# Kissinger: Seeking a Consensus

Henry Kissinger was back in Washington last week sorting out the agenda for his new bipartisan commission on Central America. Shortly after his preliminary meetings with Ronald Reagan and George Shultz, Kissinger talked with NEWSWEEK'S Henry W. Hubbard about his new job. Excerpts:

**On his appointment:** On July 9, Judge Clark called me up and said he would like to put forward my name to the president as chairman of a commission on Central America and how would I feel about that? I told him it was virtually impossible, and I hoped he wouldn't put me in a position where I would have to turn down the president... that it was an area in which I was relatively less familiar and that I didn't know whether a commission was the way to go at it. I also said I had so many other things to do. Those were the main points. The following Tuesday I was at a dinner with United Nations Ambassador Jeane Kirkpatrick, and she urged me very strongly to take it. I told her that I was reluctant. [On Wednesday] I had lunch with Shultz, arranged weeks beforehand. The conversation covered the waterfront, and at the end of it we discussed the Central American commission. He indicated some interest in it, but also that he understood my doubts about it.

[Later that day, at a meeting with Clark,] I told him that while I almost certainly could not take it there were a number of prerequisites for the commission. One, it had to be physically located in the State Department to make it clear that there was State Department pre-eminence; two, that the executive director should be a Foreign Service officer so there would be a flow of communication and no implication of a separate commission foreign policy. And third, I thought it was absolutely essential that the secretary of state not be just acquiescent but enthusiastic. This didn't have anything to do with me at that point. I was turning it down. These were not conditions. This was what I thought was required for an effective commission.

During the course of Saturday I decided I definitely would not do it. I called Clark to tell him. But ... he said he had just achieved the concurrence—the enthusiastic support—of everybody: Casey, Weinberger, Shultz, Jeane Kirkpatrick, the president.... He asked me to think about it overnight. On Sunday three things happened. [AFL-CIO president Lane] Kirkland made his participation conditional on my chairmanship. Shultz called me at great length to urge me to take it. He used

the rather subtle argument that as a friend he really had no right to ask me to undertake such a chore, but that as secretary of state he thought there was a great need.... About 6 o'clock, the president called. He said he had no second choice and urged me to accept. If you have been secretary of state, you really feel you have no right to tell the president that his conception of the need does not override yours. So I accepted.

**On the commission's policies:** My impression is that the president and secretary of state think that with luck it would do what the [social security and MX] commissions did. I do not believe it lends itself to quite the same treatment because the other two

commissions were working for a specific legislative deadline and dealt with a specific numerical content. This is a much broader field, and it does not point to any one decision; it will involve a series of decisions over a long period of time.

I believe it is in the overwhelming national interest not to have Central America turn into a major political issue—and this has been my theme when I called every member of the commission. It seems to me desirable to take Central America out of politics, whoever wins the election. Even if there is a change in administrations, a new president might well be grateful to have a bipartisan group on whose report he can rely so that he doesn't start immediately with a huge controversy. I think we really cannot afford, if we can avoid it, another searing debate like we had 10 years ago,

and this time about an area that is on our doorstep.

**On his understandings with Reagan:** Look, when you undertake a presidential assignment you cannot make a treaty with the president. ... I had a long talk with Secretary Shultz Monday evening, and that morning a briefer but very satisfactory and cordial talk with the president. Neither imposed restrictions, neither said, "We hope you stick to our policy framework." Nobody said to me, "Look, by the time you have to report, we may have a different ball game altogether." My impression is that we won't. They have said that what they want from this commission is a statement of middle- and long-range objectives. We agree that we should stay out of operational issues because we would create total confusion, and also we would be mixing into the responsibilities of the executive branch. Obviously the executive branch is free to accept or reject the commission's recommendations.

**On the commission's goals:** I would think that we would try to define what the objectives of America should be in the general area immediately south of us in its political, economic and social components, and that, of course, will have to include a security element. If my fellow commissioners agree, we will not offer tactical advice for the immediate situation. We will probably start at the other end of the telescope-and seek to define the long-term objectives. I don't want to give the wrong impression. I am generally sympathetic to the administration, but a bipartisan consensus is crucial for the solution of the Central American problem, and therefore the consensus of the commission is more important than my individual views.

**On the current military exercises:** I was not informed or consulted about the maneuvers before they took place, nor have I asked for that. I became conscious of these maneuvers the day after I was announced.... My general interpretation of the situation is that the administration is telling the truth about what it is doing. Obviously they want to send a message as to their capabilities. I don't find that incompatible with the charter of the commission.

**On his travel plans:** We're certainly planning to visit as a commission the whole area, including Nicaragua. We will have contact with the Contadora countries—all of course with the full knowledge of the State Department. And whatever contact we have will be of a fact-finding and under no circumstances of a negotiating nature. I had really not thought of including Castro. He is part of the reality, but not in a fact-finding nature. And seeing Castro is a political event. [Contact with] the Soviet Union is totally out of the question.

© Brian Basset—Seattle Times

Hitting the books: He didn't want to do it

NEWSWEEK/AUGUST 8, 1983

23

INTERNATIONAL

# Saving the World Economy

The challenge is not simply economic; at stake is the survival of free societies.

By HENRY A. KISSINGER

John Maynard Keynes wrote that practical men who believe themselves quite exempt from intellectual influences are usually the slaves of some defunct economist. Politicians these days certainly have many economic theories to choose from; most discordant, not a few of them defunct. No previous theory seems capable of explaining the current crisis of the world economy. Until recently it would have been thought impossible that prices could rise during a recession; that a system of relatively free trade and floating exchange rates could spur embryonic trade wars; that the developing nations, through defaulting on their debts, could threaten the economies of the industrial nations.

When reality clashes fundamentally with expectations, a political crisis is inevitable. That condition is upon us today. Since World War I we have expected progress. The historical business cycle of boom and bust seemed a relic of history. In virtually every Western nation the standard of living rose uninterrupted. Jobs were so plentiful that many countries encouraged the immigration of foreign labor. Although the developing countries lagged far behind, the more advanced among them—such as Brazil, Mexico and South Korea—were beginning to share in the seemingly permanent prosperity.

This illusion of uninterrupted progress was suddenly shattered in the middle '70s. There were many causes: the welfare state grew dramatically faster than productivity; inflation accelerated; high taxation reduced incentives; a generation of economic security eroded the work ethic. But what transformed these structural problems into a crisis was the more than tenfold increase in oil prices between 1973 and 1980. At first it drove inflation out of control and—when governments put on correspondingly severe brakes—it triggered global recession. Thirty million workers are now unemployed in the industrial democracies and their number continues to increase. The developing nations are crushed under the twin burden of debt and collapsing hopes of progress.

No government of an industrial democracy has survived an election since these conditions became chronic. Socialist or liberal governments in West Germany, Britain and the United States have been replaced by conservative ones; conservative governments in France, Greece, Spain and Sweden have been succeeded by socialist ones. The common feature is not the program of the parties but the condition of the societies: restlessness with a recession that seems to have neither remedy nor end; fear of a future to which there are no signposts.

If the peoples of the West lose faith that democratic governments have control over their economic destinies, the economic crisis could become a crisis of Western democracy. Each country will turn inward to protect its immediate patrimony, eroding

cooperation and paradoxically deepening the world recession. In a world of many perils, continuing economic weakness is likely to undermine the democracies' ability to conduct an effective foreign policy or to maintain their collective defense.

Historians will never settle conclusively whether the economic policies of the New Deal overcame the crisis of the '30s or delayed its resolution. But Franklin Delano Roosevelt has earned his place among our great presidents not because of his economic theories but because he restored confidence in the ability of our democratic institutions to master their difficulties. Today's crisis poses a comparable challenge. Now, as then, the first reaction is to cut consumption, reduce imports and expand exports. Now, as then, purely economic measures will not work.

In the first place, economic recovery through austerity almost surely will take longer than the citizens of most advanced democracies will tolerate; in the developing world, austerity may cause political chaos. More important, a remedy appropriate for the economic ills of one nation may prove self-defeating if applied by many nations at once. If many nations simultaneously reduce consumption and imports and boost exports, none can possibly succeed. Trade will be stifled, recession will be institutionalized and the risks of political instability compounded.

Before this downward cycle goes too far, the governments of the industrial democracies must reverse the process. They must promote economic growth, and they can do so only in coordination; solitary efforts are bound to fail.

If we do not act, we face many risks, including the loss of the relatively free international trading system that was the basis of postwar prosperity. Contrary to classical economic theory, a free trading system does not run itself; it requires a conscious act of political leadership. In the best of circumstances that task is formidable; deep recession makes it next to impossible.

## The Politics of Free Trade

In theory free trade benefits everybody. Tariffs and other trade barriers, it is said, encourage inefficiency, restrict commerce and lower the general standard of living. But the theory of free trade is rooted in a world that no longer exists. Adam Smith first advanced it in 1776, when Great Britain had a near monopoly in industrialization. Competition benefited some British industries and not others, but it did not affect Britain's total employment. As other nations industrialized (almost invariably behind temporary tariff walls), free trade prospered because there were abundant world markets and only a few key nations—no more than four or five—representing homogeneous cultures with comparable living standards operating by the discipline of the gold standard.

