# Energy Speech

Long lines at the gas pump, and another enormous hike in the cost of gasoline and heating oil, have brought home to Americans that the energy crisis strikes at the heart of the Western economic system. Energy -- its availability or shortage, its cost or reliable supply-- is central to our industrial system and also to our agricultural abundance. Today it is perhaps the most important single factor determining the level of employment or unemployment; the rate of inflation that depletes our savings and erodes our currencies; the growth or decline of our standard of living; and the availability of resources for the common defense or for desired social programs.

I want to say a few words today about the international dimension of the problem.

## The Energy Challenge and Its Consequences

What is the Energy Crisis?

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The last three decades have been a history of America's increasing dependence on imported energy. In 1950, the United States was virtually self-sufficient in oil. In 1960, our reliance on foreign oil had grown to 16 percent of our requirements. In 1973, the year of the embargo and the massive price increase, America's dependence had doubled to 35 percent. Since then our dependence has grown, not diminished; in the winter months of 1977, oil imports for the first time in our history reached 50 percent of our oil consumption--a development which was not expected until the 1980s.

When the United States was self-sufficient, or a net exporter of oil, not only were we invulnerable to embargoes but we also had some influence over the world price. We could go far toward ensuring that the world economy had available to it adequate supplies of oil at reasonable prices.

In the last two decades conditions have changed dramatically.

We have become net importers of oil and on a growing scale.
Western Europe's and Japan's energy needs increased rapidly.
Developing countries around the world began their own efforts
toward industrialization, and in consequence became for the
first time major consumers of energy. Prices remained low.
And so for two decades the world economic system expanded,
relying on cheap and plentiful petroleum, while supply,
except in the Middle East, fell far behind the explosive
energy demand.

The effect on the United States of this structural
change in the world economy was dramatic. As we grew
increasingly dependent on outside oil, the West became vulnerable
to external manipulation of price and interruption of our
supply.

It was against this background that OPEC began to make
its influence felt. Forged into an effective cartel for
determining prices and production among the few nations in

the world that were oil exporters, OPEC embarked on what
in 1973 became a successful effort to quadruple the world
price of oil. In the same year, in an even more dramatic
demonstration of the central role of petroleum in the
world's economy, the major producers cut off their exports
to certain countries during the Arab-Israeli war.

These events made explicit the energy crisis which had
been building for decades. They caused an immediate economic
crisis in both the industrialized and the developing worlds.

A drop of only ten percent of America's imported oil, lasting less
than half a year, cost Americans half a million jobs and
over ten billion dollars of national output. The massive
price increases of 1973 added at least five percentage points
to the U.S. price index, contributing to our worst inflation since
World War II. It set the stage for a serious recession in
the Western world from which we never fully recovered.

Then in 1979, events in Iran brought a second crisis.

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The world price of oil jumped by nearly 60% again and world supplies were sharply reduced again. In Iran a strong leader who was a staunch ally of the West and opposed the use of oil as a political weapon was overthrown; the regime that succeeded him is virulently anti-Western in character, unstable at best, and has prompted the 1979 energy crisis by sharp cutbacks in production for ideological reasons as well as as a result of domestic chaos and mismanagement.

Therefore the crisis continues, and it is of global dimensions:

- Economic growth in the industrial democracies in the decade before 1973 averaged 5 percent a year. Since 1973 it has averaged 2 percent. At the same time the energy crisis accelerated the average rate of inflation in the industrialized world by over three percent. It has had a monumental disruptive effect on the balance of payments of every nation. Since 1973, some $500 billion have been

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accumulated by the OPEC countries. While some $450 million of this has been spent or invested in Western countries, the remaining $50 billion represents a hemorrhage from the world economic system that inevitably means a decline, or at least a slowdown in the growth of, our standard of living. It is one of the greatest and most sudden transfers of wealth in human history. The enormous surplus earnings of the oil producers overhang the world economy. They are a factor of instability even if not manipulated for political motives. In another Middle East crisis the vast accumulated petrodollars could become a weapon against the world monetary and financial system.

--In every democratic country, the slowdown of economic growth has already had serious social and political consequences. Economic crisis was a rude shock to large numbers of ordinary people in the West whose aspirations had been raised so dramatically in the years since the war.

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Competition between social groups over their shares of the
economic pie is bound to become more bitter as the total
pie ceases to grow as it had steadily for nearly 30 years.
As inflation and recession surge across national boundaries,
democratic governments find it more and more difficult to
manage their economies, feeding discontent and demoralization.
Political stability has been shaken in many European countries,
helping to increase the political strength of extremist
groups such as the Communist Parties whose increasing power
would certainly undermine the cohesion of the Western world.

