HENRY A. KISSINGER

March 20, 2003

Dear Jiří:

I was disappointed to learn that you will be in New York on days when I am scheduled to be out of town. Regretfully, we will not be able to meet this time. However, I was happy to inscribe the books you sent for Foreign Minister Cyril Svoboda. Please pass my good wishes along to him.

Dr. Jiří Dienstbier
186 Waterman Street
Apartment 12
Providence, RI 02906

TWENTY-SIXTH FLOOR • 350 PARK AVENUE • NEW YORK, NEW YORK 10022 • (212) 759-7919

MAR 07 2003

March 6, 2003

this spring I teach as a visiting Professor at the Brown University in Providence.
Sometimes I go to New York. As I have always been interested in your comments and
analyses and in your perception of international relations I would like very much to
meet you.

I understand that you are a busy person, especially these days of growing crisis. The present situation in the Euro-American relations, developments in the Central Europe, "Old Europe" and "New Europe" etc., seem to me to be very important issues and I would appreciate hearing your views on them.

I intend to be in New York again three days after March 21. My wife will arrive to visit me and she would like to spend a few days in New York before we move to Providence. As there will be one week of holidays we also plan to visit some friends in Connecticut. So if you would prefer our visit in your country house, we would be happy to meet you there.

Wishing all the best to you and Nancy

Yours forever

Address:

Jiří Dienstbier
186 Waterman Street, Apt 12
Providence, Rhode Island 02906
phone: home: (401) 277-9057
office (Watson Institute): (401) 863-1056
e-mail: jiri_dienstbier@brown.edu

Page 1 of 2

SEP 2 9 2003

Jessee Incao

From: Rohrer Anneliese [anneliese.rohrer@diepresse.com]

Sent: Monday, September 29, 2003 11:07 AM

To: jincao@kmaglobal.com

Subject: for Dr. Kissinger URGENT!

Dear Jessica,

first of all, thank you for making this interview possible.

Dr. Kissinger told me that he will look at this text in the German translation. My questions are abbreviated because their full text will depend on the space available. Can I ask you to put the text on fast track to Dr. Kissinger as I would like to run the interview on Wednesday which means I would need his approval by tomorrow morning your time.

Interview: Dr. Kissinger, 23rd September 2003

Frage: Zur UN-Generalversammlung und der transatlantischen Kluft.

Henry Kissinger: "Ich denke schon, dass die Kluft überbrückt wurde - wenn auch nicht in einer formellen Resolution. Ich höre, dass Präsident Bush und Gerhard Schröder ein sehr gutes Treffen hatten und habe den Eindruck, dass sich die Franzosen etwas zurückspielen, ohne ihre Position aufzugeben, aber sie planen kein Veto mehr.

Ich denke, es wird sich wieder eine stärkere Kooperation entwickeln und ich habe den Eindruck, dass Europas Politiker nicht mehr in Opposition zu den USA stehen.

Frage: Können Amerika und Europa einander einfach nicht mehr verstehen?

Kissinger: Das ist zum Teil richtig, aber das hat weniger mit den Regierungen zu tun. Das ist eine Sache der neuen Generation, die jetzt heranwächst _ sowohl in Europa wie in den USA. Es hat sich ein neuer Wertekatalog entwickelt. Amerika hat sich mehr nach Rechts von der Mitte bewegt und Europa mehr _ aber eigentlich ist es schwierig, das Ganze in einem Spektrum einzuordnen. Wahrscheinlich entsteht in Europa eine Kombination aus grüner Politik, Pazifismus und europäischer Identität.

Diese neue Generation wächst mit Computern auf, nicht mit Bühängig von der Wirkung aktueller Ereignisse, nicht vom langfristigen Denken.

Das gilt zum Teil für beide Seiten des Atlantiks. Daher wird jeder unmittelbare Konflikt viel dramatischer wahrgenommen als es sonst der Fall wäre.

Diese neue Generation wächst mit Computern auf, nicht mit Büchern. Das führt zu einer Mentalität, die auf rasche Präsentation ausgerichtet ist. Sie ist daher abhängig von der Wirkung aktueller Ereignisse, nicht vom langfristigen Denken.

9/29/2003

Page 2 of 2

Frage: Kann es zwischen Europa und den USA zu einer schmutzigen Scheidung kommen?

Kissinger: Es hat immer wieder Meinungsverschiedenheiten gegeben, aber sie fanden immer innerhalb der Familie sozusagen statt. Allerdings kann ich mich nicht erinnern, dass es je solche Aussagen wie jetzt gegeben hätte, wie verschieden denn die europäischen Werte von den amerikanischen seien. Das kann man jetzt in Europa sehr oft lesen. Oder Aussagen wie jene von Robert Kagan, dass Europa von der Venus sei und wir vom Mars. Es gibt offenbar fundamentale Differenzen, aber ich glaube nicht, dass sie in einer schmutzigen Scheidung enden. Aber wir müssen uns jetzt um unsere Gemeinsamkeiten kümmern.

Wenn wir die transatlantische Beziehung erhalten wollen, müssen wir jetzt den gemeinsamen Werten und Zielen mehr Aufmerksamkeit schenken.

Frage zu moralischen Anspruch Europas und der USA.

Kissinger: Es gibt in den USA keine Animosität Europa gegenüber mehr Gleichgültigkeit, aber keine Animosität. Es gibt mehr Feindseligkeit in Europa Amerika gegenüber. Nun, die Europäer bestreiten jeden Anti-Amerikanismus, aber in den intellektuellen Kreisen und in den Diskussionszirkeln gibt es ihn.

Frage: zu Forderungen an die amerikanische Außenpolitik im Buch "Die Herausforderung Amerikas".

Kissinger: Zuerst einmal: Ich mag Präsident Bush, ich mag ihn ehrlich. Ich habe bei den Vorwahlen der Republikaner seinen Gegner, Senator John McCain, unterstützt, aber ich mag Bush. Das Bild, das die europäischen Medien von ihm zeichnen ist lächerlich. Es hat mit der Realität nichts zu tun. Er ist aus Texas und wuchs nicht mit europäischen Verbindungen auf. Das unterscheidet ihn von seinem Vater. Aber auch die jungen Europäer unterscheiden sich von ihren Vätern.

Frage zum Verhältnis Iran-USA.

Kissinger: Die Ironie in Sachen Iran ist folgende: Wenn beide Staaten die Probleme vom Standpunkt ihrer nationalen Interessen aus betrachten würden, würden sie sehen, dass es gar keine Gegensätze zwischen Iran und den USA gibt. Aber so lange sich der Iran als Land der Revolution versteht und Terror-Organisationen unterstützt, ist ein Dialog sehr schwer. Das ist meine Position.

Frage zu multilateralen und unilateralen Aktionen.

Kissinger: Ich mag diese Debatte über Multilaterismus und Unilateralismus überhaupt nicht. Wenn man nämlich Multilaterismus extrem auslegt, dann kommt man dazu, dass jede Aktion der USA mit einem Veto beeinsprucht werden könnte. Außerdem würde es Amerika verbieten, Dinge zurückzuweisen, die Europäer wollen wie etwa die Umweltgesetze oder den Internationalen Strafgerichtshof. Andrerseits lässt sich ein extremer Unilateralismus kaum mit dem internationalen System vereinbaren.

Es gäbe weniger Anlass zur Sorge, hätten wir ein philosophisches Einvernehmen mit Europa über ein gemeinsames Konzept. Dann würden nicht so sehr das Veto in den Vordergrund rücken, sondern die gemeinsamen Aufgaben. Dann könnten wir eine objektive Debatte darüber führen, was multilateral und was unilateral sein soll.

Jede Nation, sogar jede kleine Nation, wird immer darauf bestehen, dass sie gewisse Elemente ihrer nationalen Politik niemals dem Veto von irgendjemandem anderen unterwirft. Da bleibt dann eben die Frage: Wie definiere ich diese Elemente? Daher kann es bei multilateralen Angelegenheiten kein absolutes Veto geben.

Diese Problem kann man aber nicht dadurch bewältigen, indem man dauern über Multilaterismus diskutiert, denn dann läuft man Gefahr, das alles auf einen Debattierklub reduziert wird. Man sollte die gemeinsamen Ziele definieren.

Meine eigenen intellektuellen Wurzeln liegen im transatlantischen Verhältnis. Ich würde einen Bruch sehr bedauern.

Frage zu "altem und neuem Europa".

Kissinger: Man muss Rumsfeld - einen meiner guten Freunde - gegenüber fair sein. Die europäischen Medien stellten es so dar, als wäre Rumsfeld hinter dem Vorhang hervor gekommen, hätte etwas über das alte und das neue Europa gesagt, und wäre wieder verschwunden. In Wahrheit war er bei einem Treffen der Nato. Er wollte Nato-Raketen in die Türkei verlegen und Frankreich und Deutschland haben ein Veto eingelegt, etwas was nie zuvor geschehen ist. Also hat ihn jemand gefragt und er hat dann das gesagt. Aber es gibt keine amerikanische Politik, die auf eine Spaltung Europas hinausläuft. Im gewissen Sinn hat sich Europa selbst gespaltet.

