14

creditor banks. I'm convinced that the U.S. money center banks, no matter how they may protest along the way, will in the end be willing to provide the necessary additional credit. Our regional banks are a source of more uncertainty, but I think in the end most of them will also cooperate and the system will somehow compensate for those that do not. I'm less certain in my own mind about the European and Japanese banks (that together represent 60 percent of the credits to these countries), although my colleagues tell me that, in the end, the Japanese and European banks will also be willing to provide the roughly four percent a year increase in nominal debt —in other words, maintaining the real value of their loans to these countries.

Dr. Feldstein then turned to the particular case of Brazil —"the toughest problem on the near-term horizon"—to illustrate his general point.

Brazil has a debt of about $100 billion against a GNP of $250 billion, so its debt/GNP ratio is about 40 percent. With a nine percent interest rate on its debt, its annual debt service is between 3.5 and 4.0 percent of its GNP. Debt service requires that exports exceed imports. Exports in Brazil are about $25 billion. In 1985 it had an export surplus of more than $12 billion, more than enough to service all of the interest on its current debt, but not in a way that was consistent with sustained, long-term growth.

The government of Brazil has insisted that the package that comes out of the current round of negotiations be consistent with possible seven percent real growth in the years ahead—certainly a high rate of real growth, but one that is consistent with Brazil's stage of development and its own past performance. They have indicated that that means limiting annual debt service to about 2.5 percent of GNP. That means that the banks and multilateral agencies together would have to provide new credit equal to about 1.5 percent of Brazil's GNP, or about $4 billion a year, of which the banks would probably be responsible for about three-quarters. In other words, behind the very tough rhetoric is the demand from Brasilia for about $4 billion more of new loans per year, an increase of four percent which in real terms is no increase at all.

Continuing down this road—limiting net debt service to 2.5 percent of GNP—over the next several years would cause Brazil to need less additional

new money each year, and a time would come when the 2.5 percent of GNP would be more than enough to meet its entire interest obligations. But even before that happened, somewhere out in the middle of the next decade, I think Brazil, if it continued down this path, would have voluntary access to the credit markets.

I have focused on Brazil, but I think the situation is similar in the other major debtor countries—some better, some worse. In the aggregate, restoring growth requires banks to lend about four percent of the existing amount of their loans, or roughly $12 billion a year—about 50 percent more than called for in the Baker plan. I think this lending is going to occur and that more drastic measures can be avoided.

This kind of muddling through with a little more effort and goodwill is not a very exciting proposal to offer you. It doesn't have the intellectual appeal of a neat plan to restructure liabilities and forgive debt, nor does it have the dramatic appeal of the crisis and repudiation stories that some would imply are just around the corner. But as of now I'll stick with muddling through and modest debt expansion as the most promising way to achieve satisfactory economic growth and the eventual return of the debtors to the financial markets.

Hervé de Carmoy

Hervé de Carmoy, European author of the report, set forth a different view. He proposed a more dramatic departure from current practice—"a long-term structured view combined with a case-by-case approach." His view rests partly on a more pessimistic macroeconomic and "macro-political" outlook.

In macroeconomic terms we have to see that overall economic activity is slowing down. Measured against the price of manufactured exports, non-oil commodity prices in 1986 were lower than in 1985 and are at their lowest level in 50 years. Although nominal interest rates have fallen, the real cost of borrowing for developing countries increased in 1986. Public and private long-term debt and financial flows were negative in 1986, even more than in 1985. Protectionist measures have grown relentlessly. And per capita income in most heavily indebted countries has declined significantly. What is the

15

macropolitical situation? Many governments face
mounting pressure to weaken their commitment to
adjustment policies, although some determined
action has taken place. The assumed willingness to
pay must be increasingly questioned, with a lesser
disincentive to default.

Mr. de Carmoy recognized the diversity of cases among
debtor countries, which "justifies a case-by-case ap-
proach." But to restore adequate growth, he argued, a
broader initiative is needed, including "significant capital
resources, a way to improve efficiency in the investment
process, a combined approach of all creditors, a long-term
approach, and a contractual approach."

Mr. de Carmoy's proposal was set out in detail in an ap-
pendix to the San Francisco draft. In his opening remarks,
he nicknamed it the "Three Cs":

1. Capital. Up to $30 billion a year should be made available to 17 heavily indebted countries to generate six percent growth. (The World Bank estimates that $20 billion a year is required to achieve a four percent growth.) These funds should be provided in a Trilateral way—from the United States, Japan and the EEC—by commercial banks (one-fourth), multilateral lenders (one-fourth), and governments (one-half).

2. Commitment. The commitment should have three characteristics: it should be a long-term commitment, a shared commitment, and a contractual commitment. A long-term commitment: ten years is of the essence for the implementation of the kind of policies required and time is also required for institutions to change the way they act. A shared commitment: it has to be shared by the banks (a price has to be paid for the fallacies of the past, and also the banks have the staff resources and know-how to promote growth), by the multilateral agencies (because they have a wealth of experience accumulated over thirty years), and by governments (because a trillion dollar debt impacting on the lives of hundreds of millions of people is a geopolitical problem). Finally, it has to be a reciprocal commitment: indebted nations will need to commit to legal, fiscal, economic and regulatory policy changes, and these changes will have to be monitored.

3. Character, which etymologically, from the Greek,

means "imprint." An "Action Committee" is needed
to administer the fund and agree on the structural
reforms with debtor countries. The Action
Committee would have a supervisory board com-
prised of key officials of the United States, Japan and
Europe (to provide effective political leadership)
and a managerial staff of no more than 100 action-
oriented individuals. Such a committee could have
an umbilical cord to the World Bank.

To those who are potentially opposed to this ap-
proach, remember that restoring growth in the debt-
laden countries is the highest aspiration in these
countries. It is also vital to the Trilateral countries to
cement fragile geopolitical linkages and to restore
the strength of the financial and trade system. So we
should negotiate for it. We should sacrifice for it. We
should innovate for it.

Koei Narusawa

Koei Narusawa, the Japanese author, reflected on the evo-
lution of the crisis since 1982. There has been an imbal-
ance "between the adjustment policy pursued by debtor
countries and external finance provided by the creditor
nations from official as well as private sources." Too
much weight has been put on the adjustment side, while
the flow of new money dwindled and then reversed. "The
forgiveness of past debt," Mr. Narusawa argued, "is both
unnecessary and counter-productive." But in order to
avoid such an "alternative and more damaging scheme"
for reducing the burden of debt, "we have to find a new
initiative enabling the creditors to continue to provide a
certain amount of new credits to the debt-laden
countries."

One problem is divergent accounting practices and
taxation systems (particularly in regard to write-offs
and provisions for loan-loss reserves) and bank reg-
ulation among the Trilateral countries. This makes
coordination and cooperation among commercial
banks in the Trilateral countries extremely difficult.
So I see a pressing need to make some sort of har-
monization or standardization of these rules and
practices.

Mr. Narusawa recognized "the heightened role to be

16

*played by Japan as the largest surplus and creditor nation of the world.*

I'd like to stress that we are very much mindful of the need to step up our efforts to recycle capital to the needy countries—debt-laden countries in particular. But unlike Saudi Arabia in the wake of two oil crises, we do not have twin surpluses. Externally we have a huge surplus; however, internally the government is suffering from a large budget deficit. This means that Japan's surplus is in the private sector. The question becomes one of mobilizing the liquidity (or cash) contained in the private sector for the objective of recycling the surplus effectively and efficiently to the needy countries. A way has to be found to make this feasible.

Paul R. Krugman

*Paul Krugman, the last of the authors to speak, concentrated on some analytical points to help put in perspective what the others had said.*

It remains true, despite much pessimism about the debt issue, that the underlying algebra for the major debtors remains relatively favorable. If one asks what it would take not to have debt paid off, but to have the debt of major debtors grow more slowly than some measure of their ability to service that debt, the numbers do not seem unreasonable. Therefore, the simple argument that the debt is so enormous that no one can ever repay it is not correct quantitatively.

It is sometimes quite appealing to say that what these countries really need to do is restore confidence. If they can make their creditors confident in them, and especially if they can make their own citizens confident in them, then the debt problem will go away because the creditors will be willing to lend and the flight capital will return. Unfortunately, that is not an operational proposal—how do you restore that confidence? I'm afraid we have to live for quite some time in a world in which new credit is not voluntarily forthcoming, at least not voluntarily in the sense of individual investors choosing without external suasion to provide funds.

That brings me to the next point. To the extent that we are going to be relying upon involuntary

provision of new credit, whereby nominal debt grows but not relative to eventual ability to pay, it looks like a very long process—not a three-year view, not a five-year view, probably not even a ten-year view. We have to envision this as an extremely extended process.

How do we make that process work? We need a mechanism for insuring that the nominal value of debt continues to grow. The mechanism that was adopted as the basis of the initial strategy, which in the report we refer to as the "1983 strategy," was ad hoc. Under that strategy, one mobilized the creditors on an ad hoc basis through moral suasion and appeals to their enlightened self-interest to make new credit available. We must recognize that that strategy did not work as intended. For the first two years, while net new credit was extended, it fell considerably short of the amounts envisaged. During the two years up until the recent Mexican package, no new net credit was provided.

What do we do now? I guess the obvious needs to be repeated. Failure to provide new credit to the debtor countries is not an option. It cannot happen and it will not happen. One way or another the resource transfer will be kept within sustainable bounds. There are three ways in which that can happen short of something even more drastic.

One is a successful renewal of the 1983 approach —ad hoc provision of new credit on a basis which, while not exactly voluntary, is not exactly institutionalized either. That is implicitly the approach of the Baker initiative. It is certainly, if it can be done, the most desirable approach. But we need to think seriously about whether it is feasible.

The second approach is to fill the need for new credit through official lending—essentially, in part or in whole to mobilize the resources of the governments of the Trilateral nations to cover the gap between what is due on the debt and what is a feasible level of resource transfer. The question here is one of desirability and feasibility.

The third way is some mechanism whereby a portion of the interest is relent, not through actions on the part of the creditors, but through some mechanisms that makes it inevitable. I'm talking about some kind of interest capitalization, under whatever name. This third option could take place through some formalized mechanism—that is, through an agreement which creates interest capitalization—or it could very easily take place through an informal

17

mechanism, namely, the accumulation of arrearages
on the part of the debtors.

We need to recognize the reality that these are
really the only three options: renewal of the 1983
approach, on a scale larger than that envisaged in
the Baker initiative; large official net lending; or
some form of interest capitalization, agreed upon or
not agreed upon.

■ Martin Feldstein is President of the National Bureau of Economic Research and the George F. Baker Professor of Economics at Harvard University. He was formerly Chairman of the U.S. President's Council of Economic Advisors. ■ Hervé de Carmoy is Director and Chief Executive International, Midland Bank. ■ Koei Narusawa is Economic Advisor to the President of the Bank of Tokyo. ■ Paul R. Krugman is Professor of Economics at the Massachusetts Institute of Technology.

Michel Camdessus

World Economic Growth:
Ways Forward

WORLD ECONOMY: REDUCE IMBALANCES
WHILE REINFORCING GROWTH

In the closing years of the '80s the real challenge facing the world economy is how to maintain and reinforce growth while reducing very large trade imbalances in the three largest countries. These imbalances are not sustainable. How can they be reduced without risking a recession in the United States which would endanger the forward momentum of the world economy?

It is clear that the budget deficit of the United
States must be reduced, but how will the diminish-
ing fiscal stimulus in the United States be compen-
sated for by increased stimulus elsewhere in the in-
dustrialized world? And will the level of demand
for products from developing countries be main-
tained? The United States has demonstrated a high
propensity to import goods from debtor countries. It
is not obvious that this role can automatically shift
to other industrialized countries without special ef-
forts at trade liberalization—it goes without saying
that protectionism has to be resisted—and, above
all, without efforts at stimulating growth in these
countries. The major industrial economies need to
keep the commitments they made at the February
Paris meeting: while deficit countries need to put
their houses in order, surplus countries—particu-
larly Germany and Japan—need to spur domestic
demand. Recent exchange rate shifts are beginning
to narrow the imbalances that exist among the three

largest countries, but changes in price competitive-
ness will not be enough if they are not supported by
appropriate macroeconomic and structural policies.
I would particularly emphasize the latter. There is
considerable scope for structural policy adjustments
in the industrial countries, particularly in Europe. If
we are not able to progress in this field, we cannot
expect better growth.

THE INDEBTED COUNTRIES: WAYS FORWARD

Let me turn to the indebted countries. In spite of
their efforts at adjustment, these countries have been
severely affected by adverse developments in the
economic and financial fields. In the economic field
there has been a severe deterioration in the terms of
trade of most of these countries. For all developing
countries taken together, the loss in the terms of
trade last year amounted to the equivalent of about
$100 billion. The fall in export prices that was main-
ly at its root also caused a sharp deterioration in
debt to export ratios.

In the financial field there has been a sharp de-
cline in net external lending to developing countries,
offset only partly by non-debt-creating capital flows.
For countries with recent debt problems, net lending
has fallen from $87 billion in '81 to under $10 billion
in '86. While $87 billion was much too much, $10 bil-
lion is certainly not enough. In the absence of com-
pensating flows, the maintenance of debt service has
required debtor countries to run large trade sur-

19

pluses. But how long can this last, given urgently
needed investment?

Has the burden of debt for some indebted
countries become so substantial in relation to their
capacity to service it as to suggest a need to draw
much sharper distinctions among debtor countries
in the manner of treating their existing debt obliga-
tions? There are surely indications that this is true
for the poorer debtor countries in Africa. It is indis-
pensable that the international community hold out
the hope to these countries that exceptional efforts to
reform their economies will be met by exceptional
financial relief. Much of their debt is owed to official
creditors and the question of how this relief is to be
provided must be addressed by those creditors as a
matter of high priority.

We are living in a time of special fiscal restraints
in the industrialized countries. This means that for
the middle-income countries there can be little, if
any, expectation that additional official flows could
be diverted to them. For the time being it would be
mistaken to think that a magic solution can be de-
vised for transferring their debt to official entities or
for securing it by an extension of official guarantees.
These middle-income countries will continue to de-
pend upon commercial banks and other private
lenders.

Does it mean that we are in an impasse, and that
there is no solution outside of confrontation or uni-
lateral measures? I don't think so. On the contrary, I
think that it pushes us to secure the real, sound and
lasting solution. The turn of events may compel us
to accept that the debt problem will persist for a
longer time than we had earlier hoped. But the key
elements of its resolution remain essentially the
same and will continue to rest on enabling the heav-
ily indebted countries to fulfil their real economic
potential and to obtain in the market (on normal
commercial and competitive terms) financing for
their investments. All efforts from all sides (debtors,
creditors, multilateral financial institutions) have to
be geared in this direction.

It falls primarily to the debtors to recreate the
necessary conditions for sustainable flows on nor-
mal financing terms. They must be steadfast in the
pursuit of strong growth-orientated and outward-
looking adjustment policies that help mobilize do-
mestic savings and enable a greater proportion of
these savings to be productively invested at home.
On the creditors' side, there is the question of

reversing the recent net withdrawal of commercial
bank financing and preventing the protracted delays
that have attended the implementation of concerted
lending. At the heart of these difficulties is a certain
loss of cohesion within the banking community. If
this problem is not to reach dangerous dimensions,
we must deal with it expeditiously.

Do I mean that nothing has to be changed? Not at
all. Every effort of imagination is needed. But it has
to be geared to reestablishing a climate of confidence
between creditors and debtors. From both sides ef-
fort is needed to avoid what is especially corrosive
of mutual trust, that is, a lengthy process of negotia-
tion, ambiguous declarations by debtors regarding
their intentions, and, still worse, their possible con-
sideration of unilateral moves. Does it imply that
broader-ranging solutions have to be put aside? Cer-
tainly not, as long as they do not seek to pass to a
third party the burden of the risk.

ROLE OF THE FUND

In their efforts to deal with the debt problem, banks
and debtor countries can count on the continued
help of the multilateral financial institutions. Lend-
ing by the World Bank has been increasing broadly

"[F]or the middle-income
countries...it would be
mistaken to think that a
magic solution can be
devised...."

in line with the amounts envisaged in the U.S. debt
initiative announced in Seoul in 1985. And the Fund,
which was so active at the beginning of the '80s in
supporting a range of large-scale adjustment pro-
grams, will maintain its efforts and actively attempt
to adapt its instruments to the evolving situation.

I have refrained today from speaking about the
role of the Fund in resolving these difficult problems
because I have been at the Fund only a short time.
Let me conclude by saying something about my
eight weeks at the Fund. I have been in the Fund
long enough to understand what the Fund really is;
and I can assure you that it is not what you often
read in the newspapers. First, the Fund's policies are
flexible, not rigid. There are no straitjackets in our
cupboards. Second, the Fund recommends more

20

growth-oriented measures than politicians are frequently prepared to adopt. Third, the Fund works with the resources, and within the limits, provided by its members. It has been given no magic wand. Fourth, while so much of the discussion of the Fund's role focuses on the debt problem, the Fund's most important work remains that of helping to intensify the coordination of economic policies among the major countries in order to ensure a growing but stable world economy, and to alleviate the tensions that insufficient growth exacerbates. The key for growth in indebted countries lies in the industrial world: One has always to have that in mind when dealing with debt. Finally, the world evolves and the Fund must evolve with it. This is true for the debt strategy as it is for all other areas of international cooperation. The Fund has demonstrated its ability to adapt to new challenges and I intend that it shall continue to respond creatively to the challenges that lie ahead.

■ Michel Camdessus is Managing Director of the International Monetary Fund. The above is an edited version of his address.

128 The Sacramento Bee • Sunday, March 22, 1987

# Third World debt stumps Trilateral panel experts

By Herbert A. Michelson
Bee Special Writer

SAN FRANCISCO — The world's leading economists were unable to agree Saturday on how to cover the staggering, multibillion-dollar Third World debt.

Harvard Professor Martin S. Feldstein, for two years chairman of President Reagan's Council of Economic Advisers, said the approximately $900 billion debt does not mean that debtors and lending institutions, including all major can banks, are "close to" a debtogleftment.

by U.S. banks.

Brazil and Peru recently placed caps on their debt repayment. Brazil's suspension of interest payments could erode the earnings of both Corp and BankAmerica Corp., two of its heaviest creditors.

Earthquake-ravaged Ecuador has suspended debt payments on its $8.16 billion in loans and is trying to borrow another $450 million.

Late last week, Mexico borrowed another $7 billion from U.S. banks for $6 billion combined ments, the World Bank 'international Monetary

ent debt rescheduling, outback and Hydraprogram apparently Carmoy's notion of 'h.'

governments of the in, and the Euro- community "should inibility for a de resources to y borrowers," ministered by ould serve as tall Plan for ed coun-

Japanese fl with bis Narus- e presi- did not s with

## Feldstein sees hope on Brazil

By Rose Ragdale
OF THE EXAMINER STAFF

A foreign banks eventu- the money they - American left

Examiner/Gordon Stone

# Trilateral Commission report hails Mexico's fiscal-responsibility efforts

By JACK SCHREIBMAN
ASSOCIATED PRESS

SAN FRANCISCO — Mexico, among other debtor nations, was lauded by a Trilateral Commission task force Saturday as a country trying hard to pay its bills and improve its economic position in the world.

The compliments came a day after Mexico signed agreements for $7 billion in new loans while seeking to reassure lenders that the money would be spent wisely in an atmosphere of economic modernization.

Two Trilateral Commission,

"have made a budget adjustment, relative to the size of their economy, which if we (the United States) had done it, it would eliminate our federal deficit twice over." They have made vast adjustments."

Asked if the International Monetary Fund were succeeding in encouraging debt service by the nations, Hervé de Carmoy, international chief executive of England's Midland Bank, pointed to Argentina, Nigeria, Ecuador, as well as Mexico, as countries where progress is evident.

"There has been some very substantial improvement in the domes-

en most economic problems.

"There is no grand solution," the debt problem," Feldstein said. "The lenders have to contin-

ue dealing with the debtor na-

— See DEBT, C-6

to achieve satisfactory growth. That's the critical conclusion on which there is unanimity."

At the same time, the group disagreed among themselves as to how much added credit would be needed, "and how willing the banks, not just U.S. banks, are going to be about providing that credit."

De Carmoy said the group discussed the possibility that within the new institution could be set up with more capital and with greater ability to work with the various countries to get them to promote policies that

ECONOMIST MARTIN FELDSTEIN PREDICTS 6 "TENSE' YEARS THAT'S how long before Latin nations can service their debts

22

Mario Vargas Llosa

Latin America:
The Democratic Option

I am speaking as a private citizen; I represent no government and no institution. I am an independent writer convinced that the reforms Latin America requires to achieve development and social justice must be carried out within the framework of the rule of law and freedom that only democracy can guarantee.

Seen in this way, the Latin America of today justifies our cautious optimism. Never before in the history of our nations—that is, since we became independent from Spain and Portugal—has our part of the world had as many governments created by free (more or less) elections. Put in another way, never before have there been so few authoritarian regimes as there are at present. Bloody tyrannies in Argentina and Uruguay have yielded to civilian governments—the same is true in Brazil—as has the shameful anachronism until recently embodied by Baby Doc, ex “perpetual president” of Haiti. Countries in which until 25 years ago no elected president could finish out his term in office—Venezuela and the Dominican Republic, for example—are today models of pluralism and coexistence, where antagonistic political parties are voted in and out of power, and where the extreme right and the extreme left receive fewer and fewer votes in each succeeding election. Even in Central America, the region that has traditionally suffered most from political oppression, we have begun to see military regimes resign themselves—not always willingly, of course—to holding elections and yielding power to civilian leaders.

But it isn't only military dictatorships that have diminished in number to the point that the regimes of Generals Stroessner and Pinochet are now among the few surviving examples. The Cuban model of violent revolution is also undergoing a genuine thaw, especially if you compare the situation today in Latin America with what it was just a few years ago (when guerrilla groups operating in the mountains and cities were hard at work in a dozen countries trying to turn Che Guevara's maxim "Create in our continent two, three Vietnams..." into a reality). There are exceptions, of course: El Salvador, although even there guerrilla activities have lessened; Peru, where the apocalyptic fanatism of the Shining Path continues to take human lives and destroy property, even though it does not at this point constitute a real threat to the government; and Colombia, where political violence often

23

gets mixed up with the purely criminal violence of
drug traffic. In the rest of Latin America the myth of
armed revolution as a cure-all for our problems has
ceased to convince people and is increasingly the
philosophy of small, marginal groups devoid of
popular support.

