[LC]

THE CHASE MANHATTAN BANK
National Association

1 Chase Manhattan Plaza, New York, New York 10015

July 12, 1974

DAVID ROCKEFELLER Chairman of the Board

Dear Henry:

Immediately following the completion of this year's World Bank and International Monetary Fund meetings in Washington, D.C., Peggy and I will be holding a luncheon in honor of Ministers of Finance and Central Bank Governors of the member countries.

We very much hope that you and Nancy will be able to attend this luncheon, which will be held at my family's estate at Pocantico Hills in Tarrytown, New York, on Saturday, October 5. Cocktails will be served at 12:00 noon, with luncheon to follow at 12:45 P.M.

Please let us know if you will be able to join us for this occasion.

The Honorable Henry A. Kissinger
Secretary of State
Washington, D.C.

1799 175 YEARS OF GROWTH 1974

CC: Mr. Joseph V. Reed Jr.
Vice President

September 11, 1974

Mr. David Rockefeller
Chairman

PEOPLE'S REPUBLIC OF KOREA

On Thursday, September 5, Mr. David Rockefeller, Chairman, Mr. Leo Pierre, Officer for U.N. and Consular Affairs, and the undersigned, as pre-arranged, called on Ambassador Kwon Min Jun at the Korean Mission, 40 East 80th Street. The Ambassador was accompanied by Mr. Kim Chung Gol, First Secretary and Mr. Kwon Ho, Third Secretary.

After the normal courtesies and pleasantries over tea, and a film on the scenic delights of North Korea, the subject of unofficial government conversations which had originally been broached during luncheon here at the Bank, was further discussed. The Ambassador, who ostensibly returned home to North Korea for vacation after that luncheon, returned to the U. S. with a reaffirmation of his and presumably the government of Korea's desire to pursue further the matter of conversations with the United States Government. Mr. Rockefeller mentioned to the Ambassador that he had relayed the substance of our luncheon conversation to the State Department and that the State Department was agreeable to having a responsible individual meet with the Koreans at an informal meeting which Mr. Rockefeller would arrange at his house.

The Ambassador reiterated the Korean's desire to open informal discussions with our Government as they felt this would be in keeping with their hope for better relations with our country, and in the cause of world peace. The Ambassador made a very significant point in telling us that the government of the United States should have no fear of withdrawing troops from South Korea, as it was a stated principle of his government that the Korean situation would not be solved by force.

Mr. Rockefeller mentioned that the individual who might be designated by the State Department would be The Honorable William Buffum and the Koreans were very much interested in knowing as much as possible about Mr. Buffum. Mr. Rockefeller reiterated that this might not be the individual designated at the time of the future meeting but that when he spoke with the State Department several weeks ago this name was a possibility. (On Friday, September 6, Secretary Kim and Secretary Kwon called at my office requesting that we assist in developing some biographical information regarding Mr. Buffum.)

Mr. Rockefeller closed our meeting by saying he would pass the Ambassador's message on to the State Department and as quickly as possible, give both the State Department and Ambassador Kwon several dates which might be suitably convenient for them for the next meeting at his home in town.

Richard A. Fenn

30 Rockefeller Plaza

New York, N.Y. 10020

Room 1500

Circle 7-3700

December 16, 1974

Dear Henry:

The dinner you gave for the Trilateral Commission Monday was a very high point in an exceptionally interesting series of meetings. The group was much impressed with the way you outlined some of the significant points of United States foreign policy and you clearly eased some of the worries they had had on the question of cooperation versus confrontation with the OPEC countries.

I thought you might be interested in some of the materials resulting from our meetings, and I am, therefore, enclosing herewith three documents: a Resolution adopted by the Trilateral Commission's Executive Committee at the end of its meetings, a report on energy, and a preliminary report on relations with the developing countries. The energy report and the report on relations with the LDC's are both preceded by brief summaries.