--Even irrespective of the Communist Parties, trade
disputes between Western countries threaten to grow in intensity.
Protectionist pressures threaten to choke off the international
flow of goods and services that is crucial to the prosperity
of so many Western Countries--which would create a vicious
circle of new protectionist pressures and further contraction.
Thus economic disputes between allies could threaten the

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cohesion of the free world; they could weaken the political
and military cooperation on which the security of all the
democracies depends.

--For the first time in our history, a small group of oil-producing nations have monopoly control over a resource that is vital to our well-being. A central element of the price structure of all industrial economies is now the subject of economic decisions made elsewhere, by governments which have little concern for the well-being of the Western world. Even more than this: They have the power, and may easily succumb to the temptation, to exploit their monopoly for political purposes--attempting to coerce the United States into foreign policy actions that we would not otherwise see as in our national interest.

--Events in Iran should have brought home to us how much this lifeline of energy is totally at the mercy of accidents, if not of hostile forces. The Middle East is a

region of upheavals, of instability, of regimes with no
certain domestic base, of perpetual temptations to mischief-
making by forces hostile to us.

--As America's global military power continues to shrink, while the Soviet Union continues its inexorable buildup of military strength in every category of military forces and in every region of the world, an additional element of menace is introduced into the volatile Middle East. As James Schlesinger has pointed out, "Soviet control of the oil tap in the Middle East would mean the end of the world as we have known it since 1945 and of the association of free nations." For Western Europe's dependence on Middle East oil is such that Soviet manipulation of the oil weapon could spell the dissolution or weakening of America's principal alliances--if not a direct weapon of coercion against the United States if our dependence on imported energy continues to grow.

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--Nor is the impact of the oil crisis confined to the industrial nations. In fact, it is the nations of the developing world that suffer most from the massive balance of payments deficits caused by the oil price rises. The severest blow to the economic development of new nations has come not from the "imperialist exploitation" so loudly assailed in international forums like the recent "Nonaligned Conference" in Havana, but from the massive arbitrary price increases by their Third World brethren. The developing countries do not have the means, as the industrial nations have, to pass on the price rises to some extent to other nations in exports of manufactures. If they are to be able even to feed themselves they must achieve agricultural modernization, which depends on chemical fertilizers which are petroleum-based. The higher energy costs are to the developing nations permanent, chronic, and massive. The increase in their energy costs now in fact equals the total

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flow of external economic aid they receive. The entire
world's assistance thus barely enables them to stand still.

In short, the energy crisis has placed at risk America's
position in the world, and the entire range of America's foreign
policy interests. It mortgages the prospects of the US
economy; it weakens the industrial democracies economically
and potentially militarily; it undermines the world economy,
and it frustrates the hope for progress of most of the new
nations.

Responding to the Energy Challenge

Since the dramatic events of 1973, America's dependence
on imported oil has increased by nearly 50 percent despite
the efforts of three Presidents to mobilize an effective
national response to the energy challenge. This growing
dependence is intolerable. In the last year or so, energy
imports have declined--but it is more due to the Iranian crisis
and recession in this country than to a concerted national

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energy policy that can restore control over our destiny
to our own hands.

Such an energy policy is possible--and essential.

Many of the challenges that the West faces in international
affairs are unavoidable, as other nations grow inevitably in
strength and as the specter of nuclear warfare overshadows
the planet. But the threat that the energy crisis poses
to the free nations and to world order can be significantly
reduced by determined action.

The United States is in a unique and fortunate
position, which imposes on us, for that very reason, a
responsibility of leadership. Our allies in Europe and Japan
cannot aspire to reduce their dependence significantly by
their own efforts--but we can. Our allies cannot aspire by
themselves to have a significant impact on the world market
conditions of energy supply and consumption--but we can.
Our domestic supplies of energy if properly utilized, our
genius in technological innovation if fully exploited,

our ability to reduce by conservation the enormous waste
that has been built into American energy use by the habits
of decades of cheap abundant oil--give the United States the
potential for turning the situation around that no other
single nation enjoys.

Many of our partners are already embarked on programs
of conservation and energy development. They have done
better than we. But the United States consumes half of the
oil consumption of the industrialized world. Only if the
United States does its share can there be confidence that
the free world has its economic future in its own hands.

We need, most of all, an energy strategy.

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## Elements of an Energy Strategy

An effective strategy to reduce our energy dependence, in order to restore some measure of our own control over reliability of supply and of price, must include the following elements:

- determined conservation efforts,

- development of new and alternative energy sources,

- collaboration among the consuming nations, including cooperation in technical research and development, energy diplomacy, and measures to safeguard the world financial system,

- and a reliable long-term political and economic relationship between the energy-consuming nations and energy-producing nations.

## Conservation

Conservation must be a central element of any effective energy program. To discover new sources of oil and

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to develop alternative supplies of energy will take years.

In the near-term future, only conservation will enable us
both to absorb the present burden of energy costs and to
begin to restore balance between supply and demand.