Illustrations for NEWSWEEK by Geoffrey Moss

46

NEWSWEEK/JANUARY 24, 1983

Today's world economy, by contrast, contains at least 20 significant trading nations of widely different cultural backgrounds with great variations in labor costs and standards of living, each claiming sovereign control over its economic decisions. In such conditions, competition became more ruthless and its impact more drastic. No longer does one sector of industry within one country benefit at the expense of another; rather whole industries decline simultaneously or even move from one country to another. The problems of our steel and automobile industries require no elaboration; very few television sets are still made in the United States. Many European countries with high expenditures for social welfare and inflexible labor costs are in an even more difficult position.

All political pressures and incentives of the modern democratic state work against the acceptance of the bitter medicine of government-sponsored austerity and cutthroat foreign competition. The loss of jobs sets up fierce pressures for protectionism. Nearly all industrial democracies—even while they give lip service to the ideals of free trade—have sought to nudge the terms of trade in a nationalist direction. Subsidies of exports, nontariff barriers to imports, guaranteed credits, as well as the manipulation of exchange rates become the order of the day. While one or two nations can occasionally manipulate the free-trading system to their advantage, the attempt by all nations to do so will surely wreck it.

The hope for recovery of a cooperative world order depends on the preservation of the free trading system. The industrial democracies must either agree to adhere to the principles of free trade—or else they will live in a mercantilistic world of unilateral actions and bilateral deals. At the same time, the free-trading system will not survive in a world of chronic recession. There is no hope of resisting the tide of protectionism unless the world returns to a path of economic growth.

But recovery will not take place if different countries in the industrialized world continue to pursue incompatible economic policies. America, as the strongest country, must take the lead. It cannot do so, however, in isolation. The industrial democracies must achieve an unprecedented coordination of their national economic policies. No single American initiative would more effectively reverse the deterioration of the Western Alliance than a call for a coordinated program to insure the general economic expansion of the free world. Nothing is more likely to encourage a sound political evolution in the developing countries than the hope that they may share soon in renewed growth. And nothing would more effectively strengthen our hand with our adversaries than the assurance that the democratic world has dedicated itself to the recovery of economic strength.

## Exchange-Rates Politics

Perhaps no other field so dramatically illustrates the changing fashions in economic theory and its growing incompatibility with political practice than the current system of international exchange rates. Throughout the 19th century currencies were stable; prices in 1914 were essentially unchanged from 1812. The gold standard gave political leaders an alibi for self-discipline. And even when the gold standard was abandoned after World War I, nations fixed their exchange rates by formal agreement.

As recently as 1969, fixed-exchange rates were still an article of

faith. I remember a meeting of cabinet-level officials when someone suggested a change in the value of the dollar. He was never given a chance to put forward his case. It was explained to him—with the forced patience of the exasperated—that the dollar as a reserve currency had to have a fixed value; indeed it was technically impossible either to revalue or to devalue it for all other currencies would simply follow suit.

Within a few years intellectual fashion had made a 180-degree turn. By 1973 a totally new system of floating exchange rates emerged from largely unilateral American actions. The new rules made possible—indeed encouraged—continuous changes in the value of all currencies. The value of currencies was no longer fixed; the market was supposed to determine it. No country, it was held, would tolerate an overvalued currency because it reduces the competitiveness of exports, or an undervalued one because it creates inflationary pressures. When the value of their currency changed, governments were expected to take immediate remedial action.

Unfortunately, practice belied theory; far from establishing discipline the floating system tended to erode it. When currencies weaken, exports thrive; for a country eager to sell abroad, the incentive to remedy this state of affairs is minimal. Some major trading nations—Japan is the prime example—have even been accused of deliberately maintaining an undervalued currency. Other countries have overvalued their currency to serve domestic policies. The United States, for example, has relied on high interest rates to fight inflation, thus boosting demands for the

dollar. The remedy was successful—at least in the short run—but the consequence was to drain the world's liquidity, reduce global investment, and to weaken the competitiveness of American products, both at home and abroad.

In short, unilateral decisions regarding exchange rates have profoundly affected the world economy and the well-being of many countries that had no part in them. Unpredictability encourages speculation; the system tempts imbalances instead of adjusting them. A

new form of nationalistic competition evolves, all the more bitter for never having to be made explicit; the floating system encourages the myth that governments make no decision at all.

An overhaul of the international monetary system is therefore a precondition to world economic recovery. Secretary of the Treasury Donald Regan's suggestions for reform are an important start; they need to be translated into specific initiatives. While a more fundamental reform is being negotiated, the central banks could in the meantime agree on a realistic range for permissible exchange-rate fluctuations and take action when relationships among major currencies move outside this range. Reform of exchange markets and practices is only a partial step. Monetary reform, like free trade, will not succeed without the coordination of fiscal and monetary policies to prevent the imbalances that give rise to the misalignment of currencies in the first place.

## OPEC's Ominous Legacy

Any serious effort to restore the world economy must come to grips with the massive debts of the developing nations and the threat they pose to the international economic and political order. There is a special irony here. For the better part of a decade, the developing countries have been insisting on a massive transfer

> Thirty million workers are now unemployed in the industrial democracies. The developing nations are crushed by debt and dashed hopes of progress. Economic recovery through austerity will likely be intolerable even to most advanced democracies; in the developing world austerity could cause political chaos.

NEWSWEEK/JANUARY 24, 1983

47

INTERNATIONAL

of resources in the name of what they called a New International
Economic Order. The industrial democracies have either rejected
or evaded the proposal. Now it transpires that a vast and virtually
unnoticed transfer of resources has in fact been undertaken by the
much-maligned capitalist banking system on a scale that not even
the most enthusiastic advocates of official aid would have dared
to propose.

The energy crisis of the '70s has turned into a parable on the fallibility of human foresight. Each party acting perfectly reasonably in response to immediate pressures nevertheless created an almost insoluble complexity. The oil producers, suddenly awash in dollars, placed their surpluses into Western commercial banks, usually in the form of short-term deposits. The banks, flush with resources unimaginable even a few years earlier, competed fiercely for long-term loans to developing countries—especially to the more advanced countries of Latin America. Governments encouraged the process of "recycling" the petrodollars in order to maintain the oil producers' incentive to pump oil and also to foster the economic growth of the developing world. The passiveness of government and the competitiveness of the banks solved an immediate problem by mortgaging the future. When the short-term deposits of the oil producers were converted into the long-term lending of the banks, the Western financial system became enormously vulnerable.

The industrial democracies have therefore wound up paying for

the energy crisis three times:
first in the inflation and reces-
sion induced by high oil
prices; then in the inflation-
ary pressures arising from the
massive extension of credit
to help developing nations,
and finally in the threat to
the Western financial system
caused by the inability of the
developing nations to repay
their debts.

The developing countries
face a comparable triple jeop-
ardy. First the rising oil prices
consumed most if not all of
the official aid extended to
them. Next the high interest
rates caused by the oil-price

increases made it impossible to repay the commercial debt that
served as a supplement to official aid. Now they confront an
austerity from which even stable oil prices may not be able to
extricate them. Falling oil prices help energy-importing countries
like Brazil; they spell potential disaster to overextended oil-
producing debtors like Mexico, Nigeria or Venezuela.

The wealthy oil producers are free of debt, but caught in the vicious circle as well. They have geared their development budgets to rising oil prices. Now that prices are stable and even declining, they are left with a budgetary deficit that they meet by drawing down their balances in Western banks. But this reduces the funds available to help the non-oil-producing developing countries through their debt crisis.

In 1982 interest payments alone ranged up to 45 percent of the total exports of goods and services of the developing countries. An attempt to repay principal—amounting to some $500 billion—would increase that percentage substantially. These figures spell a crisis. The debtor countries cannot possibly earn enough to meet their present obligations, at least for so long as the recession continues and probably for long afterward.

Creditors and debtors are thus bound together in a system in
which disaster for one side spells ruin for the other. The creditor
cannot cut the debtor off from further aid without risking not only

a banking disaster but also a deepening of the recession. The
developing countries, after all, absorb more than one-third of U.S.
exports (and more than 40 percent of the exports of the industrial
democracies). For the United States this is more than we export to
the European Community and Japan combined.

Because the debtors can never escape their plight unless they receive additional credits, the comforting view has developed that no debtor country would dare default and wreck its creditworthiness. Unfortunately political leaders march to a different drummer than financial experts. They see the political interests of their country through the prism of their own survival. If pushed into a corner, a political leader may well seek to rally populist resentment against foreign "exploiters." This will surely occur if the so-called rescue operation concentrates primarily on the repayment of interest. A blowup is certain sooner or later if debtor countries are asked to accept prolonged austerity simply to protect the balance sheets of foreign banks.

The key question thus becomes: what is the likely impact on the political structure of the debtor country of the conditions demanded for "rescheduling," or stretching out, their debt payment? At risk here is the internal political evolution of several developing countries, including many important friends of the United States. If the debt crisis winds up spawning radical anti-Western governments, the financial issues will be overwhelmed by the political consequences.

Of course it would be absurd for the International Monetary

Fund (IMF) to launch a res-
cue operation without seeking
to correct the economic prac-
tices that brought debtor na-
tions to the edge of the preci-
pice. But the conditions im-
posed must be relevant to the
real problem. How meaning-
ful, for example, is the com-
mitment to austerity of an Ar-
gentine military government
daily losing legitimacy and in
the process of turning over its
authority to civilians of a quite
different political orientation?
With the best of intentions,
can these targets be met? And
if not, what incentive does
such a government have to re-

frain from a politically popular repudiation of debt?