Frage: Was erwarten Sie sich von Europa?

Kissinger: Dass es mit uns an einigen gemeinsamen Zielen arbeitet.

9/29/2003

Message

Page 2 of 3

Sincerely yours,
Anneliese Rohrer
Foreign Editor
“Die Presse”

Kissinger: Es gibt in den USA keine Animosität Europa gegenüber _ mehr Gleichgültigkeit, aber keine Animosität.

9/30/2003

Message

Page 3 of 3

Frage zu multilateralen und unilateralen Aktionen.
Kissinger: Ich mag diese Debatte über Multilaterismus und Unilateralismus überhaupt nicht. Wenn man nämlich Multilateralismus extrem auslegt, dann kommt man dazu, dass jede Aktion der USA mit einem Veto beeinsprucht werden könnte. Außerdem würde es Amerika verbieten, Dinge zurückzuweisen, die Europäer wollen _ wie etwa die Umweltgesetze oder den Internationalen Strafgerichtshof. Andrerseits lässt sich ein extremer Unilateralismus kaum mit dem internationalen System vereinbaren.

Jede Nation, sogar jede kleine Nation, wird immer darauf bestehen, dass sie gewisse Elemente ihrer nationalen Politik niemals dem Veto von irgendjemandem anderen unterwirft. Da bleibt dann eben die Frage: Wie definiere ich diese Elemente? Daher kann es bei multilateralen Angelegenheiten kein absolutes Veto geben. Diese Problem kann man aber nicht dadurch bewältigen, indem man dauern über Multilateralismus diskutiert, denn dann läuft man Gefahr, das alles auf einen Debattierklub reduziert wird. Man sollte die gemeinsamen Ziele definieren.

9/30/2003

9/30/03

10:30-11:30am <u>Anatoly Chubais</u>, CEO RAO UES

11:30-11:45am Coffee break, talk with attendants

TBC 11:45am HAK departs conference

Note: 11:45-12:30pm Leonid Rozhetskin, Deputy Chairman of the Board, Norilsk Nickel

1:00pm Depart NY La Guardia via US #2172 **with NMK**
2:03pm Arrive DC Nat'l
**OR**
1:30pm Depart NY La Guardia via Delta #1754 **with NMK**
2:29pm Arrive DC Nat'l

Met by Ray Urrutia in Town car confirm: 03668060
Taken to Funeral in VA

3:00pm Kraemer Funeral at Ft. Meyer Old Chapel, procession to gravesite at Arlington Nat'l Cemetery

Reception follows, at the Officers' Club at Ft. Meyer

Taken by Ray to Nat'l airport, Cell: 703/926-5616

5:00pm Depart DC Nat'l via US #2180
6:03pm Arrive NY La Guardia
**OR**
5:30pm Depart DC Nat'l via Delta #1762
6:37pm Arrive NY La Guardia

NOTE: Will try to attend AIG Dinner in NY

The Dilenschneider Group

January 10, 2003

The Honorable Henry A. Kissinger
Kissinger Associates, Inc.
350 Park Avenue
New York, NY 10022-6022

JAN 13 2003

Dear Dr. Kissinger:

As you read this, we may well be on the cusp of a critical turning point
in the history of the world—for better or worse.

This view will certainly be contested, as it should be. One fact is,
however, incontestable. Global economic and geo-political uncertainties and
imponderables abound.

With this broad view in mind, and based on discussions over the past
12 months with more than 420 experts in diverse fields including business,
finance, journalism, the arts, academia, and the non-profit sector, we have
tried to identify a set of noteworthy trends for 2003.

Those that are set out in this Report are aimed at both helping you
understand, and cope with, what lies ahead, but, more importantly, to plan
for the future.

This is the 12th Dilenschneider Group Trend/Forecasting Report. In
previous years, a great many of the trends we identified and ideas we
developed did, in fact, materialize.

We are pleased that many organizations now use these analyses in
their program planning and execution. Should you want additional copies of
the Report, please let us know.

People in business worldwide now face a decade of fundamental,
systemic and evolving change. Those who understand its impact and act on
it will profit in many ways.

The Dilenschneider Group Inc.
MetLife Building, 200 Park Avenue, 26th Floor, New York, NY 10166
212 922 0900 (fax 212 922 0971)

The Dilenschneider Group

Page 2

Consider these stark realities:

- Followers of the world's major religions are clearly challenging one another.

- The global economy remains in difficult straits. Our best thinkers say there will be no recovery for some time and that, indeed, the next "Gilded Age" is far into the future.

- Equities continue to struggle and many national governments, including those in the U.S. and in other industrialized nations, are deep in debt. This pressure is undermining confidence everywhere. Last year, in the U.S. alone, 69% of Americans expected their finances to be better in 2002. It did not happen.

- Tens of millions have lost huge sums of invested money with little or no hope of recovering it in the foreseeable future or perhaps ever. In contrast, young Americans in their 20s, 30s and 40s, who have never known hard times, continue to spend and not save.

- While democracy has deepened its roots in the West, it is clear that democratic values will not take hold in the Middle East or in most of Asia for some time to come, if ever.

- While the onward march of globalization seems unstoppable, powerful nationalistic movements are gaining strength in every corner of the world.

- The impact of 9-11, while certainly not forgotten—especially on the East Coast—is not creating the sense of national urgency it did only a year ago. Meanwhile, terrorists are accelerating their efforts in many parts of the world.

- The means of individuals to reach out through new technology—and the ability to tell their stories through the new media—has become a major factor in world politics.

Let's face it, uncertainty abounds on domestic and international fronts. The United States is about to embark on an expedition in the Middle East and no one knows what the ultimate outcome may be—even if a quick victory is achieved. At the same time, we must cope with the latest nuclear threat from North Korea—diplomatically this time, it appears.

The Dilenschneider Group

Page 3

To be sure, the U.S. has a lot going for it—extraordinary technology, wealth, military supremacy, and more. Some feel more globalization—American business making a global footprint—is the answer. Most business leaders know that operating successfully in nations, neutral or hostile to the U.S., may ensure short-term success, but it in no way guarantees a long-term foothold.

One thing is clear: It is up to today's leaders to demonstrate vision that looks around corners, and over the horizon, at monetary, trade, social, cultural, and dozens of other policies that will guide life in the 21st century.

So far, we see little attention to these imperatives. Yet we continue to hope for an informed dialogue that moves far beyond the squabbling of partisan politicians. Former New York Gov. Hugh L. Carey, in a speech to the Michael Smurfit Graduate School of Business at University College Dublin, recently offered an interesting and creative proposal. Tap the best minds in America—from universities, business, science, technology, and the arts to help. And as Truman, Kennedy, and Reagan did, pay them $1 a year for their service. There is a lot of talent out there. If asked in the national interest, who would refuse?

The big political battle in Washington this year will be over the competing economic stimulus programs. The fight pits President Bush's 10-year, $674 billion tax cut program featuring the elimination of taxes on dividend income against the more modest Democratic $300 billion proposal, which features tax cuts tilted in favor of the middle class and poor, and also offers aid for financially strapped cities and states.

With both Houses of Congress controlled by the Republicans, the odds favor the President, but he will have to make significant compromises in order to get a fiscal stimulus package through Congress in time to boost the sputtering U.S. economy.

Readers of this letter will know that since our first effort a dozen years ago, we have urged a more sophisticated level of U.S. diplomacy and action to meet the major challenges arising from global trouble spots, while exhibiting more tolerance and understanding of cultures different from ours.

Clearly, we must all focus on the terrorists.

Following our September 2002 trend letter, we received considerable criticism from supporters of Saudi Arabia about how we depicted that country.

The Dilenschneider Group

Because little has changed internally in the Kingdom in the past year, there is no new trend data to report about that nation.

However, it is clear that the Saudis remain caught in a dilemma. There are elements of Saudi society who fund terrorism and who support the fundamentalist Wahhabi sect. But the Saudis no more want to break with the West than the West wants to break with the Saudis.

Expect new challenges to arise around the world—from North Korea and a united Europe, to China, India, Brazil (with its new leadership), a politically unstable Venezuela (which furnishes 14% of U.S. oil demands), and a resurgent Russia.

Moreover, the Israeli/Palestinian, Pakistan/India, Irish and Indonesian civil conflicts are far from over. And, while the Taliban have been driven out of power in Afghanistan, elements of Al Qaeda are still active in the area, which underscores the distinct possibility that a U.S. presence may be needed there for some time.

What this all means is that, while pursuing terrorists, we cannot afford to take our eye off the ball in terms of these other global hot spots.

The messages to business? Be alert. Be careful. Be opportunistic.

This Report, then, as it has for more than a decade, focuses on critical thinking and how you might apply that in your life, your business, or in whatever other pursuit you follow. Though there are many demands on your time, we urge you to put aside a little of that time to read it thoroughly. It will, we believe, be time very well spent.