But it would be unjust to celebrate this process of
democratization merely in statistical terms. Of much
greater importance, I think, is the way in which this
process is taking place. If we compare it, for exam-
ple, with the period following World War II, when a
democratic wave also ran through the continent, we
see that the current situation is not the result, as it
was then, of external pressures or the work of local
elites. This time, the decisive—in many cases the
only—reason why governments based on legality,
freedom, and popular consent have replaced the
arbitrary exercise of force or personal power has
been the humble, nameless men and women, the
usually poor, impoverished, often illiterate people of
our countries. It's true that in nations like Haiti and
El Salvador it was essential for the United States to
withdraw its support or exert pressure on the mili-
tary to bring about the change, but even in these
cases that external pressure would have come to
nothing if the people hadn't shown that they wanted
the change with all their heart. Insofar as El
Salvador is concerned, I can personally attest to the
courage and self-sacrifice with which the ordinary

"...antidemocratic alternatives are running against the will of the people."

Salvadoran participated in the electoral campaign of
1984, how those ordinary people turned out to vote
in the face of intimidation and bullets.

This fact seems extraordinarily important to me.
For the first time, democracy or incipient democratic
forms of government are being established in our
countries with clear popular support and with an
equally clear rejection of the antagonistic options of
Marxist revolution or military dictatorship. Today,
these antidemocratic alternatives are running
against the will of the people. They are the monopo-
ly of economic or intellectual elites, while the bulk of
the populace, now that it has been consulted and
has been allowed to express its opinion without

interference, has been overwhelmingly in favor of
moderate regimes: centerleft, center, or centerright
—whichever seems to offer the most democratic
possibilities. I would like to cite my own country as
an example: In the 1985 elections, which extremists
tried to sabotage by unleashing a terror campaign to
keep people away from the polls, only seven percent
of the registered voters stayed home, a real record
when you compare it with voter apathy in the more
advanced democracies.

It would be naive to think that the ordinary men
and women of Latin America have chosen democ-
racy because of some ideological conversion, the
result of some intellectual meditation. Such cases
would be few and far between. What has spurred
such huge numbers of people in recent years to turn
to this option—which was never offered to this
extent before in our countries—has been the terrible
violence of which they have been the victims. This
violence, the result of intolerance, fanaticism and
dogmas, has been practiced both by revolutionary
terrorists and political or military counterterrorists,
and has littered our continent with the dead, the
tortured, the kidnapped, the disappeared—and
these people in their vast majority have been the
poor. The ordinary people have opted for democra-
cy in an attempt to find an escape from this night-
mare reality of civil war, terrorism, indiscriminate
repression, revolutionary “taxes,” blind executions,
and the proliferation of torture. These people on
whom political extremists inflicted new violence—
as if economic exploitation and social abandonment
were not misfortune enough—decided to support
that system which, intuitively and instinctively, they
thought would be able to defend human rights best
(or oppress them least), insure a certain social coex-
istence, and attempt to extirpate the pistol, the
bomb, and the electric cattle prod from political life.

This undocumented fact of Latin American life—
a democratization process that originates in the peo-
ple themselves—has presented us with a unique op-
portunity: We Latin Americans now have the chance
to consolidate our legal, free regimes and to elimi-
nate forever the vicious circle of revolutions and
military coups, to fight for development by linking
our historic destiny to something of which we have
always in fact been a part: the liberal, democratic
West.

Naturally, this will not be easy. The democratiza-
tion of Latin America, even though it has an unprec-

24

edented popular base in our societies, is very fragile. To maintain and extend this popular base, governments will have to prove to their citizens that democracy means not only the end of political brutality but progress, that is, concrete benefits in areas such as labor, public health, and education, where so much remains to be done. But, given the economic crisis Latin America is suffering today, when the prices of the products it exports are hitting record lows and when the weight of its foreign debt is crushing, those governments have virtually no alternative but to deceive the citizens—especially the poor—demanding they make even greater sacrifices than those they’ve already made.

I am not one of those who believe that the problem of the foreign debt should be met with demographic gestures or with a declaration of war against the international financial system. If such a war were to break out, Western banks might be affected, but our countries would be even worse off because one of the first casualties of the hostilities would be the democratic system. It is hard to imagine how it would survive the chaos and paralysis that would result from a boycott by the developed world of our economies.

But the industrialized nations—the governments and banks—should face up to this matter sensibly and realistically. They must understand that if they demand that our democratic governments pay the service on their debts by implementing policies which will have an exaggeratedly high social cost—and we have already seen the explosions of rage and despair in the Dominican Republic, Mexico, and Brazil that can take place when the fabric of society is stretched too thin—the result, purely and simply, will be the collapse of those governments and the return of military dictatorships.

Military dictatorships are not only the best breeding ground for marxist revolutionaries; they are as well models of ineptitude in the field of economics, as all the recent Latin American military regimes demonstrate. And who reaps the benefit if all this takes place? Not the banks and certainly not Western governments. Only those who are interested in seeing that democracy does not take root in our countries.

A realistic and ethically sound approach to the problem by our creditors would be to demand that each debtor nation pay what it can without placing the stability of the system in jeopardy. At the same

time, creditors should provide both the stimulus and the aid necessary to reactivate the economies of the debtor nations: The more they grow the more they will be able to pay back their debts. A veteran revolutionary who today is a genuine believer in democracy, President Paz Estenssoro of Bolivia, formulated a policy which should be considered seriously: The service on our debts should be directly

> "...if we Latin Americans do win the battle for freedom we can say we won it for ourselves...."

related to the prices of our exports on the international market and should "float" with them. If the banks and the industrialized nations are not merely interested in being paid what they're owed but in seeing that our nations emerge from underdevelopment as allies and in solidarity with the West, they should take these kinds of suggestions into account.

I am not trying to insinuate that the future of our democracies depends on you. We and we alone are responsible for our future. Moreover, I am convinced—although I’m not sure whether to be happy or sad about it—that when a Latin American nation chooses democracy it not only chooses freedom and the rule of law but the most extreme form of independence as well. This is because no other type of government receives less support from the West—or seems to have less “sex appeal” as far as the West’s communications media and intellectual elites are concerned—than those regimes in the Third World that try to live the ideals of freedom and pluralism, which are the West’s greatest contribution to the world. While I have no figures to prove it, I doubt that any democratic nation in the underdeveloped world has received the credits and subventions Cuba has received from the Soviet Union since Cuba became a Soviet satellite. And it is certainly true that no Latin American nation fighting to live in peace and freedom within the law ever before aroused the militant sympathy that Sandinista Nicaragua has inspired in liberal and progressive circles in the West. To the contrary, when it doesn’t simply inspire indifference, that struggle for democracy in poor countries usually inspires skepticism and disdain from those who should be its most enthusiastic

25

supporters. But perhaps this isn't such a bad thing
after all. Because if we Latin Americans do win the
battle for freedom we can say we won it ourselves—
against our enemies and despite our friends.

If we want democracy to take hold in our
countries, our most urgent task is to widen it, give it
substance and truth. Democracy is fragile because in
so many countries it is superficial, a mere political
framework in which institutions and political parties
go about their business in their traditionally arbi-
trary, bullyish way. Naturally, the differences in
degrees of democracy vary so much from country to
country that it is impossible to generalize. An abyss
separates Costa Rica's exemplary democracy from,
for example, Mexico's doubtful one-party democ-
racy with its institutionalized corruption, or
Panáma's democracy, where the civilian authorities
govern but the National Guard rules. In Venezuela
and the Dominican Republic, on the one hand,
democratic tendencies have permeated the armed
forces as well as the extreme right and left and have
thus drawn these elements into the political process.
In Guatemala, Uruguay, and Ecuador, on the other
hand, the military still exercises a kind of guardian-
ship or an aloof autonomy that limits the actions of
the civilian governments.

The way in which our laws are produced in Latin
America is another profoundly anti-democratic fac-
tor in the majority of our countries. Laws guarantee
sinecures which favor individuals or influential
groups in such a way that for the poor to gain access
to the legal system or even simply to earn a living

"Democracy's superiority
over authoritarian and
totalitarian regimes is
that, unlike them, democ-
racy is perfectible."

they must resort to illegal means. The separation of
powers is in many cases a myth, like equality of op-
portunity, and the fact that huge sectors of the econ-
omy are nationalized—and almost always deficit
producing—is a constant source of inflation, corrup-
tion, and discrimination. And democratic govern-
ments are neither more nor less to blame than dicta-
torships in promoting demagogic nationalism,
which has been the major obstacle to the functioning

of regional integration efforts and the reason for the
senseless waste of money in the purchase of wea-
pons. Freedom of the press usually degenerates into
irresponsible defamation; the right to criticize into
libel and insult. And the politicians with the most
democratic programs usually act in private like the
henchmen of all-powerful *caudillos*.

I could go on and on with the catalogue of the de-
ficiencies in our democracies, but why bother? What
really matters is that our democracies not only sur-
vive but that they also criticize themselves and bet-
ter themselves. If they don't, they will perish. No
democracy is born perfect and none ever gets to be
perfect. Democracy's superiority over authoritarian
and totalitarian regimes is that, unlike them, democ-
racy is perfectible. And unlike dictatorships, which
simply weaken if they try to reform, democracies get
stronger to the degree they can change and regen-
erate. Perhaps the hardest struggle we Latin
Americans will have will be against ourselves. Cen-
turies of intolerance, of absolute truths, of despotic
governments weigh us down—and it won't be easy
to shake that burden off. The tradition of absolute
power that began with our pre-Columbian empires,
and the tradition that might makes right which the
Spaniards and Portuguese explorers practiced, were
continued in the 19th century after our indepen-
dence by our *caudillos* and our oligarchies, often
with the blessing or direct intervention of foreign
powers.

For this reason the belief that violence is the an-
swer is not new, much less revolutionary in Latin
America—contrary to what our messianic ideo-
logues think. Actually, violence is the worst kind of
conformism. It means going on—using different
rhetoric and different ritual—in the same old tradi-
tion of barbarism and *machismo* that is in great mea-
sure to blame for our backwardness and the social
iniquity that plagues our countries.

What is truly original, truly revolutionary for
Latin America is the other option. The one that gives
a long overdo lesson to Latin America's privileged
classes—for whom military dictatorships still repre-
sent a guarantee of order—and for intellectual elites,
for whom the myth of marxist revolution, of return-
ing to a *tabula rasa* is still alive despite the fact that
history has shown this to be a lie. The other option is
the one the innumerable victims and the poor have
spontaneously chosen and are now defending. After
travelling the hard road of suffering violence, these

Enrique V. Iglesias

Latin America:
Development Issues

Mario Vargas Llosa has given a broad perspective on the political dimension of the challenges we are confronted with in Latin America. Everything is strongly linked to the very particular moment in which live, which he defined as the restoration of democracy in most of the countries that lived for decades under authoritarian regimes. The restoration of democracy in Latin America has been a beautiful joint venture of many things together.

I agree with Mario that this democracy is fragile and that it would be a mistake to think that by restoring political institutions and human rights we are safe for the future. One enormous question today is how to meet democratic expectations in one of the region's most difficult economic periods. Unquestionably, the decade of the '80s is the worst since the '30s. It is enough to say that the standard of living in 1986 was nine percent in per capita terms below the standard of living in 1980. This is why in some quarters this is called a lost decade.

When speaking about development issues in Latin America today there are three risks to be avoided. One is the risk of aggregation. There are common features, common elements, but it is always very risky to speak in an aggregate way about Latin America. The second risk is forecasting. We were very much betrayed by our forecasting in recent years. I think it would be dangerous to be either over-optimistic or over-pessimistic. One of the things that recent events in Latin America have shown is a tremendous capacity for adaptation far beyond our imagination—which is good for the region, and speaks well for the future. The third risk is to believe that these issues can be explained only in economic terms. In fact, this is basically a political issue which has to be addressed in all its political dimensions.

FACTORS BEHIND THE CRISIS

I think there are three elements—not just debt—which can explain the situation in the region today.

One is the crisis of our economic system, a system that was already showing signs of erosion and failure in the early 1970s. We did not succeed in the postwar period in creating a dynamic, reasonably stable and equitable economy. There are many explanations. Some people emphasize an excessively

28

inward-looking instead of outward-looking approach. Others say the governments played too large a role in their economies. Some blame pervasive populist trends. Still others stress the use of excessive monetary policies. Whatever the reason, it is clear that Latin America's current crisis goes far beyond the debt issue. Indeed, Latin America's crisis is structural in nature—it was postponed in the '70s only because of our capacity to get money from abroad.

Indebtedness is the second factor behind the crisis. We must recognize that there was a lot of irresponsibility in the '70s, not only in the debtor countries, but also among the lenders—who showed in many cases an excess of optimism and a lack of orthodox criteria. Latin America today has a burden of debt that is taking four to five percent of our GNP to service. That is a high proportion—for comparison, Germany's reparations debt in the '20s took about half that, 2.5 percent of its GNP at that time. Between 1982 and '86 there was a transfer abroad of something like $130 billion. Well, I understand the reasons why; but when you look at this in comparison to our internal investment needs, you can imagine what the present debt situation means.

Another source of our current predicament has been the behavior of the international business cycle. With all objectivity, we must accept that a series of

> **"Latin America's crisis is structural in nature—it was postponed in the '70s only because of our capacity to get money from abroad."**

trends in the world economy have been very damaging to our capacity to respond, starting with interest rates. When the debt crisis emerged in the early '80s, the total debt was somewhere around $200 billion. Because of high interest rates, our debt quickly grew from $200 billion to $350 billion. A big proportion of our current debt servicing goes to paying those high interest rates. The procyclical attitude of the financial markets and investment trends also played a role. It is also a clear that there has been a structural decline in the terms of trade of the region.

In 1986, for example, the prices of raw material exports in many of our countries were below the levels of 1932, which were historically the lowest in modern times in Latin America. Commodities and raw materials still account for 75 percent of exports.

### THREE MAJOR CHALLENGES

There are three major challenges that we are facing today in our development strategies. The first one is unquestionably the administration of the debt issue. There have been positive trends. The tremendous internal adjustment that Latin America went through in order to face its commitments represents a major difference with the behavior of the region in the 1930s. And the international financial system responded with a lot of imagination. Notwithstanding these positive elements, I think—and I want to be very honest with you, I have been dealing with this for the last three or four years in the Cartagena group—the situation is changing, and not for the better.

One reason is that we don't yet see clear signals from the international economy. We see very positive elements in the management of inflation, and some other areas, but all this is not reflected in a very strong international economy that can create for us the markets and the price levels we need. On the contrary, the signals are of a weak economy, and also of a major trap: If the United States deficit is reduced without the strengthening of growth in other major economies, we may find ourselves without markets in the United States and without markets in other OECD countries.

The second reason is a decline in commodity prices. If we had a minimal recovery of those prices, the situation would be completely different. It would not be a structural problem; and it would be very manageable.

This is why I think that we are entering into a period of fatigue—on the side of both debtors and creditors. The trade surplus that we enjoyed in recent years will no longer be there in the same size, which means that if we want to cope with servicing our debt, we will have to place further constraints on our economy. Is this really possible after five years of continuous adjustment? I am not sure. We have already squeezed the most we can out of our imports. Now we need to import more to expand investment, to expand production at a time when the situation appears to be more critical than before.

29

This is why I now foresee the appearance of new
technical moratoriums and increasing resistance to
the IMF here and there.

We have learned a lôt in managing the debt; but
something more must be done to face the coming
years. I don't have any solution—there have been
many proposals on the table—but I do know that we

"I perceive the birth in Latin America of new attitudes...more conscious that the major issues do not depend on external factors...."

need renewed and continuous imagination from
both sides in order to manage a situation that might
become explosive.

The second challenge goes beyond debt, and it is the clear recognition of all of us in Latin America that we need to undergo tremendous structural adjustment. This is a challenge that we have to pursue in order to continue the process of growth, and this challenge implies investment, technology and knowledge. These structural changes are probably a more important challenge than the debt issue as such. We are trying to undertake some innovative approaches. The recent integration efforts between Brazil and Argentina and Uruguay, for instance, show some imagination. It is not that we don't believe that we need to continue our integration into world markets, but we think that we must at least explore our capacity for doing things together, precisely to face jointly the challenges of structural adjustment in our economies.

The third challenge is political modernization, basically a modernization of institutions and attitudes. Among institutions my major concern is government—how to focus it in order to achieve enough efficiency to run the economy as a whole. Attitudes are much more complex. Here we have to deal with underdevelopment in our political structures and social capacity to respond.

## CONCLUDING THOUGHTS

I would like to finish with a note of optimism because I have the conviction that the Latin America

that emerges from this critical period will be much
more realistic and pragmatic. I perceive the birth in
Latin America of new attitudes, more realistic, more
pragmatic, more conscious that the major issues do
not depend on external factors, but depend basically
on our own capacity to respond.

What do we need from the international economy? In the first place, we need reduced uncertainties. Give us clear signals where you are going, so we can make our own decisions. Secondly, let us continue looking for new, imaginative solutions to the issues, and let us link debt with trade. The new challenge is to have freer trade, to avoid protectionist trends, and to make the GATT function to meet through trade the needs of debt. Finally, we need the consciousness that Latin America is an important potential partner in the world. And we need investment, technology, and new sources of capital to make it an engine of the world economy. We are condemned to interdependence, so let us try to manage the world economy properly and sustain Latin American participation in that progress as an engine of growth.

■ Enrique V. Iglesias is Foreign Minister of Uruguay, and former Executive Secretary of the Economic Commission for Latin America. The above is an edited version of his remarks.

30

Marcílio Marques Moreira

Brazil in Transition

**B**razil is presently going through a moment of transition. We are also experiencing wild gyrations, especially in perceptions—so much so that I’m already accustomed to Brazil being singled out as a country performing a miracle and then going through a disaster and then recovering again.

POLITICAL TRANSITION

Let's look a little closer at the transitions through which we are going. First, we are going through a political transition. After more than 20 years of authoritarian rule, a democratic regime came to power (two years ago exactly) without any major upheaval nor any traumatic discontinuity. But one must not forget that this transition was not easy. The 1981-83 recession was the deepest in our registered economic history; and this, together with already existing social tensions, put tremendous pressure on the political transformation. Moreover, the job of political transition is not finished. A constituent assembly has convened and is working in Brasilia to carve out a new constitution that would embody the principles and norms to guide our steps into the new millennium. The democratic institutions are quite new, and so they are fragile also....

ECONOMIC TRANSITION

Now, let's look at the economic transition. In the last
40 years, Brazil has passed from a predominantly
rural (two-thirds of our population lived in the
countryside) to a predominantly urban society, with
more than 70 percent of our population today living
in cities; from an agricultural to an industrial econ-
omy; from an archipelago of cultural islands and
separate economic units to one of the world's widest
cultural continuums and national markets.

Who were the protagonists of these transforma-
tions? For better or for worse they were an emerging
middle class, an energetic entrepreneurship, a mod-
ernizing bureaucracy (both civilian and military)
and an embattled working class. What instruments
did they use? Those tools of modernity that are
hailed by some and cursed by others: the automo-
tive industry, introduced by the Kubitschek regime,
together with a sprawling network of roads; the
refrigerator; and DDT—today a deadly weapon, but
recognized at that time as the only way to implant a
civilization in the tropics.

After having made this transformation to an ur-
ban society, to a more modern industrial society, we

31

were struck by a crisis from abroad—two oil shocks, a wild interest rate upsurge, and worldwide recessions followed by mediocre OECD economic performance. We were also struck from within by a too fragile industrial profile—by too little concern given to agriculture or to effort to export, by too little attention given to modern technology and to education.

When we were struck in 1974 by the first oil shock we had to respond. And how did we respond? We responded with one of the most ambitious projects to overhaul the economic structure of a developing country known in recent economic history—an effort to reinforce the industrial profile that was intensely concentrated in heavy investments. These efforts were based on domestic savings (that were already at a relatively high level of 23-24 percent), but that had to be supplemented by international savings (in order to reach in 1975-1976 a level of investment of 30 percent of GNP—a level near the Japanese levels of the '50s). This happened at the moment that international liquidity was available, the first time this liquidity had been available since the crash of 1929-1930. Latin America had called for a Marshall Plan after the war, had called for a Panamerican Operation, had called for the Alliance for Progress, for a United Nations Decade of Development, and had made repeated pleas at UNCTAD meetings, but we were met by deaf ears. So Brazil seized the moment to get hold of massive capital in order to invest—to create something like Singer's "big push" or Rostow's "take-off." And it worked. We modernized our industry, we modernized the infrastructure of the country. But we ran a risk. That risk was to take international savings in the form of floating rate loans. But the risk of not using these resources would have been larger. I don't think that the decision was an error. Because of these efforts the Itaipu, Carajas and Tucurui power projects are there, the big four steel mills are producing and exporting, and there are new ports and ships.

After the major upsurge of interest rates in the early '80s we had to adjust very abruptly at a very high cost. That led to a major recession in our economy from '81 to '83. Then from '84 to '86 we were able to recover, to show good levels of growth—8.3 percent in 1985, 8.2 percent in 1986—and to transfer abroad in these three years more than $30 billion of interest plus dividends plus capital repatriation.

Such large resource transfers abroad were possible during these few years because there was a lot of unused capacity, because there was a wide gap between potential GNP and actual GNP. But last year, maybe because demand grew above expectations, bottlenecks arose, and as a consequence, our trade surpluses dropped very severely and our reserves were eroded. This erosion of reserves prompted the decision taken last February to suspend temporarily the transfer abroad of the payments of interest on our medium- and long-term debt. But the basic reason behind it was that the annual transfer abroad of up to five percent of our GNP is unsustainable for a long period.

We have to find new ways to try to solve this problem. Maybe we cannot have as complete a solution as some would like, but I don't think simple muddling through is enough. Maybe—and there I'm

> **"We are at a threshold in Brazil, at the threshold of modernity. But to arrive there is not easy."**

being Brazilian again—maybe some kind of conciliation between muddling through and a grand solution might be the answer. We have to tackle simultaneously three problems that are deeply interlaced: first, the debt overhang; second, the massive transfer of real resources year after year; and third, future credit. We have to do the three things together. We cannot take an approach that would solve the debt overhang problem but endanger future credit. The basic effort at savings has to be internal, but has to be supplemented abroad because Brazil still is an underdeveloped country.