But the IMF conditions can be even more dangerous when they
are fulfilled. For then, the debtor country may undermine itself
politically. Western governments in economic trouble have occa-
sionally used conditions imposed by international lenders as an
excuse to practice an austerity that domestic politics might other-
wise have prevented—Britain in late 1976 is a good example. In
most developing countries, however, prolonged austerity is bound
to shake, perhaps to shatter, the legitimacy of political structures
that are the principal expressions of national cohesion and
identity.

Few debtor nations have unemployment insurance or other institutions that in the West cushion the social impact of economic downturns. A policy of forcing developing countries to reduce their standard of living drastically over a long period is likely to weaken precisely those moderate governments that are the most likely to accept Western advice. If pushed too far it risks provoking radicalism that will rally public opinion (and perhaps other debtors) by defying foreign creditors. This must be the opposite of the West's intent.

Existing international arrangements are hardly well-designed
to recognize this danger, much less deal with it. The principal
institution for overcoming the liquidity and repayment crisis of
the debtor nations is the IMF. But the IMF's original purpose was

10

48

NEWSWEEK/JANUARY 24, 1983

to lend to individual countries that found themselves in temporary
difficulty. The IMF has performed this function admirably. But
the IMF was not designed to deal with a crisis of the system
affecting scores of debtor nations simultaneously.

As country after country admits its inability to pay even
interest—and therefore renounces any immediate prospect of
repaying capital—the IMF will quickly discover that it does not
have the resources to rescue the entire developing world. But even
an increase in its resources—and in recent weeks the United States
has thrown its weight behind the effort to beef up the IMF’s
available funds—cannot cure the inherent contradiction in the
IMF’s basic strategy. As a condition for its assistance, the IMF
almost invariably insists on measures that have the effect of
contracting the economy, increasing unemployment and reduc-
ing consumption, in order to slow imports and shift resources to
exports. The problem is that IMF conditions cannot work if
applied at the same time in many countries, particularly in a
period of global recession.

Above all, austerity in a developing nation is politically
bearable only if rapid progress can be shown toward an escape
from the vicious circle in which debt service consumes export
earnings. The heart of the problem is that the current rescue
effort pretends to "solve" a debt problem that is in fact insoluble
in the immediate future. In the process it does provide an excuse
for banks to continue lending. But our real objective must be to
promote a sustained process of growth in the developing world;
without it, all the frantic activity of rescheduling is simply
delaying the inevitable crisis.

The first step must be to
change the bargaining frame-
work; the debtors should be
depriRED—to the extent pos-
sible—of the weapon of de-
fault. The industrial democ-
racies urgently require a
safety net permitting some
emergency governmental as-
sistance to threatened finan-
cial institutions. This would
reduce both the sense of panic
and the debtor’s capacity for
blackmail. At the same time it
would permit a more fars-
sighted approach to the debt
crisis focusing on the long-
term growth of the develop-

ing world. Simultaneously, new crisis machinery should be cre-
ated. The IMF needs an early-warning system and advance
consultation among the principal lenders so that crises can be
anticipated and prevented. But in the end the issue is psychologi-
cal. The debt problem is the symptom, not the cause, of a structur-
al crisis. The developing world must be given hope for a better
future if it is to sustain the immediate and inevitable austerity
without convulsions.

The Challenges to America

Only America can lead the world to rapid economic recovery, and we cannot fulfill this role without a long-term economic strategy. The free market is the most successful mechanism of producing prosperity and freedom. But the free market alone will not overcome the present economic crisis. The government must play a crucial role. We need clear decisions in at least two crucial domestic areas relevant to foreign policy.

The first is energy. There are powerful national-security rea-
sons for reducing our dependence on foreign oil, and with it the
risk of blackmail. But with oil prices stable or declining, there is
little incentive for the large investments needed for systematic
development of alternative sources of energy—even though it is

all but certain that within the decade the energy crisis will
return. When the recession ends, demand will increase; the
Persian/Arabian gulf has surely not seen its last political convul-
sion. In addition, some oil-producing countries will deplete their
reserves. The oil glut is temporary, a breathing space for the
democracies to insure themselves against future crises. Since
current market conditions do not encourage the necessary in-
vestments, the government should provide the incentives to
encourage alternative sources—as well as creation of strategic
oil reserves.

Similarly if we are serious about free trade, we have an obliga-
tion to cushion some of its harmful consequences on our people.
International competition and automation can no longer be
counted on to create more jobs than they abolish, as theorists used
to assure us. High unemployment may in fact become chronic
even after the recession ends. And as unemployment reaches the
white-collar labor force, discontent may spread to the middle class
whose frustrations have historically been the breeding ground of
extremism and rampant nationalism. If we prize either domestic
or international stability, a conscious strategy to ease the adjust-
ment process is therefore imperative—including programs of
retraining, emergency assistance, and tax incentives and other
measures to encourage the flow of resources to the sectors with the
most potential for growth.

Finally, it is not too early to prepare a fall-back position, in
case we and the other industrial democracies fail to coordinate
our economic policies; we may then have no choice except to

prepare to insure our com-
petitive survival—deliberate-
ly and systematically—in the
rough new world of unilater-
al trade practices and bilater-
al arrangements that is sure
to follow.

This agenda will require a
major change in the role of
our government. Govern-
ment, industry and labor
must act as partners in setting
the broad outlines of a nation-
al strategy, which should
then be maintained on a bi-
partisan basis. Of the indus-
trial democracies only Japan
has managed this tour de
force, and its national strate-

gy is one reason for Japan's competitive edge in world markets.

In the immediate postwar period the Marshall plan saved the
European democracies by offering the vision of a better world.
Sacrifice was sustained by hope. The United States faces a compa-
rable challenge today, both toward the industrial democracies and
toward the moderate countries of the developing world. Clemen-
ceau said that war is too serious an affair to be left to generals. By
the same token the current global economic crisis is too grave to be
left to financial experts. The political and moral impetus to restore
hope to Western economies must come from the heads of state and
their foreign ministers. For the stakes are high: whether the
economic system as we have known it will hold together—as well
as the political relationships that go with it. The next economic
summit at Williamsburg—or perhaps a less public forum—could
serve as the launching pad for a new policy.

Nearly two centuries ago the German philosopher Immanuel Kant predicted that eventually world order would come about either through intellectual and moral insight or through the experience of chaos. We are still in a position to make that choice. If the United States does not lead, we will sooner rather than later be confronting a panicky stampede. If we seize the initiative, we can draw from uncertainty and incipient despair an act of creation. And this, after all, is how almost all great creations have come about.

NEWSWEEK/JANUARY 24, 1983

49

[Y]

12/14/82

For much of the period since World War II the non-Communist world experienced unprecedented growth. The cyclical nature of economics seemed to be overcome. Cheap energy, new markets, modest inflation combined to bring about a prosperity increasing seemingly without upper limit; the scourge of unemployment seemed to be ended in the advanced industrial societies; indeed many of them imported foreign labor for the more menial and less stimulating tasks. The developing countries lagged, of course, far behind. But even there in the more advanced cases--nations like Brazil, Mexico, Indonesia--seemed to be heading for what economists called self-sustaining growth.

This idyll ended by the middle Seventies. There were many causes: domestic demoralization resulting from excessive materialism; social welfare increases far beyond the growth of productivity; and above all the nearly twenty-fold increase in oil prices. By the end of the Seventies recession was global; advanced industrial countries practiced austerity; the developing

2

nations weighted down by debt saw hopes for progress disappear. Unemployment, thought banished forever, returned cruelly. The crisis of our period concerns not only the issue of war and peace; it has shaken the economic and political foundations of the post-war economic order.

I shall not discuss here the economic remedies--if any-- for this state of affairs. I will concern myself with one fundamental point: The crisis is not technical but structural; it requires not a technical but a strategic approach. If left untended for too long it will undermine the cohesion of all democratic societies and with it their ability to conduct an effective and coherent foreign policy or to assure over the long term their own security.

An augury is the fact that no democratic government in office when the fall of the Shah ushered in a doubling of oil prices has survived the intervening period. Left wing, socialist or liberal governments in Germany, Britain and the United

LY

3

States have been replaced by conservative ones; Conservative governments in France, Spain or Sweden have been overthrown by socialist ones. The common feature is less the program of the parties than the condition of the society; restlessness with a recession which seems to find no solution; fear of a future that has no signposts. If the condition is not mastered soon, political disorientation can only grow. Governments must be perceived as regaining control over the economic destinies, as being able to chart a course for the future or they will lose their authority; demagogues of the radical right or left will increasingly dominate the political landscape.

I sympathize with those who argue that one cause for the state of affairs is that increasing governmental intervention stifles initiative; that devoting a constantly growing share of the national product to national purposes causes societies to live beyond their means. Still it seems to me essential to recognize that the necessary reforms will deal with only

4

part of the problem and perhaps not the most important one.

The energy crisis though in abeyance is sure to return. Modern
technology can produce the paradox of increasing productivity
leading to lowered employment. Though most of industrial history
output could be increased only by a rise in employment. Only
in recent decades has the opposite taken place. Improvements
in technology tend to make a large part of the labor force
redundant. The trend of automation is towards increasing
productivity while reducing the labor force. Social welfare
legislation making it difficult or costly to replace workers
has often an effect opposite to what is intended. Unemployment
therefore threatens to become congenital; strikes occur with
increasing frequency as workers seek to hold on to jobs made
obsolescent by new technology.