We would be pleased to have your comments.

RLD:jma
Enclosure

<table>
   <tr>
    <td>Risk Aversion: A Way of Life</td>
    <td>Page 26</td>
   </tr>
   <tr>
    <td>Now, It's a Board of Directors Crunch</td>
    <td>Page 27</td>
   </tr>
   <tr>
    <td>The Next Thrust of Productivity</td>
    <td>Page 28</td>
   </tr>
   <tr>
    <td>More Protests on College Campuses?</td>
    <td>Page 28</td>
   </tr>
   <tr>
    <td>What Ever Happened to Good Manners?</td>
    <td>Page 29</td>
   </tr>
   <tr>
    <td>Tort Reform in the Next Congress</td>
    <td>Page 30</td>
   </tr>
   <tr>
    <td>The Next "Big" Idea</td>
    <td>Page 31</td>
   </tr>
   <tr>
    <td>The Safest Investment is Now at Risk</td>
    <td>Page 32</td>
   </tr>
   <tr>
    <td>Key One-Year Financial Metrics</td>
    <td>Page 33</td>
   </tr>
   <tr>
    <td>"The More Things Change, the More They etc., etc."</td>
    <td>Page 33</td>
   </tr>
  </table>

## 9/11 HAS CHANGED EVERYTHING

To precisely define how 9/11 has changed, and will continue to change, the lives of every man, woman, and child on the planet would be sophomoric. Suffice it to say that everything is new and that most of us have not yet sorted out what it all means. 9/11 has indisputably impacted virtually every aspect of our lives from politics, travel, trade, personal relations, culture, the economy, to what is produced, and a great deal more.

**Implications for business:** Anyone not prepared to re-think and re-analyze their business, or personal life, should be ready for significant problems.

## A DOMESTIC OVERVIEW - WHAT WE ARE FACING

Despite a high personal approval rating, and coming off a mid-term election victory which put both Houses of Congress under Republican control, President Bush now faces a plateful of serious challenges.

The war on terrorism and a seemingly inevitable move against Iraq; the sudden North Korean nuclear challenge; the sputtering domestic economy; big budget deficits facing the federal government, cities, and states; and bitter partisan differences over both economic, tax, energy, and health reform and environmental policies will be the hot-button issues the Administration and the Congress will have to cope with in 2003 and beyond.

The Democrats, already gearing up for the 2004 presidential election with three of the likely principal candidates in the Senate—Joseph Lieberman of Connecticut, John Kerry of Massachusetts, and John Edwards of North Carolina—can be counted on to oppose the Administration's key domestic and foreign policy programs.

With slim Republican majorities in both the House (229 to 205 with one Independent) and the Senate (51 to 48 and one Independent), President Bush will have to devise a skillful strategy to build a bi-partisan consensus behind his initiatives, both foreign and domestic.

In the House, Speaker Dennis Hastert of Illinois, a moderate conservative, will continue to have trouble reining in the powerful ultra-conservative Republican wing, led by Rep. Tom DeLay of Texas. In the Senate, the replacement of former Majority Leader Trent Lott of Mississippi by Sen. Bill Frist of Tennessee, who has been a close ally of Bush, will probably be a plus for the President in the long-term. But Lott's forced resignation from the leadership post for comments seeming to support segregation, will continue to be an embarrassment to Republicans and hinder the President's efforts to attract African-Americans and Hispanics to the GOP.

The close divisions in both Houses and the right-wing ideological tilt of some leaders of the Republicans and Democrats in Congress, particularly in the House, will make it extraordinarily difficult for the President to fashion majority support for his aggressive foreign policy, as well as for such key domestic issues as tax cuts, economic policy, healthcare, homeland defense, the missile defense program, and energy and environmental policy.

**Implications for business:** Huge portions of the federal budget will be re-allocated, all types of new tax schemes will be advanced, and many new policies, that will touch every part of business life, will be enacted. This is a time to be active with your political network and especially with your key Representatives and Senators.

## U.S. FOREIGN POLICY - ALONE OR ALLIED?

For the first time since he rallied the nation behind the war on terrorism in the wake of 9/11, the President is being confronted with substantial opposition to his overall foreign policy initiatives. We are finally realizing that not everyone in the world loves us. Indeed, many loathe us.

Even though Congress last year voted him a virtual blank check to deal with Saddam Hussein on the issue of weapons of mass destruction, significant reservations are likely to be imposed by both Democrats and moderate Republicans on the Administration's plans for a pre-emptive attack on Iraq without U.N. support.

Most importantly, there is a consensus building that the U. S. should hold off any attack without a go-ahead from the U.N. Security Council.

2

The looming crisis over North Korea's decision to move forward with development of nuclear weapons could quickly escalate into the most dangerous foreign policy challenge the U. S. has faced since the 1962 Cuban missile crisis. A nuclear-armed North Korea with the missiles to deliver them would pose a critical threat to the Pacific-Asian region and could trigger a resumption of the still-unresolved Korean conflict from more than half a century ago.

If he hopes to fashion bi-partisan support in Congress and international support, the President will need to put more emphasis on diplomacy and forging alliances and less emphasis on "go-it-alone" rhetoric.

**Implications for business:** War, no matter how long, will affect every business in dozens of ways as well as the stock market. This is a good time to ready a plan for communicating that the basic fundamentals of your business will not change.

## THE EUROPEAN/U.S. AXIS -- A CRUCIAL, BUT UNSTABLE, ALLIANCE

Despite the U.S.'s current cooperation with the U.N. in tracking down Iraqi weapons of mass destruction, Europeans, driven by deep concerns over their slumping economies, Third World immigration, and the pre-emptive use of military force, continue to question the U.S. positions on both Iraq and Israel as well as U.S. hegemony, generally.

Along with many controversial foreign and economic policy issues now creating tensions, we have to expect the inevitable resentment, animosity, and envy generated by a nation that is unchallenged in wealth, influence, and military power. But while many will always dislike us for what we are, others oppose us for what we do and say.

Perceptions and contradictions on both sides of the Atlantic often collide. Europeans rail against American "cultural imperialism," yet devour our pop music stars and love our films. What we call leadership, many Europeans see as arrogant unilateralism and simplistic military solutions. Europeans take major offense at the U.S.'s refusal to accept any constraints on its sovereignty or energy gluttony that led to successive rejection of the Kyoto Proposals on the environment, the global ban on land mines, and verification measures for the Biological Weapons Convention; and our withdrawal from the International Criminal Court.

3

The most worrisome division between U.S. and Western Europe, however, relates to military action and will continue to do so in 2003. Sentiment has altered greatly about the transatlantic alliance since those post-9/11 days when Europeans strongly supported a military response to Al Qaeda and its Taliban hosts, dramatically underscoring the solidarity of the West.

Europeans, simply put, no longer believe in war—largely because of their own devastating experiences with centuries of bloody conflict. The U.S. and European views on security, power, and sovereignty are now so radically different the old partnership figures less and less prominently in U.S. global strategic thinking. Most Europeans are convinced that cooperation, trade, dialogue, and development are much more effective and humane paths to security. (All of Western Europe spends a total of $140 billion for defense annually while the U.S. military budget will top $347 billion this year.)

One thing is certain, we could narrow the growing gap considerably if the Bush Administration made a more focused, determined effort to defuse the Israeli/Palestinian conflict. The President, in pushing for the two-state solution, must speak as forcefully to Ariel Sharon about withdrawing from the settlements—which have doubled in population to 200,000 in the last decade—as he has spoken to Arafat about the murderous suicide bombers.

When all is said and done, perhaps opinions like those recently expressed by Romano Prodi, President of the European Commission, the EU's executive body, will prevail: "We have to be firm in our minds that only joint action between the U.S. and Europe can stabilize the world. I strongly believe the long-term interests of Europe and the United States are the same. To have our own foreign policy, our own defense is not to be against the United States. Even between brothers, you often have arguments. We would like to have the United States as a strong ally and, I believe, the United States would like to have Europe as a strong ally."

**Implications for business:** For all the debate about this transatlantic rift in the post 9/11 world, basic American and European values and aspirations remain similar. And Europeans still remain our strongest allies compared with the rest of the world. But watch for further fractioning of this situation.

4

RECESSION-BATTERED EUROPE FACES MOUNTING
PROTEST/UNREST

With a persistent recession still battering the economies of most European nations, many are facing big cuts in their large social welfare budgets as deficits approach record levels. In Germany, unemployment has been hovering at 10% for nearly a decade while the nation's equity markets plummeted 28% in the past year alone.

This has sparked waves of protest and mounting unrest -- especially from organized labor. Powerful unions are threatening even more trouble ahead as public spending is slashed, or remains stagnant, to meet ever-increasing budget shortfalls. European nations like France, Germany, Italy, and Scandinavia, which, traditionally, have provided their citizenry with unusually broad social benefits compared with the U.S., are entering a new era of austerity.