## SOCIAL AND CULTURAL TRANSITIONS

Finally, we have to call attention to two problems that were underplayed up to now. One, is the problem of a social transition. And the second concerns the cultural transition. While Brazil has a good record in promoting growth (six percent average annual real growth of GNP over the last 50 years), in social terms our performance has been dismal—gasping inequalities of wealth and income exist and there are shortcomings in basic human needs: health, nutrition, education, housing, sanitation (like

32

water and sewage), and mass transport. We are the tenth largest economy in the world, but if we measure our performance in terms of social indicators we might have the fiftieth place, if not worse.

We have a fundamental social debt towards the dispossessed of the fruits of progress. And that is the heaviest of our three debts (heavier than our internal debt, heavier than our external debt). It is the most urgent of our debts, an unpostponable item on our national agenda. Nobody up until now has called attention to the fact that the governments that promoted so much growth in Brazil at the same time had declared a moratorium on our social debt. They had a terrible record in terms of the redemption of this enormous social debt, which certainly is economically counterproductive, socially wrong and unjust, and politically explosive.

And finally, we have the cultural transition to go through. We are at a threshold in Brazil, at the threshold of modernity. But to arrive there is not easy. We have to keep our own identity, but still be open to learn from others. And it is not easy today to learn from others at a time when we have a loss of paradigms. I remember thirty years ago our paradigm was the United States. If we went to the World Bank, they would say, "The United States is like that, you are like this—take the difference and that is the formula to develop." At some time and for some people the Soviet Union or Cuba or Communist China were paradigms. Today, many books and some conferences point to the "four tigers"—South Korea, Taiwan, Hong Kong, Singapore—as the big paradigm: just take an outward-looking policy, just put a rein on government expenses, and you will develop and everything will be fine. But there are no paradigms. We have to carve out new paradigms from our own heritage while, of course, learning from others. But this is a difficult job. Our modern viability is really at stake, and for this we have to really mobilize all our own domestic energy. But we also have to count on a very wide extension of international understanding and the creation of a more propitious international environment.

■ Marcílio Marques Moreira is Brazilian Ambassador to the United States. The above is an edited version of his remarks.

Amnuay Viravan

33

A
Southeast
Asian
Perspective

HOSTILE GLOBAL ENVIRONMENT

Let me begin my presentation on a rather gloomy
note. Uncertainty and speculation have emerged as
the dominant characteristics of today's international
economic system, and both these forces are being
compounded by a high degree of global economic
interdependence.

In this hostile environment, at the business level,
the investor and the entrepreneur are adrift in a sea
of uncertainty. At the national level, the aspirations
of entire countries could easily be swept aside by
external forces beyond their control. (The adjust-
ment process would be difficult enough under any
circumstances.) There is still a great lack of the
global vision and political will needed to mount a
sustained and focused effort to solve the problems at
hand. In the meantime, crisis management of the
global economy reigns by default.

The results are painfully obvious to all of us.
Most of the continent of Africa is an economic and
humanitarian disaster zone; hundreds of millions of
Latin Americans find their standard of living falling
back down to what it was a decade or more ago;
tens of millions of Europeans have been without
work for half a decade; and the United States, the
world's largest and richest economy, has emerged as
the most heavily indebted nation, as the largest net
importer of capital and, since 1980, as a net recipient

of foreign direct investment. In my own Southeast
Asian region, long regarded as one of the develop-
ing world's great success stories, 1986 proved to be
an unmitigated disaster for all but one of the
countries, the worst year in more than two decades
of otherwise outstanding economic development.

There are those who will disagree with this some-
what emotional picture of the state of the global
economy in 1987. For each of the major problem
areas they will point to events denoting significant
progress. On harmonization of macroeconomic
policies and exchange rates, they will point to the
September 1985 G-5 accord on exchange rate inter-
vention and the Tokyo Summit agreement on policy
coordination. On restoring growth in world trade,
they will applaud the launching of the new Uruguay
Round of GATT negotiations. In terms of managing
the Third World debt, they will point to the Baker
initiative, to the fact that the World Bank lent a
record $17.1 billion last year, to the breathing space
given the major money center banks to improve
their capital base, and probably to the fact that, to
date, there has been no widespread, coordinated
default on the part of the heavily indebted LDCs.

I hear these indicators of progress repeated often,
but I am not totally persuaded by them. The U.S.
dollar's ongoing depreciation against other major
currencies has not really been controlled or harmo-

34

nized by official intervention. The depreciation represents a market-driven perception of the equilibrium value of the dollar which had begun six months before the Plaza meeting in September 1985 and continued for another 12 months at the same average rate. The G-5 accord simply gave official endorsement to the reality of the marketplace. The Tokyo Summit agreement on policy coordination has yet to produce any concrete results. The Uruguay Round of GATT negotiations set sail earlier this year with the promise of freer and fairer international trade in the years to come, but the storms of protectionist sentiment threaten to engulf it this same year. And the debt crisis has not gone away as many hoped it would. It is a deteriorating situation in which debt piled upon debt threatens the continuing viability as cohesive sovereign states of at least the fifteen most heavily indebted nations targeted under the Baker Plan.

I have dwelled on what might easily be described as this "environment of despair" to underline the sense of frustration which increasingly pervades the governments and the peoples of the developing world. The problems are clear to all. The resources on a global level are available, and yet, there is little in the way of action, little to offer hope.

## STALLED GROWTH IN THE ASEAN AREA

From a Southeast Asian perspective this sense of frustration is a matter of great concern. We feel like 280 million onlookers watching a Roman Circus, the wild gesticulations of an empire close to collapse. During the 1960s and '70s the six ASEAN states were often lauded as outstanding examples of successful development. No other developing region in the world grew as fast or delivered the fruits of this growth to its people as well as Southeast Asia. We followed everybody's advice. We moved from an import-substitution to an export-oriented industrial growth path and we had high rates of domestic savings. In general, we borrowed cautiously, diversified our economic structures and had excellent access to concessional funding from the multilateral agencies.

By the early 1980s these efforts had developed a certain robustness. Although growth rates slowed across the region, we weathered the global recession better than all other developing countries and better than most developed nations. By 1985, however, the strains of falling commodity prices, self-imposed constraints on external borrowing, depressed export

markets, protectionism and fluctuating major exchange rates began to emerge. Along with the North Asian NICs, the ASEAN economic miracle began to look distinctly frayed.

Since last year we have seen a divergent response in these two groups of countries as they attempt to adjust to current conditions. The North Asian NICs —Hong Kong, South Korea and Taiwan—have rebounded back to their historically high growth rates, their economies driven by falling raw material and energy costs and high export demand. Their problems today are the problems of success: highly visible and large trade surpluses with the United States, partly due to their own industrial base and partly because these countries are all, to some extent, alternative export platforms for Japanese manufacturers. Meanwhile, in Southeast Asia, with the single exception of Thailand, 1985 and 1986 turned out to have the worst average growth performance in more than two decades. Growth rates hovered between plus and minus two percent in countries which had averaged seven to eight percent over the previous 25 years.

## FIVE ELEMENTS OF A STRATEGY FOR THE ASEAN COUNTRIES

For Southeast Asia 1985 and '86 verged on the traumatic; and we are still considering possible strategies to prevent this situation from recurring. One obvious strategy is to accelerate ASEAN economic cooperation, and this subject will be the main item on the agenda at the ASEAN summit meeting in December 1987. How can we make better use of our own 280 million people, our $230 billion aggregated domestic market? How can we play a more effective

> "...ASEAN finds itself being targeted for protectionist legislation in the same category as North Asian NICs."

role in international economic debate? How can we counter rising protectionism in the industrialized markets and the impact of speculative financial flows, which today appear to have replaced trade as the main driving force in the world economy? I don't expect to see any announcement concerning

35

the establishment of an ASEAN Common Market emerging from the summit meeting, but I do expect some significant improvements in the overall level of ASEAN economic cooperation, especially in the areas of trade and investment.

A second strategy calls for greater cooperative efforts between the OECD and developing countries as a prerequisite for economic and trade expansion in the global economy. To achieve this goal, I believe that the ASEAN nations would be prepared to trade-off their short-term interests for mutual long-term benefits. It is my hope that the OECD countries will share this conviction and be willing to trade-off their short-term interests in various multilateral forums, including in the upcoming GATT negotiations.

A third strategy, with more than momentary appeal, is to explore the possibilities of stepping up trade and economic cooperation with Socialist bloc countries. In one sense this is a surprising development since the real motivation for the founding of ASEAN in 1967 was to present a common front to the then-perceived Communist threat. Today, while all ASEAN countries remain staunchly in the capitalist camp, the Communist threat has receded and the attraction of trading with all countries of the world has surfaced as a more pressing priority. Both the Soviet Union (under its new, revitalized leadership) and China are increasing their commercial overtures to ASEAN; and these invitations are no longer falling on totally barren ground. This is one of the most obvious results of a situation in which ASEAN finds itself being targeted for protectionist legislation in the same category as the North Asian NICs. This latter group runs a trade surplus with the United States amounting to over 50 percent of Japan's trade surplus with the U.S., but ASEAN is not in the same league. And yet, all too frequently over the last two years, ASEAN commodity producers and manufacturers have received the same heavy-handed attention from Congress as the North Asian NICs.

A fourth strategy, which is easy to formulate but difficult in the short-term to implement, concerns ASEAN's role as a producer of both food and non-food commodities. In spite of a substantial increase in manufactured exports, ASEAN remains a major exporter of commodities. Thailand alone is the world's fifth largest exporter of food, and the only net exporter of food in Asia. The ASEAN region as a

whole is also the world's leading source of a large number of non-food commodities, including tin, rubber, palm oil, tropical hardwoods and natural gas. However, the future for commodity exporters is bleak. In agriculture, the highly protected agricultural sectors of the Trilateral countries pit the Thai rice farmer in mortal combat against OECD taxpayer subsidies. In the non-food sector the long-term outlook is even worse. Technology is causing a major structural shift in the historic relationship between raw material inputs and production. Manufacturing is becoming more and more technology and capital intensive with a resultant decline in raw material

> "...[responsibility] must be shifted and shared more by the European Community and Japan."

intensity. The solution to ASEAN's problem as a commodity producer is simple: We must process our commodities and use them as inputs for our own manufactured exports. But such a transition takes time, capital and dynamic entrepreneurial skills.

A fifth and final ASEAN strategy revolves around an increased recognition of the importance of foreign direct investment (FDI). Typically, ASEAN has had a more open-door approach to foreign investment than most other developing countries. Today, the door is open even wider and the available incentives are even stronger. With our self-imposed restraints on foreign borrowing, FDI is now being looked upon as a critical factor in sustaining growth and employment and in acquiring new technologies and export markets.

## TRILATERAL ROLES AND RESPONSIBILITIES

The vision, resources and ability to shift the global economy back on to a more stable, more equitable and higher growth track rest almost entirely in the hands of the leaders of the Trilateral countries. Over the last couple of years, as the industrialized world recovered from the worst recession in 50 years, people have talked about a window of opportunity, during which the OECD nations would finally address the major problems of global economic reform. To date I see little evidence of any such move. On the contrary, I see the danger of this window of op-

portunity being slammed shut by increasing trade friction, the return of the debt problem to crisis status and the continued structural imbalances in some of the major economies.

Who is going to address this burning need for a new international economic order? Bretton Woods and GATT, the institutional frameworks which produced unparalleled global growth and prosperity, were born out of the ashes of a World War, largely at the behest of the gentle giant, America. Today, the Bretton Woods vision is dead and the gentle giant finds itself being absorbed into a world economy at exactly the same time as its huge technological edge has disappeared. Keeping in mind the United States' own serious structural imbalances, I believe the major initiative and responsibility for shaping our world's economic destiny must be shifted and shared more by the European Community and Japan. A window of opportunity of a different dimension awaits these two powerful forces. For most of this decade the OECD nations have been preoccupied with the military aspects of global security. But global security has an economic dimension, and it is this dimension which poses the greatest challenge today.

I believe nothing less than a global economic security initiative—to be backed more by the resources of the EC and Japan—is required if we are to secure a world fit for our children to inherit. Such an initiative will require all the key players to resist the temptation of further increasing defense expenditures and the temptation of further delaying needed structural adjustments with increasing subsidies. Indeed, if the resources required for such an initiative are to be mobilized, it will mean a gradual reduction, at least in relative terms, of defense spending and economic subsidies.

I believe the industrialized countries are capable of rising to such a challenge. We all have a sense of destiny and we are now listening to the footsteps of the 21st century. The great challenge for us is to accept that the sense of national destiny must embrace a vision of a better world for all, and to act to make that vision a reality.

■ Amnuay Viravan is Chairman of the Executive Board of the Bangkok Bank Ltd.

38

Joe Clark

*The Democratic Community:*
*A View From Canada*

Since 1945, the nations represented here have undergone an extraordinary economic transformation. But beyond that, these nations constitute a civilization, based on shared values of liberal democracy and individual initiative. The contemporary West, in the broad sense that includes Japan, is an unprecedented experiment in democratic community-building on a great scale. The challenge now is to stay united in the pursuit of *positive* goals. Few countries understand this imperative better than Canada—through our origins and national character, by vocation, and of necessity. Canada is a community of communities, a democracy that holds together across its vast expanse a remarkably small population. Given the great diversity within Canada —ethnic, linguistic, regional and economic—it has been absolutely critical for us to pull together as a nation. We see a clear analogy between Canadian nation-building, where we have pulled diversity together, and the demands of democratic community-building internationally. We see the need for something very much like our own mix of will and flexibility in managing the current international agenda.

EAST-WEST RELATIONS

In the Soviet Union we are seeing the beginnings—just the beginnings—of what may be extremely significant changes. The questions of how we deal with the Soviets and what collective strategy we apply now to arms control are of singular importance—perhaps even of historic importance. How significant are the recent developments in the Soviet Union? The verdict is not yet in, but our traditional responses will not be adequate to deal with the Soviets in the years ahead. A more open relationship is not going to be easy: what opportunities occur may be modest, and they will have to be explored with caution. But they should be explored. In Canada there is a history of skepticism about whether closer cooperation with the Soviet Union works in the long term, but the prospect of major changes in the USSR can be ignored only at our peril. The era of an unresponsive and lethargic Soviet Union is probably over. We should therefore anticipate the impact of a dynamic, more powerful USSR, whose ultimate goals have probably not changed. Let me be explicit about the questions that are involved here. Do we have enough confidence in the values we stand for to remain together without rallying simply—even simplistically—around the presumption of an un-

39

changing external enemy? Are we making the consultative process work, to the extent that we could exercise more flexibility on East-West questions without internal splintering?

I think it comes down to a matter of balance. On human rights, for example, dissidents have recently been released in the Soviet Union. We should welcome that, but we should also make it clear that continued improvement is required to break down barriers and build up confidence. Given the scope and character of General-Secretary Gorbachev's domestic economic ideas, we should be looking hard at the prospects for increased economic relations with the USSR. This is a major area, after all; of overwhelming Western strength. It would be of profound significance, and in our own interest, if we could draw the USSR further into the global economy. As a result, the Soviet leadership may, by degrees, accept the reality that economic dynamism requires real openness. We should be looking at joint ventures and increased trade prospects, within the bounds of Western security interests and on a basis of true mutual benefit. It should be clear that results will be quite constrained in the near term, given the current limitations on Soviet production and on Soviet foreign exchange. It must be realized, too, that the Soviet bureaucracy can probably resist economic reform more effectively than it can stop diplomatic initiatives.

My own country's interest in East-West issues is direct and urgent, and I do not believe this is fully understood abroad. In the United States, we still see a tendency to regard relations with the Soviets as almost a domain for American management. In Europe, the psychology of being on the front line is justifiably strong—but there is more than one front line. A strategic nuclear exchange between the United States and the Soviet Union would take place over Canada. Canadian air space, particularly in the Arctic, will assume greater significance with the increased threat from manned bombers and cruise missiles. We are acutely aware of the growing strategic importance of the Arctic, particularly for submarines. We are factoring that reality into plans for defense upgrading. But it is our very intense hope, for the best of geopolitical, budgetary, and moral reasons, that real progress can be made—and soon—in reducing tensions and bringing about verifiable arms control.

The Soviet Union appears genuinely interested in

obtaining an agreement on arms control. They want such an agreement for their own reasons, and clearly their detailed agenda will not be the same as our own. But in any reasonable interpretation of recent events, a *parallel* in East-West interests is becoming more apparent. There have been very useful talks at Geneva on strategic nuclear forces, on INF, and on space-based systems. But the issues involved in arms reduction are extraordinarily complex, particularly following Reykjavik. It is going to take great skill and a corresponding application of will to achieve real breakthroughs either on nuclear or conventional forces. Let me make Canada's objective clear: we want a *major breakthrough* and *dramatic reductions* in all categories of arms. We believe our allies want the same thing.

One particularly complex issue, not just for superpower negotiations, but also for alliance solidarity, is SDI. The immediate issue is how the ABM Treaty is to be interpreted. The longer-term issue is that of possibly profound changes in long-standing NATO strategic doctrines. Within NATO and with Japan, a dialogue at quite a new level of intimacy and sophistication may be required on the relationship between offensive and defensive systems. The alternative to dialogue is unilateralism and incrementalism in changing strategic doctrine. Given the implications for the rest of us, that is not acceptable.

> **"In Europe, the psychology of being on the front line is justifiably strong—but there is more than one front line."**

It is only on the basis of Western solidarity regarding new strategic defense systems that truly effective and broad-ranging East-West arms control agreements can be achieved.

## ECONOMIC RELATIONS

Obviously, problems of peace and security can create considerable strain within the democratic community. But the potential for strain in economic relations is even greater. Failure to resolve the strains within our community may prevent us from facing squarely the larger issues of debt and development.

40

Our economic relations are dictated by the pro-
verbial bottom-line. The industrial democracies
compete with one another, often very sharply, under
a system of agreed rules. Our economic interaction
is a fluid and rather volatile mixture of competition
and cooperation. It requires constant management
to ensure that the resulting tensions are healthy
rather than pernicious. Fortunately, over the past
several years our domestic economic policies have
been fundamentally sound in coping with extraord-
inary changes. We have long cooperated interna-
tionally within established institutional frameworks:
the OECD, IMF and World Bank. Since the 1970s we
have established some extremely important mecha-
nisms for macroeconomic cooperation—such as the
economic summit and the “quadrilateral” meetings
of trade ministers. The summit is, potentially, one of
the most useful innovations of the last dozen years.

Despite more regular consultations, two funda-
mental problems remain. First, on each of our conti-
nents, some of the deep structural imbalances that
seemed so threatening in the early 1980s are still not
resolved. Uncompetitive, highly protected and
heavily subsidized industries inhibit the movement
toward further trade liberalization. Structural ad-
justment is taking place, but in certain key sectors it
is not happening quickly enough. Second, there is
the problem of parochialism. It is true that we talk
more. But, as we say of the Soviet Union, the test is
not what we say, but what we do. There is in
Europe, in Japan, and in North America a strong
and growing tendency towards self-absorption,
insularity and distorted representations of other
countries. At the level where social and cultural
attitudes get translated into politics, the shallowness
of relations among the industrial democracies holds
real dangers. In democracies like ours, convincing
leaders is not enough. Broad publics may not start
changes, but they can stop them, particularly if they
are nurtured by a go-it-alone nationalism or region-
alism that sees other competitive nations only in
negative terms. We all communicate too much by
caricature, and we will not manage our common
economic challenges adequately if we nurture false
images of our partners—or of ourselves.

In managing our economies, we have to exercise
certain types of restraint, even when it hurts. What
this means now, above all, is the cooperation
required to help correct the unprecedented trade im-
balances that currently loom so large. This requires

further market opening and policy convergence, and
in some cases it requires further stimulation of do-
mestic demand. On a broader level, we are all going
to have to do more to deal with one another, not
only as markets or military allies but as whole na-
tions and whole cultures. Failure to do that will fuel
the kind of nationalism that is reactive and negative
rather than positive and affirming. We can do with-
out the kind of Eurocentrism, Japanism, fortress
America, and Canadian fear that sometimes get in
the way of effective trilateral relations.

The Europe-Japan relation worries me. A reflex
of consultation has yet to be developed across a
broad spectrum of European-Japanese issues. And it
is an unfortunate but inescapable fact that an impe-
tus toward European unity on trade questions since
1982 has moved in parallel with increased friction
with Japan. There is too much caricature on both
sides. The point is that friction and recalcitrance in
Europe-Japan economic relations hurts us all and
has a negative effect on the multilateral climate.

By contrast, the United States and Japan have a
much denser, more multistranded relationship. But
there the issue of the U.S. trade deficit stares us all in
the face. We all understand that the basic causes are

"...we will not manage
our common economic
challenges adequately if
we nurture false images
of our partners...."

complex, involving currency misalignments and the
effects of the huge budgetary deficit. Nevertheless,
there is a real danger that Congress may yet pass
Draconian protectionist measures, in part because of
the deficit problem with Japan. If that happens, the
effects on all trading partners will be extremely
destructive.

Even in some areas where the U.S.-Japan rela-
tionship is being managed in a way that satisfies
both sides, the implications for other economic part-
ners can be disturbing. Japanese-American cooper-
ation in some high-technology sectors, for example,
is assuming a worrisome exclusivity.

But it has been in the U.S.-Europe relationship—
in the agricultural sector in particular—where fric-

41

tion has produced the most unfortunate distortions. Agricultural production in Europe is subsidized to an extent that defies all economic common sense. The United States finally responded to this structural distortion with equally absurd export subsidies of its own. The resulting subsidy war in agricultural products has devastated the livelihood of a great many farmers in Canada, and elsewhere in the world. I will not pretend that Canada has been innocent of subsidy in agriculture, or protection elsewhere. But we are trying genuinely to reduce these barriers, and that is not easy when our farmers are bankrupted because of European and American and Japanese policy.