And all these tendencies are accentuated by world
economic structure which increasingly works counter to a
fundamental solution. The difficulties listed above cannot

5

be overcome simply by removing the debris of past mistakes
on a national basis or by the market alone. An act of economic
statesmanship is required for which deliberate decisions by
governments are necessary.

The structural problems of the international economic
order include the nature of the international financial system;
the *need* to redefine free trade under contemporary circumstances
and the relation of advanced to developing societies, especially
the "middle class" of developing countries like Brazil, Mexico,
Argentina, the countries of Southeast Asia, South Korea.

The nature of the international financial system. Throughout
the 19th century currencies were stable. The value of money
in 1914 was essentially unchanged from 1815. International
trade could therefore be conducted in predictable and--as far
as currencies were concerned--nonspeculative patterns. The
mechanism for achieving this stability was the gold standard.
So long as currencies had to be backed by gold there was an

6

automatic regulatory mechanism. Countries were physically
unable to live beyond their means, when gold started flowing
out adjustments were imposed on governments nearly automatically.
Whatever the economic merits of the gold standard it had the
enormous advantage of automaticity. Governments did not have
to make deliberate decisions of economic adjustment; it was
imposed on them; they had, so to speak, an alibi for self-
discipline.

After World War I more and more countries abandoned the
gold standard to regain a greater margin of decision over their
economies. They fixed their exchange rates by governmental
agreement and only indirectly in relation to gold. But what
was fixed by agreement could be undone by unilateral decision;
devaluation became an act of policy not the consequence of
automatic adjustments. The consequence was a temptation to
export domestic difficulties to other countries which in turn
sought the same objective. The attempt to achieve control

7

over the national economy had the paradoxical result of making
the international economy nearly unmanageable.

After World War II a new financial system was created
at Bretton Woods. It did not return to the gold standard but
it sought to fix exchange rates more systematically and it
provided emergency sustenance absent in its earlier phase.
Nations could still devalue their currencies thereby spurring
exports and discouraging imports. But it required a formal
decision and the acquiescence of other countries (which had
the option of negating the devaluation by following suit).
The international financial system still imposed a measure
of discipline.

All this ended when the system of fixed exchange rates
was abandoned in 1973 for the floating system. According to
it countries abandoned attempts to fix the value of their currencies
by agreement; they would let the market determine the value
of the currencies. Theoretically this was supposed to restore

8

the automaticity of the gold standard. Practically it removed
most restraint on the temptation to export a country's problems.
Goverments could let their currencies weaken to gain an
advantage for their exports; or they could encourage strengthening
them to attract foreign capital. If sufficiently disciplined
their central banks could even bring about this result by purchasing
or selling foreign currencies as Japan is alleged to be doing
in strengthening the dollar against the yen, thus making up
in lower export prices for whatever gains in productivity we
might be achieving. All this can be done nearly imperceptibly
and ascribed to impersonal market forces. Under the system
of fixed exchange rates devaluation or revaluation was a political
decision which had to be negotiated. The floating system encourages
the myth that no decision is involved at all; a kind of economic
warfare develops all the more bitter for never being made
explicit. The result is that deteriorating economic conditions
can be obscured until they erupt into nearly unmanageable

9

crises. The resulting unpredictability encourages a kind of speculation that accentuates economic swings exaggerating both the upper and the lower ends of the economic cycles. Over time it discourages healthy international trade and investment. Especially in times of crisis it compounds uncertainty and thus inhibits recovery.

I am not suggesting a return to the gold standard. It may even be possible that a return to the Bretton Woods type of fixed exchange rates is impractical. But it is imperative to restore some discipline and predictability and automaticity. To the international financial systems. A mechanism that imposes discipline is essential. A new Bretton Woods arrangement is needed. Secretary of Treasury Regan has hinted as much; it must be made explicit on the basis of specific U.S. initiatives.

If we seek to avoid the formality of Bretton Woods the central banks could agree on permissible fluctuations of exchange rates--in effect a modified system of fixed exchange rates. But this

10

could succeed only if the governments of the individual
democracies were prepared to coordinate their monetary
policies --an imperative imposed in any event by the current
crisis.

**The Problem of Free Trade:** It is a rarely questioned
shibboleth that free trade benefits everybody. No country,
so the argument goes, can possibly be strong in every
conceivable area of economic activity. Specialization is the
key to competitiveness; competition weeds out the weak and
insures that rewards go to the most productive. Tariffs and
other trade barriers reward inefficiency, restrict commerce
and lower the general standard of living. The experience of
industrialization of the late 19th and early 20th century seems
to confirm these premises. The current international trading
system is based on them.

Nevertheless it is open to question whether these premises
reflect either practice or reality. The free trade of the

11

19th century was based on a very few players from homogeneous cultures with comparable living standards practicing the gold standard. Then indeed it was not possible for every participant in the economic system to excel in every significant category. Even then the rise of Germany and the United States undoubtedly impaired Britain's growth. But the current world economy contains some fifteen to twenty significant industrial societies of widely different cultural backgrounds. Technology is, however, homogeneous. In these circumstances it becomes increasingly difficult for countries with high labor costs--for example Western Europe--to compete with countries whose wage rates may be less than half. It becomes nearly impossible for developing European countries like Spain or Greece or Yugoslavia to industrialize when faced with the competition of for example the countries of Southeast Asia. Even in the most advanced countries like the United States, entire sectors of manufacturing have disappeared. Very few television sets, for example, are

12

made in the United States. Thoughtful observers have argued
that we should specialize on the service industries.

That cannot, however, be an acceptable policy for a great
country. It is difficult to imagine a country maintaining
preeminence in services over a historical period while the
center of industrial activity moves elsewhere. In any event,
the decline of the manufacturing sector would bring about social
and political changes that would fundamentally alter the
character of American society and politics. The result will
be that in every country similarly threatened the pressures
for protectionism will grow over time to unmanageable proportions.
This will be especially true if the economic adjustments are
left to market forces for the market cannot possibly react
rapidly enough to handle the substantial redirection of resources
that free trade will surely impose on the industrialized
countries especially of Europe and North America.

13

We will thus be confronted with two possibilities: either a gradually uncontrollable growth of protectionism or a conscious strategy of growth in which government, industry and labor work in a partnership that of the industrial democracies only Japan has managed. The market cannot do it automatically because executives of obsolescent industries are not hired to accelerate their demise and because individual units cannot be expected to develop a national strategy of growth much less an international one.

On the other hand if present trends continue the decline in the competitive position of too many industrial democracies will accelerate. Our principal national obligation is to put forward rapidly a concept of how to arrest this trend. The currently fashionable theory which prescribes austerity as the cure cannot be true. The practice of austerity by one country can arrest its economic decline. The practice of it by all

14

industrial democracies is a definition of institutionalized
depression. Everybody cannot limit imports and spur
exports simultaneously without throwing the world economy into
stagnation. No democratic government can survive the
current uncertainty much longer. If we want to lead what we call
the free world we need a strategy of growth, of redirecting
resources into competitive areas. Nothing would reverse the
current malaise in the democracies more than a clarion call
by America to economic expansion and a program to achieve.
Nothing would strengthen our hand more in East-West
negotiations.

It is not however a problem only of growth in the
industrial democracies. For the North-South problem has
finally come home to roost not in the abstract issue of
whether the rich can thrive in a world of poverty but on the
problem of indebtedness which threatens the financial
stability of the advanced societies.

15

North-South Relations - The Debt Problem

The dimensions of the problem are self-explanatory.

The debt of the more advanced industrialized countries
amount to ____ billion dollars. The service of the debt
takes close to 50% of Brazil's exports; ____ of Mexico's;
____ % of Zaire's; ____ % of Peru's. Some major banks
have more than 100% of their assets in foreign debt. None
of the major debtor countries have any prospect of repaying
the principal of their debt; most have trouble meeting
interest payments. The potentiality of a massive international
financial crisis are self-evident.

The origin of this state of affairs goes back to the
energy crisis starting in the mid-seventies. The oil producers
suddenly awash in dollars--since that was the currency in which
the price was denominated--deposited most of their surpluses in
Western banks in the form of short-term deposits. The banks
flush with resources unimaginable even a few years earlier

16

lend it out long term to developing countries--especially
the advanced among them like the key countries of Latin
America. Competition encouraged secrecy to make it
difficult for any one bank to gain an overall view of the
dimensions of the process. Governments were reluctant to intervene
partly because of a commitment to market economies; largely
in order not to reduce the incentive of the oil producers
to pump oil.

The result was an instability of the international
financial system that threatens catastrophe:

a. The fact that the banks borrowed short term and lend long term created an inherent instability. When the income of the oil producers was high the banks had an incentive to lend compounding global consumption and inflation. When the income of the oil producers declined unexpectedly the banks were forced to retrench driving up interest rates at the precise moment that the international recession limited

[y]

17

the ability of the debtor to service the debt, let alone
repay the principal. And the resulting imperative of the
debtor nations to curtail their imports deepened the
recession in the creditor nations and thereby made the debt
problem even more intractable.

b. This process prevented a coherent view of the
magnitude of the problem and of the ability of the debtors to
repay. The process could in fact be sustained only on the
theory of continuous inflation enabling the debtors to
repay in cheaper currency. When under the impact of domestic
pressure and orthodox economic theory, the major industrial
nations chose a deflationary course the debt problem was
bound to become unmanageable.

c. The industrial democracies thus paid for the
energy crisis in three ways: in the inflationary pressures
of the higher oil prices; in the inflationary pressure
of the massive extension of credit to the developing nations;

18

in the compounding of the recession caused by the debt problem. The victims of the rise in oil prices compounded their difficulties by assuming the risk of lending out the exorbitant cost of their energy bill.

