whom I substantially agree.

1969 in the office of our Secretary of the Treasury in which there was some German currency problem, the nature of which I have now forgotten and I said, "Why don't we devalue?" I was treated as if I had told a dirty joke in church - with total contempt! It was explained to me that it was technically impossible to devalue a reserve currency: it was immoral, it was impractical, it was impossible, and I thought they all knew something that I didn't know and very uncharacteristically subsided. Two weeks later, while I was in Paris negotiating with the Vietnamese, I returned on the Sunday evening and Secretary Connolly called on me and told me that, in the absence of the national security advisor, they had all decided to close the gold window and float their exchange rates. I said that in my judgement this would not work as a permanent system because it would tempt everyone to shift his problems to another country. I was treated with total contempt. And it was explained to me that quite the contrary, these currencies would correct themselves automatically, no decisions would need to be taken, the market would take care of stability and well. . . you know the arguments. This indicates that there is some difficulty in the contemporary world about relating technical issues to political problems and about the relationship between immediate problems and long-term problems.

- 2 -

(c)

such a premium on conducting nationalist policies. There is a
whole host of issues mentioned by Helmut Schimdt that can only be
dealt with on a long-term basis and yet, the incentives of most
leaders in governments and, depending on the country, in many
businesses, is to deal with them on a very short-term basis.
Those of you who know baseball (which probably isn't very many)
will know the slogan of a famous American baseball manager called
Leo Derosja, who used to say his philosophy was, "Use your best
pitcher today because tomorrow it may rain". That seems to me to
be more and more the incentive of most political leaders and,
depending on their term in office, of many corporate leaders.

When I was Secretary of State and had to deal with some
energy companies, I was struck by some decisions they took that
seemed to me not in their long-term interest and for which I
found no ready explanation. Then I had an assistant give me the
average term in office of the CEO of these companies and I found
that it was six years and less and it became much more obvious
why they would take whatever they could get when they were in
rather than take a decision that was immediately painful but
would benefit someone in the long-term -- their successor. What
is true in business is also true in politics and it is compounded
by the fact that in politics in democratic countries and
non-democratic countries as well (maybe even more so) the
qualities it takes to reach high office are less and less the
qualities that are needed to exercise high office, or not
necessarily the same qualities. Achieving high office has become
such a time-consuming enterprise that people stagger into their

- 3 -

(LO)

offices in a state of intellectual abstraction sometimes and therefore find it very difficult to take the long-term views. There is a myth in America that people learn in office. The only thing one learns in political office is how to manipulate the bureaucracy. If you have not thought about substantive problems before you reach high office you do not have the time to learn them when you are in high office. These are some of the dilemmas of the modern period. Now let me apply them to some of the current problems that have already been mentioned.

- 4 -

(10)

about 500-600 exploring for oil today. If you project the oil market you know that the supply of oil in the United States will almost certainly diminish by two million barrels a day in two or three years. One million of these will be irretrievable as a result of strip wells being closed down that cannot be opened again because it is too costly. Another million will be lost due to lack of exploration which is caused by the take-over mania and the take-over mania has come about partly because the incentives of an industrial leader today are not necessarily to expand his manufacturing capabilities but to play it safe, to use his resources either to buy his own stock to bring up the price or to acquire some other company but not to create real wealth.

Now when I wrote my memoirs, I reviewed the oil negotiations that were going on between 1969 and 1971 in private companies and which the government did not pay any attention to. And I asked myself, "Where was I when all this was going on?" because when you are reviewing these negotiations you see that the oil companies lost every negotiations and the price went up in every negotiation by 25-50 percent. The reason I was not paying any attention was because the price was so low that it had no impact. But if we had watched it somebody should have said, "Look! It's gone from $1.10 to $2 and if you project this pretty soon it is going to explode. It has to mean that supply and demand are getting out of hand".

There was a historic moment when the Texas Railroad Commission, which set the production levels, permitted unlimited

- 5 -

production in Texas and, in effect, in America. This meant we
could no longer dump oil in order to keep the price down, which
meant that the price had to go up. Not one economic agency and
not one oil company called the attention of the American
Government to the fact that we had lost control of the market.
It was an event of historic significance and here we are in a
comparable situation. We know there is going to be an oil crisis
in the nineties. If anything else happens, if Iran wins the war
against Iraq (which I happen to believe is more lilyly than not),
if there is another Chernobyl (which I am not saying is likely
but could happen) then we are going to have an energy crisis
worse than in the seventies because in the early seventies there
wasn't even an objective supply and demand problem; at that time
it was a psychological problem because people built up
inventories too rapidly. And the future is going to ask where we
all were - why nobody made provisions for it.