As a nation dependent on exports for almost 30 percent of our gross domestic product—which translates into about a quarter of our total workforce—Canada has a critical stake in the maintenance of an open world trading system. As world traders, we must also continually respond to change in the global marketplace. Canada is now the only industrialized Western nation without secure access to a market of more than 100 million people. Clearly, our future as a vigorous and respected member of the community we call the West requires that we meet the rapidly shifting challenges of global competition and global protectionism. Therefore, it is no longer surprising that comprehensive bilateral trade negotiations should be undertaken by Canada and the United States. The trading relationship of our two countries has grown to become, by far, the largest in the world—over $150 billion (U.S.) last year. The Canada-U.S. trading relationship is simply too large, too complex and too interdependent to be governed by existing rules. Our shared goal is the creation of a long-term framework that will see the dismantling of tariff and non-tariff barriers over time and in an orderly fashion. A long-term binding Canada/U.S. agreement also holds the potential to set useful precedents for multilateral negotiations in such vital areas as trade in services and trade-related investment measures. From our perspective, the MTN and Canada/U.S. trade negotiations are complementary enterprises. Any agreement we reach with the United States will be compatible with our GATT obligations.

The new round of multilateral trade negotiations launched at Punta del Este will be the most comprehensive set of multilateral trade negotiations ever attempted, and we must take great care not to allow

the political commitments made there to be jeopardized. That could happen if drastic protectionist bills pass the U.S. Congress, or if progress is not maintained on market-opening in Japan, or if there are no signs of demonstrable progress toward resolving the crisis of agricultural subsidies.

Mr. Chairman, there is a parallel between Canada's geopolitical and economic circumstances. Geographically, we are situated between the superpowers. Economically, we are out in the open, directly affected by abrasive encounters among the

## Frank C. Carlucci

Frank C. Carlucci, the recently appointed Assistant to the U.S. President for National Security Affairs, addressed the San Francisco meeting on the morning of March 23. His opening comments dealt primarily with the role of the NSC and Congressional-Executive relations. In a question-and-answer period that followed his opening remarks, Mr. Carlucci spoke on arms control, Nicaragua, Presidential trade authority, and a wide range of other issues. Before his appointment as National Security Advisor, Mr. Carlucci was a member of the Trilateral Commission. He had previously held a variety of high-level positions in the U.S. Government.

42

larger trading entities. In terms of exposure, freezing northern temperatures are the least of our problems.

## THE THIRD WORLD

If insularity in the Trilateral areas is unacceptable in our relations together, so is collective insularity in the face of daunting Third World problems. We must keep developing countries solvent through trade flows. We must continue to implement sensible, coordinated and compassionate policies on Third World debt. And we must do as much as we can to increase the efficiency and effectiveness of our official development assistance.

Another major set of issues in the developing world that calls for both responsibility and coherence on the part of Trilateral states is regional conflicts. The crisis in South Africa is not moving toward peaceful resolution: quite the contrary. The conclusion of the Eminent Persons Group of the Commonwealth last year remains valid today—southern Africa holds the prospect of the greatest bloodbath since the Second World War. The response of nations represented here will be judged, inevitably, in the context of our claims to represent a system based upon democratic values. When Prime Minister Mulroney visited Zimbabwe in January, he was the first Western head of government to do so since Zimbabwe's independence. Canada has played a leading role in the Commonwealth program to fight apartheid. We would like to see the economic summit look closely at the deteriorating South African situation when it meets in Venice. In the meantime, we must continue helping those Black states which border South Africa, which carry the heaviest load in the fight against apartheid. They must know they are not alone.

Two other protracted regional conflicts of major concern are in Afghanistan and Kampuchea. What is required there, of the Soviets, is full disengagement. Improving East-West relations requires not only Soviet expressions of good intent, but Soviet action. This must mean Soviet military disengagement from Asian conflicts. There is complete unanimity among Trilateral partners on this issue. Let me add that Canadian foreign policy is now placing a new emphasis on liaison and consultations regarding Asia-Pacific security issues.

In the Central American conflict there are obvious differences in approach by our respective nations. The Canadian view is that Third World con-

flicts generally have local origins, and that durable solutions must be local too. Canada opposes the further militarization of Central America by any outside power. We think economic conditions are at the root of the conflict, and therefore at the root of its solution.

* * *

I hope my comments today have given you some notion of the Canadian approach to major foreign policy issues. Canadians have been working very hard to strengthen international coordination, and a great deal of that work involves cooperating with the countries represented here today. Indeed, for a country with a relatively small population, we have evolved a remarkable number of international ties. In 1987-88 we will play host, in quick succession, to the Commonwealth, Francophone and Economic Summits. All this is part of the basic Canadian strategy: building coalitions of common cause.

■ Joe Clark is Canadian Secretary of State for External Affairs and former Canadian Prime Minister.

J.H. Warren

photo by Christian von Faber-Campbell

The Canadian Scene

The situation and outlook in Canada today can perhaps best be appreciated if we recall where things stood three years ago when the Trilateral Commission last met in North America. At that time, Canada was still in the throes of the recession; growth was weak, unemployment high; and there was lingering uncertainty about Quebec's future direction. Abroad, there was a perception, because of the Foreign Investment Review Agency, that Canada was inhospitable to foreign investment. The Trudeau Liberal government was still in power but its support seemed to be waning across the country.

Much has changed. In September 1984, a remarkable federal election victory brought Brian Mulroney's Conservatives to power with an overwhelming majority in the House of Commons. Almost as important as the number of seats won was their distribution. Mr. Mulroney gained strong support from every section of the country, nourishing hope of healing the tensions between the center and the regions which had intensified during Mr. Trudeau's lengthy prime ministership. The business community sensed a new mood of goodwill, based on the belief that the new government would be less interventionist and would create a more encouraging atmosphere for the achievement of business objectives.

Now, half way through the Mulroney government's mandate, the overall economic health of Canada has improved. Investment is up and interest rates are down. The inflation rate is much lower, although still higher than in the United States. Unemployment is down, but at 9.7 percent is still unacceptably high, especially in the outlying regions. Over the period, Canada has enjoyed a substantial trade surplus, although this is offset by a large and persistent current account deficit, especially with our main trading partner, the United States. Real growth over the last few years has averaged four percent per year, second only to Japan and stronger than the United States. Employment growth, averaging over 2.5 percent over the past three years, has been remarkably high compared to Europe.

Michael Wilson, the Minister of Finance, has succeeded in containing the growth of the fiscal deficit and setting it on a downward path, both in absolute terms and as a percentage of GNP. However, at a projected $29.3 billion (Canadian) for 1987-88, the deficit is still very high and limits the government's flexibility in economic management. In

44

relative terms, the Canadian budget deficit is greater
than that of the United States, although, of course, it
has a much less significant external impact.

Following the election of the Mulroney govern-
ment, the Foreign Investment Review Agency was
replaced by Investment Canada, with a mandate to
encourage new investment and to continue monitor-
ing inward direct capital flows. Cultural industry
takeovers remain under close control, but otherwise
the area where approval is needed has been signif-
icantly narrowed and, in fact, there have been no
turndowns over the past year or so.

Steps have been taken to improve relations with
the provinces, which, in Canada, are sovereign as
regards natural resources and a number of other
areas. The Western Accord, signed with Alberta and
other western oil-producing provinces, and the
Atlantic Accord with Newfoundland eased many
years of controversy and acrimony on the energy
front between the two levels of government. The
Western Accord deregulates petroleum prices and
reduces taxes. Under the Atlantic Accord the federal
government agreed to give Newfoundland an equal
share of control over the development of off-shore
hydrocarbon resources, which are substantial. Un-
fortunately for the provinces involved, less than a
year after these agreements were reached, world oil
prices dropped to under $15 a barrel, so develop-
ment will have to wait a while.

A TALE OF TWO ECONOMIES

Canada's economic recovery, tributary in many respects to that of the United States, has been good in aggregate, but patchy regionally. Deep disparities exist, and our evolution has become in part, a tale of two economies.

Times are pretty good for the provinces of
Ontario, Quebec and Manitoba, where the manufac-
turing and service industries are concentrated. There
has been an interesting development in Quebec,
where the "separatist" Parti Québécois is now out of
power and where a new entrepreneurial class of
businessmen, working in French, is remaking the
Quebec economy on more modern, outward-look-
ing, and competitive lines. Montreal is endeavoring
to renew itself as a major French-speaking bilingual
economic center, with national and worldwide
ambitions.

In the West, the past few years have been hard
ones for the provincial economies, as they are

particularly dependent on primary resource sectors
and related manufacturing and service industries.
Depressed world oil markets, a sharp fall in the
price of potash, and falling wheat prices caused by
serious droughts in 1984 and 1985, combined with
an escalation of the export subsidy war between U.S.
and European grain producers, have undermined
the main props of the economies of Alberta and
Saskatchewan. British Columbia has been seriously
affected by the decline in metal markets, and for a
long period, until recently, by weak markets for
lumber and pulp and paper.

Atlantic Canada's problems run even deeper,
with a poor economic base reflected in low levels of
per capita earned income and very high unemploy-
ment rates. Offshore oil and gas resources still await
development.

Coping with regional disparities will remain one
of Canada's most difficult challenges. Given new
substitute materials, more efficient manufacturing,
new technologies and increased production world-
wide of most of the raw materials Canada produces,
it is not clear that the traditional demand for some of
Canada's primary resources can still be counted on
to be the same generator of economic strength. We
can expect Canada to build on other strengths and
to try to improve its relative position in the produc-
tion of goods and the provision of services.

THE DOMESTIC POLITICAL SCENE

One might have expected, with a relatively satisfy-
ing economic performance, that the ruling
Conservative Party would be riding high in the
public esteem. In fact, polls consistently reveal that
voter support has plunged, and the phenomenon
seems to be more serious than the customary mid-
term downturn. The governing party is actually
running third in many parts of the country, behind
the Liberal Party—its traditional rival—and more
surprisingly, behind the New Democratic Party
(NDP), Canada's democratic socialist party. A
March 11-14, 1987 national poll showed that among
decided voters, the Liberals have the support of 42
percent of the electorate, the NDP 33 percent and the
ruling Conservatives only 23 percent. This is in
marked contrast to the 1984 election, when the
Conservatives got 50 percent of the popular vote,
and the Liberals and NDP had only 28 percent and
18.8 percent, respectively.

It's puzzling why the government's standing has

45

dropped so drastically. Federal-provincial relations have improved and, overall, the economy has done well considering the weak oil and commodity situation. The principal ministers are seen to have performed reasonably well, notably the Secretary of State for External Affairs—as well as the House Leader, and the Ministers of Finance and Health. The Conservatives' track record on promised legislation is not bad. Elsewhere, amongst newer

> "...the urgency and nature of our main trading problems [do not] permit Canada to await the possible but uncertain outcome of GATT negotiations."

ministerial incumbents and their staffs, there has been an unfortunate rash of improprieties which have led to resignations. While these have somewhat tarnished the government's image, it does not seem an adequate answer to the apparent decline in confidence and popularity of the Mulroney Administration. Under these circumstances, the current spotlight is focussed squarely on the Prime Minister and his perceived performance.

Sometimes these shifts of opinion can be explained by growth in the popularity of the opposition leader. But this does not seem to be a central factor here. For most of the first two years since the election, John Turner, the Liberal leader, was constantly being sniped at from within his own Party. He is still trying to generate countrywide personal support and continues to run behind his Party in the polls. This may now be changing, but Mr. Turner appears still to have some hills to climb.

A phenomenon bearing on the current low standing of the government that is even more surprising is the growth of popular support for the New Democratic Party, traditionally seen as a perpetual minority party with little hope of ever governing, even in a formal coalition. Although the New Democrats have formed the provincial government at various times in British Columbia and Saskatchewan, and currently in Manitoba, and once formed the official opposition in Ontario, at the federal level they have never had broad support

across the country. Now, in several regions of the country (even in Quebec) they are reported to be neck and neck with the Liberals and ahead of the governing Tories. While the NDP leader, Ed Broadbent, is widely perceived to be an effective leader and government critic, his party's current popularity seems to have more to do with disaffection with the two traditional parties and their leadership, than to any swing of public opinion further to the left.

No one knows what will happen to the NDP's current support when Canada approaches its next general election in about two years. Should they maintain their popularity, there will be a question of whether their votes would come more from centrist voters disenchanted with the Tories or from the left-leaning wing of the Liberal Party which, like all centrist parties, seeks to a degree to be all things to all people.

Much will depend on whether the Conservatives are successful with their current three main policy thrusts: free trade negotiations with the United States, tax reform, and constitutional arrangements which would permit Quebec to accept with some modifications the major constitutional reforms of 1981. So far there is no public track record to judge the government's performance on these issues. But that will not be the case two years from now.*

## PROVINCIAL-FEDERAL RELATIONS

Canada, like the United States, is a federal state, but we have fewer provinces (only 10). One province alone (Ontario) produces half the Canadian GDP, and our provinces are stronger in terms of their constitutional and operational power than are states in the United States.

In recent years, the provinces have de facto assumed an increasing role in decision-making at the national level, and consensus development in Canada must necessarily take this phenomenon into account. Federal-provincial meetings are now institutionalized at almost every level, giving the prov-

*Since delivery of this address, the Canadian Prime Minister and the Premiers of the provinces have agreed on proposed amendments to the Canadian Constitution which are acceptable to the Government of Quebec. And on June 18, 1987 the Minister of Finance issued his tax reform package, the initial reaction to which was quite favorable.

46

inces an input on all major domestic issues. These meetings reveal and reflect the reality of economic and perceptual differences between the widely separated regions of a vast country.

These and other Canadian realities are seen dif-
ferently by the various political parties. For example,
depending on how public perceptions evolve, we
may see in Canada greater polarization between
those who wish to intensify management of the
economy through legislation and regulation and
those who seek more market freedom.

One major issue that will test the tone of federal-
provincial relations and have a marked influence on
whether the federal government and the provinces
can articulate a national vision for Canada will be
the current negotiations for a freer trade arrange-
ment with the United States.

TRADE NEGOTIATIONS:

U.S.-CANADA AND GATT

The decision of the U.S. and Canadian governments to negotiate for a freer trade arrangement represents a serious attempt to reduce and eliminate tariff and non-tariff barriers between the two countries. Success or failure will be central to the development of the Canadian economy in the years ahead. The United States would also derive economic advantage. But the negotiations are also important to them (and in part also to Canada) in furthering their interest in having services, investment and intellectual property included—or more fully included—in bilateral and worldwide trade negotiations.

Free trade negotiations will likely dominate the
Canadian political economic agenda over the com-
ing months. Political division on the issue was made
clear in a recent parliamentary debate. Although the
government handily won, dissatisfaction with the
Conservative's motion was evident. The NDP op-
posed the motion and the Liberal position was heav-
ily hedged by a variety of political, cultural and eco-
nomic concerns that the party sees as critical to any
agreement which they might eventually support.
Public opinion across the country is also divided—
business and the economic fraternity are broadly in
favor, academic positions are diverse, farmers are
concerned, and many cultural groups and other
strong nationalists are worried about possible loss of
sovereignty to the United States. While the negotia-
tions have been joined in earnest, it seems clear that
many major issues remain to be resolved before

early October when, according to the "fast track"
procedure agreed by the U.S. Congress, the negotia-
tions have to be completed, at least in sufficient
measure to report a result to Congress.

The importance we attach to our bilateral nego-
tiations does not mean that Canada is less com-
mitted to the GATT, or to a more liberal world
trading system. On the contrary, Canada actively
supported the launching of the Uruguay Round in
Punta del Este. Indeed, the ministerial declaration
which set out an impressive list of priorities in-
cluded many issues which are of particular impor-
tance to Canada. The GATT negotiations will be
lengthy and complex, but it is encouraging that they
will be addressing the real problems which have
emerged in world trade.

Finally, I'd like to make two points about the
interconnection between the bilateral and multilat-
eral trade negotiations. First, the urgency and nature
of our main trading problems—including preoccu-
pation with protectionist thrusts in the United States
—do not, given our huge trade exposure, permit
Canada to await the possible but uncertain outcome
of GATT negotiations, which will stretch over four
years or more. Secondly, both governments are
committed to attempting to negotiate an agreement
which would be compatible with the provisions of
Article XXIV of the GATT, which foresees the cre-
ation of free trade areas, as well as customs unions,
such as the EEC.

* * *

Canada is a fortunate nation, but one also with its
special problems. We face the future with the confi-
dence of an increasingly strong and mature country
more sure than in the past of its capability to dis-
charge an independent and constructive role in
world affairs.

■ J.H. (Jake) Warren is North American Deputy
Chairman of the Trilateral Commission and former
Canadian Ambassador to the United States.

Current Developments in the United States

47

A Democratic Perspective

THOMAS P. FOLEY
Majority Leader,
U.S. House of Representatives

A Republican Perspective

WILLIAM V. ROTH, JR.
United States Senate

From a Democratic congressional perspective, let me try very briefly to cover a number of major issues that we're now facing, and to suggest that it's possible (and obviously from my point of view highly desirable) to develop a better relationship and more cooperative spirit with the Administration in the resolution of these problems.

It is typical of post-war American politics for there to be a Republican President and a Democratic Congress. We have now returned to this normal condition of American politics, which obviously has been successful in important ways since the end of World War II, despite the political division. For example, President Truman's Truman Doctrine and the Marshall Plan were undertaken at a time when there were Republican majorities in the Congress. The civil rights movement had its first great successes in the Eisenhower Administration, when a Republican President was in office and a Democratic majority controlled Congress. Likewise, we've seen the successes of President Nixon in arms control and the normalization of relations with China occur with rather enthusiastic Democratic support. So, by no means should one think that the next two years need be a time of obstruction and stubborn stalemate. Instead, what concerns me is that the Administration, from my perspective, is (Continued on page 48)

Don't count the Republicans out. For that matter, don't count Reagan out. Only six months ago people were talking about the Democratic Party and its dismal future. Today the situation has turned and people are beginning to say the same thing about Republicans. Frankly, the two-party system is alive and well, and I don't think we have to concern ourselves about that.

For those of you visiting our country, it's important to understand that there's a reservoir of goodwill towards the President. The American people want the President to succeed. And they're grateful to this man because he has restored confidence in this country. He has turned the country around. I think many of you will agree that he has presided over a sharp rise in American prestige abroad. In fact, in a very real way the President has set a new standard—a new standard for the Presidency against which future candidates will be judged.

Now, that's not to deny that he's been wounded by Iran; that there has been an erosion of confidence. How badly will in part depend on whether he had any knowledge of the diversion of funds to the Contras. But generally speaking, the American people are weary of the matter. I think there could be a backlash if people felt the President was being unfairly attacked. I must admit, (Continued on page 50)

48

**Foley**, continued from page 47

demonstrating a certain lack of realism on some
principal issues.

THE BUDGET DEFICIT

I know few people who believe that the budget
deficit problem can be resolved, or at least the con-
tinued reduction of the deficit achieved, without
new government revenues—taxes....

I have to confess that it is extremely difficult for
my Party to get across to the American people that
this is the greatest spending Administration in
American history. In fact, the President's reputation
for being a fiscal conservative so overwhelms the
facts that it's difficult to even discuss the subject
with many people. When I was first formally intro-
duced to the President after his inauguration, it was
at a meeting of the bipartisan leadership in a room
immediately off the Senate Chamber, where we sat
in a large circle. The President began by saying he
was worried there had been some misunderstanding
about his intentions regarding government spend-
ing. He said he would, of course, submit to Congress
every year greater requests for public spending and
that would continue throughout his term of office.
He was not elected, he said, to reduce federal spend-
ing—which shocked the Republicans present—but
to reduce the growth rate of federal spending and to
change its priorities. Indeed, the Administration has
changed the priorities of federal spending, but they
have not, in any way that I am aware of, shown
much interest, at least prior to Gramm-Rudman-
Hollings, in reducing the federal deficit. In 1985 the
Administration budget estimated a baseline deficit
of $195 billion, and called for a deficit reduction
effort of $5 billion—a little more than 2.5 percent.

Now the Administration claims that the full impact
of Gramm-Rudman-Hollings must be realized in the
new budget (a reduction of the deficit to $108 bil-
lion). The Administration suggests this is to be done
without taxes, while at the same time boasting that
its own budget has $22 billion worth of added rev-
enues. Apparently, when the Administration uses
certain words they don't have the common English
meaning that one might ordinarily assume. Spend-
ing, for example, does not refer to anything in the
defense sector of the budget, that is preeminently
investment in national security or some other term.

Nevertheless, I think we have an opportunity to
deal realistically with the budget if the President can
be persuaded to drop the "make my day" promise
of vetoing any bill that raises taxes. The problem is
that the President has an absolute veto in this area.
In my research, never in the history of the United
States has a President ever vetoed a tax bill and been
overridden by a Congress, except on those occasions
when the Congress wanted lower taxes than the
President, not the other way around.

Now, that doesn't mean that reductions in ex-
penditures don't have to be made as well. But it's
extremely difficult, under the pressure of many dif-
ferent competing demands, for Congress to find
ways to reduce even $18 billion of federal spending.
One wouldn't think that's difficult in a budget of a
trillion dollars. But, as you know, so much of our
federal budget is already committed to either politi-
cally (or thought to be politically) untouchable areas,
or areas that frankly are untouchable. Twenty-five
percent of the federal budget, for example, is for
Social Security, which both parties agree should not
be affected in a major way. Fifteen to sixteen percent
is in debt service, which cannot be changed. The
defense budget takes 25-30 percent, and frankly, it is
not going to be cut drastically. Reductions in
defense spending in recent years have made the
defense budget no longer an easy target for quick
budget gains. So the problem is difficult, and with-
out some additional revenues I think it's politically
impossible.

It's a question of whether the Administration
chooses to leave office with a dispute over whether
it voided the possibility of serious continued reduc-
tion of the federal deficit (with all of the many con-
sequences of that), or whether it chooses to find a
political concordat on a deficit reduction policy
which would, in my judgement, be of benefit to the
United States and the international community. It is
within the exclusive and absolute power of the
President to do one or the other—to make that bud-
get compromise possible, or to make it impossible—
and he must bear political responsibility for his con-
duct in the coming weeks and months. I desperately
hope that a way will be found to deal with this prob-
lem.