This is not to blame the banks for pursuing their economic interest. In fairness they were encouraged to "recycle" the petrodollars as a means of sustaining energy supplies. Attempts to construct safety nets for just such contingencies as have now arisen were aborted by advocates of a kind of free market theory that saw in the future a linear progression of the present and made no allowance for the possibility of radical changes in circumstance.

But my purpose is not to judge the past. It is rather to discuss the adequacy of the remedies.

The conventional wisdom is that the way to avert catastrophe is to strengthen the International Monetary Fund by enhancing its resources and encouraging it to step

19

into crisis situations. As country after country admits
the inability to pay interest--and therefore renounces any
immediate prospect of repaying capital--the Fund is asked to
step in. In return for providing the resources to service
the debt it imposes financial discipline in the form
of specific conditions. These inevitably involve a drop
in consumption, a reduction of the public debt, in short
austerity. Governments sign a letter of intent defining
these targets and in return are given funds to pay at
least part of the interest due.

As an emergency measure there is no other choice.
As a permanent feature of the international economic
situation the cure may compound the disease.

There is no doubt of the importance of avoiding default;
the consequences for the financial order of a major renun-
ciation of debts would be catastrophic. Yet we must make
sure to avoid palliatives that will produce an even worse
crisis later on.

20

For one thing lending in which debtors add to their debt to pay interest can go on only so long. Their only incentive to do so can be to become "credit worthy" so that they can borrow more than the interest due. Only this will enable them to expand in restart their economic activity and thus escape the vicious circle in which exports are consumed by debt service. But that is precisely what is inhibited by high interest rates, global recession falling oil prices and the new-found caution of the Western banking system. Sooner or later some leader is bound to point out that the Emperor has no clothes; that there is no point in borrowing to protect distant balance sheets and by threatening default force a settlement on terms far more favorable than any now contemplated.

Of course the debt service problem would lose some of its urgency if the recession were to end decisively while interest rates continue to fall (unless this is

[Ly]

21

a contradiction in terms). For that would spur the exports of developing countries and ease though not end the danger of default. It is one of the reasons why a policy of growth cannot be delayed.

Even more serious is the nature of conditionality imposed by the IMF. Of course it is absurd to imply that a rescue operation for debtor nations can be launched without seeking to remedy some of the circumstances that lured them to the edge of the precipice. The problem is whether the conditions may not reflect the same overemphasis on short-term economic factors that produced the crisis.

The worst debt problems arise in countries with the most tenuous governmental processes (Brazil may be a notable exception). What is the significance of their commitments?

How firm, for example, is the assurance of an Argentine military government daily losing legitimacy and in the process of turning over its authority to civilians?

22

With the best of intentions can these targets be met?

And what if in say two years the economic conditions have not improved? Is another rescue mission then conceivable?

There are thus two contradictory dangers: the first is that the IMF conditions not be met. But the opposite danger may be more insidious still: that a major effort is made to fulfill the conditions.

For the most searing problem in almost every developing country is not economic; it is political. Most industrial democracies were nations before they became states. In developing countries exactly the opposite is true. The state often has to form the nation; its legitimacy is the principal unifying bond. Occasionally Western nations have used IMF conditions to bring about an austerity it would have been difficult to impose as a result of the domestic political process--Britain in the winter of 1976 is a good example.

23

But in most developing countries austerity has quite a different significance. The fewest of them have unemployment insurance or other institutions which in the West cushion the impact of economic downturns. Austerity in most developing countries threatens legitimacy; in short it may be the harbinger of revolution. It cannot be in our interest to solve the debt problem by promoting radicalism--however good our intentions.

Two conclusions follow: the first is that IMF conditions should transcend economic criteria. A forum or personnel must be found that tests them against the overriding necessity of political stability and progress in the developing countries.

Secondly the terms of the discourse must be redefined. The symptom of the crisis is the debt problem. But the cure is less to find the means to service it than to bring about an expanding world economy. Only this can overcome

24

the debt problem and the danger that the debtors organize
their respective weakness to blackmail the industrial
democracies by embracing radicalism. Only this can create
a world of hope rather than of incipient catastrophe.

And such a course is imperative as well for the recovery
of the industrial democracies, thirty percent of whose
exports, after all, go to the developing world.

America's Opportunity

America's opportunity is indeed its necessity. At
home we cannot wait for automatic market forces to bring
about a major recovery. We need a strategy that gives
hope to our people not in the sense of governmental intervention
into daily market decisions but by setting priorities
for a five to ten year period. This cannot be accomplished
by any industrial democracy alone; not even by one as
powerful as the United States. In 1977 the view was that
the Federal Republic of Germany and Japan should act as

25

the locomotives of the world economy. That did not work.

Today most of the other industrial democracies wait--
more or less passively for an American economic recovery.

That will not work either. A joint effort is needed for
economic, psychological and political reasons. Most of
our foreign policy problems with our allies would be eased
if we were perceived as the leaders of an effort of global
recovery.

The next economic summit should therefore be confined
to two topics: Recovery in the industrial democracies
and expansion of economic activity in the advanced developing
countries. The two topics are integrally related. It
is time to abandon the myth that all developing countries
can be grouped in a single global negotiation. Countries
like Brazil, Mexico, Spain, Yugoslavia, the ASEAN countries,
South Korea are their genesis. They are halfway between
underdevelopment and advanced industrialization. They

26

are on the verge of self sustaining growth. As they develop,
moreover, they will raise new problems of competition
for the existing industrial states imposing on them the
need for a long-range industrial policy, lest they seek
refuge in protectionism and mercantilism.

It is a daunting assignment. But in truth we have
no choice. If we do not lead we will sooner rather than
later be engulfed in the chaos of a panicky stampede.
At the same time we can draw courage from the fact that
many of our problems arise from an excess of productive
capacity. That cannot be an insoluble problem in a world
of need and straining for hope.

REAGAN AND THE RUSSIANS

# How to Deal With Moscow

The causes of tension are real, but so are the opportunities for peace—if we are bold enough.

By HENRY A. KISSINGER

The leadership change in the Soviet Union—only the fourth in its 65-year history—has produced much speculation about new opportunities for a breakthrough toward peace. In an age haunted by the threat of nuclear catastrophe the hope is as natural as it is necessary. Unfortunately some of the fashionable expressions of optimism are a familiar refrain heard at all previous successions. The new Soviet leader, it is said, appears to be more flexible and conciliatory than his predecessor (in this case it is because he supposedly likes Western music and reads English, hence understands us). We must strengthen, we hear, the “doves” against the “hawks” who were alleged, even in Stalin’s day, to have been menacing the “reasonable and sensible and understanding” incumbent Soviet leader.

There are indeed new opportunities for peace. The 1980s may well give us a chance to make major progress with the Soviets on arms control, economic relations and, ultimately, even on developing some ground rules for international conduct. But Yuri Andropov’s fondness for American novels and Western

fantasies about intrigues between hawks and doves in the Kremlin are not the sources of these opportunities. The arms race imposes dangerous uncertainties and staggering financial burdens on both parties, but especially on the Soviet Union. The recession in the West and economic stagnation in the communist world may compel both of us to re-evaluate our high levels of military spending as well as to seek mutually beneficial economic cooperation. And the increasing complexity of a world filled with regional tensions reminds both sides of the necessity of cooperation, lest a minor crisis explode into a major one, as it did in 1914.

The prospects for accord are not enhanced—they are in fact undermined—by the congenital Western tendency to psychoanalyze the personality of a particular Soviet leader or to search without evidence for some faction in the Kremlin allegedly devoted to peace in the abstract. I do not pretend to know what

Yuri Andropov’s convictions are; I am certain that nobody in our government knows either. Only a few short weeks ago Western experts were nearly unanimous in the view that Brezhnev was the principal advocate of détente in the Kremlin—a theory to which, with qualifications, I myself subscribe. Why then should his death improve the prospects for a relaxation of tensions? How did the man who headed the Soviet secret police for 15 years—suppressing dissidents and inventing such “humane” devices as mental hospitals for intellectual critics—suddenly emerge as a closet liberal?

Even if Andropov were such a man, the power of the general secretary of the Communist Party, as it has evolved since the death of Stalin in 1953, is far from absolute—especially at the beginning of his term of office. In many fields of policy it is doubtful, in fact, that the general secretary has the discretionary power of the American president. His colleagues are suspicious, hardened by the power struggles of a lifetime. They are jealous of prerogatives that they have earned so painfully in their progress through the unwieldy bureaucracies they now control. Andropov can nudge them in his preferred direction, but any dramatic change endangers his position: Khrushchev’s fate defined the risks of unorthodoxy for his successors. Brezhnev, in any event, never seriously tested these limits.

To base hopes for relaxation of tensions on changes in leadership undermines the very real

opportunities for diplomatic progress. It tempts the Soviet leaders into deferring the fundamental re-examination of their priorities and strategy without which the real causes of tension will continue unrelieved. And it demoralizes the democracies by trivializing the issue. We cannot ask our people to sustain the exertions and perils of a prolonged struggle if the outcome appears to depend so much on the idiosyncrasies of whoever happens to be in power in the Soviet Union.

