REMARKS BY HENRY A. KISSINGER AT THE AMERICAN BANKERS ASSN.

October 18, 1982 - Atlanta, Ga.

Let me talk to you about a number of foreign policy problems that are on our agenda. Let me begin it with a theme that I used to pick up from the Chinese when I first went there. I, quite frankly, never understood what they were talking about. But, as you know, when a Westerner says something you don't understand, you think maybe he doesn't know what he's talking about. When a Chinese tells you, you figure there's something wrong with your own intelligence. At any rate, they used to say when we came there, "there is turmoil under the heavens, but the situation is excellent." I didn't quite know what that meant but I never admitted it. But, I would have to say that the present situation is one in which it is possible to say there is turmoil under the heavens, but the possibilities of progress in foreign policy are as good as they have ever been. Even though I am going to discuss problems, my basic theme is that the problems on our side of the dividing line in the world are soluble. The problems on the other side are systemic.

Let me talk first about the Middle East. There is no question that there is extraordinary turmoil in the Middle East. It is also significant that in the middle of this turmoil, all the significant Arab countries are turning to the United States to play the role of mediator. Until about a year ago, there

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was a so-called rejectionist front of Iraq, Syria, Algeria, South Yemen, Libya and a few other countries. The PLO had a kind of veto over the negotiations that might be going on. That situation has changed radically as a result of recent events. A number of things have become clear. First, it has been made clear that the Soviet Union can provide weapons to start a crisis but it has no means to end a crisis. The Soviet Union has been exposed as a paper tiger, incapable or unwilling to assist its friends in the area. Almost equally important, the new generation of American weapons has proved to be far superior to the newer generation of Soviet weapons.

The Soviet-supplied air forces and the Soviet-supplied missile defenses have been totally outclassed by the American equipment, an event of profound significance not only for the Middle East but for the political influence of a country whose only important economic export, whose only competitive export has been in the field of weapons. For all of these reasons, even the heretofore radical Arab states like Syria have come to the conclusion that they must negotiate through the United States if they want to achieve their objectives. This has happened at a period when the so-called oil weapon has lost much of its influence. This is partly because there is a surplus of oil, it is partly because the investments of many of the oil producing countries make it almost as dangerous for them to bring about a financial crisis in the industrial democracies as for us, and finally because the budgets of almost all oil producing countries are now such that with their development programs internally and with their inherent budgets, they cannot afford

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to reduce oil production for political reasons below a level
that they have already reached, and a level that is already
producing a surplus. The circumstances for a negotiation are
better than they have ever been. For this reason, the initiative
by President Reagan marks a seminal event in Middle East dip-
lomacy. I am not concerned that it has initially been re-
jected by all the parties, directly by Israel, indirectly by
some of the Arab countries. The fact is that nobody has
broken off negotiations. This very week, major delegations
are appearing in Washington to explore what technically they
haven't accepted and I'm very optimistic that if we persevere
and if stick to fundamental principles, that great progress
can be made over the next year. I think a number of principles
have been laid down or are implied that can serve as the basis
for a major advance. I would like to sum up some of them.

Gap here: something like: The first is that the West Bank + Gaza cannot remain under Israel; control. The second is that Jordan must be the negotiator. This must mean that Jordan is really the interlocutor and not The first is simply a cover for an organization like the PLO that has heretofore been supported by Soviet intelligence funds and by the most radical groups. Third, that while Israel must not identify security with annexation, it must not be asked to seek its security entirely in formalistic recognition by its neighbors. In other words, there has to be a strategic basis for it. At the same time, Israel must understand the importance of the dignity and the self-respect of its Arab neighbors. On this basis, I believe that a major progress, at least an interim solution, can be achieved. And I believe that the initiative taken by the Administration will in fact

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succeed, despite the ups and downs of the headlines of the
day. In these circumstances, the moderate elements in the
Middle East have the best chance since the collapse of the
Shah of Iran to become the dominant element and the dangers
of an economic crisis, having its origin in the Middle East,
are sharply reduced.

The biggest danger remains the threat from the fundamentalists
in Iran and from the radicals in each country that want to
overthrow existing institutions. It therefore has to be
clear, especially in the Gulf states, that the United States
supports the existing institutions, that it stands behind these
governments without the tendency for exuberant tinkering with
historical institutions that sometimes has been our trademark.
It is of course important that we persevere in the negotiating
process that I have described.