It seems to me significant that such concrete recommendations could be developed by men and women of such diverse backgrounds and experience, and from three different regions of the world. The most interesting recommendations, in my opinion, are the following:

(1) a new bank for fund recycling with equal control by producers and consumers. If this could be created, they believe it would not only further the necessary process of cooperation between consumers and producers, which the Executive Committee felt to be so important; but it would also mean that producers and consumers would share any bad debts, rather than having most of them borne by the United States and West Germany;

(2) a recommendation that the annual growth of energy consumption be held below two percent in North America, three percent in Europe, and four percent in Japan;

(3) a new international development agency to borrow $3 billion a year from 1976 to 1980 from the OPEC countries at eight percent, and

-2-

December 16, 1974

to make it available to the most needy developing countries at three percent. The total cost of the necessary interest subsidy from 1976 to 1980 would be $900 million a year, of which the U. S. share might be about $170 million, a sum small enough so that it should be politically feasible;

(4) a Middle East peace settlement guaranteed by the United States and the Soviet Union.

You gave us all a big lift, and I deeply appreciate both your arranging the dinner for us and the frankness with which you spoke. With best wishes,

Honorable Henry A. Kissinger
Secretary of State
Department of State
Washington, D. C.

TRILATERAL COMMISSION
Executive Committee
Resolution

December 10, 1974

The international system is undergoing a drastic transformation through a number of crises. Worldwide inflation reflects, transmits and magnifies the tensions of many societies, while the difficulties produced by the abrupt change in oil prices are accompanied by the entry of major new participants onto the world scene.

Confrontation in an attempt to maintain the underlying assumptions of the old system could lead to a general breakdown. On the other hand, creative policies to adapt it to the new partners and conditions could extend the area of effective cooperation more widely than ever before.

Such cooperation must be based on the principle of equality. This is the core of any future political understanding.

This applies notably to the most urgent challenge, the one posed by the funds being accumulated by the oil producers. These could dislocate the system if they are not properly absorbed. Cooperatively used, on the other hand, they are a potentially massive new source of investment in a world which will be in desperate need of capital.

In view of the proposals which have been put forward for cooperation between the oil consuming countries, and the need for cooperation also with the oil producers, the Executive Committee

[LC]

-2-

of the Trilateral Commission calls on the major oil consuming
countries to approach the OPEC countries in order to find out
if they would consider:

- Setting up a new Bank for Fund Recycling, with
  subscription of an equal amount of capital and
  joint control by oil consumers and producers.

  Such parity is essential to create confidence and
  stability, enabling the bank to borrow funds from
  the OPEC countries on an acceptable debt instrument.

- Creating a new international agency associated with
  the World Bank to supply the extra $3 billion a year
  urgently required by the most needy developing countries.
  This agency should borrow $3 billion a year at 8%
  interest from OPEC countries and lend it to low
  income countries at 3%, in loans with 20-year
  maturities and four-year grace periods, in each
  of the years 1976-1980. The total cost of the
  interest subsidy required for these loans would amount
  to $900 million a year for the years 1976-1980, a sum
  small enough so that it should be politically feasible
  to raise it among the OECD and OPEC countries.

These short term solutions are complementary to the need simul-
taneously to develop a longer term framework for international coopera-
tion. The Executive Committee believe that this should involve a

THE TRILATERAL COMMISSION

ENERGY: A STRATEGY FOR INTERNATIONAL ACTION

Second Report of the

Trilateral Task Force on the Political and

International Implications of the Energy Crisis

Rapporteurs:

JOHN C. CAMPBELL
Senior Research Fellow,
Council on Foreign Relations

GUY DE CARMOY
Professor, European Institute
of Business Administration
Fontainebleau

SHINICHI KONDO
Former Ambassador
of Japan to Canada

December 1974

[L]

The Rapporteurs

JOHN C. CAMPBELL was born on October 8, 1911, in New York City. He received his higher education at Harvard (A.B., 1933; M.A., 1936; Ph.D., 1940). Mr. Campbell served as a specialist on Eastern Europe for the United States Department of State from 1942 to 1946. In 1946, he became Secretary and Political Adviser for the United States delegation to the Council of Foreign Ministers and the Paris Peace Conference. Later, in 1948, he served as Political Adviser to the United States delegation to the Danube Conference. From 1949 to 1955, Mr. Campbell was in charge of Balkan Affairs and then a member of the Policy Planning Staff in the Department of State. Since 1955, he has been a Senior Research Fellow at the Council on Foreign Relations. Since 1963, he has been a Consultant and Adviser to the Department of State, serving on the Policy Planning Council there in 1967-68. Mr. Campbell has written numerous books and articles on United States foreign policy, Eastern Europe, and the Middle East.