The United States is theoretically capable of reducing
its energy consumption by as much as 30 percent <u>without</u>
affecting the rate of growth of its GNP or its standard of
living. In 1975, Americans <u>wasted</u> more fossil fuel than was
used by two thirds of the world's population.

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Given the high cost of energy, conservation is in the
clear self-interest of every hard-headed businessman or
every cost-conscious homeowner. It is a classic example of
how the *common* interest can be exactly consistent with
self-interest. Conservation is not a new burden to be imposed
on our pocket books; it is the discipline and effort required
to ease the burden of energy costs on our national economies and
on individual families.

Conservation requires above all the more efficient use
of the energy now available. It means getting 30 to 40 miles
to the gallon instead of seven; better insulated houses with
more efficient heating systems; a national commitment to
eliminate waste by turning out unneeded lights, television sets,

and air conditioning, and the greatest possible use of
public transit. Tax codes should be rewritten to promote
conservation measures. Public utilities should be given
incentives to shift to more energy-efficient systems.

If America fails to take these relatively simple measures,
we doom ourselves to 50 percent or even greater dependency
on imported energy. We will have delegated crucial decisions
to foreign countries to whom our prosperity is not in all
circumstances an overriding objective and who cannot be
expected to show a greater concern for our well-being than
we do.

## New and Alternative Energy Sources

The second essential element of an energy strategy is
development of new and alternative energy supplies.
Conservation alone, crucial as it is, cannot permanently

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reduce our dependence on OPEC oil. Even the most ambitious conservation plan could not expect to do more than reduce our dependence on imported oil to the level of 1973--when an embargo caused the most serious recession since the 1930s.

Much more can and must be done to develop new sources of United States oil. The/ should provide every incentive to maximize its domestic production. Decontrol of prices of domestic oil and natural gas is essential; there is no excuse for a national policy that subsidizes consumption and penalizes production. We should also pursue a conscious policy of diversification of foreign sources. Any new source of oil is additional insurance against an embargo and a contribution to equilibrium in the international energy dialogue.

It is clearly in the interest of the United States and all the industrial democracies to diversify technologically as well as geographically. It has been said that the United States is the Saudi Arabia of coal, so vast are our deposits.

Moreover, the industrial democracies have the technical skill
and resources to create fuels from shale oil, tar sands, and
coal gasification and liquefaction. And much progress has
been made--and more can be made--on advanced methods such
as nuclear power, fusion, biomass conversion, wind and solar
power.

The investment required to develop new and alternative
sources in the near-term future is as massive as it is essential.
President Carter's July 15 proposals for a massive synthetic
fuels program and an energy mobilization board are important
initiatives. Congress and the President must reach agreement
at an early date on some program to meet these goals. A
serious review of the incentives and disincentives for energy
development provided by our tax system and environmental
policies is clearly in order.

## Collaboration among the Industrial Democracies

The third element of our strategy must be collaboration

among the industrial democracies of North America, Western Europe and Japan.

greater resources than As I have said, the United States, which is blessed with any of our allies, which is less vulnerable to outside pressures, has a responsibility to take the initiative to organize the collective effort by example and by leadership. With a major American effort, the field of energy can in the 1980s give a new impetus to the unity among the democracies that in the immediate postwar period spurred common defense, diplomatic cooperation, and progress towards European integration.

For these reasons, the United States took the initiative in 1974 first to organize the Washington Energy Conference and then to help bring about the International Energy Agency. This body, the IEA, has been in operation for five years now. It is the principal institution of energy cooperation among the 19 leading industrial nations of the democratic world.

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The capacities of the industrial countries to develop new energy sources vary widely. Some have rich untapped deposits of fossil fuels; some have industrial skills and advanced technology; some have considerable capital available for investment. Few have all three. Nothing would do more to encourage a sense of common purpose among the industrial democracies than to find ways to undertake joint energy development programs.

In addition, an emergency program has been approved by all IEA members to maintain reserve stocks and to share supplies during any future oil embargo. The significance of this program cannot be exaggerated. It would greatly reduce the impact of selective embargoes against individual countries. And it would ease even the impact of a general embargo, which, in any event, involves such political risks that it could be invoked only in the most extraordinary circumstances. The emergency

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sharing program can thus serve as both insurance and deterrent
against any new embargo.

There is a fashionable view that any collaboration
among the industrial democracies is a "confrontational"
policy. This is absurd. If it is proper for a cartel to
wield its power in calculated and cold-blooded service to
its self-interest, the consumers commit no crime in concerting
their efforts to meet the challenge. I must say frankly that
attempts in Europe to make bilateral deals with OPEC,
scavenging for national advantages, are self-defeating. Only
in concert do the industrial nations have any effective
bargaining power.

The IEA thus symbolizes the possibility of a collective
response to one of the most serious challenges the West has
faced in a generation. It demonstrates the recognition by
the democracies that their destiny is shared, in the economic
field as much as in the security field, and that their best

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hope of a solution is through unity and common effort. I
continue to believe that a demonstration of *successful*,
common mastery of our economic challenges is essential for the
maintenance of our political unity, on which our security depends.