TRADE

The trade problem is of great interest to all of us. I'm
not going to attempt here to take you through all of

49

the possibilities, but let me offer a word of caution, as somebody concerned about excessive and overly rigorous trade legislation. It is true that many Americans are beginning to see themselves as victims of trade policy. It's increasingly true in Japan and Europe as well. This is political reality that simply can't be ignored. This Administration has been criticized in the past for engaging in patchwork protectionism while espousing the overall principle of free trade. I've not criticized it from that standpoint, but I think it is true that the Administration has tended to view trade as an issue to be put aside after temporary crises were resolved. The Democratic leadership wants a trade bill the President will sign. We're not interested in seeing a bill that is largely a background for a trade plank in the 1988 Democratic platform.

## CURRENT INVESTIGATIONS

I speak to Ambassadors from Europe or Canada or Japan who one way or the other express their great concern about the investigations currently underway in Washington. They wonder about the American tendency, as some of them put it, to engage in self-flagellation to the point of weakening its position in the world. I'd like to point out the bipartisanship of the two committees of Congress organized for the purpose of carrying on this investigation. The two committees' staffs have been merged. I think the work of the Tower Commission will be followed by an essentially unified report of the House and Senate Committees. It is impossible in this country, even if the two parties wished to, to simply put an abrupt end to the investigation. An attempt to do that would be denounced in the press and would leave the American people with unanswered questions, which they would fill in, believe me, with theories and opinions which might be much worse than anything the official record would disclose.

It is sometimes suggested that the Democratic Party wants to bring this Administration down. Absolutely nothing could be further from the truth. We have our firm disagreements with the Administration on a number of policy issues, but we realize it would be disasterous for the American Presidency to go through a crisis scarcely ten years after Watergate. Why would it be a political problem for the Democratic Party? In part because the Democratic Party hopes to be in the White House

two years from now and would not want the office so badly weakened and hobbled by a lack of confidence that any program we might undertake would be difficult, if not impossible, to achieve. And above that are broader more patriotic reasons. The Democratic Party believes that the Federal institutions are important and that a sense of public confidence in them is essential for there to be proper public policy.

## FOREIGN POLICY

Let me just say a word about foreign policy, and I do so with some knowledge of the great wisdom gathered in this room. On arms control, we hope to support an agreement on Intermediate Nuclear Forces, which appears to have a good chance of being concluded in the coming months. There will be, however, some disagreement with the Administration in the areas of SALT II sub-limits and ABM Treaty interpretation. I cannot personally understand what the Administration thought it would achieve by abrogating the SALT II sub-limits last year, or this year by its open talk about early deployment of SDI and attempts to reach a conclusion on the so-called "broad interpretation" of the ABM Treaty. It was clear that would provoke a response in Congress and indeed it has. But I don't think it need interrupt an INF agreement. The Democratic Party continues to support SDI research, but that consensus breaks down at the point where direct confrontation with the ABM Treaty is apparent.

On Nicaragua, the Administration, I think, faces the end of Congressional support for military funding of the Contras this fall. The question is whether it will develop an alternative policy that avoids a sudden crisis when Congress ends that funding. There is a great deal of agreement on the objectives that we seek in Central America. The principal problem is what appears to us to be the almost fixed attitude of the Administration that the Sandinista regime must be removed from power—as the principal goal of our policy in Nicaragua. The issue unfortunately has become something of a political litmus test. If the Democratic and Republican Conventions were meeting this month, I think it would be virtually impossible for a Republican candidate to be nominated who is not in support of military aid to the Contras, and vice versa for a Democratic candidate. Our politics is not generally very ideological (it is a centrist type of politics), but occasionally emo-

50

tional issues arise that affect the political equation dramatically.

## CONCLUDING REMARKS

Let me just close by again saying that we have a system that works well to foster political compromise, but only when there is a certain realism about public attitudes and what is achievable. It was the great Edmund Burke who said that government, indeed every human benefit and enjoyment, every virtue and every prudent act, is founded on compromise and barter. These great issues may seem to be ones that should not be decided on the basis of compromise and barter, but they can be decided on no other basis. For the next two years we have an opportunity in this country to produce some real movement on a number of critical issues: trade, budget, arms control, and the broader issues of foreign policy. If we in Congress take the opportunity, and if the Administration is willing to take it, I think some important things can be accomplished which will be to the benefit of not only both parties in this country but to all those in the international community who wish us well. I hope that will happen.

**Roth**, continued from page 47

support for the President could erode further, but overall, I think we are moving out of the problems of Iran.

Let me tell you what particularly concerns me about this episode, that is the question of the governance of the United States. To me it's critically important that every President isn't faced at some stage with being undercut, as has happened to the last four Presidents. I think it was Dave Broder of *The Washington Post* who wrote back in the '60s, when Lyndon Johnson decided not to run for reelection, that the press would not be satisfied until they destroyed every following President. You can make an argument, not that the press necessarily did it, but that that has happened. Watergate, of course, destroyed Nixon. Ford was depicted as a man who couldn't do two things at one time. Carter was attacked for the hostages. We cannot permit that to happen again. This country cannot become mesmerized with an investigation to the detriment of the key issues that face us. Mistakes have been made—don't misunderstand what I'm saying. What I'm

bothered about is that future Presidents will be afraid to make mistakes; and the man who makes no mistakes is a man who does nothing.

## THE ISSUES AHEAD

I think that in many ways the Reagan Administration is off to a new beginning. Let me discuss briefly what I see happening during the next 18 months. I think some progress will be made, but it's going to be a very political 18 months—that would have been true without Iran, because of the Democrats' victory in the Senate. I fear that during the next 18 months too much time and attention will be put by both parties on establishing a platform they think will be successful in electing the next President. Make no mistake, we're already involved in that Presidential campaign.

I think that our becoming competitive in emerging world markets is the most serious problem our country faces. In my judgement, the government should try to create an environment of growth. That means we have to address the budget deficit, the trade deficit, and the problem of savings—to mention just a few.

I'm not very encouraged that much will be done in the way of reducing spending. I agree with Tom Foley that this Administration, in certain areas, has expanded spending substantially. That is certainly the case with defense. The real problem is whether or not we're going to be able to reign in spending. I happen to agree with the President that it's a mistake to raise revenue. I guarantee that if we raise revenue we will raise spending—there are too many goodies out there. The only way we're going to make progress and become competitive, and hold down the growth of government, is by not raising taxes. I think that's an issue we Republicans will like to face in the next election.

Let me talk briefly about trade. I am cautiously optimistic that we are going to have some pretty good trade legislation. The President has promised to veto anything that is too protectionist, and would be backed in a veto. So if anything is going to be enacted, I think it will be a step forward.

Several weeks ago, before the Senate Finance Committee, Robert Hormats said that either we will solve the trade deficit by positive constructive steps or it will be done by whatever means are necessary. That's something important for our friends abroad to consider. Either we're going to work together to

51

have liberal trade that we all profit from, or we're
going to see this country turn to protectionism.
There is a real possibility that protectionism will be
the key issue in the next Presidential election.

Let me tell you what's going to happen in 1988. I
think the Democrats have an opportunity, particu-
larly after regaining control of the Senate in the 1986
election and because of the Iran-Contra affair. But
the Democrats are a divided party, and there's also a
question as to what kind of record they're going to
create for themselves during the next two years. I'd
just point out that in 1946-48 the Republicans con-
trolled the House and the Senate and were charged
with being a do-nothing Congress by President
Truman. Not only was he reelected in 1948, but a
Democratic Congress was elected as well. So, it's not
always a blessing to control Congress. Moreover, the
Republicans are entering next year with some
pluses. We're in the 51st month of a relatively strong
economy. In that period we've created about 12 mil-
lion new jobs, 800 thousand in the last two months
alone. Manufacturing productivity is increasing four
percent a year. So, it's my prediction that if the
Reagan Administration is able to put the Iran con-
troversy aside, next year we will elect a Republican
President. The House will obviously remain
Democratic, while the Senate will be up for grabs,
with a slight leaning towards the Democrats.

## TASK FORCE REPORT:

### Science and Technology in Trilateral Relations: Competition and Cooperation

Takashi Mukaibo

Harold Brown

Luis Solana

Fumio Kodama

Lewis Branscomb

### Takashi Mukaibo

The draft report of the science and technology task force was discussed in San Francisco. Takashi Mukaibo, the Japanese and lead author, described the report as having three main purposes:

First, we describe science and technology issues in the three regions and the state of international cooperation in science and technology. Second, we identify clearly the critical issues that lie in the relationship between science and technology, on one hand, and international relations, on the other. Third, we try to define a framework for Trilateral cooperation, based on general principles but with some recommendations for specific regions.

The creation of our task force is recognition of the growing importance of issues relating to science and

technology in foreign policies and in international relations. At no time in the past have societies so consciously promoted science and technology as a means of achieving national security, economic well-being and national prestige. But while science and technology is increasingly international in character, politicians, publics and governments maintain national perspectives—particularly in commercial and defense technologies. Nationalistic notions threaten the free flow of information among the Trilateral countries, and thereby threaten to slow development of new technologies in such areas as space, medicine, transportation, pollution control, and the production of goods.

Dr. Mukaibo talked in particular about trade problems:

Many of the emotional trade issues in Trilateral relations concern high technology goods. High-tech pro-

55

duction is valued by all regions because it is seen as
profitable, clean, important to national security, and
a measure of national industrial capacity. Interest in
promoting high-tech production in each region is
good and competition is healthy. However, policies
to promote high technologies should recognize the
fundamentally international character of science and
technology. We should avoid nationalistic policies
that promote competitiveness by erecting govern-
mental barriers to the outward flow of technology or
by subsidizing R&D in an exclusive way. We should
not adopt an approach that looks at competitiveness
as a battle for shares in a fixed global economy, but
rather see progress in technology creating opportun-
ities that benefit all countries. We should also avoid
sector-specific policies that try to pick winners or
subsidize losers. We believe industrial policies
should focus on broad "precompetition stages" such
as promoting the right economic climate, education
policy, and R&D support. We recommend that our
regions try to make contributions to the pool of sci-
entific information and technological development
more equal to their respective economic sizes.

He then turned more directly to Japan:

It was logical when Japan was catching up with the
West that it concentrate on acquiring technology
from abroad and on further refining it for competi-
tive advantage. Now that Japan is at the industrial
frontier, it also needs to contribute to the stock of
basic knowledge—at which it is working. Unfortu-
nately, because of a language barrier, many of the
contributions that Japanese scientists and engineers
are already making are not internationally recog-
nized. Therefore, we recommend that the Japanese
government support the cost of translating pub-
lished articles from Japanese into English, and that
governments and scientific communities in the
Trilateral areas support the distribution of those
articles within their countries.

National and international systems for the
development of engineering standards have become
more important because design, development and
production are distributed more internationally. As
a result, Japanese standards, which are frequently
design-oriented, have become a source of com-
plaints. So too have the unclear ways in which these
standards are developed. We recognize that Japan's
system differs for historical and cultural reasons, but

we believe Japan must move forward toward per-
formance-based standards and transparent policy
making processes.

Dr. Mukaibo finished his remarks calling for a "better
mechanism for anticipating international relations prob-
lems and opportunities associated with new technolo-
gies."

We believe that no existing institution is giving
adequate sustained interest to these problems. We
would prefer that an existing institution take up this
task. But if none is willing, we should explore
whether or not we should establish an international
institute for science and technology policy to pro-
vide early warning to our policy makers.

Harold Brown

Harold Brown, the North American author of the report, began his remarks by addressing several features of science and technology in North America. He then turned to a discussion of three aspects of technology transfer:

First is technology and economic competition...
Technology has indeed become a central factor in
Trilateral economic competition. Because of its
importance in that role, the report concludes that
symmetrical access to technology is important to
establish. While there's reasonably good symmetry
between the U.S. and Europe, there is less between
the U.S. and Japan, and between Europe and Japan.
As regards the U.S. and Japan, that asymmetry can
be explained in part by the fact that in the United
States the technology is largely developed in open
places—university laboratories and so forth—while
in Japan most of it is the result of industry efforts,
where there's a tendency to be more closed and
more proprietary (which is true not only in Japan).

The second technology transfer issue is that
connected with international security; primarily it
deals with military technology or dual-use technol-
ogy transfers to the Soviet bloc. ("Dual-use" technol-
ogy can be used either for civil or military pur-
poses.) The issues flow from a need to preserve a
technological lead over the Soviets. There is an
apparatus of the Trilateral countries called COCOM,
whose purpose it is to control these transfers. Except
for the United States, few Trilateral countries have

56

taken seriously enough the threat to Western secu-
rity posed by such transfers. On the other hand, in
recent years the U.S. government has tried to have
such an extensive list of dual-use technologies con-
trolled that other members of COCOM have become
unconvinced of the U.S. case—that tends to encour-
age cheating and bog down the whole system. The
same is true for U.S. attempts to use technology
transfer controls based on military reasons to put
economic pressures on the Soviet bloc. Recently,
there have been U.S. government moves to rational-
ize the whole process, and that's to be applauded.
The sharing of dual-use technology among Trilateral
countries is a relatively new issue—that has resulted
from Japanese leadership in many technical areas.
This new issue is the sharing of Japanese dual-use
technology (or even military technology) with the
U.S. and Europe. This probably needs government-
to-government attention given the sensitivities, both
political and constitutional, in Japan on this matter,
although in the end the governments may decide to
handle this on a firm-to-firm basis under a govern-
ment umbrella.

Finally, civil technologies transferred to develop-
ing nations can be very important for their economic
and social progress. Their ability to absorb civil tech-
nologies is a substantial problem, however, as is the
need to develop indigenous science and technology
in those nations. The Trilateral nations need to help
build institutions in the developing countries and to
work with end-users in those countries to see that
the technology is appropriate. It can be as advanced
as any in the world and still not get used because
the infrastructure doesn't exist or because the cultur-
al or sociological fit is wrong.

Dr. Brown closed with a few recommendations that were especially directed at North America:

First, we need to retain open access to technology,
but one conditioned on symmetrical treatment; and
relatedly, firms, universities and governments need
to create incentives for researchers from the U.S. and
Canada (whether from universities or from indus-
try) to spend time in Japanese laboratories, and to
make that a positive contribution to a career pattern.

Second, an effort needs to be made to raise the
level of scientific and technical education and under-
standing, of the public and of political leaders. With
respect to industrial leaders, a manufacturing em-

phasis is particularly important, both for technol-
ogists and for operating executives.

Third, those who make U.S. national security and
economic policy should balance controls on the
transfer of technology to Third World and Soviet
bloc countries against the need for high-technology
competitiveness in sales and in production. The
important thing is that once a conclusion is reached,
the policy should be adopted and should be consis-
tently followed.

All of these recommendations are rather general
in nature, but they are not so easy to implement—in
part, because their importance has not been ade-
quately realized and accepted. Technology remains
an engine of change, but like other engines it doesn't
tell us where to go. If we don't direct our own
course, technology will still take us somewhere. We
ought to choose some directions.

Luis Solana

Luis Solana, the European author of the report, concentrated on his hope for a "Europe of R&D."

I suppose a Japanese speaker can easily represent
the strategy of his country and an American speaker
may represent it, but it is difficult for a European
speaker to present a scheme for R&D accepted by all
Europeans...The Europe of R&D is only beginning
to exist; it is not real yet.

Mr. Solana saw four main supporting elements in
encouraging a "Europe of R&D" over time. First is the
current effort of the European Community to complete a
unified internal market by 1992.

[This effort is] most necessary to create a demand for
European research...We must not forget that the
market has to be created first for the research to
make sense. If there is not a real common market,
what reason is there for a European company to
give part of its resources for European research? In
more or less protected national markets, a com-
pany's own resources are usually enough...Technol-
ogy without market would be a miracle.

*The second supporting element would be "only one European education system."*

57

I don't mean uniform, but united. Without an equiv-
alent European education, the idea of European
R&D is hard to reinforce. Obviously universities are
the key, but other levels must be kept in mind.

Third are joint projects, such as the Channel tunnel. He
noted Euratom and Airbus. He saw virtues in SDI-type
projects.

I'm not going to make any political evaluation. I
only want to say that I wish Europe were able to de-
fine projects—capital-reinforced R&D—as has been
done by SDI.

The last but not least of Mr. Solana's four supporting ele-
ments is more economic and political power for Brussels,
for the Community. He noted that only three to four
percent of the Community budget is dedicated to R&D.

Can there be in the future real Trilateral competi-
tion? I believe that if Europe does not react urgently
it will be difficult. The Euro-optimists can point to
the many areas of science that have developed in
Europe, but they must also note how many of them
have been applied to business in the U.S. and Japan,
and how few in Europe. At the same time, we must

tell the Euro-pessimists that large American multi-
national companies are developing their R&D in
Europe and with European scientists.

Someone might think that I am advocating
European protectionism. By no means. I want
Trilateral competition, but the problem is that the
European side of the triangle is not yet strong
enough.

The authors were joined on the dais by their two associate
authors, Fumio Kodama and Lewis Branscomb, who both
participated in a question and answer session that
followed the opening presentations.

■ Takashi Mukaibo is Acting Chairman of the Japan Atomic Energy Commission and former President of the University of Tokyo. ■ Harold Brown is Chairman of the Johns Hopkins University Foreign Policy Institute and former U.S. Secretary of Defense. ■ Luis Solana is Chairman of the National Telephone Company of Spain. ■ Fumio Kodama is Professor of System Engineering at Saitama University in Japan. ■ Lewis Branscomb is Director of the Science, Technology and Public Policy Program at Harvard University and former Vice President and Chief Scientist at IBM.

“High-Tech” Development

One reason the meeting was held in San Francisco
was to afford members an opportunity to visit the
“Silicon Valley” area south of San Francisco. On
March 24 an optional program concerned with the
dynamics of “high tech” development was held.
The group visited a) Genentech, where we heard,
among others, from G. Kirk Raab, President and
Chief Operating Officer; b) the Center for
Integrated Systems at Stanford University, where a

program that focused on Stanford's role in high-
tech development was organized by Dr. John G.
Linvill, Director of the Center; c) Hewlett-Packard,
where we heard from John A. Young, President
and Chief Executive Officer, and toured a comput-
er assembly area; and d) Intel, where we saw a
short film and heard from Robert Noyce, Vice
Chairman and co-founder, who talked about
"high-tech" trade issues.

Unemployment-Employment Trends
and Their Implications

Heinz Kluncker

Lester Thurow

Ginko Sato

EUROPE

HEINZ KLUNCKER

At the beginning of 1987 unemployment in Western Europe reached its highest level since the Great Depression in the 1930s. The unemployment rate is currently 11.8 percent (about 20 million persons), not including those looking for work who are not registered as unemployed. Young people, women, unskilled workers and the physically handicapped have been the most severely affected. The length of time people are unemployed has also increased. With a predicted European growth rate of 2.0 to 2.5 percent for 1987—and uncertain export markets—we can expect increased unemployment or, at best, a stagnation of the employment figures.

THE CAUSES OF UNEMPLOYMENT

Unemployment is above all the result of the organization of the economy and, therefore, also the organization of work. It is aggravated by the fact that those in responsible economic and political positions are not seriously interested in fighting unemployment effectively. There are several causes for the volume and duration of unemployment. One is a drop in demand. As a result of the economic crisis and the negative effects of austerity policies, there has been a noticeable decrease in people's incomes and, therefore, a drop in demand on both domestic and foreign markets.

Another cause is the application of new technology. Politicians, economists and scientists make different evaluations as to whether and to what extent the application of new technology—for example, the use of microelectronics—causes an increase in unemployment. Some facts are clear, however. In recent years investments to rationalize production have dominated investment decisions. Through the use of more effective technical, and above all electronic aids, human labor has been replaced by technical installations, leading to the dismissal of employees, who are not in a position to find new jobs. In Western Europe, productivity has increased more and more rapidly in recent years. When productivity increases, to prevent a rise in unemployment, demand must grow and/or working hours must be considerably shortened.

Finally, as a result of a neo-conservative offensive, public services have been totally or partly abolished or have been privatized. This has meant the dismissal of employees, most of whom have not been able to find suitable jobs again because of the tight job market. (Continued on page 60)

59

UNITED STATES

LESTER C. THUROW

For those of you who are devotees of science fiction movies, you'll remember in the Star Wars movies that there was a light and a dark side to the "Force." What I want to do this afternoon is talk about a light and dark side to the economic forces that generate jobs in America.

THE LIGHT SIDE

The good part of the story is that the American economy creates jobs like crazy, and it's not something that we just discovered with the beginning of the Reagan Administration. From 1972 to 1976 under Presidents Nixon and Ford, the American economy generated 6.5 million jobs; from 1976 to 1980 under President Carter it generated 10.5 million jobs; and from 1980 to 1986 under President Reagan it generated 11.4 million jobs. Although the Carter Administration created 0.7 million more jobs per year than the Reagan Administration, the fact is that regardless of who's been running the American economy, it has created a very high number of jobs.

If you look at the period from 1980 to 1986, employment in agriculture, mining and manufacturing fell 1.2 million. The number of jobs in transportation and utilities increased by 0.5 million and in government by 0.7 million. During this same period we created 1.0 million jobs in construction (mostly building new homes) and 1.4 million in finance, insurance and real estate—mostly in finance. We created 3.2 million jobs in wholesale and retail trade, largely by going to 24-hour retailing; and we created 5.4 million jobs in the service industries, about 40 percent of these in health care.

The reason for America's strong gains in employment is easy to understand: Very strong macroeconomic stimulus was injected into a very receptive microeconomic environment. From 1980 to 1986 the American money supply (M1) grew 76 percent, or more than 10 percent per year, while the fiscal deficit rose by $145 billion or 3.5 percent of GNP. Combined, these factors produced a classical Keynesian reflation—in a big way.

In the microeconomy productivity grew very slowly—only 1.3 percent per year from 1980 to 1986. Because demand grew at a higher rate, the result was job growth. (With one percent productivity growth and a three percent growth in demand, employment grows by two percent. But with a four percent increase in productivity and the same three percent rise in demand, (Continued on page 61)

JAPAN

GINKO SATO

Japan experienced virtually full employment during its high economic growth period between 1960 and 1973, and even during recessionary periods, the unemployment rate was little more than one percent. After the oil crisis of 1973 and 1974, Japan experienced a long depression, yet the unemployment rate was lower than 2.5 percent. Although it reached a record high of three percent this January, low unemployment is still pointed to as evidence that Japan enjoys prosperity while other countries suffer. There are several reasons why our unemployment rate is low compared with other advanced industrialized countries.