The second problem I want to discuss is East-West relations
with particular emphasis on Soviet trade. In talking about
Soviet trade it is important not to treat it as a purely
economic phenomenon. We deal in the Soviet Union with a very
curious kind of government. Here is a state that has created
one of the most powerful military machines in history and yet
it has managed to meet none of the consumer needs of its
societies. It is a superpower but there is not one single item
of export that has a technological component in which the
Soviet Union can compete on its merits with any advanced
Western society -- not one. Soviet exports are almost entirely

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to Eastern Europe, in its satellite orbit, or to the developing world where they are used as a means of payment for arms under unfavorable conditions. It is a state that has created a heavy industry that is both large and backward and that in the 65 plus years of its history has managed exactly three changes of leadership. The two first leaders died in office, the third was removed while he was on vacation without his colleagues and the fourth is trying to return to the early traditions. The Politburo, the ruling group of the Soviet Union, its equivalent to a board of directors, has an average of about 73 and, nevertheless, last year at the meeting of the Central Committee of the Communist Party, they were confirmed in office for another 5 years unchanged. Why? Because in the Soviet system, the obligations are personal, not constitutional.

Any significant change in leadership brings with it a massive upheaval all through the ranks of the Soviet bureaucracy with unpredictable consequences. But the Soviet Union is now facing not just one change of leadership but two changes of leadership.

In the history of the Soviet Union, each succeeding leader has been of an age group 10 years older than its predecessor.

Stalin was in his forties when he came into office. Khrushchev was in his fifties, Brezhnev was in his sixties, the successor to Brezhnev, whoever that might be, will be in his seventies.

And, when I say whoever that may be, I am willing to bet that not even Brezhnev knows who his successor is going to be because success in the Soviet Union is bureaucratic success and is achieved by masking your ambitions while you grab for power.

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In 1969, President Nixon asked me to give him a list of
possible successors to Brezhnev. I did so, and I must have
been reasonably accurate because every last one of them has
been purged, in the meantime. But whoever he is, he'll be
in his seventies. Then it will take him 2 or 3 years to
consolidate himself and, on the basis of actuarial tables,
maneuvering for the new succession is certain to start right
away, again. So we have two succession crises in an economy
that is a total mess. You cannot run a modern economy on the
basis of central planning. The more complicated the economy
becomes, the more difficult the planning is when managers
know neither their customers nor their suppliers,¹ it is in-
evitable that you have corruption, shortages, black markets and
surpluses, all occurring simultaneously. You keep reading in
the Soviet press about tractor factories that allegedly had
been built until they tried to take delivery of tractors and
found they didn't exist, of oil refiners carried on books that
were not in existence either. What can you do with an economy
in which you can lose a tractor factory and an oil refinery?
In short, a fundamental reform of the Soviet system is in-
evitable. ² The biggest danger of war is that the Soviet Union
may decide to clean up the external environment before it
turns to the domestic reform that Poland has made clear is
inherent in the problems of communist societies and that the
Chinese are attempting to deal with by reducing the role of
central planning, increasing the role of incentive and giving

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[d]

some scope for free enterprise.

When all is said and done, I believe that we are in a position
to prevent military adventures by the Soviet Union. This is
why it is important that the defense program, urged by the
Administration in its main outlines, is continued. It is also
important that we realize that a negotiation with the
Soviets will sooner or later be inevitable. But if it is
inevitable, we must not give away for nothing what the Soviet
Union should be negotiating about. We must resist the siren
calls of unilateral disarmament, in whatever guise they appear,
because far from bringing about disarmament, they will prevent
the negotiations that I think the 80s are certain to bring.
It is in this context that we must look at East-West trade.

I'd like to state a number of principles with respect to East-West trade. First, what the Soviet Union buys from the West are things it cannot get anywhere else. It is usually high technology, items with some kind of intellectual input for which they pay, if they pay at all, either in cash or in raw materials, both of which are hopefully <del>ir</del> replaceable elsewhere. Or else, they buy grain, which does not have an intellectual input, but which, if you look at overall grain markets, is not all that easy for the Soviets to replace elsewhere. Under these circumstances the fundamental decision for the West is whether it wants to give up its economic strength for primarily economic reasons, or whether it should bargain for some political

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concessions in return. By political concessions I do not have
overly ambitious aims. What I have in mind is a mutual reduction
of arms; a decision to keep the Red Army within the territories
of the largest land mass of any country in the world, namely
the Soviet Union, and the abandonment of support for terrorist
organizations that are designed to undermine the existing structure
including proxy troops in distant areas like Africa. For all
of these reasons, I think the Administration has asked the
right questions with respect to the pipeline. I do not believe
that the tactics by which we advanced our case will go down
in the annals of diplomatic history for skill and subtlety.