GUY DE CARMOY was born February 20, 1907, in Paris. He holds a Licencié ès lettres et en droit and a Diplômé de l'Ecole libre des sciences politiques from the University of Paris. Mr. de Carmoy was an Inspector of Finances from 1930 to 1960. He served as an Alternate Executive Director of the International Bank for Reconstruction and Development from 1946 to 1948, and as a Director of the Organization for European Economic Cooperation from 1948 to 1952. From 1962 to 1967, he was Administrator of the Banque des interêts français. Mr. de Carmoy has been a Professor at the Institut d'Etudes Politiques since 1950. Since 1961, he has served as a Professor at the European Institute of Business Administration at Fontainebleau. He is the author of *Les Politiques etrangères de la France, 1944-1966* (1967), *Le Dossier européen de l'energie* (1971), and many other works.

SHINICHI KONDO was born in 1910. He graduated from Tokyo University in 1934 and entered the Japanese Foreign Office in 1939, serving as Consul in New York City in 1941. Mr. Kondo held a variety of posts in the Foreign Ministry from 1941 to 1961, when he was appointed Ambassador to Denmark. In 1965, he was a member of the Japanese delegation to the United Nations. In 1967, he became Deputy Vice Minister of Foreign Affairs. Mr. Kondo was Ambassador to Canada from 1969 to 1972. Currently he is with the Mitsubishi Corporation in Tokyo.

[L.C.]

THE TRILATERAL PROCESS

The report which follows is the joint responsibility of the three rapporteurs of the Bilateral Task Force on the Political and International Implications of the Energy Crisis, with Mr. John C. Campbell serving as principal drafter. The rapporteurs were aided in their task by extensive trilateral consultations. In each case, the consultants spoke for themselves as individuals and not as representatives of any institutions with which they are associated. Those consulted included the following:

Zbigniew Brzezinski, Director, The Trilateral Commission

Helene Carre-d'Encausse, Fondation Nationale des Sciences Politiques, Paris

George S. Franklin, North American Secretary, The Trilateral Commission

Wolfgang Hager, Research Institute of the German Society for Foreign Policy

Rokuro Ishikawa, Executive Vice President, Kajima Corporation

Karl Kaiser, Director of the Research Institute of the German Society for Foreign Policy

Paul F. Langer, Senior Social Scientist, The RAND Corporation

Walter J. Levy, President, W.J. Levy Consultants Corporation, Inc.

Cesare Merlini, Director of the Italian Institute for International Affairs

Kiichi Miyazawa, Member of the Diet (LDP); former Minister of International Trade and Industry

Yoshihiko Morozumi, Vice Chairman, Committee for Energy Policy and Promotion; former Vice Minister of International Trade and Industry

Peter R. Odell, Director of the Economics-Geography Institute, Erasmus University, Rotterdam

Kiichi Saeki, President, Nomura Research Institute of Technology and Economics

Masao Sakisaka, President, Institute of Energy Economics, Japan

Eric C. Sievwright, President, E.C. Sievwright Associates, Ltd., Toronto

Takao Tomitate, Senior Economist, Japan Institute of Energy Economics

Louis Turner, Research Specialist, The Royal Institute of International Affairs, London

Carroll L. Wilson, Professor of Management, Alfred P. Sloan School of Management, Massachusetts Institute of Technology

Joseph A. Yager, The Brookings Institution

# ENERGY: A STRATEGY FOR INTERNATIONAL ACTION
## Summary of the Report

The international energy crisis presents a range of challenges to the Trilateral countries. The task force concludes that their response, both national and international, has been weak and inadequate, and it recommends a broad program of action.

The report concentrates on three major aspects in addition to energy policy itself. One is the problem of relations with the oil-exporters, especially those in the Middle East. How is the adjustment to be made between vital consumer interests and the exercise by the producers of their new "oil power"? Second are the strains induced and intensified among Trilateral countries themselves. The oil embargo and sharp rise in oil prices have tended so far to divide the three regions, and Western Europe within itself. Third are serious problems of internal adjustment and stress that lie ahead for the Trilateral countries in facing the societal implications of the crisis. These three sets of problems are interrelated. Trilateral solidarity, for instance, is affected by the approaches chosen to the oil-exporters and by the success of governments in handling domestic strains.

