CONTENTS

1. FOREWORD

2. INDONESIA - A CASE IN ECONOMIC DEVELOPMENT..... 5
By H.E. Prof. Dr. Ali Wardhana

3. WORLD ECONOMIC SITUATION.................. 23
By Prof. Dr. Paul W. McCracken

4. THE INTERNATIONAL MONETARY SCENE............ 43
By Mr. G. William Miller

5. OUTLOOK ON CURRENCY...................... 57
By Mr. Heinz Riehl

6. INTERNATIONAL CAPITAL MARKET.............. 83
By Mr. Martin P. Lee-Warner

7. INVESTING IN DEVELOPMENT COUNTRIES-INDONESIA AS A CASE.................. 123
By Ir. Suhartoyo

8. INVESTMENT STRATEGY IN INDUSTRY............ 135
By. Mr. Hideo Sugiura

9. INVESTMENT STRATEGY IN SECURITIES........ 153
By Mr. Arthur Zeikel

10. WORLD ENERGY SCENE...................... 173
By Dr. Hamonangan Hutabarat

11. A NEW ECONOMIC STRUCTURE THROUGH GEO-POLITICAL APPROACHES.................. 181
By Dr. Henry A. Kissinger

My assignment here tonight is not to repeat the excellent speeches on economic trends which you have already heard and which I had the privilege of reading. I want to talk to you about two related topics. First, the general foreign policy environment in which these economies will have to develop. Secondly, I would like to discuss a number of economic issues from a foreign policy point of view, not claiming that I am a technical expert with respect to this, but emphasizing the political preconditions that seem to me to be required in order to resolve them. Of those three I want particularly to mention the issue of free trade versus protectionism, the issues of exchange rates and the issue of world economic development as it comes to expression in the international debt problem. I repeat I want to do this from a foreign policy point of view, not from an economic point of view. But before I get to these more economic questions, I would like to discuss some aspects of the international environment as it appears to me. And inevitably I am going to do so from the American point of view, which I know best.

It seems to me no matter what projections we made of economic trends, it can be made irrelevant by world economic crisis if we are optimistic, then certainly pessimistic trends will be eased by an international environment of some stability. In the area, for example, with which I now have been given the responsibility to write a report for the President, mainly Central America, we are dealing with economies of relatively small size. It is relatively easy to think up economic programs which are bound to make a significant difference in that relatively small area. However, without a climate of security and stability and a growth progress, these projections are going to remain purely theoretical.

Now, let me talk for a bit about the international environment as I see it, especially as it applies to Asia and to South East Asia, and then I will turn to the economic question that I have mentioned earlier.

One of the striking facts to me, as I travelled around the world, is the general belief that the U.S. foreign policy follows, marvelously planned, carefully considered long-range criteria in some countries assumedly of an imperialistic design. But in all countries, or in too many countries as if there were a well

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established body of American foreign policy doctrine. What
our friends abroad have to understand is, that the United
States with respect to foreign policy is a developing country!
In the field of foreign policy, the United States began its own
involvement about the same time that Indonesia became
independent. Until 1945, indeed until 1948 the United States
was secure behind two great oceans. The United States never
had to concern itself with problems of international security.
For us, security was taken care of by distance and to some
extent by the British Navy. And if you read the debates in
America about foreign policy prior to 1949, you will find it
repeats many of the premises of the present so-called non-
aligned movement. We thought the balance of power was a
purely European invention. We thought we were morally
superior to the quarrels of the European states, in which we
chose as a general proposition not to involve ourselves. And the
United States through most of their history acted as if it could
participate or not participate in international affairs as it saw
fit, and could act as the moral arbiter of the quarrels of others.
All of this reflected geography and the fact that other nations
conducted an active foreign policy. It is an irony of history
that the United States against its wishes, and I must say against
the convictions of most of its people, has been projected in
the day-to-day management of international relations. It is a
double irony that on the way to the management of inter-
national relations we have cropped past the Europeans going in
the opposite direction and that we now find ourselves
criticized from Europe, not to speak from Asia, in the same
tones of moral superiority that we would really like to apply
to everybody else.

to everybody else.
When you see the American domestic debate, you will find
that within America there are two schools of thought. There is
one school of thought which believes that foreign policy is a
sub-division of psychiatry and that acts as if relations amongst
states were like relations among people. And there is another
group of people and another school of thought that thinks and
acts as if foreign policy is a sub-division of theology and leaves
the impression that if the walls of Jericho have not yet
crumbled, it is because we have not yet found the right trum-
pet to blow. Now this is the real American debate, and every