If international order is to be made secure against
instabilities caused by energy, the needs of the developing
countries which are not blessed with oil must also be addressed
by the world community.

These developing countries were caught in the middle by
the 1973 oil crisis. Because of the energy-induced recession
in the industrialized countries, their oil import bill shot up,
and their export prospects sharply declined. From 1973 to
1975, the foreign debt of those countries nearly doubled, from

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$67 billion to $117 billion. They need relief from the enormous blight of high energy costs on their development hopes and plans. Relief for the poorer developing countries is an appropriate task for the joint efforts of newly-rich oil producers and the industrial democracies. Specifically:

- We should rapidly expand all forms of assistance, capital and technical, to aid developing countries to expand their own domestic energy production. Many developing countries possess considerable promise for oil, coal, and other forms of energy. They have been unable to exploit them for lack of the capital and technical know-how which modern energy development demands.

- The world financial system has performed remarkably well in channeling some of the petro-dollar surpluses to the needy developing countries. Now, however, is the time to consolidate their debt structures and expand

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the flow of official, longer-term capital. The
development assistance resources of the World Bank
and other international financial institutions must
be expanded.

--In the final analysis, the long-term solution to the
developing countries' payments problems is trade. We
must stem the retreat to protectionism. The successful
completion of the Tokyo Round of trade negotiations is
an important accomplishment in this regard.

Cooperation Between Consumers and Producers

Every one of the tasks I just enumerated calls for a
joint effort by the oil producers and the industrial
democracies. This brings me to the fourth, but perhaps
most challenging, element of any international energy strategy:
the role of the oil producers in the emerging world energy
order.

Clearly, the democracies must safeguard their
economies against the hazard of conflict. But, in doing all
we can to reduce our vulnerability to pressure and threat,
we must take care not to make it inevitable. On the
contrary, the basic reality of the present situation is
the economic and political interdependence between the
energy producing nations and the energy consumers. The
challenge to creative diplomacy in the years ahead is to
mold this mutuality of interest into a stable and positive
long-term relationship.

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What are these mutual interests?

First of all, obviously, the producers need markets for their oil. Disruption of the economies of the industrial democracies reduces world growth and world demand for energy. In 1975, as the result of the recession in the industrial democracies, market conditions were depressed to the point where some producers committed to ambitious development programs found themselves in difficulty and were looking for means to sell their oil surpluses despite the production restrictions of OPEC.

Secondly, the producers have a stake in the financial stability of the industrial democracies which are, after all, the only places where they can productively invest their payments surpluses. The global economy cannot be disrupted as it was in 1973 without severe damage to the interests of the oil-producing countries themselves. Under present conditions, a world economic crisis would have a massive impact on the oil producers because their overseas investments

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would be in severe jeopardy.

Thirdly, the industrialized world is the only source of the technology, capital goods, training and management skills which the oil producers require to develop their economies. In a climate of confrontation, the governments and publics of the industrialized world have little incentive to support such programs.

Fourth, many of the oil producers are concerned about their own stability and safety. A cooperative relationship with the West enhances their security. They cannot be eager to shatter ties which might expose them to the designs of avaricious and hostile countries; they have a major political interest, therefore, in the friendship of the industrial democracies.

Thus, most of the oil producers can have no interest in confrontation; indeed, if they understand their interests, they have an important stake in the ability of the industrial

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democracies to solve their energy problems. Some of the
more enlightened OPEC countries are therefore, paradoxically,
leading advocates of energy conservation. They know
theirs is a depleting resource and they are eager to extend
its life over the longest period of time. They want to use
their oil revenues to develop and diversify their economies.
Some of them also believe that the world's oil reserves
are too valuable to be used up for fuel; they are seeking
to switch their own oil resources into new petrochemical
industries for their own economic advance.

The basic reality is therefore that the ultimate "solution"
to the world's energy problem is a thriving, interdependent
global economy which promotes economic advance in every region
through the free flow of trade, investment, skills and ideas.

In building such a world, the industrial nations have
an obligation to take serious account of the developing

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countries' and oil producers' legitimate aspiration for long-term income security and economic growth. The developing countries and producers, in their turn, must recognize that pressure or blackmail will in time backfire on those who use such tactics. The United States, as the world's strongest economy, would be injured less than others in an environment of economic warfare. But this would be incompatible with the open economic system that has nourished the world's prosperity and our own. And it would be inconsistent with basic American values.

A cooperative solution for energy thus merges with the problem of world order. The United States had no more important task than to contribute its creativity to building an international system that all nations have a stake in preserving because they participate in its construction and share in its benefits. In a world of 150 sovereign states, there simply is no peaceful alternative. Consumers, producers,

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and developing countries should learn from the energy crisis
both the dangers of economic warfare and a more hopeful
recognition of their common stake in a flourishing and just
world order.