The task force recommends a broad, positive approach to the oil-exporters. Without isolating the issue of price, the Trilateral countries should seek common and reciprocal interests with the exporters going far beyond oil, interests which can be furthered by cooperation in a variety of forms, bilateral and multilateral. It is suggested that the Trilateral Commission itself set up an expert group to seek unofficial discussions with OPEC representatives on a whole gamut of relevant issues. The oil issue in the Middle East cannot be separated from the Arab-Israeli conflict. The

Summary - Page 2

task force emphasizes the need for an early settlement and for an agreed
North American-European-Japanese approach.

While seeking positive relationships with the producers, the
Trilateral countries must themselves cooperate to maintain their financial
health in the face of existing oil prices and to establish arrangements for
sharing energy in any future emergency resulting from cutoffs of Arab oil
supplies. The task force applauds the emergency sharing plan proposed by
the Energy Coordinating Group and recommends acceptance of this plan by all
Trilateral countries.

For the medium term, through 1985, the Trilateral countries must
start now to work toward reductions of their dependence on uncertain external
energy sources. This requires action for both conservation and increased
supplies. On conservation, the task force recommends that the annual rate
of increase in energy consumption over the next decade be held within 2
percent in North America, 3 percent in Europe, and 4 percent in Japan. This
is a substantial reduction from rates of increase prevailing before 1973.
On increasing secure supplies, the task force sees the most immediate increases
coming primarily from intensified production within the Trilateral community
from known reserves of fossil fuels. The task force recommends that policy
decisions on North Sea oil and gas development be taken on a European basis,
and that Canada and the United States take Japanese and European needs into
account in development of their own rich fossil fuel sources. If the
solidarity and cooperation of the Trilateral countries is necessary and
desirable for reducing dependence on OPEC, for emergency sharing, and for
coping with high oil prices, then it should be valid as well for the
development of known resources, whatever their location, within the Trilateral
area.

Summary - Page 3

For the much longer term, to the end of this century, the Trilateral
countries should move now to outline cooperative energy research and
development efforts, anticipating the end of the hydrocarbon age.

While not pessimistic about the long-term future, the task force sees a transitional period of extraordinary difficulty and adjustment ahead as Trilateral societies adapt to insecure, expensive, perhaps reduced energy supplies, and to slower economic growth. It is a real question whether the necessary sacrifices will in fact be accepted by powerful elements in the body politic. In such cases, there is instability whether a government tries to face the crisis or to avoid it. Individual countries must remain sensitive to each other's problems and agree on sharing burdens and shortages. The task force emphasizes the value of the O.E.C.D. and the proposed International Energy Agency as structures for international cooperation. It also recommends the formation of a non-governmental body of experts to make a long-range evaluation of the social dynamics of the three Trilateral regions, to monitor the evolving situation, and to report periodically to governments and the Secretary-General of the O.E.C.D.

The central proposal of the report is an agreed long-term strategy for the Trilateral countries. The specific recommendations are intended to give substance to that strategy and ensure its success.

[L.C.]

Energy is the economic lifeblood of the industrialized nations. In the period of the next decade, in which the supply of energy will be uncertain and the cost will be high, they will face new and critical challenges dangerous to their economic and social stability and to their political institutions.

It is not a matter of energy economics alone, or of political decisions by individual governments on how to cope with shortage. Energy is central to the whole complex of international economic relations involving the supply and movement of raw materials, the rules and practices of world trade, the maintenance of an international monetary system, and the control of inflation. On the political side, the problems of supply and price have compelled the energy-consuming countries to find new kinds of relationships with the principal oil-exporting countries. Above all, and most important for our purposes here, the crisis brings inevitable stress within each consuming country and in their relations with each other. It has already weakened the fabric of the European Community and added strains to the ties between Europe, the United States, and Japan.