First, as many of you know, the practice of lifetime employment prevails in Japan. Even at times of recession and slowdowns in business activity, employers will make every effort to avoid laying off workers: by reducing overtime work; by transferring workers within plants, between plants and even between companies; by training redundant workers in new skills while paying them wages; and so on.

Second, the percentage of self-employed workers and those in family-owned businesses is relatively high—25 percent for Japan, as compared to about ten percent for the United States and the United Kingdom, and less for other member countries of the Commission.

Third, because a major portion of Japanese youth are students who are also financially dependent on their parents, youth labor participation is much lower in Japan than in other advanced industrialized countries, where the youth unemployment rate is notably high.

Fourth, mid-career changes are still relatively uncommon in Japan. The promise of lifetime employment and a wage system that rewards seniority are strong incentives for workers to serve a single employer until retirement.

Fifth, because the internal labor market is flexible, it is possible for employers to adjust to a changing market by transferring redundant workers to new jobs or new plants. Because labor-management communications are generally highly developed, such adjustments are fairly easy.

In recent years, however, internal and external socioeconomic changes have been the cause of much concern. The Japanese population is rapidly aging, at a tempo unparalleled in other parts of the world. As life expectancy rises, workers increasingly express a desire to work even (Continued on page 62)

60

**Kluncker**, continued from page 58

## EFFECTS ON INDIVIDUALS AND FAMILIES

Long-term unemployment causes a drastic fall in the standard of living of the families affected. In fact, we can justifiably speak of "poverty" again in Western Europe. Even short-term unemployment can have a lasting and damaging effect, for example, when particular professional qualifications are no longer required. This can lead to a permanent loss of income.

The only way to obtain complete information on the negative effects is to listen to what the unemployed have to say. In the meantime, the results of scientific tests are available which deal with psychosomatic illnesses and behavioral disturbances that have been caused by unemployment. Work is more than just a source of income. A person's self-confidence and self-esteem can be negatively affected in many ways because of the loss of a job. The effects can be just as harmful if school-leavers can find neither a trainee position nor a suitable job. All too often the development of these young people is permanently and negatively affected. The family is also affected: there are more family conflicts; in the case of children, their development is disturbed and their school work suffers; there is an increase of psychosomatic disturbances among wives; and there are more divorces, and more cruelty to children.

## EFFECTS ON SOCIETY AS A WHOLE

Before the present economic crisis there was a certain social consensus in most European countries between the relevant groups: the political parties and their most important representatives in parliaments and governments, the employers' associations and the trade unions. The longer mass unemployment lasts, the greater the danger that basic consensus will be destroyed. This is particularly true in those countries in which there has consciously been no attempt to achieve full employment through legislative measures.

Mass unemployment can also weaken people's faith in a democratic state—recall Central Europe at the end of the '20s and beginning of the '30s. Nobody can say exactly when unemployment becomes destabilizing. But the danger is particularly acute when unemployment lasts a long time and is constantly increasing.

Financing social security systems, and especially old age pension schemes, has become increasingly difficult as a result of the number of unemployed and of the length of time many of them are without jobs.

## POLITICAL ACTION REQUIRED

I am sure that the present economic crisis and the resulting unemployment are not natural phenomena and are not irreversible. Unfortunately, many European governments and the political forces which support them do not see the necessity for government action to fight this deplorable state of affairs. It is high time there was political action to reestablish full employment. Parliaments and governments bear a great part of the responsibility, as do intergovernmental institutions such as the OECD and the European Community.

It is becoming more difficult to influence fully economic forces at a national level, but it would be fatal if national governments used problems at the international level as an excuse for their own inactivity. Lack of results at the so-called "Economic Summits" makes it all the more necessary for the state to try to improve the employment market with domestic measures.

Unemployment cannot be fought effectively solely by economic, financial and fiscal policies that are aimed at increasing the quantitative growth rate. Everyone who supports industrialized society must, at the same time, stand up for adequate investments to ensure full employment. This is where the real problem begins. It is very important for the social acceptability of economic activities and for the safeguarding of full employment which kinds of investment are made.

If those holding responsible positions in industry and politics do not change their attitude, unemployment in Western Europe will not fall. On the contrary, there is a danger that in some countries it will even increase because of demographic development and structural changes. The aim of all those who are responsible must be to give everyone who wishes to work the opportunity to do so. The following kinds of legislative measures are possible: government investment programs to increase environmental protection, to save energy, and to redevelop towns; increased government financing of training programs; increased government financing of basic research; and tax relief for investments which have a

61

positive effect on employment. Besides these legislative measures, the collective bargaining partners should put their efforts into shortening working hours in any way which could create jobs.

■ Heinz Kluncker is Former President of the Public Services and Transport Workers Union in the Federal Republic of Germany.

**Thurow**, continued from page 59

employment decreases by one percent.) Low productivity growth hurts the growth in real income but it helps job growth.

Changes in the relative prices of capital and labor have also helped to increase employment. Since 1972 real weekly earnings have fallen 14 percent for non-supervisory workers in the U.S. economy. At the same time higher real interest rates have led to a much higher real cost of capital. With lower absolute and relative wages, American employers received strong economic signals to hire people rather than move toward more capital-intensive production methods. Capital deepening has not occurred. On the contrary, in some recent years capital-labor ratios have actually fallen.

Limited unemployment insurance coverage also helps to increase employment by creating a labor force that is willing to accept jobs even if the wage rates offered are far below those previously earned. In 1986 only 33 percent of those unemployed received any unemployment insurance payments whatsoever, and those receiving such payments replaced only 42 percent of their gross wages.

The U.S. is also an economy marked by great variance in wages—in particular a low-wage sector that is absent from most other wealthy industrial countries, and has an impact on employment. Thirty-one percent of the U.S. labor force earns less than $7,000 per year. Minimum wage laws contribute to this situation. The U.S. minimum wage is low ($3.35 per hour or just 38 percent of the average wage) and is widely ignored (approximately ten million U.S. workers earn less than the legal minimum wage). The law is lightly enforced and the penalties for violation are minimal.

The final aspect of this microeconomic environment is the ease of hiring and firing people. In the

United States workers are genuinely a variable cost, while in much of the world they're a fixed cost. There is no law requiring advance notice of layoffs or severance pay when laid off. Because workers are easy to fire, U.S. employers are willing to hire them when demand rises.

Put all of these factors together and you have an economy where strong Keynesian stimulus leads to millions of jobs.

## THE DARK SIDE

While millions of jobs have been created, most of them have been low-wage jobs—of the new jobs generated since 1978, 49 percent pay less than $10,000 per year; in contrast, only 39 percent of all jobs paid less than $10,000 per year in 1978. On average, new jobs pay substantially less than old jobs. The result is a rapid rise in income inequality. In 1985, the bottom 60 percent of all American families received the lowest share of total income that they had ever received since the statistics were first collected in 1947. The Federal Reserve Board recently reported that the income share of the top ten percent of the population has risen from 29 percent to 33 percent. Wherever one looks, income inequality is now rising in America.

The reasons are not hard to find. Many of the new growing high-tech industries pay wages substantially below those of the old, declining rust belt industries, such as the automobile, steel or machine tool industries.

International trade also plays a role. The U.S. trade deficit has eliminated many high-paying blue collar jobs. In U.S. manufacturing it takes one million full-time workers to produce $40 plus billion worth of goods. Thus, last year's $170 billion trade deficit represents a loss of four million U.S. manufacturing jobs. These jobs have been replaced by new jobs, but they pay less. Using input-output techniques it is possible to calculate the average wage paid in import-competing industries ($19,583 in 1983), in exporting industries ($18,607 in 1983), and in domestic industries that neither export nor compete with imports ($16,168 in 1983). And so, as we lost jobs in the international sector and gained jobs in domestic industries, we had a shift towards lower paying jobs.

On a related point, the import of manufactured products from low-wage Third World countries is also putting downward pressure on U.S. wages—

62

especially at the bottom of the wage scale. Where factor price equalization used to be an intellectual curiosum taught in courses on international trade, it may be becoming a reality. While the United States imports 63 percent of all manufactured products exported from the Third World, Europe imports only 23 percent and Japan only seven percent, yet Europe's GNP is larger than that of the United States and Japan's GNP is now half that of the United States. Whatever downward pressure does occur from the import of lower-priced Third World goods is concentrated in the United States.

## INTERACTIONS

Unless you believe the United States can run a trade deficit forever, at some point those jobs are going to come back to America and the rest of the world is going to lose four million jobs. Based on bilateral trade flows, about one-third of those jobs would come from Japan, about one-third would come from Europe or Canada, and about one-third would come from the rest of the world. Employment problems in the rest of the world are going to become worse.

But it is equally true that when the United States cures its trade deficit, its income distribution problems will become worse. The United States will lose $170 billion worth of consumption that it now does not pay for, will have to start paying interest on its international debts, and will suffer a deterioration in its terms of trade as the dollar falls to bring the current account back into balance. Yet a "soft landing" (a slow cure for the U.S. balance of payments) is in many ways worse than a "hard landing" (a rapid movement toward balance in international trade). For the slower the cure the bigger the ultimate trade surplus the United States will need to meet its interest payments on its international debts. For example, if the United States were to cure its trade deficit at the rate of $20 billion per year and pay six percent interest on its international debts, its current account would be balanced in the year 2001. At that point the United States would have an international debt of $1,800 billion and annual interest payments of $100 billion, which means that it must run a perpetual trade surplus of more than $100 billion per year —increasing job problems in the rest of the world.

When it comes to a quick improvement in the U.S. balance of payments, there are three options. The first option we all know well: we all cooperate to solve these world trade problems with a minimum

of pain. This requires that the United States raise taxes to cure its federal budget deficit problem (so that the United States needs to borrow less money in international money markets). It requires that Japan and Europe stimulate their economies to encourage faster domestic growth (so that U.S. exports could rise rather than its imports fall, in lessening the current imbalance more rapidly). If this is not possible, and neither side is willing today to do what is necessary, then the dollar must fall enough to bring about the necessary rebalancing of international accounts. No one knows how far it must fall, but all of our current evidence indicates there's a long way to go. If neither of these two options occur, the only remaining option is for some kind of unilateral U.S. action to cut imports—such as auctioning off import certificates—to prevent itself from plunging ever deeper into international debt. Now, the third option is not desirable, but if we won't or can't do options "one" or "two," I'm personally in favor of "three." If that makes me a protectionist, I'm perfectly willing to stand up and be called a protectionist. I would argue that unilateral action is better than doing nothing until a crisis in international exchange markets forces a solution upon us.

■ Lester C. Thurow is Dean of the Alfred P. Sloan School of Management at the Massachusetts Institute of Technology.

**Sato**, continued from page 59

after they reach retirement age. However, job opportunities for the aged are still very limited. To maintain a vital and sound society with a rapidly graying population, the problem of employment security for the elderly needs to be promptly addressed.

Japan is also facing a crisis in its relationship to the world economy. Recently, newly industrialized countries (NICs) such as Korea and Taiwan have been exporting cheaper products than Japan. Although Japan's products have been blamed for an increasing number of jobless people in the United States and Europe, Japan is itself confronted by similar pressures from the NICs. Moreover, the recent sharp appreciation of the yen has put considerable pressure on the employment structure, and many of

63

Japan's industries have been dealt a severe blow. Industries such as shipbuilding, steel, coal, machinery and transport-equipment manufacturing have lost their international competitive edge, and are under heavy pressure to dismiss redundant workers. In the areas where these industries are vital to the local economy, there has been a sharp rise in unemployment, an increase in the number of people living at the poverty level, and a decrease of revenues for the local government.

Many fear that our new record high unemployment rate of three percent—the highest rate since the government first began compiling employment statistics in 1953—signifies the beginning of an upward trend. It does reemphasize the need for effective countermeasures to cope with these problems.

Last April, the Law Concerning the Security of Employment of Older Persons was enacted to increase employment opportunities for the aged. Under this law, the government advises companies to extend their mandatory retirement age and to devise extension programs. In addition, companies with six percent or more of their work force aged 60 and above are given subsidies. This subsidy scheme is funded by contributions made by all employers in proportion to the total wages they pay.

The Japanese government has admitted the necessity for change in the industrial structure—to decrease exports and increase domestic demand and supply of products and services. To prevent an increase in unemployment in the course of this change, the Ministry of Labor has plans to launch an emergency program. Roughly, the program provides subsidies for employers who keep redundant workers on the payroll while providing them with in-company education and retraining or outside vocational training, instead of dismissing them. The Ministry of Labor also plans to assist employers' organizations to establish employment security centers that promote the transfer of workers from depressed industries to growing industries. This program is also funded by contributions made by all employers in proportion to total wages they pay.

We are faced with the formidable task of making these countermeasures effective. The training of older workers in new skills is not easy. The transfer of workers from depressed industries—mainly in manufacturing—to growing industries—mainly in the services—means that interregional adjustment of employment is needed. More workers will have to

move into urban areas where the growing opportunities are. This will require adjustments not only by displaced workers, but by their families as well. It will also exacerbate overpopulation in big cities and the socioeconomic decline of rural areas.

Although Japan's outlook for the near future does not appear bright, we are endeavoring to adjust to these drastic internal and external changes in order to create a new and well-balanced industrial structure and to improve trade relations with other countries.

Ginko Sato is Director-General of Women's Affairs at the Japanese Ministry of Labor.

Yoshio Okawara

Yoshio Okawara is the new Japanese Deputy Chairman of the Trilateral Commission. He assumed this role in 1986, after having joined the Trilateral Commission in 1985 upon retirement from a distinguished diplomatic career. Ambassador Okawara had entered the Ministry of Foreign Affairs after graduating from Tokyo University's Faculty of Law. He rose through the ranks, ultimately becoming Ambassador to the United States in 1980-85. Ambassador Okawara is now serving as an Advisor to the Minister of Foreign Affairs and as Executive Advisor to the Keidanren. As Japanese Deputy Chairman of the Trilateral Commission he succeeds the late Nobuhiko Ushiba.

The Trilateral Commission
Name of Job: Henry A. Kissinger
11-05-87 Proof 4 Palatino 10

Current East-West
Negotiations

When I was asked last November to speak here today there were no negotiations going on at that moment and there seemed to be great unanimity that Reykjavik will not be recorded in diplomatic history as a stellar achievement of the art of foreign policy. So I thought I was on reasonably safe ground. Since then there has been an evolution; and I thought the most useful thing I could do is to present more or less controversial ideas. Those of you from abroad who disagree with me can consol yourselves that I'm performing my usual function of uniting Americans by getting both liberals and conservatives mad at me simultaneously.

Until Reykjavik I had never publicly criticized the Reagan Administration. I believed that even though some of the rhetoric could have been moderated, they were generally heading in the right direction; and that some of their opponents, many of whom I like personally very much, were generally heading in the wrong direction. However, the manner in which Reykjavik was assembled and the nature of the negotiations disturbed me deeply.

Let me state my view on the current state of East-West negotiations in three propositions:

1. There may indeed be an important opportunity to make progress in East-West relations, an opportunity on two levels—to fix the basic strategic problem produced by the excessive reliance on nuclear weapons, and secondly, to begin putting East-West relations on a new basis.

2. None of the proposals now being discussed in the military field, in my view, improves the situation. And several make it worse.

3. We are witnessing a process in which arms control is being transformed from a strategy into an obsession, a process in which every intellectual current bears a part of the responsibility. Political leaders are so obsessed with public relations and short-term impact that they are not addressing the

fundamental problem

UNDERSTANDING OUR OPPORTUNITIES

Let me say a word about the two levels of opportu-
tunity. For a decade or more it should have been
~ would
will lead eventually to the demoralization of the
West. It is not possible indefinitely to tell demo-
cratic publics that their security depends on the
mass extermination of civilians, unopposed by
either defenses or a mitigating strategy, without
sooner or later producing pacifism and unilateral
dismarmament. SDI offers us an opportunity here, to
which I shall return later.

Secondly, I believe we do have a new situation in
the Soviet Union. Gorbachev is different from any
Soviet leader that I've ever seen, or that I have
ever heard about. And there's no doubt that the
people around him conduct themselves with an
openness and flexibility that is unprecedented. But
the question is, do we reward them; do we pay in
foreign policy concessions for their domestic reform?
I would argue that the task of Western leadership
is to translate an opportunity into foreign policy
objectives and to fix the problems that produced the
tensions. Of course, domestic reform in the Soviet
Union has attractive features, but if it does not lead
to a change in foreign policy conduct, we would be
taking the odd position that a strengthened adver-
sary is better for us *per se* than a weakened adver-
sary—which at least is a new theory of interna-
tional relations. I repeat, I think these reforms can
be very helpful, but we must be able to translate
them into foreign policy objectives.

In this effort, we need some understanding of
what Gorbachev and his associates represent.
There are at least four possibilities: He is a tradi-
tional Leninist risen through the ranks who wants
to see the Soviet Union strong, and has decided he
needs domestic reform. He is caught in a bureau-
cratic dilemma—on the one hand he wants to
reform the economy, on the other he cannot take on
every power structure in the Soviet Union simulta-
neously; and therefore, we might easily see a comb-
ination of domestic reform and foreign policy con-
servatism. (I must say that I do not find in the
Soviet proposals that have so far been made in the
military field much that is different from either
the past or from an attempt either to maintain a
Soviet advantage or to increase it.) Or we are see-

ing here a new phenomenon in the sense that for the
first time, here is a Soviet leader in restless motion
looking for domestic approbation among the mass of
the population and not in the party apparatus it-
self. (In the field of international policy this could
lead to extreme fluctuations and does not at all
guarantee, necessarily, eternal conciliatory policy.)
Finally, maybe there is a genuine change.

CURRENT PROPOSALS: INF

I'm not going to choose between those four options. But I would say that the policy of the West today will not tell us what is really the motivation of the Soviet Union because we are not putting forward propositions that we can in good conscience say are an improvement of the situation. We are putting forward propositions that we believe will be accepted. Or we are putting forward propositions that satisfy short-term domestic pressures in our countries. Let me illustrate this by some discussion of the looming agreement on the zero option on the INF. I will be in the tiny minority that does not consider this a milestone in Western statesmanship; in fact, I do not think it is a good agreement. And I think it is amazing that there has been so little discussion of some of its problems.

What was the purpose of INF? It was asked for
by the Europeans, allegedly to close a gap when the
Soviet Union introduced medium-range missiles
into its arsenal in the middle- and late-'70s. That
technical military argument was always somewhat
dubious. To resist the SS-20s we could have used
sea-based missiles or our strategic missiles in the
United States. The most valid argument for placing
American medium-range missiles in Europe was to
couple the defense of Europe and the defense of the
United States in some organic manner. With Amer-
ican missiles capable of reaching the Soviet Union
stationed in Europe, the Soviet Union could not
engage in nuclear blackmail against Europe without
risking American retaliation from Europe; that
would bring general nuclear war; and that is pre-
sumably unacceptable. The same argument could be
made with respect to a conventional attack on
Europe, on the theory that a Soviet planner could
not assume that the United States would permit
these missiles to be overrun.

That is the fundamental argument for having
these missiles in Europe. It created a certain auto-
maticity in the American response. It was an argu-

[Y]

4

ment, admittedly, that nobody made explicitly,
and therefore, the whole discussion has been off on
technical military issues. This coupling is being
destroyed by what is now being negotiated.

It is perhaps useful to discuss briefly the forces in
the United States that generated the zero option.
Among the principal forces were people in the
United States who, throughout the '70s, opposed
arms control agreements as a snare and as a delusion
and as encouraging a misapprehension of Soviet
motives. They argued not that they were against
arms control, but that they were against arms con-
trol that only froze the existing programs. They
were in favor of reductions; this became an article
of faith. (Others argued in a similar manner for on-
site inspection.) Other forces in the generation of
the zero option were military technicians who say
it doesn't make any difference where the weapons
are stationed, as long as we use them. And finally,
there were neo-isolationists, who really want
Europe to take care of itself. You non-American
Trilateralists therefore confront a coalition of neo-
conservatives, neo-isolationists and arms control-
lers who have come together on this proposition
and who will give it momentum, especially in the
absence of anybody making explicit what they're
privately thinking.

The zero option originated in the Defense
Department; it was opposed by Secretary of State
Haig. It was packaged by public relations people
whose knowledge of strategy was minimal, and of
arms control was less. But it had the great advan-
tage that it was not possible to top a proposal that
offered to go down to zero. Europeans followed the
same strategy, rattled by their own domestic
opponents. They hid behind the hoary well-estab-
lished doctrine of the Harmel Report that we
simultaneously pursue negotiations and armaments.
And therefore, the zero option was supported on
both sides of the Atlantic with the confidence that
probably the Soviets would never accept it, and as
a device by which we could proceed with the
deployment.

Let me explain my concerns about the consequences
of this agreement. It is said that the Soviets are
giving up more warheads than we are. That's prob-
ably true, though it should give us some pause
because I do not believe anyone here who has ever
negotiated with the Soviets has seen them eager to
make disproportionate cuts in their forces. The cuts

in warheads barely reduce the Soviet capability to
attack Europe with nuclear weapons. They'll still
have hundreds of short-range weapons, thousands
of ICBMs, hundreds of airplanes and an arsenal
useful for that purpose of some 20,000 warheads—
while eliminating the U.S. capability to retaliate
from Europe. That is a psychological not a numer-
ical fact. It discredits and discourages those who
have sought the best defense.

For the third time now in the last 25 years the
United States has unilaterally reversed—in differ-
ent Administrations—decisions which it urged on
the Europeans. It withdrew the Thors and Jupiters
in the context of the Cuban missile crisis, within
less than five years of deployment. It abandoned
the neutron bomb within two years of committing
Europeans to it. And it is now well on the way to
withdrawing the INF within three years of its
deployment—indeed, before its deployment is even
completed. Therefore, it is unlikely that any Euro-
pean leader will again stake his political future on
following American strategic prescriptions opposed
by the Soviet Union. This is another way of saying
that the Soviet Union is on the verge, and may
have already achieved a veto over nuclear deploy-
ments within NATO. This is all the more true be-
cause this decision also forecloses important Euro-
pean alternatives. I do not see how the Federal
Republic can agree to the stationing of French
medium-range weapons on its territory, were that
ever offered, after having just got rid of the Amer-
ican ones. Indeed, the long-range strategy of the
Soviet Union must now be to accelerate the denucle-
arization of all of Germany; and therefore, to
heighten the psychological distinction between the
Federal Republic and those European countries that
have nuclear weapons.