Second, we all talk about protectionism and we deplore it
and if this were an academic seminar I would take a shot at
making some elevated comments about the world community and the
division of resources and similiar things. The fact is that
political incentives are all in the direction of protectionism.

We make affirmations of free trade and yet the three major
players (Europe, America and Japan) are structurally incapable of
implementing it: Europe because it is divided although it
probably wouldn't implement it even if it were united; America
because we really have never had an international economic

-6-

(LC)

strategy. We have been focused on our domestic policies and you
can trace all these many changes in our economic decisions. It
isn't that the impact on the rest of the world was considered and
rejected, the impact on the rest of the world wasn't even
considered because domestic economics are considered a domestic
economic problem. We go from a high dollar and high interest
rates to a low dollar and low interest rates and we defend each
of them with equal fervour, we ask Germany and Japan in one
administration to be the locomotive, in another to accept the
high dollar and then again to become the locomotive. There is no
forum in which this can be discussed and our industrialists don't
discuss it either very much because they are focused on their
next annual report and their incentive is to maximize whatever is
needed in that report. Japan, with all due respect to my old
friend the Prime Minister, is, in my view, not culturally well-
equipped to take global positions.

The strength of Japan is its national identity. The skill
of Japan lies in the fact that it is so conscious of its national
characteristics that it can adjust to almost any change in the
international environment. So when the dollar is high they push
exports, when the dollar is low they push financial services.
When commodities are high they manage to adjust their economy and
also when commodities are low. It's a masterful performance but
one that makes it very difficult for Japan to relate to the rest
of the international community. So Japan, which operates by
consensus is not well-equipped for dialogue.

- 7 -

(L)

At international meetings most Japanese delegations make an opening statement and then they take notes on what everyone else says before going home to study it and the next time you meet them they are again one lap ahead of you. I'm not saying this critically, I'm saying that in a world in which we have these tremendous problems there is no player who takes a global view. I think protectionism is an important fact of life for this intellectual reason: I know economists say that under free trade everybody gains and this may be true on the average but somebody is bound to lose in the specific - somebody's bound to win and somebody's bound to lose. When it affects employment and industry, the losers in democracies are going to go to their governmental process and ask for help and that equates with protection. That is a fact of life.

There is, however, a difference in the way this is handled. My impression of Japan and of some European countries, is that the government tries to help the strongest industries and thereby tries to adjust to a future. In America the government tries to help the weaker industries that are already in trouble. This then sets up a situation in which bitterness is bound to be the consequence and in turn magnifies protectionism because when we are already under siege in some industry we try to negotiate quotas or other restraints that are not justified by the market. These can only be stopgaps and usually succeed only when the country that exports excessively to the United States has decided to shift to some other area thereby setting up another confrontation a year or two down the road. The cumulative effect

- 8 -

(c)

is that the American labour movement is now protectionist.
American farmers are becoming protectionist, American industries
are becoming protectionist.

If I were head of a corporation I would say that we have to
think of various possible scenarios. It could be a free trade
scenario in which case one has to try to figure out which
industries will decline and which will rise and in which country.
I personally believe it is more likely (not more desiderable but
more likely) that we are moving into a mercantilistic period in
which political and economic decisions will be much more closely
linked. Free traders say that can't work; I think it can work -
I'm not saying that it should. I'm saying one should study how
these potential trading plans may deal with each other. I'm
making this as a morally neutral statement: I'm saying if you
want to look at the world this is what might happen and this
should be looked at. I believe protectionism will be a huge
issue in America, in 1988, in the presidential campaign. Should
it prevail, history will not stop and it's ridiculous to say that
everything will go to hell. Even going to hell must have an
operational definition that should be analyzed.

-9-

(c)

we are speaking of a free trade world, a trading block world, if we do not find some way of bringing the growing developing countries into some relationship with the industrialized countries we are not going to be in one world, we are going to be in a revolutionary world which will alter all premises.