In our previous report, The Imperative for a Trilateral Approach, we pointed out that our countries are faced with a situation not unlike those of wartime, requiring a comparable degree of effort, cooperation, and willingness

This report focuses on the political and social aspects of the international implications of the energy crisis. A special report on monetary aspects was presented to the Executive Committee meeting in June 1974 and additional materials will be presented at the December 1974 meeting.

-2-

[LC]

to share sacrifices among allies. Thus far, however, the best comparison is to
the conduct of the Western democracies in the period of the "phony war" of
1939-40. The response of governments and peoples has been weak and inadequate.
They have not shown that they have grasped the magnitude of the problem, much
less defined with any clarity what they must do about it. For example, if they
must accept some change in living standards and lifestyles - which seems
unavoidable - then decisions as to how and how much must be taken soon and in
an equitable and orderly way, or they will impose themselves later at
incalculable economic and political cost.

We are not pessimistic concerning the long-term future. While growth of
energy consumption should not and indeed cannot continue at the rate attained
in the past two decades, and economic growth is bound to slow down as a
consequence, we do not regard an end to economic growth as either desirable or
inevitable. But we do foresee a transitional period of extraordinary difficulty
and adjustment, until such time as our societies can count on more secure and
more abundant energy. The main emphasis of our report, with no intent to
slight the importance of energy policy itself, is on the political, social and
international consequences of this situation.

We pose some blunt questions. Do governments have the political will to
face the truth and to act, and if so, will their peoples give them the power
to act? Will they have the strength to avoid nationalistic action for common
interests? It will be a test both of democratic institutions and of inter-
national solidarity.

# I. Dimensions of the Problem

The energy problem should be seen in terms of time and of space, and
of both economics and politics.

-3-

[LC]

## 1. The time dimension

Three different time periods should be considered. All three have already begun.

The first period is the present and near future. The consuming countries must cope with the threat to financial and economic health and stability caused principally by the sudden rise in the price of oil. They also face the potential threat of a crisis of supply if the Middle East peace negotiations do not succeed and major oil-producing countries again resort to the "oil weapon" for political reasons. Even without war those producers, as long as they have an effective cartel, can further limit production as a means of maintaining or increasing prices.

The second period covers the next decade, from now until 1985, in which the consuming countries, in addition to meeting the continuing financial problem, must make a serious and necessarily costly effort to free themselves from critical dependence on imported oil. This can only be a gradual process, but it will not take place at all unless goals for the reduction of growth in demand and for the development of alternative sources are set now and the necessary decisions are taken in time.

The third period is the longer term, to the end of this century, in which the need is for the timely development of new sources of energy, not only to replace oil imports but to cope with the decline of the world's reserves of hydrocarbon fuels. Here again, governments will have to take decisions in the near future, especially on research and development.

## 2. Emergence of a powerful new actor

Reversal of the terms of trade between manufactures and raw materials and the rise of the cartel of oil-producing countries have created dramatic changes in overall relationships between industrial and raw-material-producing countries. The existence of the oil cartel, with its power to fix prices, also

-4-

introduces a fourth party, and a very powerful one indeed, into the relations
of the members of the Trilateral group, whose economies are affected in
different ways. The power of the Organization of Petroleum Exporting Countries
(OPEC) is felt particularly by Western Europe and Japan, which cannot dispense
with oil imports from the Middle East. The United States remains the most
powerful economy, but its freedom of manoeuvre has been hampered by the weakening
of its European and Japanese partners and by its inability to limit the
rise in the price of oil.

3. The impact of high oil prices

In order to keep their economies going, the consuming countries have
paid the high prices set by OPEC at the end of 1973 and maintained or increased
during 1974. Some of them are already in a serious financial plight because
of large deficits in their balance of trade, the drain on their financial
reserves, and the decline of their capacity to borrow. The position of Italy,
of Great Britain, and of France is critical.

The entire group of consuming countries, moreover, must deal with the
question of "recycling" the oil payment money not balanced by exports to the
producers. The sums, which have been conservatively estimated at from $60
to $75 billion for 1974 alone and up to $650 billion (World Bank estimate) for
the period to 1980, are or will be too large for the private banking system to
handle without backing by central banks or governments. The investment
process goes on, as individual oil-producing states put their funds on deposit,
make their own decisions on short or long-term investment, or conclude bilateral
agreements with consuming states. But the oil money is piling up too quickly,
there is insufficient time for adjustment, and the funds do not go back to
the consuming states which need it the most.