European workers are mobilized to defend their benefits and pensions and perhaps protest against further privatization of state-owned businesses. In France, one-fourth of the workforce is still employed in the public sector, but the new center-right government has said it plans more divestitures of state-owned assets. Companies like France Telecom and Air France have already been largely privatized.

The move to more privatization is also fueled by European Union rules requiring state monopolies to open up to competition. Typically, by March, European railways will have to open their tracks to private freight shippers. This new competitive environment will inevitably impact current labor safeguards such as lifetime job security and higher pensions in order to achieve greater efficiency and productivity, more flexibility, and less-costly, shorter-term contracts.

**Implications for business:** There is a strong potential here for considerable social upheaval in the not-too-distant future.

5

# THE ECONOMY - CAN WE JUMP-START THE FUTURE?

Despite evidence of a slow recovery, there is growing concern over the possibility of a dip back into recession. Aside from a still relatively strong housing sector, fueled by near-record low interest rates, the domestic economy continues stagnant. Unemployment stands at 6%; the industrial sector is operating at only 73% of capacity and business investment is flat. Consumer spending, which accounts for two-thirds of the nation's $10.7 trillion gross domestic product (GDP), and which has borne the brunt of the modest recovery thus far, seemed to be flattening out by year's end.

- In the 1970s and early 1980s, the U.S. retooled and again became competitive in the world. In the late 1980s and 1990s, hi-tech pushed the economy to unheard-of levels. Today, there appears little on the horizon to give an aggressive kick to the future. Hence, we will need to be comfortable with very modest growth and wild swings of uncertainty.

- Investors are disappointed to a degree they have rarely experienced. Retirement savings have been wiped out in many cases. There has not been a time since the market decline of 1973-74 that approximates our current situation.

How weak is the U. S. economy as we go into 2003? Consider these factors:

* The multi-trillion dollar federal budget surpluses projected for the decade following the Clinton Administration have vanished and the prospect of red-ink federal budgets far into the future is very real.

* The federal budget surplus of 2.3% of our GDP (about $230 billion) in the last year of Clinton's Administration has, in two years of Bush, turned into a federal deficit of 2.3% of GDP (about $230 billion). This is the largest two-year negative shift in the federal budget since World War II.

6

* The states and cities across America are also confronted with massive projected deficits for the 2003 fiscal year. Unlike the federal government, they cannot run deficits, but must either raise taxes or make severe cutbacks in health, education, and other services, or both. Many are starting to do this.

* The recession and the aftershocks of 9/11 have been devastating to the U. S. economy and the equity markets. The drops in stock values in 2002 were among the largest in more than 25 years.

* The unemployment rate at year's end stood at 6% and could climb even higher. This does not include the uncounted millions who have given-up after fruitless job-hunting. Worse still, the average length of time for laid-off workers to find new jobs rose to six months at the end of the year.

* At Christmastime, unemployment compensation ran out for 750,000 laid-off American workers, who had exhausted the 26-week payment program. As its first order of business in 2003, Congress passed and the President approved an extension of unemployment benefits for 13 additional weeks.

* The poverty rate in 2001 increased for the first time in a decade from 11.3% to 11.7%. Translated, this means that more than 32.9 million Americans lived below the poverty line in 2001—an increase of 1.3 million over 2000. The Census Bureau figures for 2002 won't be available until next Fall, but expectations are the figure will rise.

* Median household income declined 2.2% in real terms during the same period to $42,228.

* Homelessness and hunger rose sharply in 2002 in major American cities, according to a survey by the U. S. Conference of Mayors.

7

* Bankruptcies, both individual and corporate, rose to record heights last year, with the sharpest increases coming during the second half.

* Welfare rolls, which had been declining steadily over the past five years, increased in 2002 by 0.9%. This could rise sharply if unemployment grows to the 6.3 to 6.5% level that some experts are predicting.

**Implications for business:** Much of the future will depend upon how President Bush's proposed economic stimulus package for individuals and business fare in the closely divided Congress. Republicans plan to push tax cuts, reduce or eliminate taxes on dividend income, provide tax incentives for business investment, and make the elimination of the estate tax permanent.

Democrats, who labeled the President's plan as a giveaway to the wealthiest part of the population roundly condemned the centerpiece of the $684 billion proposal—the elimination of taxes for dividend income. The Democrats put forward a $300 billion plan of their own—tax cuts for the middle class and poor and aid to the fiscally stressed cities and states. They argue that the middle class and poor need them most and will be more likely to spend the money and spur the economy. Some Democrats favor a one-time reduction in the payroll tax (social security), now the most regressive and costly tax to the working poor.

Expect plenty of debate and rhetoric and perhaps unexpected attacks on your sector. Be ready to respond. With both parties pushing for a tax cut stimulus program, the White House will have a fair chance of working out a compromise. It is in the interests of business to push both sides for a quick compromise that will give the stagnant U.S. economy a boost.

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In a "Fiscal Survey of the States," the Association reported that the amount of money the states had on hand at the end of the most recent fiscal year dropped to $14.5 billion, from a peak of $48.8 billion in 2000. The current balance equaled 2.9% of state spending, the smallest cushion since 1992. Many of the states have already cut aid to higher education and funds for local government, which have problems of their own. How bad is the situation?

Consider:

* In New York, after making painful budget cuts earlier, Gov. George Pataki directed state agencies to cut spending 5% more for the remainder of the year. Cuts in 2003 are expected to be much deeper.

* California Gov. Gray Davis estimates a $34 billion shortfall over the next 18 months.

* In Illinois, the budget deficit is estimated to be $2.5 billion out of a budget of $50 billion.

* Oklahoma is experiencing its worst budget crisis in decades. Oklahoma State University was asked to return money to the state and all state agencies were directed to cut spending by 6.5%. Gov. Frank Keating, a conservative Republican, asked the Pardon and Parole Board to identify 1,000 non-violent inmates for early release in order to cut costs.

* Oregon is considering shortening its school year for elementary and high schools by 15 days. Other states are cutting teachers pay, increasing class size, not filling vacancies, and laying off employees.

* Kentucky Gov. Paul Patton plans to release 567 state prison inmates to help reduce a $500 million budget deficit. Iowa has laid off prison guards. Ohio and Illinois have closed prisons. Montana, Arkansas, and Texas also plan to release convicted felons early. Many states plan to follow Michigan's lead in repealing strict mandatory sentencing laws for drug crimes.

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Nearly two-thirds of the 25 cities surveyed reported decreasing the amount of food they provided to the poor last year by rationing meals and food donations to ensure that no one went hungry. The cities reported that people remained homeless for an average of six months, and that 73% of the homeless families were headed by single parents.

Nashville Mayor Bill Purcell, who chaired the Conference's Task Force on Hunger and Homelessness, said: "These are not simply statistics; these are real people who are hungry and homeless in our cities."

**Implications for business:** Expect all types of pressure to step forward for help. It is worth determining how much you can allocate and what you would like to see it put for. Monies that go to "soft" crises will not be seen as prudent donations.

## THE JOB CREATION ENGINE SLOWS DOWN

More jobs were cut in 2002 than in the five previous years combined and forecasters indicate the pace may accelerate in 2003. Pay scales are being cut at the same time. Although the U.S. unemployment rate is now at 6%, many older Americans feel they must get back into the workplace because they have lost their market-based nest eggs. This puts pressure on those entering the labor force for the first time.

Moreover, manufacturing jobs have been in decline for the past 20 years, this sector cannot be expected to reverse a negative employment trend as it once did.

Recent polling data shows nearly 70% of the public says the economy is in bad condition, up from 39% in June. And with no firm indication of economic recovery, it is unlikely that business will add jobs.

Some brave economists suggest that when the economic upturn comes, the U.S. may well add between 80,000 to 100,000 jobs a month. But those making such forecasts are in the minority.

**Implications for business:** Rising unemployment will put intense political and economic pressure on everyone and unless reversed at some point expect social problems.

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BUDGET CONSTRAINTS WILL SLOW HEALTHCARE REFORM

One of the key issues on both major parties' agendas in 2003 will be some
kind of healthcare reform. But the probability that any sweeping reform
will be enacted this year—or even before the next national elections —
remains small. In an era of mounting federal budget deficits and big
military expenditures, Congress will be reluctant to vote the billions of
dollars needed although almost everyone recognizes the U.S.'s healthcare
system badly needs repair. With so many states also facing their worst
fiscal crisis since the 1930s, almost assuring big cuts in health, education,
and other services, there's little hope for state-funding, either.

The fact that a physician is now the nation's leading Republican legislator
may give long-pending reforms some priority. It's been nearly a decade
since the last big effort to overhaul the system by the Clinton
Administration came a cropper.

Today, with 41.2 million Americans—10 million of them children —lacking
any kind of health insurance; employers railing against continually
mounting premiums (up 11% last year) and employees upset by sharply-
rising co-payments; growing pressure from senior groups to enact some
kind of prescription drug benefit; and healthcare expenditures spiraling
out of control as managed care programs fail to rein in costs, these realities
can't be ignored too much longer. Perhaps the only upside of the dire
situation is the booming health sector's ability to generate most of the
economy's new jobs these days.