I do believe that the fundamental issue is valid and it is whether
we should extend special credits and concessional prices to the
Soviet Union under present circumstances and help solve their
foreign exchange problem while contributing to the economic
dependence of western countries without, at the same time,
having a political negotiation. I do not argue that we
cannot trade with the Soviet Union but I think we require
a careful analysis: first, of what trade is justified by
commercial considerations; secondly, we must avoid special
credits and concessional prices or we will bring about what
Lenin predicted 60 years ago -- that the capitalists would
one day fight among each other for the privilege of selling
the rope with which they are to be hanged. In fact we're
under danger now that only are we competing for the privilege
of selling the rope with which we are to be hanged, we are
even offering credits and cheaper prices to buy the rope

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[Lc]

with which we are to be hanged. So, special credits and
concessional prices ought to have a political justification.

A Third, there are some transactions which are justified even
on commercial grounds which add so disproportionately to the
strength of the Soviet Union that they too should be made
the subject of political discussions. There exists for
example, a so-called COCOM list in which goods of particular
strategic importance are theoretically not sold to the
Soviet Union in order to prevent the disproportionate
strategic strength. I have to tell you quite candidly that
I believe that the amount of grain we are offering to sell to
the Soviet Union belongs into that category. I think there
is rampant hypocrisy in Europe in their pretense that if we
did not sell grain they would not have the pipeline. This is
not true. They would have the pipeline anyway. I believe
also that some grain sales are justified, but unrestricted
grain sales, which is now the case, with a guarantee that they
are embargo-free, seems to me to be giving away one of our
principal assets too cheaply.

So, it seems to me that the industrial democracies ought to
get together to agree on a number of things. First, what
credits are appropriate to extend to the Soviet Union and the
terms on which they would be extended. And to make sure that
those credits are homogeneous and that there is not a competition
between the industrial democracies to achieve them. Second,
what strategic items should be on a strengthened list. Third,

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what level of grain sales is in the mutual interest, and at
what level we are unilaterally strengthening the Soviet
capacity to solve its domestic problems without facing the
fundamental issue of what they are going to do with their
economy. Their economy is now squeezed by the fact that they
cannot put more pressure on the consumers without returning
to the police state which will be very difficult. Their
economy does not generate the capital by itself. Their
governmental system needs overhauling. I believe that if
we stick to our guns we have an opportunity, in the foreseeable
future, for a fundamental change in East-West relations at the
end of which it is quite possible that there will be an
amount of trade unimaginable today, but in a world made safer
by substantial [red]isarmament, in a world in which there are
restraints on international conduct, and we must not give away
this opportunity by the industrial democracies competing with
each other on a short-sighted basis or solving their domestic
problems for electoral purposes or forgetting the great
opportunity that [x] before them.

Now let me make a few comments about another topic, quite
unrelated, which has to do with the developing countries
with especially the debt problem, some of the larger developing
countries, such as Mexico, Argentina, Peru, Brazil, Zaire --
they're not all of the same category. I'd like to mention
a few principles with respect to those to this distinguished
group which I am sure knows more about the subject than I do.

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All I can tell you is that when I was in office Secretary
Simon used to say that my knowledge of economics was one
of the best arguments against universal suffrage he had
ever seen. He proved his competence in politics by calling
the Shah of Iran a nut in the middle of the oil crisis. When
I complained about that he said, "You politicians always get too
excited. I'll fix it". So, he put out a statement saying he
had been quoted out of context. The poor Shah went to his
grave trying to figure out a context in which you could call
him a nut without offence. Let me talk about the debt problem
of these countries.