The beginning of wisdom is therefore to recognize—as Secretary Shultz did in last Thursday’s press conference—that there are objective causes of tension. In the last seven years we have seen Cuban troops supported by Soviet logistics in Angola and Ethiopia; Soviet military bases in South Yemen; Soviet military

equipment pouring into the rogue state of Libya; a communist coup in Afghanistan followed by an invasion by the Soviet Army; Soviet political and military support for the Vietnamese occupation of Cambodia; and Soviet intelligence support for terrorist groups in many parts of the world. All this has been buttressed by the Soviet Union’s relentless military buildup, begun long before that of the Reagan administration.

This is not to deny our own mistakes: our rhetoric has occasionally been exuberant and unrelated to sustainable strategy, our actions have sometimes been unilateral and uncoordinated with our allies, and above all we have allowed divisions both within and among the free nations. It is possible to explain this or that Soviet move as a reaction to our moves; it requires either wishful thinking or a special form of masochism to find the preponderant fault on our side or to ignore the consistent pattern of Soviet conduct which, whether by design or momentum,

Helmut Sonnenfeldt

Kissinger with Brezhnev (1973): ‘Soviet negotiators make concessions to what they define as the balance of forces, not to personalities.’

30

NEWSWEEK/NOVEMBER 29, 1982

threatens the global equilibrium. It is this assault that must be
ended if there is to be true progress toward peace.

Any serious effort to improve relations with the Soviet Union must therefore begin with an analysis of realities—those that impede progress as well as those which, properly managed, offer reason for hope. Among the factors that make for tension, ideology still plays an important role. This may sound surprising in view of the widely reported cynicism of much of the Soviet population. Nor am I suggesting that Lenin is read at bedtime by Soviet leaders as a guide to the next day's actions. The impact of ideology is more intangible: ideological élan has been replaced by an orthodox interpretation of reality; personal conviction has given way to a kind of rote impetus to undermine Western democracies and the international equilibrium. To a Leninist, peace is neither a personal affirmation nor a static condition. It reflects "objective factors"—the balance of power, the state of the economy or technology. No Soviet leader, for example, can justify concessions on the basis of the personal good will or sincerity of a Western leader. Soviet negotiators make concessions to what they define as the balance of forces, not to personalities. They understand concrete proposals based on reciprocity; unilateral gestures are likely to be interpreted as a trick or as a confession of weakness. It is no accident that those presidents most eager for an improvement of relations, most prone to personalize their diplo-

macy and most resistant to the
concept of balance of power
suffered a shipwreck with the
Kremlin; while those presi-
dents who were least senti-
mental and insisted on strict
reciprocity were the most suc-
cessful. Absent a balance of
forces *and* a concrete Western
program for peace, all pres-
sures within the Soviet society
make for a continuation of the
present course, if only as a
result of philosophical and in-
stitutional rigidity.

There are some American conservatives in both parties who luxuriate in the myth of diabolic Soviet planners implementing a detailed master plan for world revolution. No one who has actually dealt with the top Soviet leadership has encountered such types. If they exist, they are well hidden from foreign visitors. The leaders one in fact encounters are tough, ruthless and persistent. But they have originated

no profound initiatives; they have usually avoided great risks. They have expanded into vacuums created by irresolution or weakness. They have systematically accumulated power not in support of a predetermined plan for aggression but rather because the notion that there may be an upper limit of usable power is foreign to them, and instinct leads them to believe that strength is directly translatable into bargaining position and political advantage.

Bureaucratic inertia reinforces ideological proclivity. The irony of communist systems is that they contain the seeds of Bonapartism. For the sole organizations outside the Communist Party with autonomous command structures are the armed forces and the paramilitary units—some 200,000 men strong—of the KGB. One way or another the armed forces emerged as balance wheels in the struggles among the hierarchs of the party; in Poland they have become the heirs of its disintegration, in the Soviet Union the head

of the secret police has taken over. Since no one can achieve
eminence—much less the top spot—without military or paramili-
tary support, these forces are in a position to exact constantly
increasing resources. The growth of Soviet military power is built
into the system—if only as a result of internecine power struggles.
If not matched by the West, this military expansion will inevitably
create temptations for blackmail since communist ideology has no
rationale for *not* exploiting a favorable power balance.

Only overriding necessity can alter this rhythm. Fortunately such conditions are likely to appear during the '80s. If Western policy is firm and creative, the Soviet leadership will have every incentive to consider alternatives. For one thing, Soviet foreign policy has not been a startling success. It has been said, and not only as a joke, that the Soviet Union is the only country in the world entirely surrounded by hostile communist states. The satellite orbit is an economic drain and in Poland a demonstration of political as well as economic bankruptcy. Afghanistan is a festering wound. China—whatever temporary tactical adjustments are made—is in the long term a geopolitical nightmare as its billion people modernize along a distant, dis- puted frontier 4,000 miles long. Lebanon has shown the near irrelevance of Soviet power and influence in the Arab-Israeli conflict. The Soviet adventure in Africa has led to no break-

through. Growing pacifism in some European countries is balanced by the advent of a conservative government in Germany and by declining communist strength in France and Spain.

Moreover, the Soviet Union will not be able to evade much longer the contradictions between the necessities of a modern industrialized society and the rigidities of the communist system. What institution in the West could survive with no method for replacing a governing board whose average age is over 70? Where there is no constitutional procedure, loyalty goes to the person, not to the office; power is exercised in a ruthlessly competitive struggle for survival. Leaders dare not relinquish the positions that ensure their power and subordinates dare not urge change because their personal fate is tied to their patron. The trend is toward gerontocracy. It is no accident

that each successive general secretary has come from an age group
10 years older than his predecessor. Stalin was in his 40s when he
succeeded to office; Khrushchev was in his 50s; Brezhnev was in
his 60s by the time he eclipsed Kosygin; Andropov will be at
least 70 before he consolidates his power. His rule will be
shadowed from the beginning by the relative imminence of a new
succession.

The Soviet system is also an economic disaster. To run a large modern economy by central planning is to institutionalize backwardness and inefficiency. Ironically, the attempt to achieve total predictability leads to near-absolute arbitrariness. Where managers can choose neither customers nor supplies, all incentives work the wrong way. Managers deliberately underestimate their capacity lest the failure to reach an ambitious target reflect on their political reliability. Since they cannot influence allocations except by bureaucratic maneuvers outside the economic process, they

James L. Long Associates

MX-missile launch: 'The West could be heading for unilateral disarmament while sitting on the most destructive arsenal the world has seen.'

NEWSWEEK/NOVEMBER 29, 1982

31

REAGAN AND THE RUSSIANS

ment of the Soviet Union without insisting on some linkage to restrained geopolitical conduct? But tying sanctions to Poland only obscured this more basic issue, which would have had to have been confronted whatever happened to Solidarity. The promised studies of the East-West trade problem can lead to a more unified strategy of economic diplomacy only if our allies do not use them solely to gain time to tranquilize us and if we, for our part, are prepared to include measures that will require sacrifice from us as well, such as limiting grain sales. Both arms control and trade policy need to be freed of the penchant for spasmodic one-shot action and must be made part of a coherent national-security strategy.

The United States must learn to combine military strength with a strategy for peace. A positive diplomatic program is the prerequisite for maintaining public and allied support for a strong defense and foreign policy. It could help us avoid the danger that our body politic will be torn between peace movements advocating forms of escapism and official policies neither supported nor understood by our public. Alternating bellicose rhetoric with sudden concessions only raises doubts about our

steadiness among supporters and will be dismissed as mere tactics by opponents. The United States should not be reluctant to make the opening move. Every successful East-West negotiation in the postwar period has resulted from American proposals. Conservative critics cite this as a sign of the West's tendency toward appeasement. And it is true that the free countries' impatience with deadlock enables the Soviets occasionally simply to sit back and elicit even more favorable Western offers. But this is particularly true if the public debate turns on whether to negotiate at all.

If, however, we pre-empt the negotiating process with a bold program, we have a chance to dominate both diplomacy and public discussion. Soviet bureaucratic rigidity is hostile to imagination—in diplomacy as in other fields. Not infrequently they are better placed to respond with a

counterproposal than to originate an offer. We should seize every opportunity to put before them negotiating proposals that reflect our definitions of genuine arms control, proper economic relations and restrained international conduct. It can only be to our advantage to negotiate from our agenda, not theirs.

Thoughtful, concrete proposals prosper better in quiet diplomacy than in dramatic public presentations that invite a propaganda battle. We must persevere in them for the time it takes to test the real, not the propagandistic, Soviet reaction. They must reflect a clear view of our own purposes, including what we will not accept. Our policy must be based on strength to discourage adventurism yet at the same time offer a vision of a better world for all peoples, including the peoples of the Soviet Union.

At home this requires an armistice in the debate that has rent our country for over a decade—between those extreme conservatives who reject all negotiations as a trap and every agreement as a

surrender and those extreme liberals who insist that most of our dangers are self-induced, to be remedied by unremitting pressure on our own government. The administration has the obligation to put forward an intelligible strategy for dealing with the Soviet Union. Until now it has alternated intransigent assaults on a caricature of the détente policy of the 1970s with sweeping gestures better suited to fend off pressures than to achieve any permanent result.

But while the administration—as all new administrations—could benefit from greater coherence, it deserves recognition for having created the building blocks of a promising foreign policy. Its firm tone has prevented major Soviet challenges. Beneath the often exuberant rhetoric, the administration's actions have almost invariably been restrained and responsible. The major need is to relate the pieces to each other and to place them under unified strategic and tactical control. There exists, then, every reason for reconciliation.