The Asian part of the agreement gives me great
worry as well. It permits 100 Soviet medium-range
warheads in Asia balanced, if that is the proper
word, by 100 American warheads that the Soviets
insist be in the continental United States. From
there they cannot reach the Soviet Union in case of
a Soviet attack on China, Japan or Korea. Even if
the Soviets should make one of their famous conces-
sions and permit the stationing of these warheads
in Alaska, I believe that those who know some-
thing about our military budget will agree that it is
highly improbable that the United States would
for long maintain 100 warheads in Alaska which

6

can cover Soviet territory only at huge expense, when there are so many other means available.

The Soviet Union does not need 100 warheads aimed at China, Japan and Korea for military purposes. It has a surplus of warheads for that purpose. What it does heed is our approval of that deployment, because that shows that we are making a distinction between Europe and Asia. And it is therefore a political weapon.

For all these reasons I am extremely worried, and I'm even more worried about the fact that there has been no serious debate going on. We are told that the argument in favor of the zero option is that the Soviet Union is giving up more warheads than we are giving up—I've already dealt with that. We're also told that the impending agreement will permit verification. But verification, which was used by so many conservative opponents of arms control to kill what they didn't like, is not an end in itself. Verification depends on whether you understand what scale of violation is needed to upset the agreement and what measure you can take to respond and how quickly you can respond. I would be astonished if it were possible to reintroduce American medium-range missiles in Europe after they have been withdrawn. And therefore, what exactly are we going to do if it turns out that the verification procedure tells us that there is a violation. (Incidentally, I do not assume that there will be violations, given the balances that I have described, at least not in the immediate future.) We are told also that the impending agreement is a test towards something more useful. I would ask this question: When are we going to do something useful? What is the purpose of symbolic agreements that you cannot explain in substance? Why not make a substantively important agreement?

I have spent this much time on INF because it shows the intellectual problems all of us are facing. I believe it would have been infinitely better to propose a 50 or 75 percent reduction which kept some American missiles in Europe, and make the rest of the withdrawal conditional on some amelioration of the short-range weapons problem and the conventional balance. We would have had all the benefits that I've described and few of the penalties. We cannot blame the Soviets for the zero option proposal, so we'll probably have to go ahead with it. If we do, it would be highly desirable to find ways of stationing aircraft carriers or

something else close enough by to Europe to make it
clear that we are still physically committed, or to
accelerate the creation of European forces—in other
words, to undue in part what we have inflicted on
ourselves. But, in the atmosphere that will be gen-
erated, I doubt that this will happen.

CURRENT PROPOSALS: START and SDI

Now, I would argue that some of these attitudes
are reflected, as well, in the general negotiations on
START and on SDI, which I cannot cover in detail.
With respect to START, I do not oppose a 50 percent
reduction, but I defy anybody to tell me, except
symbolically, in what way it improves the situa-
tion—given the way it is now being negotiated, in
which all essential weapons are being main-
tained, except at a lower level. It neither reduces
the danger of surprise attack nor does it reduce the
danger of civilian devastation. I have no problem
living with this as a symbolic move. I would have
preferred a negotiation designed to abolish MIRVs,
which would have made a difference.

Now let me say a few words about SDI. SDI has
become an almost mythical issue. Much of the oppo-
sition to SDI is generated by the conviction that it
is an obstacle to arms control agreements, an obsta-
cle to the very agreements that I have analyzed
previously. I am generally in favor of SDI, though
not of the arguments that the Administration has
advanced on behalf of it. I am in favor of SDI
because I do not see how democratic leaders can
insist for the indefinite future that their popula-
tions must live in a world in which they are forever
exposed to mass extermination. I do not see how the
Mutual Assured Destruction theory can end in any-
thing else but unilateral disarmament and paci-
fism; and in that sense the left wings in many
countries have carried the argument to its logical
conclusion. I do not understand why it is immoral to
have weapons aimed at weapons but it is moral to
have weapons aimed at people. I do not accept the
proposition that strategic defense must lead inevi-
tably to an escalating arms race. Why is it not pos-
sible to have a negotiation to establish a balance
between offense and defense that maximizes obsta-
cles to aggression by either side? One reason it is not
possible is because more intellectual energy is ex-
pended on either proving that SDI is technologi-
cally feasible or ridiculing it, so that in the process
we are building what I believe is a major trap for

ourselves. I do not think we can get to the right conclusion by the legal exegesis of ambiguous clauses in an agreement. We can get to it only by stating a definition of the various objectives we want to serve and beginning a discussion, hopefully on a nonpar-tisan basis, of the various goals—from preventing limited attacks and third country attacks, to pro-tecting retaliatory forces—and how these could be related to offense/defense relationships.

What bothers me is that we are sliding into a situation where the Administration has already accepted in effect a twelve-year moratorium: ten years of moratorium plus two years of negotiations —in other words, three presidencies from now. This is now being reinforced by Congressional pressures that will make testing very difficult, if not impossible. We would be unilaterally abandoning SDI without negotiation, without clarifying its possibilities

## CONCLUDING THOUGHTS

How comfortable can we all be when at a period of maximum Soviet weakness we solve for them the problem of European missiles and the problem of strategic defense without getting anything for it except a 50 percent reduction of strategic forces which a) solves no danger, and b) should be symmetrical?

What bothers me is that we are caught in a dilemma of our own making. The arms controllers are caught in the categories of the '50s, when there were single warheads, fixed missiles and relatively few warheads. The opponents of arms control are caught in the categories of the '70s, in which they attacked what they wanted to kill with technological arguments which are now coming home to roost. And the politicians are more interested in what they can say than in what they can think. There are no incentives for dealing with the long-term future. It is odd that with two summits coming up we have been so reluctant, all of us, to raise any political issues. Linkage has been condemned for 30 years, and yet, when are we ever going to speak about the political projection of Soviet power abroad, from Nicaragua to Angola to Cambodia? Great fun has been made of the attempts of the Nixon Administration to begin talking about rules of conduct, but nobody has yet come up with any other kind of discussion.

So, we are living in a period in which the Soviet

9

Union is in great difficulty. It may or may not have a leader interested in serious change. Surely, they cannot undertake their domestic program and sustain aggressive international policies simultaneously. I could use a phrase that President Reagan used in his campaigns, "If not now, when? And if not we, who?" When are we ever going to make a difference?

I would like to conclude with two quotes. One is from a Swiss play called "The Arsonist." A Swiss bourgeois in a town which is reported to have arsonists takes two people into his house; and it gradually dawns on him that maybe these are the arsonists. The arsonists become more and more confident and more and more aggressive and keep asking him for proofs of his good faith—that he doesn't suspect them of being arsonists—culminating in their asking him for matches, which he then hands over. His wife says, "You must be crazy, handing over matches to arsonists;" and the play ends with him saying, "If they were arsonists would they be asking me for matches?"

The second quote I would like to mention is from Prime Minister Lee Kwan Yew from Singapore, who alleges that there exists the following Chinese proverb: "When there's turmoil under the Heavens, little problems are turned into big problems, and big problems are not dealt with at all. When there is order under the Heavens, big problems are reduced to little problems, and little problems should not obsess us." What worries me more than I have ever been concerned in my political life is my fear that we are not turning big problems into little problems. I wonder whether we are contributing to order under the Heavens.

□ Henry A. Kissinger was U.S. Secretary of State during the Nixon and Ford Administrations. The above is an edited version of his remarks.

HENRY A. KISSINGER

Address to The Trilateral Commission

March 22, 1987

David, and ladies and gentlemen, I think I can come in for about half an hour into the panels after lunch. As David pointed out, When I was asked to speak about Reykjavik, there were no negotiations going on at that moment and there seemed to be great unanimity that Reykjavik had not been will not be recorded in diplomatic history as a stellar achievement of the art of foreign policy. So I thought I was on reasonably safe ground. Since then there has been an evolution, and I thought the most useful thing I could do is to present more or less controversial ideas, which, if those of you from abroad who disagree with me can consol yourself that I'm performing my usual function in uniting Americans by getting both liberals and conservatives mad at me simultaneously.

When I wrote my memoirs, I thought I had a rather good recollection of a number of pregnant sentences I had uttered in various negotiations that I was rather proud of. And then when I looked at the record, which in my day was tried to be kept verbatim whenever we could have a notetaker there, I found that while my recollection was reasonably good of what I had said, when read in context it was not quite as brilliant as I remembered it. And I will say this because I would like to begin with a recollection of my visit to the Soviet Union, which Harold Brown can correct this afternoon,

since he was also present. But I wanted to do it to state my general view on
the subject of negotiations as they are now being conducted.

Gorbachev turned to me and said that... and asked me why I, who
had supported the negotiations in the seventies and been instrumental in
conducting them, was beginning to turn against negotiations, specifically the
Reykjavik agreement. And I remember answering, and Harold Brown can
correct this... and I said there are three groups in America. There are
those want any agreement and for whom the fact of an agreement is
valuable in itself. There are others who are in effect opposed to any
agreement, because they think it's a snare. And then there is a group to
which I belonged that is in favor in negotiations with the Soviets, but would
like a negotiation that about which it can be said that it makes a difference.
Now, that part I know I remember accurately. Now I thought that
Gorbachev was beginning to be interested in discussing that subject when he
remembered that if he went down that route he would have to abandon his
claim that Reykjavik was sacrosanct. And so then he made a debaters point
saying, well at any rate you are saying Reykjavik was alright, you just want
something better.

Well, I don't believe Reykjavik was alright. To me personally it was the watershed. Until then I had never publicly criticized the Reagan Administration even though they have not always expressed themselves about me with the same admiration my mother feels. But, I believed that even though some of the rhetoric could have been moderated, they were generally heading in the right direction; And some of their opponents, many of whom I like personally very much, where generally heading in the wrong direction.

However, direction. I thought, the manner in which Reykjavik was assembled and the nature of the negotiations disturbed me deeply. Indeed, quite frankly, it disturbs me more than the Iran controversy, because Iran was done by a small group of relatively subordinate people in the White House, while Reykjavik involved the highest levels of our government. And I speak so frankly because this involves our common future ... of all of the Trilateral.

Now let me state my view on the current state of East-West negotiations in three propositions: One, there may indeed be an important opportunity to make progress in East-West relations. An opportunity on two levels -- to fix the basic strategic problem produced by the excessive reliance on nuclear weapons, and secondly, to begin putting East-West relations on a new basis.

Second, None of the proposals now being discussed in the military field, in my view, improves the situation. And several make it worse.

Three: We are witnessing a process in which arms control is being transformed from a strategy into an obsession, and in which every intellectual current bears a part of the responsibility, and in which political leaders are so obsessed with public relations and short-term impact that they are not addressing the fundamental problem.

## Understanding Our Opportunities

Two levels of opportunity. One for a decade or more it should have been clear that the reliance on Mutual Assured Destruction will lead eventually to the demoralization of the West. It is not possible indefinitely to tell democratic publics that their security depends on the

mass extermination of civilians, unopposed by either defenses or a
mitigating strategy, without sooner or later producing pacifism and
unilateral disarmament.
SDI offers us an opportunity here, to which I
shall return later.

Secondly,

Second, I believe we do have a new situation in the Soviet Union.
Gorbachev is different from any Soviet leader that I've ever seen, or that I
have ever heard about. And there's no doubt that the people around him
conduct themselves with an openness and flexibility and have adopted a
~~address code which~~ that is unprecedented. ~~The question is, do we reward them; do~~
we pay in foreign policy concessions for their domestic reform? And there I
would argue that the task of Western leadership is to translate an
opportunity into foreign policy objectives and to fix the problems that
produced the tensions. Of course, domestic reforms in the Soviet Union has
attractive features, but it is... but if it does not lead to a change in foreign
policy conduct, we would be taking the odd position that a strengthened
adversary is better for us ~~per se~~ than a weakened adversary which at least
is a new theory of international relations. I repeat, I'm not opposed to I
think these reforms can be very helpful, but we must be able to translate
them into foreign policy objectives.

In this effort, we need

And we should get to some understanding of what Gorbachev and his
associates represent. There are at least four possibilities: One) He is a
traditional Leninist risen through the ranks who wants to see the Soviet
Union strong, and has decided he needs domestic reform.

no

Two, that he is caught in a bureaucratic dilemma on the one hand he
wants to reform the economy, on the other he cannot take on every power

structure in the Soviet Union simultaneously; And therefore, we might
easily see a combination of domestic reform and foreign policy conservatism.
And I must say that I do not find in the Soviet proposals that have so far
been made in the military field much that is different from either the past or
from an attempt either to maintain a Soviet advantage or to increase it.)

no P The third possibility is that we are seeing here a new phenomenon in the sense that for the first time, here is a Soviet leader in restless motion looking for domestic approbation among the mass of the population and not in the party apparatus in itself. (In the field of international policy this could lead to extreme fluctuations and does not at all guarantee, necessarily, eternal conciliatory policy.)

no P Finally, And fourth, maybe there is a genuine change.

Current Proposals: INF But
I'm not going to choose between those four options. I would say that
the policy of the West today will not tell us what is really the motivation of
the Soviet Union because we are not putting forward propositions that we
can in good conscience say are an improvement of the situation. We are
putting forward propositions that we believe will be accepted. Or we are
putting forward propositions which satisfy short-term domestic pressures in
our countries. Let me illustrate this by some discussion of the looming
agreement on the zero option on the INF. And I will be in the tiny minority
that does not consider this a milestone in Western statesmanship; in fact, I
do not think it is a good agreement. And I think it is amazing that there has
been so little discussion of some of its problems.

What was the purpose of INF? It was asked for by the Europeans, allegedly to close a gap when the Soviet Union introduced medium-range missiles into its arsenal in the late 1970s into the middle- and late-seventies. That technical military argument was always somewhat dubious. To resist the SS-20's we could have used sea-based missiles or our strategic missiles in the United States. The most valid argument for placing American medium-range missiles in Europe was to couple the defense of Europe and the defense of the United States in some organic manner. This American missiles capable of reaching the Soviet Union stationed in Europe, the Soviet Union could not engage in nuclear blackmail against Europe without risking American retaliation from Europe. It could not attack Europe without attacking the American missiles. And it could not risk a counterblow from these missiles even if they had a ninety-percent chance of destroying them -- there would still be tens of them left. It could not accept the casualties from this without simultaneously attacking the American strategic arsenal and that would be general nuclear war; and that was presumably unacceptable. And the same argument could be made with respect to a conventional attack on Europe, on the theory that a Soviet planner could not assume that the United States would permit these missiles to be overrun.

That is the fundamental argument for having these missiles in Europe. It created a certain automaticity in the American response. It was an argument, admittedly, that nobody made explicitly, and therefore, the whole discussion has been off on technical military issues. This coupling is being destroyed by what is now being negotiated. And it is perhaps useful to discuss briefly the forces in the United States that generated the zero option.

7

For once it was not soft-headed liberals eager to make an arms control agreement. The following groups were the principal spokesmen.

Among the principal forces were people who, throughout the '70s, no P Throughout the seventies people in the United States opposed arms control agreements who opposed arms control agreements as a snare and as a delusion and as encouraging a misapprehension of Soviet motives. argued not looking at Watergate, Vietnam and all the other problems that were going on argued not that they were against arms control, but that they were against an arms control that only froze the existing programs. They were in favor of reductions; so this became an article of faith. Then in a similar manner to (Others argued we needed on-the-site inspection). Then we have military technicians who say it doesn't make any difference where the weapons are stationed, as long as we use them, and neo-isolationists who really want Europe to take care of itself.

The zero option originated in the Defense Department; and it was opposed by Secretary of State Haig. And it was packaged by public relations people whose knowledge of strategy was minimal, and of arms control was less. But it had the great advantage that it was not possible to top a proposal that offered to go down to zero. Europeans followed the same strategy, rattled by their own domestic opponents. They hid behind the hoary well-established doctrine of the Harmel Report that we were simultaneously pursue pursuing negotiations and armaments. And therefore, the zero option was supported on both sides of the Atlantic with the confidence that probably the Soviets would never accept it, and that it was a device by which we could proceed with the deployment. You confront therefore you non-American Trilateralists therefore confront a coalition of neo-conservatives,

neo-isolationists and arms controllers who have come together on this proposition and who will give it momentum, especially in the absence of anybody making explicit what they're privately thinking.

Let me explain my concerns about the consequences of this agreement. And I recognize that it is not likely to be stopped by anybody at this moment, but perhaps we can draw some lessons. I've already said that the Soviets are giving up more warheads than we are. That's probably true, though it should give us some pause because I do not believe anyone here who has ever negotiated with the Soviets has seen them eager to make disproportionate cuts in their forces. It eliminates ... it reduces barely the Soviet capability to attack Europe with nuclear weapons. They have hundreds of short-range weapons, thousands of ICBMs, hundreds of airplanes and an arsenal useful for that purpose of some twenty-thousand warheads. It eliminates the U.S. capability to retaliate from Europe. That is a psychological not a numerical fact. It discredits and discourages those who were on the battlefronts on behalf of the best defense.

For the third time now in the last twenty-five years the United States has unilaterally reversed -- in different Administrations -- decisions which it urged on the Europeans. It withdrew the Thors and Jupiters in the context of the Cuban missile crisis, within less than five years of deployment. It abandoned the neutron bomb within two years of committing Europeans to it. And it is now well on the way to withdrawing the INF within three years of its deployment -- indeed, before its deployment is even completed. Therefore, it is unlikely that any European leader will again stake his political future on following American strategic prescriptions opposed by the Soviet

Union. This is another way of saying that the Soviet Union is on the verge, and may have already achieved a veto over nuclear deployments within NATO. This is all the more true because this decision also forecloses important European alternatives. I do not see how the Federal Republic can agree to the stationing of French medium-range weapons on its territory, were that ever offered, after having just got rid of the American ones. Indeed, the long-range strategy must now be the policy of the Soviet Union to accelerate the denuclearization of all of Germany; and therefore, to heighten the psychological distinction between the Federal Republic and those European countries that have nuclear weapons.

And the Asian part of the agreement gives me great worry as well. It permits 100 Soviet medium-range warheads in Asia balanced, if that is the proper word, by 100 American warheads that the Soviets insist be in the continental United States. From there they can retaliat against Canada and Mexico in case of a Soviet attack on China, Japan or Korea, but not on the Soviet Union. But even if the Soviets should make one of their famous concessions and permit this stationing of these warheads in Alaska, I believe that those who know something about our military budget will agree that it is highly improbable that the United States would for long maintain 100 warheads in Alaska from which they can cover Soviet territory only at huge expense, when there are so many other means available.

The Soviet Union does not need 100 warheads aimed at China, Japan and Korea. For military purposes, it has a surplus of warheads for that purpose. What it does need is our approval of that deployment, because that

For all these reasons I am extremely worried, and I'm even more
worried about the fact that there is no serious debate going on. We are told
that the argument in favor of this is that we are gaining more warheads than
we are giving up. I've already dealt with that. We're also told that it will
permit verification. But verification, which was used by so many
conservative opponents of arms control to kill what they didn't like, and
which they now ... which ... some of them now have the arrière-pensée
they can use to thwart other agreements. Verification is not an end in itself.
Verification depends on whether you understand what scale of violation is
needed to upset the agreement and what measure you can take to re-
spond. I do not do so and how quickly you can respond. I would be
astonished if it were possible to reintroduce American medium-range
missiles in Europe after they have been withdrawn. And therefore, what
do not exactly are we going to do if it turns out that the verification procedure tells
us that there is a violation. (Incidentally, I don't assume that there will be a
violation, given the balances that I have described, at least not in the immediate
future.) We are told also that it is a test towards something more useful. I
would ask this question: When are we going to do something useful? What
is the purpose of symbolic agreements that you cannot explain in substance?
Why not make a substantively important agreement?

I have spent this much time on INF because it shows the intellectual
problems all of us are facing. I believe it would have been infinitely better
to propose a fifty or seventy-five percent reduction which kept some

11

[Y]

American missiles in Europe, and make the rest of the withdrawal conditional on some amelioration of the short-range weapons problem and the conventional balance. We would have had all the benefits I've described and few of the penalties. Since, however, we cannot even blame the devious Soviets for this scheme since it is a self-inflicted wound, and since the only contribution the Soviets made to it was that once Dobrynin came back to the Soviet Union, he convinced them that what you see is what you get. And that it is therefore safe to accept American proposals -- that there is no hidden agenda. We cannot blame the Soviets for this proposal so we'll probably have to go ahead with it. If we do it would be highly desirable to find ways of stationing aircraft carriers or something close enough by to Europe to make it clear that we are still physically committed, or to accelerate the creation of European forces in other words, to undue in part what we have inflicted on ourselves. But in the atmosphere that will be generated I doubt that this will happen.

## Current Proposals: START and SDI

Now, I would argue that some of these attitudes are reflected, as well, in the general negotiations on START and on SDI. I cannot cover those in detail, but I would like to say with respect to START, we again have this alliance of people who want reductions and people who want arms control, and the result is the fifty percent reduction which... to which I do not happen to be opposed, but I defy anybody to tell me, except symbolically, in what way it improves the situation -- given the way it is now being negotiated, in which all essential weapons are being maintained, except at a lower level, in what way it improves the situation. It neither reduces the danger of surprise attack nor does it reduce the danger of civilian devastation. But I'm willing, I have no problem in living with it as a symbolic move. I would have preferred a negotiation

designed to abolish MIRV's, which would have made a difference. Now let me say a few words about SDI.

Now, let me say a few words about SDI. SDI That has become an almost mythical issue. Much of the opposition to SDI is generated by the conviction that it is an obstacle to arms control agreements. An obstacle to the very agreements that I have analyzed previously. I am, in general, in favor of SDI, though not of the arguments that the Administration has advanced on behalf of it. I am in favor of SDI because I do not see how democratic leaders can insist for the indefinite future that they must live in a world in which they are forever exposed to mass extermination. I do not see how the Mutual Assured Destruction theory can end in anything else but the end of unilateral disarmament and pacifism. And on that level the left wings in many countries have carried the argument to its logical conclusion. I do not understand why it is immoral to have weapons aimed at weapons but it is moral to have weapons aimed at people. I do not accept the proposition that it must lead inevitably to an escalating arms race. Why is it not possible to have a negotiation to establish such a balance between offense and defense that maximizes the right to maximum obstacle to aggression by either side? One reason it is not possible is because more intellectual energy is expended on either proving that SDI is technologically feasible or ridiculing it, so that in the process we are building what I believe is a major trap for ourselves. I do not think we can get to this conclusion by the legal exegesis of ambiguous clauses in an agreement. We can get to it only by stating a definition of the various objectives we want to serve and beginning a discussion, hopefully on a non-partisan basis, of the various goals that could be served from a non-partisan point of view. Preventing limited attacks to third country attacks to protecting retaliatory

forces and now these could be related to offenses and defensive relationships.