I was at the last IMF meeting and bankers were scurrying around frantically trying to figure out what would happen in the negotiations going on between Mexico and the bankers at that particular moment. I think it was fairly obvious and anyway it made no difference. If I may quote what Mao Tse Tung said to me once: he said, "You Americans remind me of swallows that fly up into the air at the approaching storm and flap your wings but you and I know that the flapping of the wings does not influence the coming of the storm". Now I had that impression at that meeting. The crisis in Mexico isn't going to come this year when you have an economically well-trained president who has already gone far down the road on this negotiation. The problem will come next time when that president is leaving office, or the time after when the Mexican institutions are in further process of change and then both companies and governments will have to have some plan.

The conventional argument is that we will then take Mexico to court and throw them out of the international economic environment. Ridiculous: Eighty million people cannot be excluded from the world economy and we cannot have a hostile neighbour at our border blaming the United States for its

- 10 -

(lc)

misery. Therefore, the economies of Latin America are going to be very vulnerable to political decisions in any one of three or four countries and especially to our reactions to this. If we panic, if we become confrontational, what then are we going to do? The only way out is for countries and companies to promote growth in LDCs and to do it in a way which does not try to co-opt their markets for national purposes. That is something one can afford to try to do once the political crisis is over in this round. If there is any issue on which the industrial nations ought to agree it is that they should all get these countries back on their feet toward growth. Afterwards we can compete. But if we compete now about growth we may blow the whole situation up.

Finally, there is a lot of discussion about whether America is moving its center of gravity from the Atlantic to the Pacific. I've already mentioned that America may have to shift its centre of gravity to the Rio Grande if things go very badly in that country. What one really ought to ask oneself in addition,

- 11 -

is what happens when China succeeds? Or what happens if China
totally fails? It's going to be one or the other; it's hard for
me to see how it can be in the middle. What happens when India
succeeds? What will the world economy look like when all these
countries are trying to export simultaneously? Who is going to
buy all of this? How do we then create a world economy either on
a mercantilistic or on a free trade basis. These are points that
Helmut made. They illustrate the fact that governments need to
have a vision of the future and companies need to have
assumptions about possible futures if they are not going to be
trapped by doing the familiar very well. Remember that most big
upheavals have occurred because the familiar was no longer
relevant.

FUTURO
ORGANIZZAZIONE
RISORSE

NOV 25 1986

Il Direttore

Rome, 24th november 1986

I have great pleasure in sending you the transcriptions of the speeches delivered at the seminar: "The Global Company Between Competition and Cooperation" on the 16th October 1986, in Milan.

I would like to take this opportunity of thanking you for your lively contribution to the Seminar. We at Montedison, consider ourselves fortunate in having the support of a man of your vast knowledge and experience. The points you made in your presentation clarified many aspects of the theme and the seminar would not have enjoyed the success it did without your participation.

Naturally, good organization helps things run smoothly and I am happy to be able to convey your compliments to the Organization Committee.

For my part, I would like to add that it has been a great honour to work with you and I hope to have the opportunity of repeating the experience at some future date.

Once again, I thank you for helping to make the Seminar a valuable and enriching experience for all of us and look forward to the opportunity of meeting you again.

Yours sincerely,

Mr. Henry A. Kissinger
350 Park Avenue
26th Floor
NEW YORK, N.Y. 10022
U.S.A.

Via G.B. Morgagni, 31 - 00161 Roma

Tel. (06) 860151 - telex 610310 Monted I

[L.C.]

(Milan, 16 October 1986)

For several months various Montedison emissaries have approached me with insistent charm or charming insistence to tell me under no circumstances to speak for more than 15 minutes because with this distinguished audience discussion had to start at 10.45. I told them not to worry about me - not that I would't speak for more than 15 minutes but that when the time came for me to speak there would be only 15 minutes left if I knew my colleagues, all of whom have spoken with great wisdom and with all of whom I substantially agree.

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offices in a state of intellectual exhaustion sometimes and therefore find it very difficult to take the long-term views. There is a myth in America that people learn in office. The only thing one learns in political office is how to manipulate the bureaucracy. If you have not thought about substantive problems before you reach high office you do not have the time to learn them when you are in high office. These are some of the dilemmas of the modern period. Now let me apply them to some of the current problems that have already been mentioned.