Address of Henry A. Kissinger
to the Commodity Exchange
"International Economics"

September 27, 1977

Ladies and Gentlemen, I am honored that you
should invite me to meet with you. It is notable that
you should do so. Even my notorious humility does not
blind me to the fact that Secretaries of State speaking
about international economics has not exactly been an
every day event in our history.

We can be morally certain that Metternich was
never asked by the corn and pig iron mongers of the
Austro-Hungarian Empire to discuss the interrelationship
of international politics and global economics. I doubt
if the utility of such a meeting would have occurred
to Bismarck either. That supreme writer on diplomacy
of our century, Nicholson, despised business and trade
as quite beneath the concerns of statesmen. And I
confess that when I came to Washington almost nine years
ago, I brought with me some rather conventional notions
about the secondary significance of these issues to
the commanding geo-political problems of our age.

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Our own diplomatic history also reflects a tradition of conceptual separation of politics and economics -- a division often reflected in conflict between the Department of State and the Department of the Treasury. During the 19th Century, until the Spanish-American war, while our political horizons rarely extended beyond this Hemisphere, American commerce and business were felt in every corner of the globe, opening Japan, dominating the world grain trade, leading the advance of industrial science and technology. In the era of our political isolationism between the wars in this Century, we still played an active role in the financial and monetary affairs of the West. And, most dramatically in the post-war era, our foreign policy was conducted as a remarkably distinct exercise, with no overall strategic concept; the structure of political peacekeeping laid down for the United Nations' in San Francisco, and the fabric of economic relationships established at Bretton Woods, were perceived as two almost unrelated efforts by the statesmen of the day.

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We live, however, in a different age.

The changes in the political map since 1945 are evident. When the United Nations was organized at the end of World War II, there were only 51 geographic entities equipped to act as nation states. Since then membership in the world community has tripled.

But the map of global economics has altered at least as radically. In 1945, ours was the only industrial nation to emerge from the war with a flourishing, vigorous economy. We were the single pillar of the world's economy; the dollar was the linchpin of world finance. Nothing was possible without us. We alone could finance and equip the rebuilding of world industry and trade after the war; we alone were a source of capital and technology for the new peoples living in poverty. But today, economic power and influence are just as diffuse as political significance. The oil exporters of the Middle East, Africa and Latin America have become major contenders in the economic arena. Their financial cooperation, for the first time

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in history, is essential to any major proposal for systemic change. The Communist nations are now important trading partners of Europe, and are becoming major debtors by building up massive obligations to western banks as they finance that trade. A number of aspiring economic powers have emerged outside the traditional zones of Northern Hemisphere industrial concentrations; Brazil, Taiwan, Mexico, Israel, South Africa, Singapore, Colombia and Korea. All are laying claim to a greater role in world finance and trade.

12/6

The post-war economic system which emerged from Bretton Woods served us remarkably well. The world experienced, in the past thirty years, an unprecedented expansion in the output of its goods and services. The results of this production explosion have been masked in part by a simultaneous and equally extraordinary demographic explosion. The fact is, nevertheless, that mankind was able, thanks to the organization and management of international commerce and finance, to increase the levels of living of large numbers of people, and expand the sense of hope and opportunity for hundreds

12/7

of millions.

The post-war economic system which worked so well was based on four central elements:

- a liberal trading system, and a rapid increase in trade opportunities and exchange;

- the free movement of investment capital and technology;

- ready access to cheap energy and other raw materials; and

- effective institutions of international economic cooperation.

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In the early seventies, however, the world economic system was assaulted by a wave of inflation, soon followed by the most severe recession since 1945. In serenity, it is not easy to describe a situation of oil prices so high. In 1973, unemployment both began to rise everywhere. Real rates of growth in the major economies have still not resumed their pre-1973/75 levels. (And they look less healthy

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now than they did even a few months ago.) Unemployment
is high. Inflation on the average is twice the level
of the sixties. And it is apparent that there is no
easy solution at hand; any direct effort quickly to
expand employment by public sector expenditure increases
would lift those inflation rates even higher.

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In short, the world economic structure is faced
with unprecedented challenges. Each of the four central
elements of the postwar economic system is under assault:

- liberal trade is challenged by the increased
drive for protectionism in the United States, in Europe
and throughout the world;

- there is a growing sense that the world
financial system, which survived the strains imposed
by the recycling of the OPEC surpluses, could prove
unequal to the financing requirements of the decade
ahead;

- since 1973, we have had some hard lessons
in the classroom of experience that energy is not

inevitably cheap, or infinitely available and the
developing world is experimenting with ways to transfer
those petroleum lessons to other commodities;

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-- finally, these challenges in trade, finance,
technology and raw materials will severely test the
international economic institutions with which we have
lived for thirty years. Our capacity for economic
cooperation will be put to the proof as never before.