Without the contribution of the private banking system, the
tremendous rise in oil prices in the early seventies would
have led to financial catastrophe then. The recycling of the
OPEC surplus funds was a major achievement, primarily of the
private banking system. It, however, had a number of long-
term difficulties. One was the funds being lent were borrowed
short but lent long, which had the makings of a crisis. The
very magnitude made it difficult to get an overall approach.
Third, governments were reluctant to intervene because they
did not want to trigger a cut-off of the oil supplies. Moreover,
there was also the belief that governments had no right to
intervene in the essentially private transactions. All of
this led to this mushrooming of debts of which we find today's
symptoms in which some countries are unable to meet their
obligations. In more countries, the debts have become a major

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political problem, especially in conditions of worldwide
recession. There is another paradox. A default would hurt
everyone. Lending, especially private lending, must go on
and it has to be in excess of the interest that is due. It
cannot be simply a rescheduling of existing obligations because
there has to be an opportunity to start a level of economic
activity that permits these countries over a period of time
to make some progress towards solving their difficulties.

So the debate must not discourage private lending, especially
at a time when there is no hope of substantially expanded
governmental lending. This faces us, however, with a serious
problem. On the one hand, it would be a irresponsible and it
would compound the problem if funds were made available without
conditions. There has to be some conditionality which brings
some improvement in the economic conditions. On the other
hand, it is also a fact that these conditions cannot be defined
in purely economic terms. All conditions involve a degree
of austerity and austerity is tough enough in developed
countries. But in developing countries in which governmental
legitimacy is in itself often the issue, one has to be very
thoughtful about what can be demanded,lest in the process of
reforming the economy, one overthrows the governments or
creates a focal point for radicals against capitalism, free
enterprise, as has already happened in some developing countries.

I believe that the IMF must be strengthened not only in the
resources that it has available, but that it is imperative for
either the IMF of some institution yet to be created to analyze
not only the economic but the political conditions of development.

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So just as the industrial democracies have to get together
on East-West trade it is imperative that they get together on
analyzing the nature of the debt problem, not just in its
crisis manifestations, but in its long-term manifestations,
which means that they have to have some concept of what they
mean by economic development and some idea of how that is
related to political development. All of history proves that
the most fragile moment for political instability is at the
precise moment when economic conditions begin to change
drastically and existing institutions are weakened before new
institutions are put in their place. The developing countries
have to recognize that the major source for their development
will be private and not governmental, west and not east.¹ They
must recognize the relationship between economics and politics
as far as we are concerned. They cannot kick us around in
the United Nations and at the same time expect unlimited
economic support.

A number of dialogues are essential: between the industrial democracies, about the nature of development, the nature of conditionality, between the developing and the developed nations about the same topics. This is a huge agenda. It is an agenda, however, that is soluble and that the essence of which is primarily to be found in our own minds. As a nation it is not easy for us to deal with it. As a nation we have never had to conduct foreign and foreign economic policy on a consistent basis. As late as 1950, we produced 52% of the world's gross

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which meant that we could overwhelm every problem with
resources. We did not have to make priorities. Every
decade since then we have lost 10% of our relative position
in part because of the inevitable development of technology.
Whatever the reason, with some 20-22% of the world's gross
national product, we are now in a position where we have to
substitute thoughtfulness for raw power, even though we are
still the strongest country in the world. More now depends
on our assessment than ever before. More now depends on
our moral quality to make judgments before we can prove
they are necessary. When the scope for action is greatest,
as every executive knows, the knowledge on which to base
such action is at a minimum. When the knowledge is greatest,
the scope for action has often disappeared. We have to overcome
our reluctance to face the fact that we are in a long, probably
interminable, process in which it can never be said that
history has ended, our problems are solved. Every problem I
have mentioned here, while capable of solution, is also an
admission ticket for another set of problems. Yet, having
said all of this, I want to return to my original theme. There
is nothing I have said here today that with discipline,
imagination, and dedication we cannot solve. Our problems are
conceptual and political. What is more, many of them are on
the road to solution which is why I am a strong supporter of
the current administration. If you look at the other side of
the dividing line, every problem they have is systemic. It
cannot be changed without a change of their economic and political

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system.

A Chinese friend of mine has told me a proverb which I don't think you can ever be sure that they don't make it up as they are talking to you, but at any rate it says this: "When there is turmoil under the heavens little problems are dealt with as if they were big problems. Big problems are not dealt with at all. When there is order under the heavens, big problems are turned into little problems. Little problems are seen in their right perspective." Ladies and gentlemen, I would submit to you that with all the turmoil in the world, we and we alone have the opportunity to bring about order under the heavens.