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If I were head of a corporation I would say that we have to think of various possible scenarios. It could be a free trade scenario in which case one has to try to figure out which industries will decline and which will rise and in which country. I personally believe it is more likely (not more desiderable but more likely) that we are moving into a mercantilistic period in which political and economic decisions will be much more closely linked. Free traders say that can't work; I think it can work - I'm not saying that it should. I'm saying one should study how these potential trading plans may deal with each other. I'm making this as a morally neutral statement; I'm saying if you want to look at the world this is what might happen and this should be looked at. I believe protectionism will be a huge issue in America, in 1988, in the presidential campaign. Should it prevail, history will not stop and it's ridiculous to say that everything will go to hell. Even going to hell must have an operational definition that should be analyzed.

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HELMUT SCHMIDT'S SPEECH

AT THE MONTEDISON SEMINAR

(Milan, 16 October 1986)

I would like to look at the whole picture from a different point of view and start with the question of what is meant by the expression "global company".

If one thinks of global companies names like IBM, EXXON, Sony, Mercedes Benz, Fiat, and Montedison come to mind. All of them are global in that they have affiliates and market outlets more or less all over the world. On the other hand, almost all of them are nationally-based -- not multilaterally-based, constituted under either American or Japanese or Italian law according to the nationality of the mother company with a nationally based top management. There are few exceptions to this pattern.

Therefore I would say that the global company is often not at all global where its structure and personnel are concerned but is a nationally-based company which pursues global interests. Despite the fact that quite a lot of internationalization of shareownership is going on -- more so in America and Europe but Japan is catching up -- it seems to me that there is no company, as yet, which could really be called global or international or supernatural. There is not even a true European company. We

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have two bi-national companies of size in Europe, Royal Dutch Shell and Unilever and that is as near as we get.

If they are being managed properly and intelligently, why are all companies reaching out beyond their national markets and boundaries? The main reason is because national markets are too small for them. This does not apply to the United States where a company can be satisfied with a market of 235 million people who earn a lot of money and can spend a lot of money. But Italy is too small a market for Montedison, Germany is too small a market for Daimler Benz or Siemens, Japan is too small a market for Hitachi or Sony.

American enterprises enjoy the potential advantages of an economy of great scale -- huge markets, great numbers of market participants, consumers, and investors, high turnover, and high gross profits. Therefore they can set aside a large amount for research and development and thereby arrive at new technologies and new products and can increase their productivity. This is one of the reasons for the technological lead which the United States economy has enjoyed over the decades since World War II in many fields and in many branches of industry. The other reason for that lead, of course, is the enormous R&D component of the American defense budget which is surpassing that of any other defense budget in the world.

I think we ought to understand that there are perhaps four, or maybe five huge common markets -- homogeneous markets -- in

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the world right now. There is the United States. If, for instance, Pan American, an airline situated in New York City, wants to buy a number of airplanes from Boeing, in Seattle in the state of Washington, I don't know how many thousands of miles away, they do so under the same legal system, they have the same insurance companies, they have a closely knit banking network, they have the same tax system, they have the same interest rates, they have the same technical standards, they have the same language, and they have the same trade policy which tries to defend Boeing against the competition of Airbus or what have you. It's one homogeneous common market.

Second, the USSR is a homogeneous common market, very low in the level of its non-military technology and very low as regards the ratio of investment to fixed capital in their civilian economy, but nevertheless, its 270 million people or so from Vladivostok to Kaliningrad (formerly Konigsburg in what was formerly eastern Prussia) there exists one currency, one plan, one Gorbachev, one trade policy, one Communist Party, and one politburo.

The third common market is in the process of developing. It might develop into one big economic entity and join all the advantages of an economy of scale -- that is the People's Republic of China, right now 1.1 billion people and by the end of the century probably 1.2 billion. No matter how long Deng lives and gives guidance, I think his impact has already gone deep enough that there will not very likely be a reversal of the

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present trend of opening up for more modern economic thinking and
more modern economic management. And China will, from Urumchi in
the West to, let us say, Chang-Chou in the East enjoy one system,
one plan, one currency, and so on. The same is true of India
(though I'm not dealing with India -- it will lag behind for
obvious reasons).

But then you have the great common market of Japan: 120
million people, one currency, one central bank, one trade policy,
one Miti, one Nakasone. These are four or five already existing
common markets, all of which enjoy the advantages of the
economics of great scale. This also applies to Japan.