I would like to address today three aspects
of this contemporary international economic challenge.

-- First, in terms of the relationships between
the developed West and the developing nations;

-- second, and perhaps of even more
ominously direct significance to us, the international
energy crisis; and

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-- third, last and closest to home, the
industrial democracies themselves and their hopes of
managing and their economies in ways which will maintain
the vital social and political equilibrium of Europe,

Japan and the United States.

The Industrial Democracies and the Struggle
for Development

I turn first to the challenge to the
international economic system presented by world poverty --
the challenge, if you will, to define the proper role
for this nation, and for the industrial democracies
as a cohesive force, in the struggle for growth in the
poor nations of the world. The issue, it is clear, can
no longer be ignored:

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-- half of the peoples of the world live in
misery and destitution;

-- in large parts of the world, there are more
illiterates today than ever before;

-- with few exceptions, the populations of the
less developed nations are increasing more rapidly than
those of the industrial countries, and their rates of
demographic growth have been impervious to efforts toward
restaint.

Yet the future resource requirements of our
own industrial plant, and our hopes for coherent
solutions to such global problems as pollution, the
oceans, energy, food and human rights, to name a few,
demand that the North and the South find new ways to
cooperate.

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As Robert Asher has said:

"As sources of imports, as markets for exports, as keepers and breakers of international peace, as claimants on the consistence of mankind, and as trade unions that must be dealt with, the developing countries have become more important to the United States than ever before."

At times in recent years, however, the developing
countries seemed bent on wrecking what ~~its~~ prospects
for cooperation there were. They perfected a practice
of bloc denunciation, stating their claims for a
renovation of international economic relations with
a stridency which went far beyond the needs of their
case. There were times when the dialogue between the
rich and the poor seemed to deteriorate into

12/14

institutionalized confrontation and conflict.

Such a result would have been a tragedy for all. In a sense, the United States is less vulnerable than most; an era of hostility and autarchy, and the outbreak of economic warfare between North and South, would injure others more than us, and it could hurt the poorest the most. But it would have damaged our well being, without a doubt, and could have become a permanent challenge to the commitment throughout the industrial democracies to liberal trade and the open financial system which have nurtured the prosperity of all nations for a generation and a ralf.

12/15

The meeting of the Seventh Special Session of the United Nations General Assembly in 1975, however, gave pause to that process, and new possibilities for consultation began to emerge, at the United Nations Conference on Trade and Development at Nairobi last Spring, and then at the North-South dialogue conducted at Paris in 1976 and early 1977.

At each of these meetings, the United States

put forward a series of responsible proposals to meet
the challenge of global poverty. These proposals
represented a serious effort to redirect the relationship
of the North and the South into new, more productive
channels. We took the initiative:

-- to expand and liberalize the compensatory
financing facility of the International Monetary Fund
at a time of severe decline in commodity export earnings,
with the result that increased financial resources were
available to the developing countries when they needed
those resources most desperately. As of April of this
year, almost $3 billion was outstanding from the expanded
facility, the great bulk to the LDC's;

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-- to increase the future overall levels of
official development assistance, generally;

-- to draft new rules for access to markets
and supplies in the framework of the multilateral trade
negotiations in Geneva;

-- to expand LDC access to Western capital

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markets;

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-- to escalate the transfer of technology; and

-- to reach new international understandings
as to the appropriate role and function of the
transnational corporation in the global development
process.

It is a matter of satisfaction to this nation
that progress has been made on a number of these
initiatives. The North-South dialogue, just recently
completed in Paris, was marked by advance on a number
of fronts, including the flows of official development
assistance.

However, the issue will not rest where it is.
The Paris dialogue is over; no new mechanism is proposed
to replace it. The agenda for the future relationship
between the North and the South is for the moment a
clean slate. We should approach that agenda in realistic
terms:

-- Too long we have tended to express our own

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national interest in global development in terms of
guilt. Too many justifications for aid have been
constructed from the simple fact that we were rich and
they were poor. I do not deny the moral dimension of
poverty in the world, but I think it essential that
the American people understand that more is at stake
than ethics. It is in the most material sense in the
national interest of the United States to encourage
and stimulate the development process throughout the
world.

-- By the same token, we must rise above the
notion that all underdeveloped countries are alike and
that their interests are identical. A number of the
nations of the developing world have begun to assume
international significance: Brazil, Mexico, Korea,
Taiwan, Nigeria, for example. All are nations which, though
at the beginning of the industrial process, and though
still poor in per capita terms, nevertheless count on
the global scale of things. And there are also other
vital distinctions among the more than one hundred poorer
countries of the world which a realistic policy of

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development must take into account. Some developing
nations are energy sufficient; some are heavily dependent
on imported petroleum. Some are commodity producers
and exporters; some are not. A considerable number
have begun to manufacture and export textiles, shoes
and other light consumables into world markets; a large
number are still in the pre-industrial stage. Some
are able to finance their needs in private capital
markets; a large number cannot. These are differences
in the fundamental interests of the developing nations.
Our policies must take account of these differences.
A single program for all will not serve.