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once in a while there is an odd character like myself who tries to take the position that foreign policy depends on a patient accumulation of nuances, that you are involved in an endless process in which the solution of one problem is the admission price to another problem, and in which the adjustment of equilibrium is the best you can do at any one moment of time. People like that have a greatly unifying influence on the American scene. Those of you who are experts of the American scene will know that I am attacked with equal vehemence from the left as well as from the right. For the left, I am too power-oriented; for the right, I am too relativistic. The left wants the millenium, the right wants a confrontation. I believe in neither, and I would like to put before you what I take to be the American foreign policy problem to which we will be driven by reality, and are being driven by reality. We cannot continue, and I speak to you very frankly. Every four to eight years when we change our President, to announce a reassessment of our foreign policy, we cannot create the impression in foreign countries that everything is up for reconsideration every four years, because if we do, we will become an element of instability and uncertainty. When you conduct a serious foreign policy you have to recognize two fundamental things. The first is that when your scope for action is greatest, the knowledge on which to base such action is at a minimum. So you always have to act on the basis of an assessment you cannot prove true when you make it. The second thing you have to remember is that however elevated your objectives, whatever great things you may want to achieve in life, you will never get a chance unless you have first brought about security. You cannot avoid the problem of security. And you cannot take the advice of many people of excellent modus, who tell you they know for sure that if you do certain things, the other side will follow suit, that if you do not develop certain references, the other side will not do it. Professors have the privilege of saying, I have made a terrible mistake, I'm going back to the library and write another book. Statesmen are given only one chance, there are certain experiments that they cannot try, because if they try them and they fail, their setback will be irremediable. It is in this context that I want to make some observations first about our relations with the

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Soviet Union, and then about some of our relationship in the
Asian area winding up in Southeast Asia, and then I will turn
to the economic question.

First our relationship with the Soviet Union. We face in
the Soviet Union a very strange political system. The Soviet
Union has never decided whether it is a cause, or whether it
is a country. If it is a country, one can deal with it on the
normal pattern of international relations; if it is a cause, it
will continue to expand and seek to achieve an element of
superiority. It is a very strange system because it claims to
represent Scientific Materialism and yet it is run by a collecti-
on of ancient leaders incapable of settling the problem of
succession, incable of rejuvenating itself, and obviously
absorbing enormous amount of their energy in internal
manoeuvres. It is a system that has covered an area enormous-
ly rich in resources for seventy years, and yet has made a
colossal mess of its economy. In a system in which nothing has
a price, and in which the cost of nothing is known, in which
everything works through allocations, corruption, mismanage-
ment, and plain confusion are absolutely inevitable. Why is it
that a country that is producing intercontinental missiles has
never produced individual manufactured articles for export
that can compete on world markets with any manufactured
article of any market economy? Why is it that the chief export
of the Soviet Union to developing countries is weapons? And
any developing country that wants to rely on the Soviet Union
for anything else, is bound to fall far behind other developing
countries dealing with the technologically more advanced
societies. That is an anomaly, but what the Soviet Union has
done well and on which it has put all its resources is the
accumulation of weapons. And so, whether they intend to or
not there is a constant pressure on the global balance of
power. And the Soviet Union has a peculiar way of interpret-
ing the global balance of power. In 1979 when they had 50 of
the so-called SS-20 missiles in Europe, they said there was now
a balance of power. In 1981, when they had 150, they said
there was now a balance of power. Now, when they have 350,
they still say there is a balance of power. And we have yet to
build a single one, which you could not prove from the

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demonstrations that are taking place in West European capitals, you might think that it was the Americans that are challenging the equilibrium.

I am not going into all the quarrels between us and the Soviet Union in this, a non-aligned country, and I am not suggesting for one second that Indonesia should take a position on this particular issue; I am saying something else. Just as we have to respect the non-alignment of a country like Indonesia, nonaligned countries have to understand that we cannot ignore its relentless military build-up. There will sooner or later be some unmanageable international political crisis, which will threaten the homes of everybody. Why does the Soviet Union have to send yearly a hundred thousand tons of military equipment into the Caribbeans? Without that, we would not have a crisis in Grenada today. Of course the Soviet Union has a right to its own security as every other nation has, but if it interprets its own security in such a manner that it is absolute, then absolute security for the Soviet Union means absolute in security for everybody else, and that creates the tensions, and that is what we are seeking to resist.

It would be easy, or relatively easy, to come to some understanding on international restraints. Contrary to what much of the hostile propaganda towards us in much of the world says, most Americans have no desire for foreign adventures in order to resist some of the challenges we are facing. The real problem is whether we can come to some end of the arms race by negotiations. But failing that, we have no choice except to continue our part of it. And doing so, is a protection for the United States, even when we were criticizing it.