Then in the sixth place you have that so-called European
common market which is a rather uncommon thing. It is anything
but common: they have eleven currencies (thank God the Luxembourg
people do not enjoy the 12th currency of their own), they have
eleven central banks, twelve different governments, twelve trade
policies, twelve different tax systems, twelve different
management systems of their monetary policy. They don't enjoy
the same technical standards or safety standards. For instance,
the British build elevator systems that would be very difficult
to employ in a high-rise building in Frankfurt and viceversa.
And never would British Rail buy a German locomotive or would
German railways buy a locomotive from France. We are far away
from that.

So this is why European nationally-based corporations or

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companies who reach out to international markets reach out beyond Europe into America and other places. The difficulties in selling Italian products in Canada or in America are not greater than the difficulties in selling them in Holland, but the American market is much bigger -- the chances are bigger. So the smaller a national market is, the more likely companies in that market are to sell beyond the national boundaries. Holland and Belgium are good examples of this. Their populations are, respectively, 15 and 10 million people and they export well over half of their GNP. In Germany, we have about 60 million people, and we export more than 35 per cent of our GNP. Japan, with over 120 million people, exports in the order of 15 per cent of their GNP. And the United States, with an enormous domestic market, exports less than 10 per cent of its GNP.

This is why European companies (and in the second place, Japanese companies) are much more vulnerable to these wild exchange rate changes than are American companies. There are, of course, exceptions to this rule. The bigger your domestic market, the less you depend on exports and the smaller the impact of these wild fluctuations of the dollar, which I have seen at DM 1.72, at DM 3.45, and now again at DM 1.98. I agree with Mr. Feldstein; I think it is rather likely that it will fall back to DM 1.50 or thereabouts in the next couple of years. So European (and in second place, Japanese) companies are much more dependent on stable economic conditions in the world at large than are American companies. The tragedy is that if the American companies are not so interested in the stability of the dollar

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exchange rate, neither is the American government. On the other hand, they have the greatest leverage in the world economy.

The twelve European governments have made much too little progress in homogenizing the uncommon European market. They have been unable to make progress in the field of a European monetary system which ought to work like the IMF did until the end of the sixties: create a common reserve currency called the ECU; and make the reserve currency, ECU, also a common currency, a parallel currency in the 12 countries. This would lead to greater discipline in budgetary and monetary policies because no government can easily run the risk in parliament and public opinion of devaluating their currency twice in a year or three times in two years. They also run a risk if they have to appreciate the currency, in which case the trade unions and consumers will come and say, "You are making us jobless, you are depriving us of our chance to compete in international markets." So stabilized exchange rates between the European countries would foster harmonious economic behaviour of governments and central banks.

Right now there is much greater financial cooperation between banks in, say, New York City, London, Tokyo, Frankfurt, or Hong Kong than the amount of cooperation between banks in Rome and Milan, Amsterdam, Paris, Madrid, and so on. This is a ridiculous development of the last ten years and very dangerous for the Europeans. Governments are, of course, even less well informed than are central bankers and since they are

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conservatives, they do nothing in that field. In the absence of
a weighty ECU, of a weighty common European currency, which also
has to serve as a reserve currency for many people in the world
-- in the absence of that, individual European nations and
individual European-based companies, whether they think of
themselves as being global or not will depend on *other* people's
decisions rather than decisions which their own governments
cannot make because they are not making progress in homogenizing
this so-called common market.

The European-based internationally-active companies are
therefore seeking cooperation with companies outside Europe, in
the United States or in Japan, much more than they are seeking
cooperation with other companies inside this European market of
330 million people. Think of the enormous purchasing power of
330 million people if they only enjoyed one currency and one tax
system, and one legal system, and one system of safety
regulations and technical standards etc. The failure of European
governments to make quicker progress, in my view, is likely to
cause the American predominance to last longer than is necessary
and might even cause an aggravation of this American
predominance. The whole worldwide system now is put at risk, as
has been said, by the fluctuations of dollar versus yen, or
dollar versus European currencies and I think it is quite clear
that the U.S. budget deficit is the main reason for the current
account deficit and the main reason for the growing international
net indebtedness of the United States and I fully agree with Mr
Feldstein that the United States Government has no legitimate

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reason to blame the Japanese or the French or the Germans or
others for their current account deficit. They created it by
themselves by super-Keynsian deficit spending.