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-- We should also avoid the assumption that
a modest level of economic generosity will buy political
cooperation. Politics and economics are a seamless
web, for developing countries as for us. It is an error
to assume that because they are poor and need our
assistance to meet their growth aspirations, they will
mortgage their political interests for our aid.

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-- It has been suggested of late that our

development efforts should concentrate on meeting basic human needs -- of ameliorating the worst aspects of absolute poverty around the globe within our lifetimes. I applaud the establishment of measurable human life benchmarks -- in terms of life expectancy, literacy, food consumption and mortality -- against which we can test our cooperative efforts to meet the challenge of world poverty. But it is a fact that the momentum of growth is strong in some but not in all LDC's; it is also a reality that some nations, and some sectors within nations, have done better than others, and that they will probably continue to outpace the average.

Our development objectives should be ambitious and tangible. We should not, however, confuse objectives with means. Though our aim may be to ameliorate world poverty, the means to that end may not necessarily be a dole to the poorest. There is a profound question whether, for example, direct international social transfers can give the same impulse to the expansion of national economies as other forms of assistance.

12/22

-- Finally, however important official aid may be, it is in the area of trade opportunities where the greatest hopes for development lie. And commodity policy is key.

12/23

There have, I need hardly tell this audience, been major changes in the commodity field in the last two years. In 1976, the debate reached a climax at the Nairobi meeting of UNCTAD. There, the bulk of the membership supported the Integrated Commodity Program of the UNCTAD Secretariat. We and other developed countries voted for the proposal, but in our case and several others, with important reservations as to buffer stocking. We did indicate, however, that we were prepared to consider specific buffer stock arrangements on their merits, and in addition, that we would cooperate and participate in meetings to examine the common funding of such buffer stocks.

12/24

(Since then, the new Administration has moved smartly ahead. It has done so with an appreciation of the practical. The issue is not an ideological one

between the United States and other developed countries
on one hand, and the mass of LDC's on the other. We
have gone beyond the abstract question whether we can
sign an article of faith in support of a ill-defined,
awesomely described, single Common Fund. The
Administration has demonstrated that the United States
is prepared to examine specific commodity market
proposals on their own merits. The question has
descended from the summit of abstract principle to the
plain of reality. In some cases, in fact, developing
countries have found themselves more opposed to certain
stocking proposals than the developed countries. It
is now apparent that, of the almost three dozen
commodities which the Secretariat of UNCTAD had said
might be eligible for buffer stock arrangements, not
more than five in the near future will actually produce
a buffer stock agreement. By the same token, we have
also developed a commendably pragmatic position on the
post-Nairobi issue of a funding interrelationship between
possible commodity buffer stocks.

12/25

12/26

It is not certain how the commodity issue will

work out. But I think it is fair to say that, while
before Nairobi, it threatened to produce an ideological
confrontation between two camps, the Nairobi Conference,
and what has ensued, have moved commodity policy issues
in a series of practical and realistic discussions of
the substantive merits of the various proposals.

It is important that this should be so. For
the world could not have tolerated for much longer the
tactis of bloc confrontation by the LDC's which were
becoming a tradition in the early 1970's. The
declaration of ideologies, the ringing demands for
massive, automatic resource transfers, the efforts to
instill a sense of guilt in North by the South -- these
were only serving to outrage the very constituencies
in the developed world who were most interested in
speeding the development process. Full cooperation
requires that the developed and the development countries
work together in practical and realistic ways. Unless
I misperceive, we have begun to see, in these last
several years, new, real possibilities for exactly that.

12/27

It is none too soon, for this nation and the
world have a vital interest in meeting the challenge
of poverty around the world.

The International Energy Crisis

Next, and even more evidently vital to our long
term economic and political interests, is the
international energy crisis. It is difficult to
overestimate the significance for this nation, and for
world economies, of the fourfold increase in the
international price of petroleum. That increase dampened
industrial activity throughout the industrial world,
put hundreds of thousands of out of work here and fueled
the fires of inflation everywhere. We are only now
beginning to work our way out of the immediate effects;
the industrial countries are just beginning, and not
everywhere successfully, to achieve something of the
growth momentum of the 1960's, before the energy price
increase.

12/28

I have spoken elsewhere about the vital
importance of an effective domestic energy policy.

12/29

In response to the Administration's efforts to raise the consciousness of the American people about the grave circumstance in which we now find ourselves. I embrace its proposals for a major effort to conserve energy; but I have urged a more vigorous program of expanding alternative sources of energy, in this nation and around the world.