Employer payouts for worker healthcare benefits rose an average 15% in 2002 and are expected to do likewise this year. Rapidly escalating medical outlays for an aging population; demand for expensive and proliferating new drugs and technologies; rising salaries for health workers; and a backlash against the limits imposed by managed care have all contributed to skyrocketing costs.

A broad range of widely-differing proposals has been offered from both sides of the aisle. For the medically uninsured, these range from tax credits and subsidies to pay for private health insurance to a so-called single-payer system advocated by Al Gore and a number of legislators.

**Implications for business:** As the 2004 presidential sweepstakes gathers steam, we will hear a great deal about healthcare from every prospective Democratic candidate, but actual Congressional remedies appear extremely unlikely this year.

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## THE ONWARD MARCH OF FREEDOM

According to Freedom House, there are, today, 89 free countries in the world, based on free elections and the rule of law, compared with only 43 just 30 years ago.

Today, 44% of the world's population lives in freedom, up from 35% in 1972. Exceptions to this trend are in the Middle East and Africa. Thirty years ago, Freedom House named two free nations in those parts of the globe: Israel and Lebanon. Today, it lists only Israel. Also noteworthy: free nations are now responsible for $26.8 trillion—or about 89%—of the world's total $29.9 trillion GDP.

**Implications for business:** Pushing commercially and politically for freedom and democracy is good business.

## CLASH OF CULTURES?

Thinkers and others in the West, who struggle to understand the opposition from the Muslim world, should consider:

- The vast majority of Iranians, Turks, Indonesians, Lebanese, and many other Muslim peoples long for social justice with a fair and equitable legal system.

- Numerous studies show most Muslims want, in every respect, precisely what people in the West aspire to: better schools, improved hygiene, an increasing standard of living, and improved opportunities for their children.

- Many Muslims recognize that their economies, security, and freedom are threatened by militant Islamic extremism.

We do not intend in this Report to elucidate the many reasons for the ever-widening gulf between cultures. Nonetheless, it's important to note that when the world's 1.3 billion Muslims view the West, they often come away with feelings of rejection and resentment. In more than a few cases, they see the West supporting despots, turning a blind eye to torture, and tolerating autocratic states that have used the September 11 attacks and the West's war against terrorism to disguise their own internal repression.

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Indeed, to the extent that nations like Russia, China, India, Egypt, and Uzbekistan have moved to curb the power and influence of their home-grown Islamist extremists – real or suspected – one sees a growing understanding of the West.

It's a simple proposition, but one of the best ways to defeat fundamentalist extremists in the Muslim world is to promote basic human values and democracy. Too often, we are seen as propping up regimes that could never win a free election.

This kind of support also plays directly into extremist Islamic hands. Witness recent elections in Pakistan, Turkey, Bahrain, and Morocco that saw Islamist parties gain important victories. It's noteworthy that support for these parties now comes from both the middle class as well as the poor. That gives them more credibility, but also tempers their radicalism.

Many respected American Mideast scholars, like Shibley Telhami of the Brookings Institution, also believe that a war on Iraq will more likely spread repression than democracy and freedom across the region. Arab nations will, under those circumstances, opt for repression not reform. Democracy, he says, cannot be imposed by military force even if force is used successfully to oust tyrannical dictators.

**Implications for business:** Until understanding and tolerance are embraced by both sides, you can expect problems that will create a saw-tooth environment with resulting problems for all business.

## CHINA - THE NEW COLOSSUS

Asian markets have outperformed global markets for much of the past 18 months. But strong growth in Asia's 41 economies has now come to a halt and Japan, the region's largest economy, remains mired in problems, enjoying zero growth as its traditional egalitarian model breaks down.

China, the world's most populous nation and Asia's most dynamic economy, continues to accelerate. The new China, which has re-emerged as "the factory of the world," is also creating considerable anxiety for all of its Asian neighbors -- both as a potential military threat and a formidable economic competitor with a powerful work ethic.

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Factoring in Hong Kong and Taiwan—often included today in what is called Greater China—and adjusting for purchasing power parity, the Chinese economy now boasts a staggering GDP of $7.8 trillion compared to the U.S.'s $10.7 trillion.

Since Deng Xiaoping began his market-oriented reforms and embraced capitalism in the 1980s, the nation's growth and energy have been mind-boggling. Chinese already own more mobile telephones than Americans. While world trade stagnated, Chinese exports rose some 21% in the first ten months of 2002. Foreign investment is up 20% to $46 billion. More than half of China's industrial output now comes from the private sector. A visitor to Shanghai these days encounters a booming, sophisticated metropolis whose skyscraper-dotted skyline is beginning to resemble New York.

In November 2002, the world saw the elevation of Hu Jintao to lead China's Communist Party, replacing Jiang Zemin as the most powerful figure in the country's government. Hu is surely powerful, but the real strength in China is Zeng Qinghong, Jiang Zemin's protégé and responsible for two-thirds of those who serve on the Politburo's "Standing Committee." Watch this man as well as Hu and look for the possibilities of friction following in the first orderly political succession in China since 1949.

## Cheapest Labor Pool

But China cannot be denied. It has the world's deepest, and cheapest, pool of manufacturing labor. Though China's population is now 1.3 billion, nearly 700 million people live on farms, earning on average just $285 per year compared with the average U.S. household income of nearly $40,000 a year. This has created a bonanza for factory bosses in China with an almost endless supply of cheap labor that not only allows companies to control costs, but often to cut them dramatically.

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How this economic vitality will impact the future social and political fabric of the nation remains problematic. China is still, basically, a dictatorship whose citizens lack basic democratic political freedoms and civil rights. China scholars have observed that the Communist Party is sustained more by the public's political apathy than any kind of terror or oppression. In the wake of the nation's sweeping economic reforms, the Chinese appear to be focused on getting rich not making revolution, whether democratic or cultural.

**Implications for business:** The Chinese economic dreadnought appears unstoppable. Until the beginning of the 19th century, historians point out, China boasted the largest economy in the world and one of the more advanced civilizations. The ensuing 200 years of underdevelopment and colonial occupation are now viewed by the Chinese as historical injustices that need to be remedied. As the 20th century was regarded by many as "The American Century," in Henry Luce's famous phrase, the 21st century could, very well be China's.

## RUSSIA - READY TO EMERGE?

What was once a great nation in Eastern Europe has now devolved into a grindingly poor country. The life expectancy of Russian males has dropped at least 5-10 years since the Cold War. Many Russian hospitals lack essential medical aids such as aspirin and medical gloves. Sixty percent of Russian schools today are without indoor toilets. All this is a sign of the high price the nation had to pay for competing with the United States in a missile and arms race.

All is far from lost, however. Currently, with Russia's President Vladimir Putin advancing a pro-Western agenda, the future does not look as bleak for this European power. Rather, in hopes to end Russia's own self-estrangement from the rest of the world, Putin is determined to join the developed and democratic nations of America and Europe. Interestingly, a recent poll found that 77% of Americans could not name the President of Russia.

The outside world can find some solace in the fact that Russia has registered a respectable amount of growth and prosperity in recent years. Its foreign debts are being paid-off steadily, GDP is up 5%, and oil and gas are delivered on time. These are all signs of a nation that desires to bring itself out of its decline, rather than simply managing it.

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Russia, itself, realizes its weakness and needs the West - particularly the US and Europe -- to have any chance of catching up in the world. As a result, Russia continues to work hard to establish a credible alliance with the West, especially in the wake of the September 11 terrorist attacks on the United States.

Meanwhile, the ideal of democracy, the rule of law, and an open civil society are still evolving, but not without considerable difficulty. After centuries of Czarist autocracy and more than 70 years of top-down Communist state rule, Russians have a great deal to learn about how participatory democracy works.

## Entrenched Bureaucracies

Bureaucracies are entrenched. Among too many ordinary Russians, democracy, in fact, enjoys a bad name, linked to what they view as the failed economic reforms of capitalism. Another bulwark of democratic rule, the media, although ostensibly free, is anything but independent, beholden to the business groups that own and control them.

Currently, the country appears to have three prime sources of political muscle: 1) Communism is far from dead as a rallying ideology for disaffected Russians -- especially the older generations disillusioned with market reforms; 2) far-right populists continue to thrive on growing xenophobic sentiment and even a nostalgic longing for pre-revolutionary days; 3) Vladimir Putin and his all-purpose Unity movement firmly hold the reins of power. An exceptionally shrewd politician, Putin has built his support on cynical exploitation of the war against Chechnya and Chechnian terrorism plus a universal desire among Russians for order after the chaotic Yeltsin era.

The next big issue at hand is Russia's integration into NATO and the WTO. The most significant step began just recently, when Russia was given a major voice in NATO deliberations about terrorism, arms proliferation, missile defense and peacekeeping. Having accepted the deal on nuclear weapons from a position of weakness -- a sensible move given that it cannot afford to keep the ones it has, Russia is showing signs of its increased support of Western policies and commitment towards a better Russia.