Without reconciliation there can be no continuity. Without continuity we risk growing irrelevant. Americans do not always understand to what extent our freewheeling process of arriving at decisions unsettles those who have staked their political survival on us. When a foreign statesman follows our lead, he ties his reputation to our judgment. When we reverse course, we in effect undermine him. This happens almost across the board when

administrations change and, too frequently, even within administrations. The history of SALT and of various weapons deployments is replete with examples of key foreign leaders having been left high and dry by sudden and unilateral American reversals of positions. Over time they will seek to free themselves of such risks, thereby reducing our influence and pushing us to the sidelines.

It is equally crucial and more difficult to create a consensus among allies. Right now the allies are divided over the assessment of Soviet conduct, military strategy, important aspects of arms control and many issues outside the NATO area. These divisions invite the Soviets to apply détente selectively in order to split the West so that it can avoid having to face its own dilemmas. It is in fact conceivable that Soviet leaders can project Western disintegration

as a mirror image of Soviet trends described earlier; in that case they will seek to outwait us.

Whether this happens is largely up to us. The West is in the fortunate position that its problems—major as they are—almost without exception can be remedied by a new effort of unity, coherence and will on the part of the democracies. The Soviet Union cannot make this claim; its problems are systematic, structural and fundamental. If we can rally ourselves and develop a vision of a better future, a broad and comprehensive East-West negotiation could be within our grasp.

Henry Kissinger was national-security adviser to Richard Nixon from 1969 to 1975 and secretary of state from 1973 to 1977. In two subsequent NEWSWEEK articles, he will discuss in more detail what a Western negotiating position might include and the political implications of the global economic crisis.

Tass from Sovfoto

Soviet mini-bus factory: 'Shortcomings in Soviet technology cannot be remedied by pep talks; they require a structural change in the Soviet economy.'

NEWSWEEK/NOVEMBER 29, 1982

37

# Straight Talk From Kissinger

[LC]

Henry A. Kissinger was back on the diplomatic circuit last week. Taking time out from his book-writing chores, Kissinger met with French President Valéry Giscard d'Estaing, German Chancellor Helmut Schmidt and British Prime Minister James Callaghan, and delivered a lecture in West Berlin on "International Perspectives in the 1980s." NEWSWEEK'S Arnaud de Borchgrave began an extensive interview with Kissinger before he left New York and completed a total of more than seven hours of conversation in Paris. It was Kissinger's toughest and most detailed critique of the Carter Administration's foreign policy since he left office two years ago. Excerpts:

**DE BORCHGRAVE:** President Carter recently said that U.S. prestige was low when he took over because of Vietnam, Watergate and CIA wrongdoing and he is trying to rectify the situation. What is your reaction?

**KISSINGER:** I regret it when the President as a national leader speaks as if history began when he was inaugurated. It makes bipartisan support very difficult. It confuses foreign leaders who didn't think U.S. prestige was low in 1976. Certainly not in the countries that mattered. It misconceives the problem. Many foreigners raised questions over Vietnam because we lost, over Watergate because it was inexplicable to them how a country could tear apart its Executive authority, and over CIA investigations—not because of what was discovered but because of the dismantling of an institution for no purpose whatsoever. The basic credit for overcoming the legacy of the Watergate era should go to President Ford.

**Q. How severely have we harmed our counterintelligence capability?**

**A.** We have seriously damaged our entire intelligence capability and I don't believe that what was discovered in the investigation warranted the wanton assault which took place. The effective dismantling of our covert capability is a calamity. I want to make clear, however, I am not justifying the actions that led to Watergate.

**Q.** Some critics suggest that one of our biggest problems is that new, younger policy planners in the Carter Administration think that any pro-Western leader, especially in the Third World, is probably not worth having as a "iend. Any leftist or Marxist leader, however, assumed to enjoy the allegiance of the people. Is this hurting?

**A.** There is to me inexplicable self-hatred that denigrates everything we attempt and despises those who associate

with us. This was compounded by the President's Notre Dame speech, for example, when he said he would free our policy from the inordinate fear of Communism which had characterized it in the past. What were allies of the U.S., who had worked with us for a generation, to think? Had they become dispensable? Did our new attitude toward Communism weaken our previous commitment? These uncertainties account for some of the strains of the past year. We must take care not to erode the distinction between allies and neutrals.

George Walker—Gamma-Liason

*'Russia will press to the limits of its strength'*

**Q.** Soviet leaders appear to believe that the era of U.S. predominance is ending and that of Soviet supremacy beginning. What can be done to change these perceptions?

**A.** We clearly cannot accept the idea of Soviet supremacy. This would create so much chaos and uncertainty that it would threaten our own immediate security. Nor can we accept the proposition that the Soviet Union has the right of unlimited intervention, directly or by proxy, in every part of the world while in the name of relaxation of tensions we do not react. In other words, I believe in linkage. Russia must choose between expansionism and relaxation of tensions. It cannot have both ... Free peoples cannot survive if Moscow conducts a geopolitical policy while the U.S. has a stagnating policy.

**Q.** Even more important than the nuclear equation is conventional power and the political will to use it. Isn't this a critical advantage for the Soviet Union?

**A.** For the greater part of the post-World War II period we could defend most threatened areas by our nuclear superiority ... For a variety of reasons, that superiority has eroded ... That means that we and our allies must have a capacity for regional defense inside and outside the NATO area. If we don't develop this, then in the '80s we're going to pay a very serious price. The first installments are already visible.

**Q.** Détente, in Soviet eyes, seems to be continued U.S. retrenchment in the wake of the Vietnam defeat and acquiescence in Russia's geopolitical objectives. Hasn't their understanding of détente become the current coinage of appeasement?

**A.** Détente, properly conceived, is a necessity ... We cannot resist expansionism unless our people are convinced of our dedication to peace. We should have learned in Vietnam that we cannot sustain confrontation unless public opinion is convinced of its necessity. We have to demonstrate that we have made every reasonable effort to avoid a crisis. But détente must not lull us into complacency, slackened defense efforts and unwillingness to consider geopolitical consequences. Otherwise détente will turn into appeasement.

**Q.** Given President Leonid Brezhnev's latest "hands off Iran" warning to the United States, what risks do you see there?

**A.** The Iranian situation is a tragedy for the West. The Shah is a leader who on every critical foreign-policy issue has been totally on the side of the West and who has been a stabilizing factor in every crisis in the area. Beyond formal documents, it was a very close coordination of our respective foreign policies. The Shah never interrupted the flow of oil to anybody for political reasons. His economic-development program was a great success. He moved his country from feudalism into the modern age. The Shah is paying the price of modernization: he is being attacked by those who think he moves too fast and by those for whom he is not moving fast enough. Brezhnev's statement occurred when there had been no U.S. military move of any kind. It was gratuitous and provocative.

In this context, our own answer was not very strong. I don't think it came across as a ringing affirmation of a commitment to a country that is so vital to us or as a warning to the Soviets not to

56

Newsweek, December 11, 1978

INTERNATIONAL

middle in Iranian affairs. It almost sounded as if we were declaring Iran an area of neutrality.

**Q. Is the United States, then, to blame for events in Iran?**

A. Much of the turmoil stems from the ocess of development. There are, however, three areas of U.S. responsibility: (1) The geopolitical decline since Vietnam has demoralized friends and emboldened enemies; (2) the human-rights campaign, as now conducted, is a weapon aimed primarily at allies and tends to undermine their domestic structures; (3) the assault on the CIA has deprived us of crucial information and vital tools.

**Q. By signing some twenty agreements with the Soviets in 1972, you thought you could weave them into a web of mutual interest and temper their behavior. Since then we've seen defeat in Indochina, then Angola, Ethiopia, Afghanistan. What went wrong?**

A. This is much too simple. In 1972 we were in the middle of Vietnam and in 1974 in the middle of Watergate. What went wrong was our domestic difficulties. We cannot ask the Soviets to restrain themselves if we deliberately emasculate ourselves. Between 1972 and 1974, the Administration certainly dug its own grave. The CIA investigations did not have to be conducted in so flagrant a manner. The Vietnam defeat was almost entirely a U.S. domestic affair. The Congress cut aid to Vietnam by 50 per cent in each of the peacetime years at a time when Hanoi was flagrantly violating the agreements.

Under those conditions, no peace agreement could ever be maintained. In the context of this weakness, some challenge was inevitable. It happened in Angola. That could and should have been contained. When it was not, Ethiopia followed as the next step. That sequence shook confidence in us not only in Africa but also in the Middle East. So I think the Soviet Union will certainly press to the limits of its geopolitical strength. That is its nature as a great power and as a Communist power. It's our responsibility to create the necessary counterweights.

**Q. You once said that those who give an exaggerated estimate of Soviet power do a disservice to the United States. The total number of Warsaw Pact tanks shot up from 43,000 to 50,000 in the last year alone. The Soviet Union is now shipping more military hardware to African countries than France, Britain and the United States combined. Do you still feel the same way?**

A. That comment was made with respect to Soviet strategic power. Russia has engaged in a massive buildup of its military forces which, if projected into the '80s and unmatched by the West, is bound to create a grave political weakness. This, in turn, is bound to be transacted into political benefits for the Soviets. Either the Soviet buildup has to be stopped or we have to build up our own armed forces.