In Asia, the United States has a number of objectives, as of course it also has in Europe. We must have the objective of security, and we must have the objective of progress. The problem of security in Asia is somewhat more complicated than in Europe, because the distances are vast, the countries are of a different character, much less homogeneous than the European society. I will just make an observation about three countries, or two countries and one grouping, and then I will

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turn to the more positive aspects.

We have to deal in Asia with Japan, with China and with the ASEAN Group. Each of them represents a different set of problems. Japan has been independent for thousands of years, and in the not too distant past was an adversary of the United States, and an occupier of some of the countries of Southeast Asia, and for that matter of Northeast Asia. Therefore, the problem of security between the United States and Japan has a very particular feature. On the one hand, the independence and security of Japan is not only of vital American interest, it is of vital interest to all the countries of that region. On the other, nobody wants a resurgence of Japanese nationalism and Japanese self assuage. Therefore, the alliance between Japan and the United States is in everybody's interest. For if Japan attempted to defend itself entirely upon its own resources, a much more nationalistic policy would inevitably follow. It is one reason why I, quite frankly, have never favoured American pressure on Japan for a speed-up of its military program. Japan can follow its own course and we cannot prevent it, but I think that Japan's security problem is best maintained within the context of the existing alliance with the United States, and within the limitations that have developed by practice over the last two decades.

China has a different tradition and a different relationship with the United States. It considered itself the Middle Kingdom through the greater part of its period, and it will pursue its security objective as a what it calls the policy of equality with the Soviet Union. Realistically, no Chinese policy can shorten the frontier with the Soviet Union and therefore the Chinese will be the best judges of their security requirements. We have a common interest with the Chinese in their independence and in the prevention of Soviet domination. We do not have identical interests in other parts of the world. And that must be understood by all sides.

Third, ASEAN. ASEAN has been one of the enormous success stories of the post-war period. When the Vietnam war ended, there was a sense of pessimism of what might follow. But the economic recovery in this part of the world, in which Indonesia has played such an honourable and major role, and

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the increasing political cohesion among the countries of ASEAN is one of the positive features of our period. We, as Americans, have a profound interest in the continued economic development of this area and in its security. We do not need any military arrangement to make this interest clear. We have an interest in the security of this area, because the peace of the world depends on major nations with a long tradition able to develop free of foreign intervention. So we have here a rather peculiar relationship of respectful non-alignment but cordial cooperation on many political and economic aspects. And it is in this country itself that I would like to discuss the politics of some economic issues that are before all the nations in the world.

The first one is the issue of free trade and protectionism. I want to make clear that I can analyze these problems better than I can offer solutions, and it may not be so easy to find solutions. We face currently an anomaly. The anomaly is that everybody professes adherence to free trade and yet, too many nations practice direct or disguised form of protectionism. In a period of alleged free trade there are many instances of trade wars and discriminations, and there are a number of inherent reasons for it. The theory of free trade developed in the 19th century, when Britain had the monopoly of energy and the monopoly of industrial capacity. It goes without saying that it is easy to run a free trade system with only one component. Later on other European nations developed their own industry, interestingly enough almost always behind tariff walls, that were lowered only when the industry had achieved com petity. But still, as late as the outbreak of World War I there were only 4 or 5 major industrial nations, of a similar cultural tradition, with similar living standards and comparable labour practices. Many of them had colonial empires which also added to their markets. In this world with some twenty or more growing industrial nations, every year there are new entries to this system of industrialisation. Inevitably, there are cultural differences and differences in labour costs, differences in domestic performance which are bound to affect the com petitiveness of various industries. Moreover, when the number of industrial states was relatively small, the setback of one