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Foreign Debt Hurts Economy


While the Russian economy has enjoyed recent periods of growth, that is not, primarily, due to the emergence of competitive, well-managed businesses. Instead, a recent 75% devaluation of the ruble and high oil prices are the instigators of this growth. More important, there is still a great deal of foreign debt plaguing the economy -- something the Russians would like to see written off, but an idea not warmly received by Americans and Europeans.

**Implications for business** There is one large caveat and deterrent for business in Russia. For years, the country has been riven by a strict bureaucracy rife with corruption and inefficiency. This increases the cost of doing business and can threaten a firm's survival, making investments in a Russian firm risky. While major reforms have been devised and implemented, there is still a long way to go, as Putin himself admits. This can be a great place to do business, but 24/7 vigilance is crucial as conditions change daily.

INDIA: A HAVEN FOR CRIMINALITY

Corruption in India, with one of the world's largest populations—
1,045,845,226 (July 2002 est.)—is at an all-time high and most see little
hope for a turnaround soon.

In Uttar Pradesh and Bihar, Indian states that are home to about 250 million of the world's poorest people, it is estimated that less than one-third of the federal government's development money reaches its intended goals. Nearly 200 of those states' legislators have criminal backgrounds, ranging from larceny to contract killing.

Even in the capital of New Delhi, approximately 20% of members of the Parliament have a criminal past. It is estimated that 18,000 of the city's 42,000 municipal workers regularly fail to show up for work. A recent study found nearly 40% of India's famine relief stock was sold on the black market.

To meet this crisis, several anti-corruption groups have been organized,
but progress is very slow. Pervasive crime and corruption, it appears, is
inevitable when a majority of the population is still mired in deep
poverty.

**Implications for business:** The opportunities here are considerable, but there is also considerable risk.

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LOOK FOR CHANGE IN IRAN

Many signs indicate Iran may begin to emerge as a model of a more
liberal Muslim state in 2003-4.

Ruling mullahs, actually a small percentage of Iran's Shiite clergy, are having a hard time keeping young people in check. In fact, two key mullahs, Taheri and Montazeni, have even called for the clergy to be removed from government.

Support for change is coming from various levels of the country. Serious investors may soon be taking a larger role in Iran. Many Ayatollahs who have squirreled away huge sums in Dutch banks—the Swiss are not considered as reliable as they once were—are also inquiring about how these funds can be used domestically. Iran is still, however, aching over a vicious and bloody war with Iraq, 1980-1988, which claimed at least 300,000 Iranian lives and injured more than 500,000.

The crackdowns on personal behavior in Iran are much less severe today and fashion and other staples of normal life are starting to reappear. There is also a groundswell of support from the more than 70,000 students who were in the U.S. in the 1980's (less than 2,000 are here now).

Although the divide between the West and the Muslim world has deepened in recent years, many reasonable people in both camps yearn to see another major moderate Muslim state emerge, which could be Iran.

**Implications for business:** If this happens it will unlock huge potential not just in Iran, but with the entire Muslim world. The question: Can this positive trend be sustained? One can be sure that fundamentalists and others will not sit by idly and watch what they have worked so hard for to come undone.

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LATIN AMERICA'S TROUBLES CONTINUE

All over Latin America problems worsen and positive developments seem
far off.

Argentina has been through an economic nightmare; Venezuela is in political chaos and stands to lose the advantage of the tremendous oil stash it has. Colombia is increasingly lawless. Brazil, the world's fourth largest democracy with 170 million people, has a new President, Luis "Lula" da Silva, who is both untested and who will have to deal with widespread corruption, violent crime, a problematic rule of law, and widespread poverty.

The upshot of the current oil strike and turmoil in Venezuela is hard to predict. It's Chavez, with his poor and working class allies vs. the middle class, professionals, and business. Oil production, Venezuela's lifeblood, has plummeted and that can have serious reverberations in the U.S. and for global oil prices. Venezuela is the world's No. 5 oil exporter and No. 4 supplier to the U.S.

Even Mexico, long a leading location for foreign direct investment and manufacturing job creation is now losing out to other cheaper-labor nations. Mexican factory workers earn about $3,300 a year without bonuses and benefits, much higher than Asian workers. All told, 529 factories and 223,000 related jobs have left Mexico since December, 2000, many going to China.

Most interesting to watch is "Lula," a charismatic, left-wing labor leader, who has little formal education, worked as a lathe operator in Sao Paulo, and led strikes for nearly 20 years in his country. Although he has, since election, moderated his more radical stances, "Lula" must now manage a huge economy whose currency has slumped sharply while interest rates have risen.

**Implications for business:** If the new President can be successful in 2003 and win global confidence, Brazil could be an engine for the region and then Latin America could again be a major economic plus for the world. Watch "Lula" closely.

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COMPARING THE U.S. TO THE WORLD

1. The planet Earth now has 6,157 million people, of whom 4.5% live in the U.S.

2. Thirty percent of the world's population is less than 15 years old. In the U.S., the figure is 21%.

3. Seven percent of the world's population is at least 65 years old compared with 13% in the U.S.

4. Average life expectancy at birth outside the U.S. is 64 years compared with 77 in the U.S.

5. The worldwide infant mortality rate is 53 per 1,000 live births compared with 7 per 1,000 in the U.S.

6. Thirty-three percent of the world's gross domestic product of $30,100 billion is American.

7. Of annual global exports of $6,000 billion, 13% originate in the U.S.

8. Average global GDP per person is $7,200 compared with $36,200 in the U.S.

9. Forty-five percent of the global stock market capitalization of $26,900 billion is in the U.S. and 10% in the U.K.

**Implications for business:** As others become aware of the U.S.'s overwhelmingly dominant position, there will be more and more calls to split the pie, or at least a portion of it.

22

ARE WE FINALLY GETTING AWAY FROM
OUR DEPENDENCE ON OIL?

The United States has 3% of the world's proven oil reserves but consumes 26% of the world's oil production -- much of it coming from some of the most politically unstable areas of the world. Transportation alone accounts for two-thirds of the oil used by U.S. consumers, suggesting that improving fuel economy standards is all-important. Environmentalists hold that SUVs should be required to meet the same standards as passenger cars.

We are, however, seeing a number of positive signs, including expanding use of renewable alternative energy sources. Auto-makers are also beginning to wean themselves away from oil. Hybrid electric vehicles, which combine a traditional internal combustion engine with an electric motor to achieve dramatic improvements in mileage and reduced emissions, are rapidly growing in popularity.

In 1999, there were just 17 hybrid electric vehicles sold in the United States. Last year, 20,000 were sold, and this year the number is expected to reach more than 40,000. The authoritative automotive research firm, J.D. Power, estimates that annual sales could exceed 500,000 vehicles a year by 2006, from 12 different companies.

While Toyota and Honda are the only two auto-makers selling hybrids right now, Ford is planning to introduce a hybrid version of its popular Escape SUV in late 2003. It will be in dealer showrooms by early 2004. Ford estimates first-year sales at 20,000 or more. GM and DaimlerChrysler are also planning the introduction of hybrid pickup trucks and SUVs, but in the 2004 model year.

Contributing to this trend will be further advances in research for fuel-cell powered vehicles and continued political pressure in California to maintain the nation's toughest environmental regulations for automobiles. With 10% of all U.S. auto sales in California, the state will continue to lead the regulatory movement toward cleaner and more fuel-efficient vehicles.

**Implications for business:** Look for the start of a major re-ordering of the automobile industry in ways that significantly affect all suppliers to that business and consumers.

23

## OIL PRICES COULD SKYROCKET

The fragile world economy is seriously threatened by the high price of oil and the possibility that prices could go even higher. Civil unrest in Venezuela and the looming war with Iraq are the chief drivers of today's unstable market. OPEC has been successful in managing prices on a yearly basis, but not short-term. During the last three years, it maintained a $22 to $28 a barrel range for its basket of crudes. This withstood the September 11 attacks, the threat of war in the Middle East, and a sharp fall in global oil demand.

Venezuela and Iraq, taken together, produce about 5 million barrels daily, or more than a fifth of OPEC's 23 million barrels a day current quota.

Replacement would not be easy and come at a very high cost. Some experts see $40 a barrel as not unreasonable.

**Implications for business:** Depending on how this plays out, the world economy, especially the American, would then likely be put into a tailspin.

## MARKET REFORM -- THE NEW RULES

Pending specific rules to be issued shortly by the SEC, here are the principal new regulatory constraints as mandated by the new Sarbanes-Oxley Act and the SEC:

- CEOs and CFOs will continue to be required to sign affidavits attesting to the accuracy of their firm's financial statements.

- Attorney-client privilege, notwithstanding, corporate lawyers must now report any evidence of wrongdoing.

- Auditors will no longer be permitted to provide most non-audit services to clients they audit.

- At least one member of a Board's audit committee must now meet the SEC's definition of a "financial expert."