> 'Détente must not lull us into complacency, slackened defense efforts and unwillingness to consider geopolitical consequences. Otherwise, détente will turn into appeasement.'

**Q. If we were spending 15 per cent of our GNP on defense, as the Soviets are now doing, our economy would be on a war footing. What should we do to force Russia into a credible reversal of its ongoing buildup?**

A. Moscow has to understand that we are determined not to fall behind in an arms race. They cannot possibly win an arms race against the U.S. Our technology is far superior to theirs. Secondly, we have to prevent geopolitical expansion in its early phases when it is most ambiguous and when there is least proof of its consequences. If we had succeeded in preventing the Cuban action in Angola, there would be no Cubans in Ethiopia or in other outposts today. It cannot be accepted that the Soviet Union sends its planes to Cuba to free Cuban planes for service in Africa or other trouble spots ... If the Soviet Union is prepared to operate on acceptable principles of peaceful coexistence, then I think we should be generous and flexible in our response. But we cannot permit a gradual expansion by proxy forces which are being freed for overseas service by the redeployment of Soviet forces.

**Q. You have compared Soviet-Cuban-East German interventions in Africa to the expansion of Germany prior to World War II, an expansion that owed its success, you said, to the paralysis of those whose mission it was to contain it. How can the Soviets be contained?**

A. In 1936, when the Nazis reoccupied the Rhineland, one French division could have stopped them and the world would still be arguing today whether Hitler was a misunderstood nationalist or a maniac bent on world domination. One always has to balance moral certainty against insufficient knowledge. At a time when the scope for action is greatest, knowledge is usually at a minimum. When knowledge is greatest, the scope for action has disappeared. If one wants absolute moral certainty, one may pay a horrendous price.

In 1975, I was concerned with Angola because the first appearance of Cuban proxy troops thousands of miles from their Caribbean home, unopposed by the U.S., created a new reality that was bound to have serious long-term consequences. The take-over of Afghanistan ... produced yet another new reality. I'm not saying we can change all unfa-

vorable trends everywhere. But, at a minimum, we must demonstrate that we understand the problem, and where we cannot affect a situation directly, as in Afghanistan, we can attempt to give courage to neighboring countries like Iran and Pakistan so that these friends have a sense that the U.S. is aware of their perils and ready to come to their assistance.

**Q. Do you believe that Moscow plans to acquire control over West Europe's twin jugulars in the Persian Gulf and Southern Africa in order to induce reflexes of appeasement and the neutralization of West Europe?**

A. I'm not sure that it's all that clearly articulated. Basic Soviet strategy is to achieve a maximum degree of influence and the gradual reduction of our own world position. The Soviets are very good at accumulating power, and power, in turn, creates its own reality. Therefore, the long-term impact may well be what you describe.

**Q. Soviet officials have been saying in private conversations with Americans that we should practice unilateral restraint in the development of new weapons systems in order to help the doves in the Kremlin against a rival faction of hawks. Do you buy that?**

A. No. If you look at the history of debates about Soviet intentions, almost invariably there has been a tendency to describe the top man in office in the Kremlin as a dove assaulted by some unnamed dark forces in the wings. We must conduct foreign policy, not psychiatry. A sound policy must be based on strict reciprocity. We will obtain no concessions for services already rendered—like the cancellation of the B-1 bomber or the neutron system.

**Q. Won't a new era of détente with Russia, as advocated by the Administration, foreclose the Chinese option?**

A. In this triangular relationship we have to be very careful not to be tempted by one side or the other into foreclosing our options. We must maintain an option toward both sides. It is not détente as such that will foreclose our Chinese relations; it would be the way détente is conducted, especially if Peking perceived it to constitute a Soviet-American partnership. At this point, it's not yet clear to me exactly what the Administra-

Newsweek, December 11, 1978

61

(L)

Mon is aiming at in its relationship with
the Soviet Union. That will be deter-
mined by how the new SALT treaty is
presented. In other words, will we insist
on some linkage or will we consider
SALT an end in itself?

Q. How do you feel about Western arms sales to China in general and U.S. ones in particular?

A. An increase in China's defensive capability, which would make invasion of China more difficult, is in our interest. This could be done by assisting in the transfer of technology or by some other methods. I certainly would not get in the way of our European allies who want to sell defensive weaponry to China.

Q. Carter's critics say that in Rhodesia we are guilty of undermining a compromise reached by black and white leaders and that we are facilitating a take-over by two Soviet-backed guerrilla leaders. Do you agree?

A. We have an interest in a moderate
solution in which the races coexist in the

them from Cuban and Soviet support. The theory is that these people are nationalists and that once they've achieved their objectives they will repeat what Sadat did in Egypt in 1972 when he expelled all Soviet military advisers. But this was after we had faced down the radicals in a series of crises in 1970 and had refused to adopt their program.

Q. Has Ian Smith lived up to his part of the bargain he made with you in 1976?

A. The issue should not be posed in those terms because conditions have changed. The plan has been implemented in its formal aspects. On the other hand, the premise of the plan was that Joshua Nkomo would participate in the government, so in one sense all its premises have not been fulfilled. Nkomo, while not inherently a radical, has now shifted to the Soviet-Cuban-East German camp because he perceives it will be the victor in southern Africa. His natural inclination is to become Prime Minister of Zimbabwe and he is lining

Q. Why are pro-Western blacks with large followings dismissed as Uncle Toms while guerrillas who terrorize their own are given the respectful label of "liberation forces"?

A. I cannot psychoanalyze the motives but I would recommend that we watch our language a little more carefully.

Q. Isn't one of the problems the assumption that when dictators fly leftist colors they must be standing for human progress?

A. The problem is whether you dam up radicalism by embracing radical programs or whether you dam it up by creating moderate alternatives. I believe the latter is the correct way. Others believe you fight it most effectively by co-opting radical policies as the wave of the future. I think this feeds radicalism.

Q. Soviet spokesmen are criticizing us for abandoning the joint U.S.-Soviet aim of a comprehensive Arab-Israeli settlement in favor of a separate peace. Do you think Camp David was the right approach?

A. Yes, in the sense that it represents a solution by stages. I always thought that a comprehensive settlement under the Geneva formula with the Soviets as chairmen would give a veto to the radicals. It would not advance a solution because it would produce a deadlock and make another explosion much more likely. Look at the problems that the Egyptians and Israelis encountered on just one agreement. On the Middle East, I would give the Administration high marks. The basic strategy is correct.

Q. What would be the consequences of a separate peace between Egypt and Israel?

A. I think Sadat was right in trying to establish linkage with the next phase of the negotiations on the West Bank and Gaza. Now that the Israelis have accepted the principle—and are only holding back about the date of elections—all that seems to be left is to work out details. I can't believe it will fail on this issue.

Q. Should Jordan's King Hussein get involved in the next phase on the West Bank?

A. King Hussein has established a very complex and astonishingly good relationship with all the other Arabs, including the radicals. I can understand his reluctance to get involved without having some precise idea of what is going to happen. He might well conclude, for example, that an election on the West Bank will produce a PLO majority unless he represses them, and that would expose him again to all the perils he faced so courageously in 1970. I'm confident that once Hussein sees an evolution that opens up the way for a moderate settlement, he will join in the negotiation. I have great confidence in his judgment on this.

Q. If Sen. Jacob Javits retires from the Senate in 1980, will you enter the race?

A. I expect Javits to run in 1980.

Q. And if he doesn't?

A. I don't want to answer that.

'On the Middle East, I would give the Administration high marks. The basic strategy is correct . . . [Camp David was the right approach] in the sense that it represents a solution by stages.'

future. We must prevent another African
problem being "solved" by Cuban
troops and Soviet guns or we will lose all
capacity to affect events...

The strategy behind the so-called Kissinger plan was to bring about majority rule in Rhodesia while preserving minority rights and thus preventing the disaster of a racial conflict. The new U.S. team saw the problem somewhat differently. Their theory was that the best way to prevent yet another crisis being solved by Cuban troops was to take over the cause that the Cubans have been backing. They thought that would assure that the radical program would be limited; in fact, it made the radicals more assertive, without in any way diminishing their reliance on Cuban and Soviet support, which has actually increased. We should not support the proposition that only those who are prepared to go to war can determine the conditions of peace.

Q. I have personally heard Robert Mugabe say his forces won't stop fighting until they have imposed a one-party Marxist dictatorship. Why do some of our top officials still seem to favor guerrillas over moderates?

A. They believe that by supporting
radical groups, the U.S. can separate

up with those forces that seem to him
most promising. In a way, he is being
radicalized by the absence of a balance of
power. The U.S. should not throw all of
its weight behind those whose chief
claim is that they have Soviet arms and
thereby lose all incentives for restraints.

Q. What would be a proper policy toward South Africa in the years to come?

A. It should have three objectives: (1) to make South African institutions more compatible with widely accepted norms of human dignity; (2) to do so without a racial war; (3) to achieve this within a period of time that is relevant to the aspirations of the majority. It can be done only by giving the white minority a sense that we understand the dramatic challenge change will bring. It must have a sense that the beginning of its adaptation is not the beginning of its total collapse. It requires an understanding that a policy of confrontation with South Africa is tantamount to a policy of fomenting race war. Cyrus Vance, for whom I have the highest regard, showed a keen understanding of all these complex issues on his recent visit to South Africa. But so many domestic pressure groups want confrontation and conflict.

62

Newsweek, December 11, 1978