What bothers me is that

We are sliding into a situation where the Administration has already accepted in effect a twelve-year moratorium; ten year of moratorium plus two years of negotiations -- in other words, three Presidencies from now. This is now being reinforced by Congressional legislations or pressures or reductions that will make testing very difficult, if not impossible. So that we would be its possibilities are unilaterally abandoning SDI without negotiation, without clarifying, and I would like to ask you all how comfortable we can all be when at a period of maximum Soviet weakness we solve for them the problem of European missiles and the problem of strategic defense without getting anything for it except a fifty percent reduction of strategic forces which a) solves no danger, and b) should be symmetrical?

What bothers me is that we are caught in a dilemma of our own making. The arms controllers are caught in the categories of the fifties, when there were single warheads, fixed missiles and relatively few warheads. The opponents of arms control are caught in the categories of the seventies, in which they attacked what they wanted to kill with technological arguments which are now coming home to roost. And the politicians are more interested in what they can say than what they can think. Nobody is worried over here or they're worried. There are no incentives for dealing with the long-term future at a time when we are going to have to do with tomorrow's elections. It is odd that with two summits coming up we have been so reluctant, all of us, to raise any political issues. Linkage has been condemned for thirty years, and yet, when are we ever

going to speak about the political projection of Soviet power abroad, from
Nicaragua to Angola to Cambodia? It is great fun has been made of the
attempts of the Nixon Administration to begin talking about rules of conduct,
but nobody has yet come up with any other kind of discussion.

And so we are living in a period in which the Soviet Union is in great
difficulty. It may or may not have a leader interested in serious change.
Surely they cannot undertake their domestic program and sustain aggressive
international policies simultaneously. So I would say, with respect to what we face, I would like to be could use a phrase that President Reagan used in
his campaigns, "If not now, when? And if not we, who?" When are we ever
going to make a difference?

I would like to conclude with two quotes. One is from a Swiss play
called "The Arsonist" in which a Swiss bourgeois in a town which is reported
to have arsonists takes two people into his house; and it gradually dawns on
him that maybe these are the arsonists. And the arsonists at the end become more and more confident and more and more aggressive and keep
asking him for proofs of his good faith -- that he doesn't suspect them of
being arsonists -- culminating in their asking him for matches, which he
then hands over, and his wife says, "You must be crazy, handing over
matches to arsonists;" And the play ends with his saying, "If they were
arsonists would they be asking me for matches?"

And the second quote I would like to mention is from a man some of us here know, Prime Minister Lee Kwan Yew from Singapore, who alleges that there exists the following Chinese proverb: I say alleges because I don't

believe there are as many Chinese proverbs as the Chinese lay upon us to
enhance our sense of inferiority. That proverb goes something like that,
"When there's turmoil under the Heavens, little problems are turned into big
problems, and big problems are not dealt with at all. When there is order
under the Heavens, big problems are reduced to little problems and little
problems should not obsess us." What worries me more than I have ever
been concerned in my political life, and why I would be delighted to be
proved wrong by this distinguished group, is my fear that we are not turning
big problems into little problems, and that we are making agreements. But I
wonder whether we are contributing to order under the Heaven.

APR 13 1987

HENRY A. KISSINGER

March 22, 1987

David, and ladies and gentlemen, I think I can come in for about half an hour into the panels after lunch. As David pointed out, when I was asked to speak about Reykjavik there were no negotiations going on at that moment and there seemed to be great unanimity that Reykjavik had not been . . . will not be recorded in diplomatic history as a stellar achievement of the art of foreign policy. So I thought I was on reasonably safe ground. Since then there has been an evolution, and I thought the most useful thing I could do is to present more or less controversial ideas, which those of you from abroad who disagree with me can consol yourself that I'm performing my usual function in uniting Americans by getting both liberals and conservatives mad at me simultaneously.

When I wrote my memoirs, I thought I had a rather good recollection of a number of pregnant sentences I had uttered in various negotiations that I was rather proud of. And then when I looked at the record, which in my day was tried to be kept verbatim whenever we could have a notetaker there, I found that while my recollection was reasonably good of what I had said, when read in context it was not quite as brilliant as I remembered it. And I will . . . I say this because I would like to begin with a recollection of my visit to the Soviet Union, which Harold Brown can correct this afternoon,

2

Well, I don't believe Reykjavik was alright. To me personally it was
the watershed. Until then I had never publicly criticized the Reagan
Administration, even though they have not always expressed themselves
about me with the same admiration my mother feels. But, I believed that
even though some of the rhetoric could have been moderated, they were
generally heading in the right direction. And some of their opponents, many
of whom I like personally very much, where generally heading in the wrong

direction. I thought the manner in which Reykjavik was assembled, the nature of the negotiations, disturbed me deeply. Indeed, quite frankly, it disturbs me more than the Iran controversy, because Iran was done by a small group of relatively subordinate people in the White House, while Reykjavik involved the highest levels of our government. And I speak so frankly because this involves our common future . . . of all of the Trilateral.

Second, none of the proposals now being discussed in the military field, in my view, improves the situation. And several make it worse.

Three, we are witnessing a process in which arms control is being transformed from a strategy into an obsession, and in which every intellectual current bears a part of the responsibility and in which political leaders are so obsessed with public relations and short-term impact that they are not addressing the fundamental problem.

Let me say a word about the opportunity: One, for a decade or more it should have been clear that the reliance on Mutual Assured Destruction will lead eventually to the demoralization of the West. It is not possible indefinitely to tell democratic publics that their security depends on the

Second, I believe we do have a new situation in the Soviet Union.
Gorbachev is different from any Soviet leader that I've ever seen, or that I
have ever heard about. And there's no doubt that the people around him
conduct themselves with an openness and flexibility and have adopted a
dress code which is unprecedented. The question is, do we reward them, do
we pay in foreign policy concessions for their domestic reform. And there I
would argue that the task of Western leadership is to translate an
opportunity into foreign policy objectives and to fix the problems that
produced the tensions. Of course, domestic reforms in the Soviet Union has
attractive features, but it is . . . but if it does not lead to a change in foreign
policy conduct, we would be taking the odd position that a strengthened
adversary is better for us per se than a weakened adversary, which at least
is a new theory of international relations. I repeat, I'm not opposed . . . I
think these reforms can be very helpful but we must be able to translate
them into foreign policy objectives.

And we should get to some understanding of what Gorbachev and his
associates represent. There are at least four possibilities: One, he is a
traditional Leninist risen through the ranks who wants to see the Soviet
Union strong, and has decided he needs domestic reform.

Two, that he is caught in a bureaucratic dilemma. On the one hand he
wants to reform the economy, on the other he cannot take on every power

structure in the Soviet Union simultaneously. And therefore, we might
easily see a combination of domestic reform and foreign policy conservatism.
And I must say that I do not find in the Soviet proposals that have so far
been made in the military field much that is different from either the past or
from an attempt either to maintain a Soviet advantage or to increase it.

The third possibility is that we are seeing here a new phenomenon in
the sense that for the first time, here is a Soviet leader in restless motion
looking for domestic approbation among the mass of the population and not
in the party apparatus in itself. In the field of international policy this could
lead to extreme fluctuations and does not at all guarantee, necessarily,
eternal conciliatory policy.

I'm not going to choose between those four options. I would say that
the policy of the West today will not tell us what is really the motivation of
the Soviet Union because we are not putting forward propositions that we
can in good conscience say are an improvement of the situation. We are
putting forward propositions that we believe will be accepted. Or we are
putting forward propositions which satisfy short-term domestic pressures in
our countries. Let me illustrate this by some discussion of the looming
agreement on the zero option on the INF. And I will be in the tiny minority
that does not consider this a milestone in Western statesmanship; in fact, I
do not think it is a good agreement. And I think it is amazing that there has
been so little discussion of some of its problems.

What was the purpose of INF? It was asked for by the Europeans allegedly to close a gap when the Soviet Union introduced medium-range missiles into its arsenal in the late ... middle- and late-seventies. That technical military argument was always somewhat dubious. To resist the SS-20's we could've used sea-based missiles or our strategic missiles in the United States. The most valid argument for placing American medium-range missiles in Europe was to couple the defense of Europe and the defense of the United States in some organic manner. This American missiles, capable of reaching the Soviet Union, stationed in Europe -- the Soviet Union could not engage in nuclear blackmail against Europe without risking American retaliation from Europe. It could not attack Europe without attacking the American missiles. And it could not risk a counterblow from these missiles even if they had a ninety-percent chance of destroying them -- there would still be tens of them left. It could not accept the casualties from this without simultaneously attacking the American strategic arsenal and that would be general nuclear war, and that was presumably unacceptable. And the same argument could be made with respect to a conventional attack on Europe, on the theory that a Soviet planner could not assume that the United States would permit these missiles to be overrun.

7

Throughout the seventies people in the United States opposed arms
control agreements ... who opposed arms control agreements as a snare and
as a delusion and as encouraging a misapprehension of Soviet motives
argued -- not looking at Watergate, Vietnam and all the other problems that
were going on -- argued not that they were against arms control, but that
they were against an arms control that only froze the existing programs.
They were in favor of reductions; so this became an article of faith. Then
others argued we needed on-the-site inspection. Then we have military
technicians who say it doesn't make any difference where the weapons are
stationed, as long as we use them, and neo-isolationists who really want
Europe to take care of itself.

The zero option originated in the Defense Department, and it was
opposed by Secretary of State Haig. And it was packaged by public relations
people whose knowledge of strategy was minimal, and of arms control was
less. But it had the great advantage that it was not possible to top a proposal
that offered to go down to zero. Europeans followed the same strategy,
rattled by their own domestic opponents. They hid behind the hoary well-
established doctrine of the Harmel Report that we were simultaneously
pursuing negotiations and armaments. And therefore, the zero option was
supported on both sides of the Atlantic with the confidence that probably
the Soviets would never accept it, and that it was a device by which we
could proceed with the deployment. You confront therefore ... you non-
American Trilateralists therefore confront a coalition of neo-conservatives,

Let me explain my concerns about the consequences of this agreement. And I recognize that it is not likely to be stopped by anybody at this moment, but perhaps we can draw some lessons. I've already ... it is said, that the Soviets are giving up more warheads than we are. That's probably true, though it should give us some pause, because I do not believe anyone here who has ever negotiated with the Soviets has seen them eager to make disproportionate cuts in their forces. It eliminates ... it reduces barely the Soviet capability to attack Europe with nuclear weapons. They have hundreds of short-range weapons, thousands of ICBMs, hundreds of airplanes and an arsenal useful for that purpose of some twenty-thousand warheads. It eliminates the U.S. capability to retaliate from Europe. That is a psychological not a numerical fact. It discredits and discourages those who were on the battlefronts on behalf of the best defense.

For the third time now in the last twenty-five years the United States has unilaterally reversed -- in different Administrations -- decisions which it urged on the Europeans. It withdrew the Thors and Jupiters in the context of the Cuban missile crisis, within less than five years of deployment. It abandoned the neutron bomb within two years of committing Europeans to it. And it is now well on the way to withdrawing the INF within three years of its deployment -- indeed, before its deployment is even completed. It, therefore, is unlikely that any European leader will again stake his political future on following American strategic prescriptions opposed by the Soviet

Union. This is another way of saying that the Soviet Union is on the verge, and may have already achieved a veto over nuclear deployments within NATO. This is all the more true because this decision also forecloses important European alternatives. I do not see how the Federal Republic can agree to the stationing of French medium-range weapons on its territory, were that ever offered -- as . . . having just got rid of the American ones. Indeed, the long-range strategy must now be -- of the Soviet Union -- to accelerate the denuclearization of all of Germany. And therefore, to heighten the psychological distinction between the Federal Republic and those European countries that have nuclear weapons.

And the Asian part of the agreement gives me great worry as well. It permits 100 Soviet medium-range warheads in Asia balanced, if that is the proper word, by 100 American warheads that the Soviets insist be in the continental United States. From there they can retaliate against Canada and Mexico in case of a Soviet attack on China, Japan or Korea, but not on the Soviet Union. But even if the Soviets should make one of their famous concessions and permit this stationing of these warheads in Alaska, I believe that those who know something about our military budget will agree that it is highly improbable that the United States would for long maintain 100 warheads in Alaska from which they can cover Soviet territory only at huge expense, when there are so many other means available.

The Soviet Union does not need 100 warheads aimed at China, Japan and Korea. For military purposes it has a surplus of warheads for that purpose. What it does need is our approval of that deployment, because that

For all these reasons I am extremely worried, and I'm even more
worried about the fact that there is no serious debate going on. We are told
that the argument in favor of this is that we are gaining more warheads than
we are giving up. I've already dealt with that. We're also told that it will
permit verification. But verification, which was used by so many
conservative opponents of arms control to kill what they didn't like, and
which they now ... which ... some of them now have the *arrière-pensée*
they can use to thwart other agreements. Verification is not an end in itself.
Verification depends on whether you understand what scale of violation is
needed to upset the agreement and what measure you can take to re-
spond ... I do not ... and how quickly you can respond. I would be
astonished if it were possible to reintroduce American medium-range
missiles in Europe after they have been withdrawn. And therefore, what
exactly are we going to do if it turns out that the verification procedure tells
us that there is a violation. (Incidentally, I don't assume that there will be
given the balances that I have described, at least not in the immediate
future.) We are told also that it is a test towards something more useful. I
would ask this question: When are we going to do something useful? What
is the purpose of symbolic agreements that you cannot explain in substance?
Why not make a substantively important agreement?

American missiles in Europe, and make the rest of the withdrawal conditional on some amelioration of the short-range weapons problem and the conventional balance. We would have had all the benefits I've described and few of the penalties. Since, however, we cannot even blame the devious Soviets for this scheme since it is a self-inflicted wound, and since the only contribution the Soviets made to it was that once Dobrynin came back to the Soviet Union, he convinced them that what you see is what you get. And that it is therefore safe to accept American proposals -- that there is no hidden agenda. We cannot blame the Soviets for this proposal so we'll probably have to go ahead with it. If we do it would be highly desirable to find ways of stationing aircraft carriers or something close enough by to make it clear that we are still physically committed, or to accelerate the creation of European forces; in other words, to undue in part what we have inflicted on ourselves. But in the atmosphere that will be generated I doubt that this will happen.

Now, I would argue that some of these attitudes are reflected, as well, in the general negotiations on START and on SDI. I cannot cover these in detail, but I would like to say with respect to START, we again have this alliance of people who want reductions and people who want arms control and the result is the fifty percent reduction which ... to which I do not happen to be opposed, but I defy anybody to tell me -- except symbolically, the way it is now being negotiated, in which all essential weapons are being maintained, except at a lower level -- in what way it improves the situation. It neither reduces the danger of surprise attack nor does it reduce the danger of civilian devastation. But I'm willing ... I have no problem in living with it as a symbolic move. I would have preferred a negotiation

That has become an almost mythical issue. Much of the opposition to SDI is generated by the conviction that it is an obstacle to arms control agreements. An obstacle to the very agreements that I have analyzed previously. I am, in general, in favor of SDI, though not of the arguments that the Administration has advanced on behalf of it. I am in favor of SDI because I do not see how democratic leaders can insist for the indefinite future that they must live in a world in which there is ... their populations are forever exposed to mass extermination. I do not see how the Mutual Assured Destruction theory can end in anything else but the ... but unilateral disarmament and pacifism. And on that level the left wings in many countries have carried the argument to its logical conclusion. I do not understand why it is immoral to have weapons aimed at weapons but it is moral to have weapons aimed at people. I do not accept the proposition that it must lead inevitably to an escalating arms race. Why is it not possible to have a negotiation to establish such a balance between offense and defense that there is a maximum obstacle to aggression by either side. One reason it is not possible is because more intellectual energy is expended on either proving that SDI is technologically feasible or ridiculing it, so that in the process we are building what I believe is a major trap for ourselves. I do not think we can get to this conclusion by the legal exegesis of ambiguous clauses in an agreement. We can get to it only by stating a definition of the various objectives we want to serve and beginning a discussion, hopefully on a non-partisan basis, of the various goals that could be served from preventing limited attacks to third country attacks to protecting retaliatory

forces, and how these could be related to offense and defensive relationships.

We are sliding into a situation where the Administration has already accepted in effect a twelve-year moratorium, ten year of moratorium plus two years of negotiations -- in other words, three Presidencies from now. This is now being reinforced by Congressional legislations or pressures or reductions that will make testing very difficult, if not impossible. So that we are unilaterally abandoning SDI without negotiation, without clarifying. And I would like to ask you all, how comfortable we can all be when at a period of maximum Soviet weakness we solve for them the problem of European missiles and the problem of strategic defense without getting anything for it except a fifty percent reduction of strategic forces which a) solves no danger, and b) should be symmetrical.

What bothers me is that we are caught in a dilemma of our own making. The arms controllers are caught in the categories of the fifties, when there were single warheads, fixed missiles and relatively few warheads. The opponents of arms control are caught in the categories of the seventies, in which they attacked what they wanted to kill with technological arguments which are now coming home to roost. And the politicians are more interested in what they can say than what they can think. Nobody is worried... or they're worried... There are no incentives for dealing with the long-term future at a time when we are... when all the public pressures have to do with tomorrow's elections. It is odd that with two summits coming up we have been so reluctant, all of us, to raise any political issues. Linkage has been condemned for thirty years, and yet, when are we ever

going to speak about the political projection of Soviet power abroad, from
Nicaragua to Angola to Cambodia. It is . . . great fun has been made of the
attempts of the Nixon Administration to begin talking about rules of conduct,
but nobody has yet come up with any other kind of discussion.

And so we are living in a period in which the Soviet Union is in great
difficulty. It may or may not have a leader interested in serious change.
Surely they cannot undertake their domestic program and sustain aggressive
international policies simultaneously. So I would say, with respect to what
we face, I would like to . . . could use a phrase that President Reagan used in
his campaigns, "If not now, when? And if not we, who?" When are we ever
going to make a difference?

I would like to conclude with two quotes. One is from a Swiss play
called "The Arsonist," in which a Swiss bourgeois in a town which is reported
to have arsonists takes two people into his house; and it gradually dawns on
him that maybe these are the arsonists. And the arsonists at the end
become more and more confident and more and more aggressive and keep
asking him for proofs of his good faith -- that he doesn't suspect them of
being arsonists -- culminating in their asking him for matches, which he
then hands over and his wife says, "You must be crazy, handing over
matches to arsonists." And the play ends with his saying, "If they were
arsonists would they be asking me for matches?"

And the second quote I would like to mention is from a man some of
us here know, Prime Minister Lee Kwan Yew from Singapore, who alleges
that there exists the following Chinese proverb. I say alleges because I don't

[LJ]

15

believe there are as many Chinese proverbs as the Chinese lay upon us to
enhance our sense of inferiority. That proverb goes something like that,
"When there's turmoil under the Heavens, little problems are turned into big
problems, and big problems are not dealt with at all. When there is order
under the Heavens, big problems are reduced to little problems and little
problems should not obsess us." What worries me more than I have ever
been concerned in my political life, and why I would be delighted to be
proved wrong by this distinguished group, is my fear that we are not turning
big problems into little problems and that we are making agreements. But I
wonder whether we are contributing to order under the Heaven.

The Trilateral Commission

345 EAST 46th STREET, NEW YORK, N.Y. 10017 • (212) 661-1180

Cable: TRILACOM NEWYORK • Telex: 424787

MAY 15 1987

David Rockefeller
North American Chairman

Isamu Yamashita
Japanese Chairman

Georges Berthoin
European Chairman

J. H. Warren
North American Deputy Chairman

Yoshio Okawara
Japanese Deputy Chairman

Egidio Ortona
European Deputy Chairman

Charles B. Heck
North American Director

Paul Révay
European Director

Tadashi Yamamoto
Japanese Director

EXECUTIVE COMMITTEE

Giovanni Agnelli
Henrik N. Boon
Zbigniew Brzezinski
Hervé de Carmoy
William T. Coleman, Jr.
Paul Delouvrier
Horst Ehmke
Alan Greenspan
Takashi Hosomi
Yoshizo Ikeda
Robert S. Ingersoll
Yusuke Kashiwagi
Lane Kirkland
Henry A. Kissinger
Robert S. McNamara
Yohei Mimura
Saburo Okita
Keichi Oshima
Sir Michael Palliser
Charles W. Robinson
Henry Rosovsky
Volker Ruhe
Kiichi Saeki
José Antonio Segurado
Lord Shackleton
Henri Simonet
Luis Solana
Myles Staunton
Niels Thygesen
Otto Grieg Tidemand
António Vasco de Mello
Otto Wolff von Amerongen

May 12, 1987

Hon. Henry A. Kissinger
350 Park Avenue - 26th Floor
New York, New York 10022

Dear Henry,

Thank you again for your major speech to us in San Francisco. You have certainly succeeded in helping stir a wider debate on the prospective INF agreement and associated issues.

The staff is now preparing the publication on the meeting, and we hope you will allow us to make use of your speech -- as edited with your approval, of course. I believe we sent you a transcript shortly after the meeting. The staff is enclosing here that transcript with our proposed changes marked, and a clean copy of the edited version in proof form. Perhaps you will have some changes you would like to make in the clean copy.

Also enclosed is a copy of the publication on our 1986 meeting in Madrid, to remind you of the general style of these publications. I know the staff intends to give your speech a prominent place in the San Francisco publication, and I hope we may make use of it. The publication should appear in the latter half of June.

Even before the publication appears, I wonder if it would be acceptable to you for us to circulate the speech in this proof form to North American members and supporters?

With best regards,

DR/pw
Enclosures

EUROPEAN OFFICE: 35, avenue de Friedland, 75008 Paris, France
JAPANESE OFFICE: Japan Center for International Exchange, 4-9-17 Minami-Azabu, Minato-ku, Tokyo, Japan