- Nearly all corporate personal loans to executives or directors are outlawed.

- The new independent Public Company Oversight Board will now inspect auditing firms, set audit standards, and sanction auditors.

24

- Investment bankers will be prohibited from influencing analysts or retaliating against them.

The new federal legislation also establishes much tougher penalties for accounting and securities fraud and guarantees federal protection for corporate whistle-blowers.

As this new regulatory landscape becomes more visible and meaningful, it should give individual investor confidence a much-needed boost. But the investing public still appears skeptical about corrective moves made to date. A recent Securities Industry Association-funded poll found that only 26% of the investors surveyed expect 2002 Congressional reforms to reduce fraud.

**Implications for business:** This is just the start of restrictions. Don't expect wary, skeptical, bruised non-professional investors to jump back into the equity markets in substantial numbers for some time to come, if then. And look for an increasing number of civil suits—class action and individual—as investors try to recoup some of their losses.

## BIG DEALS DID NOT PAY OFF

Nearly $4 trillion of corporate mergers were completed from 1998 to 2000 — more than in all of the preceding 30 years.

The great majority did not pay off for shareholders, employees who lost their jobs, or customers seeking greater efficiencies and lower prices. The most egregious example, by common agreement, was the disastrous merger of AOL and Time-Warner, which some have labeled "the all-time worst marriage in corporate history."

A *BusinessWeek* study of deals over $500 million found:

- Fully 61% of buyers destroyed their own shareholders' wealth. A year after their deals, the losers' average return on equity was 25 percentage points below that enjoyed by their industry peers.

- The buyers lost largely because they paid too much, transferring wealth to the sellers' shareholders.

- About four-fifths still showed negative returns after 24 months.

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- Companies that paid for their acquisitions solely with stock - 65% of the cases - showed the worst results. After a year, they lagged behind their peers by 8%. By contrast, those paying entirely cash gained 0.3%.

Again and again, buyers over estimated cost savings through synergies and did a poor job integrating operations while cutting costs at the expense of revenue growth.

Worried Wall Street predicts 2003 won't bring bankers relief from a two-year slump that has trimmed revenues by 40%. The top 10 securities firms have lost roughly $260 billion in market value since the end of 2000. Merger activity slumped 29% this year, to the lowest level since 1998. Indeed, investment bank head-count has been slashed 15% in two years.

**Implications for business:** Big mergers or acquisitions are relatively rare these days, but we suspect Wall Street will create them again simply because of the revenues they generate for investment banks. In recent weeks, IBM, HSBC, Credit Agricole, TRW/Northrop and Coca-Cola have all been involved in significant deals.

## RISK AVERSION: A WAY OF LIFE

Everyone from Jack Welch to Alan Greenspan has exhorted business to take more risks in these difficult times. But few business leaders have come forth to do so. With the financial markets on a plateau and Iraq and other uncertainties on the horizon, do not expect much change in 2003.

Typically, a normally venturesome firm like Credit Suisse saw its risk appetite fall to a new low last year. Research and development expenditures are falling for most companies, not rising. Government programs that spawned new products (NASA may perhaps be the best example) are stalled and cautious analysts, anxious to redeem their reputations and prove their sharpness, are now measuring carefully and exercising unusual caution and restraint, emphasizing short term returns.

26

A few giants, led by General Electric, IBM and Microsoft, are bucking the trend, but most businesses seem ready to ride out 2003 hoping the economy turns.

**Implications for business:** Until new product chances are taken again, expect stagnation. But for those who do take risk and succeed look for major pay-offs.

## NOW, IT'S A BOARD OF DIRECTORS CRUNCH

Coming on the heels of a stubborn bear market, one of the many troubling by-products of the on-going corporate scandals is the crisis in corporate governance—specifically, the growing shortage of suitable, qualified individuals willing to serve on boards. Time was when these positions were much sought-after plums with annual retainers occasionally eclipsing six figures for less than 15 working days over any year.

But, today, cautious candidates are asking management plenty of questions before agreeing to sign on. Last year, the attrition rate for board members zoomed to 20%—a figure expected to jump considerably higher in 2003 as the terms of thousands of directors expire and the exodus continues. As many as half of sitting directors have indicated they will probably not be seeking another term.

Meanwhile, overseeing management on behalf of shareholders has never been more essential or under more intense scrutiny.

Although how directors perform could play a critical role in restoring investor confidence, the pool of qualified and available candidates keeps getting smaller. The reasons are easy enough to identify—realistic concerns about possible costly lawsuits coupled with potential damage to personal reputations.

Compounding this are new listing requirements from the New York Stock Exchange and NASDAQ. In order to eliminate any potential conflict of interest, the new rules call for a majority of a company's directors to be independent with no links of any kind to management. And members of compensation and audit committees must be 100% independent. Complete compliance is mandated within two years.

**Implications for business:** Positive fallout from the new board climate will be a more well-informed and diversified universe of directors with broader perspectives. It may also offer new opportunities for women and minorities. There will be pain for those who resist change.

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## THE NEXT THRUST OF PRODUCTIVITY

Most informed observers agree the next new thing that will boost productivity and the economy has not, as yet, appeared, on the horizon. But serious talks are being held in many corporations about advancing an old, very basic quality—trust—and winning gains from everyone moving in the same direction with the same purpose based on re-discovering this classic business ideal.

This is not meant to imply that economies of scale and scope have suddenly become unimportant. Well-managed companies must demonstrate control over the value chain, from product design through to marketing and distribution.

But recently, because of compensation schemes, too many managers tended to “do their own thing” to achieve success. Many are, however, starting to discuss programs and plans to get people out of their silos and cooperating closely to move the business ahead. This requires a level of trust that in most cases does not now exist. And it requires a new type of leader—a team builder—very different from the lone hero-figures of the 1990s.

**Implications for business:** Look for this trend to accelerate and, if it works, for those companies that embrace it to have impressive gains.

## MORE PROTESTS ON COLLEGE CAMPUSES?

Have the seeds been planted among students from Boston College to Berkeley to start major anti-war protests? This phenomenon is still in its early stages, but the Institute for Policy Studies—a liberal think tank—is now helping students on 135 campuses in 35 states organize against the war. And more than 10,000 university faculty members have already signed an Internet letter opposing any war in Iraq.

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The next several months will see where this nascent effort goes, especially since there is no draft today and patriotic fervor, fueled by the 9-11 terrorist attack, is still very strong among young people. Campus conversations are, in fact, pushing against protest, but there is no denying the many small campus protests we've witnessed during the past several months.

**Implications for business:** This development should be watched closely as it will affect not only the national mood and perhaps the economy, but also corporate recruiting.

## WHAT EVER HAPPENED TO GOOD MANNERS?

The lack of civility and a rise in plain old rudeness across the U.S. has increased dramatically in recent years, a disturbing trend that is likely to continue.

A recent national survey indicates that more than three-quarters (79%) of Americans agree that the discourtesy displayed by motorists on the nation's highways is a "serious national problem."

Nearly three-quarters (73%) feel that Americans once treated one another with greater respect. More than half (58%) say they often encounter reckless and aggressive drivers on the road; 64% add that the problem is getting worse. On the other hand, despite the disruptions and delays involved in flying these days, only 13% report seeing frequent rudeness at airports.

The most universal gripe? Calling a company and getting a recorded message rather than a human being. An overwhelming 94% labeled this "very frustrating."

Nearly half (49%) of the study respondents complained they are often subjected to "loud and annoying" cellphone conversations in public places.

**Implications for business:** Frustration and rudeness lead to a more fractured society and an inevitable surge in lawsuits as angry individuals seek redress from the courts.

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TORT REFORM IN THE NEXT CONGRESS

Advocates of tort reform are sharpening their knives to have yet another go at enacting meaningful legislation to cut the stranglehold that the plaintiffs' bar has on numerous sectors of the economy.

Two areas that President Bush has targeted are imposing caps on non-economic damages in medical malpractice cases and shifting most class action suits from state to federal courts. The argument in favor of a malpractice cap is that multi-million dollar malpractice awards in recent years have driven doctors' insurance premiums through the roof, forcing many doctors to either abandon their practices or move to other states.

Especially hard hit have been physicians in specialty fields such as obstetrics, neurosurgery, and trauma. Recently, hundreds of Pennsylvania doctors, who were threatening to stop work or cut back on services effective January 1, were convinced to stay on the job by incoming Gov. Ed Rendell, who promised to have the state pick up, at least temporarily, a substantial piece of the cost of the doctors' malpractice insurance. In West Virginia, surgeons actually declined to operate. While medical malpractice caps have been enacted in 17 states, the Bush Administration, prodded by insurance lobbyists and doctors' groups, feels a national solution is needed.

The same is the case with class-action litigation. Traditionally, anti-business state court juries in so-called "judicial hellholes" like Mississippi, Louisiana, West Virginia, and Illinois have awarded tens, sometimes hundreds, of millions of dollars on the most specious of product liability claims. Making it easier to shift these cases to federal court would, it is believed, impose some rational limits on this type of litigation.