On the other hand, the Japanese, the Germans, and the Dutch
have no reason whatsoever to blame the Americans. They have
created their own current account surpluses. The Japanese, for
instance, are saving much more than they invest inside their own
economy and that to a lesser degree is also true of Germany,
Holland, and others in Europe. They are responsible for the
results of their own budgetary and monetary policy. I do not, to
the slightest degree, defend my friend (German Finance Minister
Gerhard) Stoltenberg's international behaviour.

Now, these American deficits and Japanese and European
surpluses have left us with a dollar which has become a totally
unreliable yo-yo. No European or Japanese company can predict
where it will go next and how long it will stay there. I think
that within a short time, perhaps even during Reagan's last two
years in office, America will take refuge behind an inflationary
monetary policy again.

It might help were there a powerful ECU and if the Japanese
were to groom the yen to become an accepted reserve currency. It
is inevitable, but the Japanese have yet to decide whether to
accept it or to fight it.

If we could agree to have a triangle of currencies: dollar,

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yen, and ECU, the world might become a little bit more calculable
in the future.

Mr. Feldstein says the dollar will sink and I agree, except
in the event that we lapse back into a full cold war between West
and East and people again think of looking for a safe haven for
part of their private property. Then there might be, for
political or psychological reasons, rather than for reasons of
economic fundamentals, an expensive dollar for some time.

I see four present dangers facing us. Although I could just
say that the cooperation between governments, in general, is not
satisfactory I think I should hint at four dangers.

Number one: Right now real interest rates worldwide are too
high. For instance, in Germany, real interest rates are more
than six percent. If somebody has saved some money last year or
made a good profit in his company, he will of course invest it in
some financial market being sure that he gets back 6 percent
after 365 days, after inflation. If he does invest that same
profit in housing he won't get a single cent after 365 days.
There is no demand for new housing. If he invests it in his own
factory, he is quite certain that he will not get back a six
percent profit on the money he invests today. He may,
nevertheless, invest it in the fixed capital of his own company
because he is calculating over more than 365 days - maybe he is
calculating over five years or twelve. But the incentive is to
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consequence of much too high real interest rates. They have to
be high in the United States in order to attract credit and
capital from abroad to finance their budget deficit and to
prevent a haemorrhage of their economy. Of course these high
interest rates prevent not only fixed investment but are
partially responsible for the continuously high rate of
unemployment, especially in the investment goods sector, in
Europe.

Second danger: If the present situation prevails for another
two or three years it seems rather likely that protectionist
measures taken by all the participants, not only by the United
States, far from that, also by EEC and the Japanese and others,
are likely to disrupt the fabric of the worldwide division of
labour between companies; disrupt also the worldwide division of
labour between nations and national economies and replace the
competition between companies by competition in the field of
trade barriers and subsidies by governments.

Third danger, which hasn't been mentioned so far, is the
unsolved time bomb of the debt situation in Latin America. We
hear that the United States now has a net external debt on the
order of $200 billion and it will be $300 billion next year.
Although this sounds like a very large sum it is, however, not at
all as large as is $100 billion for Brazil, or as $90 billion for
Mexico.

For them it is a much larger burden. And it is not only the

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Brazilians and the Mexicans, there are the Peruvians, the Argentines, and many others who are on the brink of declaring, "I have been elected president of my nation not in order to pay interest to somebody on Wall Street -- I have been elected in order to see to the welfare of my own nation and I hereby declare that I will not allow my companies or banks to pay interest."

They will not easily understand that they are shooting into their own feet. That will become apparent only a little later when nobody gives them new credit. This is a timebomb which has not been defused. It could have dire effects on our Western banking system; nobody really knows. And the departure from the IMF of a man like de Larosiere gives me some concern. He has managed skillfully to move from one crisis to another. Yet a general framework, an overall policy for approaching the debt crisis has never been established.

Fourth danger: I see a real risk regarding future energy supply. If we should see another Chernobyl or another Three Mile Island, OPEC could exploit the psychological situation and exert enormous leverage. The current hypersensitive debate on nuclear energy is bringing calls for the closure of nuclear reactors, not today or tomorrow, but yesterday. Thus, another nuclear accident could bring plant closures in a number of countries and the world might rather quickly see a third oil price explosion. And despite the experience of two previous oil shocks, our governments still do not cooperate adequately to neutralize, or even partially neutralize the foreseeable economic effects of

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