[Lc]

-5-

The problem is of great urgency and may become unmanageable. Appeals to the producing states to relieve the situation by reducing the price of oil, whether based on political sympathy, common interest in a viable world economy, or the dangers of confrontation, have not induced them to do so. As demand is cut by conservation, they are in a position to reduce the supply and maintain income by raising the price still higher. Should they henceforward, as it is intimated, index the price of oil on the rate of inflation in the consuming countries, it will increase further the inflationary effect of the whole process.

### 4. The Middle East situation

Political conflicts in the Middle East, especially the Arab-Israeli conflict, add to the critical nature of the problem. Progress toward Arab-Israeli peace settlements has been slow or non-existent since the conclusion of the interim cease-fire and separation-of-forces agreements following the Yom Kippur war. Each side is building up its armed strength. Israel fears for its existence (which is openly rejected by radical Arab elements) and suspects that compromise agreements would only be the prelude to new Arab claims. The Arabs, especially since the summit meeting at Rabat, have taken positions which make negotiation with Israel more difficult. A new round of war is a strong possibility.

In these circumstances, the Arab states might act to cut down or cut off oil exports to Western countries in a number of contingencies: in case of a resumption of war with Israel, certainly; in case of failure to reach a settlement within a relatively short time, probably; to prevent the extension of Western loans to Israel or the conclusion by the F.E.C. of a trade agreement

[LC]

-6-

with Israel, possibly. A substantial reduction in oil supply would, of course, increase the risk of economic collapse on the part of the more vulnerable consuming countries.

In the absence of understanding with the Soviet Union covering the dangerous contingencies in the Middle East, the possible role of that country, which has given strong political and material support to the Arabs against Israel, may create further serious problems for the Western nations in maintaining their security and their vital economic interests.

## 5. Intra-European relations

The oil crisis has added to the predicament of a European Community already suffering from serious trade and monetary imbalances due to diverging economic policies. The result has been to deprive the Community of its policy potential not only in regard to energy but also in other major fields. Inflation has increased to a point where it endangers political stability in individual countries, and the differential between rates of inflation drives the members of the Community further apart. As long as the balance of payments of E.E.C. member states is diversely affected by the rise in the price of oil, no progress can be made toward a common monetary policy.

As each member of the Community is hit by the effects of high oil prices, its natural reaction has been to take national measures to protect its own economy, sometimes to the detriment of others, and to look for help to individual governments rather than through a joint approach. Only recently has there been a growing awareness of the serious implications of the financial crisis and of the need for a common loan fund.

[L.C.]

-7-

Furthermore, the continued emphasis on making decisions by intergovern-
mental mechanisms rather than through the Community institutions has made it
impossible for the Community either to respond quickly to an emergency or to
adopt long-term policies which are more than non-committal pledges. The
uncertainty over Britain's participation adds to the near-paralysis of the
Community institutions.

Less tangible but nonetheless real are the effects on mutual trust of the
lack of solidarity shown by the European countries when the Arab states in
1973 cut back oil exports and raised prices. The Community institutions were
not effective. Individual members, seeing recurrent use of the oil weapon as
the most real danger, did not resist the temptation to seek reinsurance
through bilateral deals with oil-producing countries at the risk of overbidding
and of eroding the common commercial policy.

The absence of a common energy policy for the E.E.C. made it difficult to
face the crisis together at its outbreak. The divisive effects of having to
make choices between the Arabs and the Americans, in turn, have hampered the
creation of a comprehensive European energy policy. Without such a policy,
Europe can hardly play a strong and constructive role together with North
America and Japan in dealing with the energy problem either in the near future
or over the long term.