The plaintiffs' bar, through the Association of Trial Lawyers of America (ATLA), has vowed to fight any efforts at tort reform. As the single largest contributor to Democratic Party candidates, the trial lawyers are already bragging that it will take 60 votes in the Senate for any tort reform bill to pass, meaning, of course, they will filibuster it to the end.

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## Asbestos Litigation

There is one specific area, however, where a modicum of reform is remotely possible -- asbestos litigation. With nearly 60 American corporations already in bankruptcy because of their asbestos liabilities and many more on the brink, there is a growing consensus that something needs to be done. The Supreme Court, even though it is hearing an asbestos case this term, has, in the past, passed the buck on dealing with the issue, saying in no uncertain terms that it is Congress' problem to address. The issue has even split the plaintiffs' bar, with some trial lawyers arguing that only cancer cases should be compensated and that so-called "unimpaired" claimants—i.e., those who have had some asbestos exposure but are not yet ill and may never become ill—should have their cases put in legal limbo until they actually become sick.

With 95% of current claimants falling into the "unimpaired" category, legislation along this line would go a long way toward finally taming the "asbestos monster."

**Implications for business:** All in all, both at the Congressional and Supreme Court level, the plaintiffs' bar is now clearly in the dock and not in front of it. Whether it will emerge victorious, as it has always done in the past, remains to be seen.

## THE NEXT "BIG" IDEA

Ideas bring change. Since we now live globally, they operate in an even larger arena. We are influenced by the way others think and feel. The power of thinking has become the dynamo driving economies and economic growth in general. Now, more than ever, higher education and the development of ideas may be the critical investment.

Many feel that a "big idea" is needed today to move the world forward, enabling all to reap greater prosperity.

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Where will it come from in the U.S.? Carnegie-Mellon University has formulated a "creativity index" that identifies the top cities where an unusually creative and gifted population is most likely to produce the "big ideas" that will bring positive change. They are:

1. San Francisco

2. Austin

3. San Diego, Boston (tie)

5. Seattle

6. Raleigh-Durham

7. Houston

8. Washington-Baltimore

9. New York

10. Dallas, Minneapolis-St. Paul (tie)

**Implications for business:** Many in all parts of the world are attempting to produce the next "big" idea. When it happens, look for a total re-ordering of life.

## THE SAFEST INVESTMENT IS NOW AT RISK

Expect notably higher utility rates in 2003. Many utility holding companies, scalded by ill-advised entries into unregulated businesses such as commodity trading, are increasingly looking to pass some of their financial burden onto their utility units. A financial crisis more acute than any in modern history is facing the industry. This will have a major impact on the market. Those legendary "widows and orphans," who used to count on dividends and growth from utility stocks, are living in bad times.

Debt, from expansion and a weak economy, are all working against the industry. Is deregulation itself the villain, or is it incompetent and risky deregulation plays by management? This will take some time to work out

Few, if any companies are unafraid. There will likely be no light at the end of the tunnel until 2004 or even 2005.

**Implications for business:** This will impact economic development as well as the market. Look for utility managements to come under fire and only those who focus on the customer will be successful.

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SEP 2 2 2003

The Dilenschneider Group

September 16, 2003

The Honorable Henry A. Kissinger
Kissinger Associates, Inc.
350 Park Ave
New York, NY 10022

Dear Dr. Kissinger:

Accompanying this covering note, please find our customary September Trend Letter. As you know, we do two such letters annually — the first in January to begin the year, and the second in September as corporate operational and budget plans are made for the coming year.

This is the 27th in the series, and we have been particularly pleased with the reaction from clients and friends seeking thoughtful answers and clarity about the most serious questions and issues Americans, and the world, have faced in decades—possibly since World War II.

There is a great deal of good happening in the world today and countless people are doing admirable things in all walks of life. Some of this will be profiled in the following pages and in our January letter. But the world remains a very dangerous place. There are many desperate people prepared to do whatever they must do to achieve their destructive aims. This phenomenon, too, is profiled because we believe it is prudent to prepare for the bad while enjoying the good.

To be sure, the United States and the world are in a perilous time and how matters are handled over the next 12 to 18 months will define the shape of our lives for generations to come.

Although the United States of America is, today, facing crucial decisions at home and abroad, it appears more isolated than it has been in recent memory. Heartland America is, for the most part, unaware of the animosity towards this country coming from abroad and many of the nation's elite have no answer for it.

The Dilenschneider Group

Moreover, Americans have engaged in a vigorous, on-going
discussion about rights and freedoms over the past half century – for
minorities, gays, women, the disabled, and on issues ranging from the
environment to privacy, from the economy to war and peace, and much
more. All this has focused global attention on the United States making
objectivity and balance about these decisions even more difficult.

For this letter, we reached out to complete a round of more than
140 interviews with leading bankers, economists, academics, politicians,
media representatives, figures in the arts and religion, in the security
field and other influentials throughout the United States, Europe and
Asia.

We also reached out to former Ambassador Robert Gelbard, who
has written a brief essay which is appended to this note. Ambassador
Gelbard has been one of our most distinguished public servants,
representing the United States most recently in Indonesia and Croatia.

Additionally, we had the privilege once again of attending the
remarkable Ambrosetti Conference in Cernobbio, Italy, in early
September. That meeting brought together some of the world's leading
political, social and economic thinkers.

In attendance were at least four Nobel Laureates, including
Shimon Peres, Robert Mundell, Riccardo Giacconi and Rita Levi
Montalcini; four European prime ministers; two European foreign
ministers; Romano Prodi, President of the European Union; several of the
world's leading economists; Amre Moussa from the Arab League; Jean-
Claude Trichet, the head of the European Central Bank; global
luminaries such as Mario Monti, Richard Perle, Peter Sutherland, Yotaro
Kobayashi, Lester Thurow, Tom Ridge; and approximately two dozen
others who expressed their views on the most important world
developments during the past 12 months, and their opinions about the
major issues facing the global community in the immediate future.

There was overwhelming sentiment expressed for the U.S. to get its
global position right—especially with regard to Iraq, Afghanistan, other
military actions and the worldwide terrorist threat.

The Dilenschneider Group

To help our clients and others reflect upon the current extraordinary global social, economic, political and cultural climate, we have summarized in this report the insights taken away from these 140 interviews. They underscore the reality that the way businesspeople around the world are thinking about the future has clearly changed.

We also include a summary of economic forecasts gathered from some of the top business/financial institutions in the world.

A significant part of this letter represents intelligence gleaned about such urgent issues as the economy, the Middle East and terrorism, since these topics dominate so much of our current thinking. Our January 2004 letter will be more inclusive about a number of equally critical issues.

As noted, this is our 27th Trend Letter and I must acknowledge that one of the many satisfactions that comes with researching and writing these reports has been hearing from our friends about the frequency with which our forecasts about matters economic, political, social and cultural have been squarely on target.

Here, then, is our latest effort based on a consensus of those 140 interviews and what was said at the 2003 Ambrosetti Conference. We hope you find this report useful.

We would, of course, be grateful to hear any responses you might have to the contents.

Best regards,

Robert L. Dilenschneider

RLD:jma

Attachments

TABLE OF CONTENTS

<table><tr><td>When Will the Next Terrorist Strike Come?</td><td>Page 1</td></tr><tr><td>Freedom - What Happened?</td><td>Page 1</td></tr><tr><td>No One is Safe</td><td>Page 2</td></tr><tr><td>The 20<sup>th</sup> and the 21<sup>st</sup> Centuries are Totally Different</td><td>Page 2</td></tr><tr><td>Is George Bush Vulnerable?</td><td>Page 3</td></tr><tr><td>The Outlook for the 2004 Elections</td><td>Page 4</td></tr><tr><td>Has Iraq Become a Quagmire?</td><td>Page 4</td></tr><tr><td>A Global Economy Takes Hold</td><td>Page 5</td></tr><tr><td>Is It Still "The Economy, Stupid?"</td><td>Page 6</td></tr><tr><td>Protectionist Sentiment Continuing to Grow</td><td>Page 8</td></tr><tr><td>When More Can Also Mean Less - The Productivity Dilemma</td><td>Page 9</td></tr><tr><td>It's Not Just Manufacturing, Globalization Hits U.S. Service Sector</td><td>Page 9</td></tr><tr><td>Are We Energized on Environmental and Social Issues and Does It Make a Difference?</td><td>Page 10</td></tr><tr><td>Iraq - What's Ahead?</td><td>Page 11</td></tr><tr><td>Europe has Come a Long Way and the Resolve is There to Go Further</td><td>Page 11</td></tr><tr><td>Despair is Settling In and Deepening in the Middle East</td><td>Page 12</td></tr><tr><td>Can the Road Map Be Saved?</td><td>Page 12</td></tr><tr><td>Asia (Except North Korea) is Very Quiet and Very Successful</td><td>Page 13</td></tr><tr><td>Against North Korea, Diplomacy Rules</td><td>Page 14</td></tr></table>