Here, I would like to add some further comment about the international financial and economic significance of the energy crisis.

The energy crisis, which began in 1973, created a massive strain on the international system. When prices first began to climb, most experts were concerned that the facilities of financial intermediation might not serve, that the private credit machinery of the industrial nations would not be able to recycle the surpluses which OPEC nations were earning. Their predictions were wrong. The world financial system worked remarkably well in the immediate aftermath of the price increase. Furthermore, although total debt

12/30

of the LDC's has increased awesomely during the period,
there is considerable evidence that only a few countries
are now overextended. The international banking system,
in short, has survived phase one of the OPEC oil crisis.

But this success has tended to mask the
underlying difficulties.

12/31

We put together in the years just before the
OPEC price rise a revolutionary change in the post-war
economic system by abandoning the Bretton Woods fixed
exchange rates and introducing floating rates. This
made for an enormously important and flexible new element
in the world's economic system. The system permits
a form of automatic and measured adjustment to trade
imbalances and avoids the need for official and sometimes
radically disturbing exchange rate changes.

It was fortunate indeed that we moved when we
did. For had we been saddled with fixed rates during
the oil crisis, the strains would have been intolerable.

But the important contribution of the new

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exchange practices during the financial crisis beginning
in 1973 must not obscure the fact that floating rates
are not enough to cope with the international financial
consequences of the energy crisis. Adjustment to the
new conditions of world finance cannot come through
exchange rate changes alone. The United States, long
an oil exporter, is now importing about a quarter of
its petroleum requirements. There is every likelihood
that, if current trends continue, both our relative
and our absolute imports will increase in the years
ahead. We face the prospect, in short, of $100 billion
annual oil import bills, and a total import bill over
the next decade for oil somewhat equal to our present
annual GNP of $1 trillion plus.

In short, oil imports will dominate our import
accounts for years to come.

Furthermore, if present trends continue, oil
imports will prove relatively inelastic in the future
as they have in the past. That means that even though
relative prices for imported energy will go up in this

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- 23 -

country, our demand will not decline correspondingly.
As a result, our international payments will be thrown
further out of balance. In short, price changes and
the terms of our trade will not alone automatically
lead to the kind of adjustment we must have to meet
the energy crisis.

We may not feel the financial strain as acutely
as others, since our oil imbalances will probably
continue to be offset by other financial inflows. But
we will sense the effects, and our allies in Europe
and Japan will be subject to major pressures.

12/34

We met the financial effects of the energy crisis
over the past five years by virtue of the new exchange
floating and the fact that the public and private
institutions of international finance could Marshall
the resources to meet national payments difficulties.
But the radical shift in the international energy market,
the massive increases in oil imports into the United
States which are likely in the future if present trends
continue, and the resulting accumulation of industrial

12/35

country deficits may push us all to the outer edge of
the effectiveness of the international monetary and
financial system. And make no mistake. This nation,
not Japan or Europe will be the primary cause of the
problem.

If we continue on this course -- of massive
imports into the United States at monstrous prices
producing mountainous trade deficits -- we will be
driven, and we will drive others, to seek solutions
in other sectors of the international system. The
temptation and incentive to try to crimp imports through
protectionism of all sorts will grow; there will be
new pressures to stop the import of shoes from Brazil,
handbags from Uruguay and textiles from Taiwan, and
our relations with these significant developing countries
will suffer, and their own prospects for economic advance
frustrated. We will be increasingly tempted, by the
same token, to choke off our purchases in the industrial
democracies. The effects on recovery in Britain, France,
Portugal and Italy could be disastrous for democracy
in Europe and Japan.

12/36

In short, the oil crisis is challenging the United States to consummate global leadership and sacrifice. Whether this nation can resolve itself to accept an effective national energy policy is central not only on our own economic future but to the health of the entire world economy. We must, I repeat, understand that an effective national energy policy for the United States is vital not only to our own national interest but to the viability of the global world economic system.

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## The Industrial Democracies

I now turn to the industrial democracies, which must be at the center of our attentions in the years immediately ahead.

The future of the world economy -- and so the future of the world and our place in it -- will turn on what happens in the industrial democracies. Western Europe, North America and Japan produce some two-thirds of all the world's goods and services. They

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account for 75% of its trade. They are the world's bankers and the world's inventors.

The west has not been without its critics. There is a tradition on the left, in East Europe and in Africa, Asia and Latin America, of disparaging the west. There is also irony in the fact that they turn to the industrial democracies for the scientific knowledge and practical know-how, the techniques of management, planning and analysis, the systems of production and the marketing which modern economies demand.

And yet, successful and emulated as the industrial democracies are, there are signs of deep stress.

For half a century, the nations of the west have been expanding public sector expenditures and enlarging social services. Almost everywhere, these expenditures have grown more rapidly than national production. This has been both the cause and effect of a revolution of rising expectations throughout the

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