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industry could usually be compensated very easily by an
increase in others. Under present conditions when in so many
of the industrial democracies a politics of pressure groups is
becoming even more pronounced, one of the inevitable results
of free trade is that a disadvantaged group go to their govern-
ment and ask for help, and it is usually the least competitive
industries that are asking their government for intervention
against the most competitive industries. It is inherent in the
profits. This would happen even if every government played
exactly according to the proper rules. But to a group of
people, probably much more confident in the field of econo-
mics than I, I do not have to state that not every government
is playing according to the proper rules, indeed it is correct to
say that very few governments are playing according to the
proper rules. Subsidies of exports, restrictions on imports,
manipulations of currencies, all are used to achieve com-
petitive advantage and therefore there is a constant strain on
the economic system. I do not believe this is especially true in
our relations with Japan, but it breaks out periodically in our
relations with Europe, and I am sure, that Indonesia has
its own catalogue of American protectionist measures. The
usual method in which it has been solved is to conduct
industry by industry negotiations, especially in relations with
Japan. I think this is an absolutely futile excercise, not only
because as I said it fits the least against the most competitive
industries but also because it enables countries to shift out of
the industry under discussion into some other field, so that
when the negotiation is completed one has inherited an empty
shelf. What is needed is an eventually political attitude in
which the major nations analyse seriously what is needed to
operate a free trading system and commit themselves on a
comprehensive basis to do this. If not, then no matter what-
ever high sounding phrases are used at periodic Gatt conferen-
ces, it is safe to predict that within 10 to 15 years we will be
living in a mercantilistic world and one of the ironies of the
present situation is, as I shall discuss within a minute, that the
solution of the debt problem that is advanced by international
financial institutions is to encourage the mercantilistic world,
because it encourages to restrict its imports and to expand its

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exports. But it should stand to reason that it is impossible for
all countries to expand their exports and restrict their imports
simultaneously. it is a technical impossibility. So, a more com-
prehensive and frankly a more political approach to the issue
of free trade is in my view extremely important.

Let me say a few words about an even more international
problem, that of exchange rates. As an ex-officio member of
the National Security Council in 1969, I was entitled to par-
ticipate in financial discussions under the aegis of the Secre-
tary of the National Treasury. In the summer of 1969 there
was a currency crisis which by present day standards would
not even be taken seriously, but which at that time exercised
everyone enormously. I said, "Why don't we devalue?" If I
had told a dirty joke during religious services, I could not have
been treated with more contempt. All the members present
explained to me that the dollar being a reserve currency could
not be devalued, for technical reasons and moral reasons, and
I thought that may be they knew something that I did not
(which would not have been hard to do at that time), and I
subsidized. What shook my confidence was that two years later
that very same group went from no devaluation to permanent
devaluation, and from a total commitment to fixed exchange
rates to a total commitment to floating exchange rates. I must
say on behalf of the floating system that we probably could
not have lived through the oil crisis and the subsequent dis-
locations with any other system. It was necessary for that
time. It is probably impossible to return to the gold standard
or something like it, which in the 19th century maintained the
value of the currencies unchanged for a hundred years. Ulti-
mately, exchange rates are determined by domestic economic
and monetary policies and no exchange rate regime can long
relieve governments of the effect of their domestic policies on
the international value of the currency. Clearly, no one wants
instability because instability hampers trade and growth. It is
important to identify the avoidable instability under either a
fixed or a flexible exchange rate. A fixed system has the
advantage of being more predictable but its disasters are also
more profound. A flexible system requires more decisions,
but the cost of wrong decisions are less.

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I must say this at the beginning. Nevertheless I believe a pure floating system under present circumstances gives too much of a premium for speculations and makes for many businesses currency transactions as much, or more a source of profit than actual industrial production and most importantly, it encourages governments to solve their own domestic problems at the expense of somebody else. There is an intense debate about whether the dollar is overvalued, or the Yen is undervalued, whether the overvaluation of the dollar could help us fight inflation even though it reduces our exports, while the undervaluation of the yen gives the Japanese an unfair competitive advantage. At this point it is probably impossible to tell, whether one is the cause of the other or to what extent they are related. But it seems to me that some grade of predictability in exchange rates, maybe in wider bands than were traditional, is highly desirable. It is another subject that requires political decision but let's face it: the political decision that is required is a degree of coordination of fiscal and monetary policies that up to now no government has been willing to undertake. And it is therefore a substantial political decision, not a purely economic decision. If we accede to the required coordination of fiscal and monetary policies, under either system a certain degree of predictability would develop. But when France has a socialist government, and the U.S. has a dedicated free market system both coming in at the same time, you are bound to have major inequalities in development in the exchange rates.

Let me now turn to what is really my most fundamental issue, which has to do with the management of the debt problems and its possible solution. Indonesia, thanks to its prudent management, and thanks to the continuity it has achieved in its economic scheme has escaped the worse of the debt problems. The debt problem is concentrated in its major effect in Latin America. But its effects are relevant to the whole world and its solution can only be in the context of a global approach to the issue of economic development. The debt problem has its origin in the oil shocks of the seventies, when suddenly our banks were awash in petro-dollars and recycling became a competitive matter to the middle level of

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developing societies There were many good reasons for it at the time, and I know of no government that attempted to prevent it. It is not now an issue of who is to blame, I am now concerned with the solution of the problem.

Here, I would like to make this fundamental proposition: the debt problem cannot be solved as a financial banking problem, the debt problem can only be solved in terms of an approach to global economic development between the advanced industrial societies and the developing societies. The International Monetary Fund was designed to deal with an individual crisis in an individual country. It was never designed to deal with a crisis of the system. Consortia of private banks have an obligation to their stockholders to protect their balance sheets. They cannot be blamed for coming up with solutions that keep the system going year after year without getting to its root cause. It is my conviction that the present approach is likely to lead to a political and economic disaster for the following reasons.

The present approach is to lend money to the debtor countries to enable them to pay interest to the creditor countries so that the loans can be kept on the books as performing loans. There is very little effort made to repay principals, because that has long been abandoned. In return for this the debtor countries are supposed to undertake major programmes of domestic reform, and the creditor countries are supposed to lend them more money than they owe in interest so that they can begin the process of economic recovery. All of you present know that the system is simply not operating in this manner. On the one side, austerity is a very difficult decision to take for an indigenous government. To engage in austerity at the request of either international institutions or of foreign banks is over a period of time intolerable. When pressurized to cut its indexes and to eliminate subsidies these may be sensible economic measures but they threaten the political position of the leaders concerned. I know very few political leaders of the world who will admit that 5 years ago they had made a mistake. Most of them will blame somebody else. There is a great danger that the existing arrangements will gradually break down at both ends. On the one end, that the IMF con-

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ditions are not met as, let us face it, they cannot be met today
in most countries. And on the other end, that the banks do
not lend the excess money above what is needed. What is
happening is a recycling, an increase of debt in order to pay
interest. In the long run, this system is politically insupportable. Somebody sooner or later will break out of the system
and when that happens, all the other countries will have to
follow suit and then the financial system is in danger.

I believe that the debt can be repaid only if economic activity is started again. The present theory is that economic activity will start automatically when the conditions are met in two or three years and new money is lent. We cannot wait this long. The industrial democracies first of all must see to their own growth. That is not the subject to discuss here, and in the U.S. we are making pretty good progress. But there is also needed a policy for the development of the developing nations, a policy of growth for the developing nations without which the debt problem will become a monster that will consume us. Some of it will be taken care of by the recovery in the industrial democracies. Hopefully commodity prices will go up, hopefully interest rates will come down, but we cannot wait for the automatic event to occur. We cannot continue a dialogue that is based only on the repayment of interest. For developing countries the austerity that they must experience must be the decision of their own governments and we will be better serviced if we approach them in a development and growth context. This, incidentally, is a highly unpopular theory in the United States in many quarters, and I do not know with what enthusiasm it is met in developing countries. However, we need a dialogue for growth. I see there are at least three obstacles that I have experienced :

1. How do we decide the forum? The UNCTAD type conferences lead to theoretical rhetorics; it leads to very little concrete progress. So one needs a forum that lends itself to realistic discussions.

2. While the advanced industrial nations have an obligation for a concept larger than that provided by the international financial institutions, the developing nations also have

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an obligation to come up with some concept that is some-
thing other than a listing of unilateral demands. And how
they can organise themselves into a smaller executive
committee that can conduct a rational negotiation is as yet
an unsolved problem.

3. It is true that the economic growth of the world's economy is an American interest independent of politics involved. But in all candour, we cannot separate politics entirely from economics. As I have said before, we have to respect non-alignment. But I must also say in all frankness, that when I was in office, my staff kept the Declaration of the non-alignment from me, which was probably good for my blood pressure! Afterwards, I started reading them and I noticed the amazing phenomena that never could I find any criticism of the Soviet Union and never could I find any praise of the United States. It is statistically impossible that the U.S. is always wrong; occasionally, if only by accident we are bound to do something right! That deserves mentioning. This does not apply to Indonesia. In my experience Indonesia has a common, moderating and constructive impact on the non-aligned movement.

And therefore I can say here in frankness what I said before
that it seems to me there are two essential requirements :

1. A real dialogue on the growth of the world's economy beyond the issue of debt, and independent of the issue of interest repayment.

2. Enough political restraint on both sides so that, while we may not always agree, we are not also always in a constant posture of confrontation.

Having said all of this, while I have listed before you a
whole catalogue, the interesting aspect about their nature is
that all of them are solvable. The security ones by decisions
of the advanced industrialised nations, the development one
by cooperation between the advanced and the developing
nations so that we can sum up our comments in this observati-
ons; yet we have a big agenda. But we are in a position to say
what few other groups of nations can say, that the solution of
our problems is almost entirely in our own hands.

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