6. European-American relations

When the impact of the Middle East war, the Arab oil embargo and the cutback
in production struck the Western world, it revealed an apparent conflict of
vital interests between Europe and the United States. During the October
war the United States concentrated on the issues of military and political

-8-

[LC]

security and underestimated the difficulties of the Europeans, whereas Europe thought of economic security first and underestimated the involvement of the Soviet Union. In the period following the war these differences were smoothed over as the two sides began talks on energy matters and tried to improve the procedures for consultation within their alliance. Nevertheless, the potential conflict of interests remains and could come to the surface if the Middle East again erupts in war or if the financial strain bears too heavily on Europe. It is rooted in the profound difference in vulnerability between Europe and the United States, which recent events have widened. The United States has become relatively stronger, owing to the abundance of its energy resources and a strong economic position which should attract the surplus funds of the oil-producing states. Europe is militarily dependent on America and economically dependent on the oil-producing states of the Middle East. Both types of dependence will endure for some time and have to be kept in balance.

The functioning of the Atlantic Alliance is inescapably affected by these developments. Besides bringing to the fore differences of outlook on the Middle East, they may weaken the defense of Western Europe itself. The cost of oil imports will probably induce the European states to reduce their military expenditures at a time when the U.S. Congress is considering the reduction of American forces stationed in Europe. This double trend will have a destabilizing effect on security in Europe, which in turn will weaken the security of all members of the alliance, including the United States.

The gap in strength between America and Europe, which energy factors have increased, thus creates problems which cannot be easily solved within the alliance as it now functions. Both parties have an interest in making it more

-9-

[LC]

effective in the consideration of problems and the adoption of consistent policies outside of Europe, particularly in the Middle East. It is important to the alliance as a whole that the European countries improve their economic position with oil-producing states, and also that a common approach be found to the political issues involving those states, especially to the question of a settlement between Israel and its Arab neighbors.

7. Japanese-American relations

Japan's dependence on Middle East oil, even greater than Europe's, dictated a similar attitude toward the October war and led to public statements of policy sympathetic to Arab views on terms of political settlement with Israel. Japan's statements and policies, however, did not create differences with the United States comparable to the controversies and recriminations which marked European-American relations, for Japan was remote both geographically and politically from the Middle East conflict. Nevertheless, Japan's scramble for oil in the world market and its intensified efforts to secure future supplies through direct deals with producing countries in the wake of the crisis caused considerable apprehension on the part of the United States, which was trying to bring about a common front of consumers and an approach based on non-discriminatory access. Subsequent developments, however, have shown that Japan's achievement in direct deals was relatively small.

Such strains as these Japanese activities caused were largely dissipated by Japan's participation in the Washington conference on energy in February 1974 and in the work of the Energy Coordinating Group. But there remain fundamental differences in the positions of the two nations, one with vast reserves of

-10-

[LC]

potential energy and the other with virtually none. Japan's support for international efforts for closer cooperation among consuming countries carries the proviso that they will not lead to confrontation with producing countries, for all the developed countries Japan is the most vulnerable, economically and politically, to interruption of oil supplies. Japan's continued dependence on imported oil, and on Middle East oil in particular, requires it to keep on good terms with producing states, to diversify its sources of energy, and to draw upon the resources of North America.

These factors carry the danger of conflicting Japanese and American policies in the future, especially if the Arab states should again use oil as a political weapon. The sensitivity of both nations to their trade relations may increase the potential for disharmony and dispute if world economic conditions deteriorate. Closer and more frequent consultation, both official and non-governmental, will be needed to prevent friction and conflicts of interest between the two countries.

## II. The Response to the Problem

The following, in brief summary, is the record of action, national and international, in response to the energy crisis.

### 1. North America

In the United States the Middle East war, the Arab oil embargo, and the threat to the security of future supply prompted emergency measures to cope with immediate shortages, a cut in demand in response to conservation and higher prices, and the launching of the concept of "Project Independence," with the aim of ensuring a stable supply and eliminating dependence on foreign sources by 1980. The Executive and the Congress failed to agree on a number of aspects of energy policy, however, and no comprehensive long-term plan was adopted. Certain

[Lc]

-11-

specific governmental actions have been taken, through legislation or executive decision, (a) to encourage economy of use, (b) to promote the expansion of domestic oil and gas production, (c) to authorize and expedite building of the Alaska pipeline, (d) to set terms for increased mining of coal, (e) to accelerate production of nuclear power, and (f) to make available increased funds for research and development of solar, geothermal and other forms of energy.

These are largely ad hoc measures and half-measures which by themselves do not constitute a comprehensive policy and have not brought decisive results. The ending of the Arab embargo and the easing of the supply situation in the spring of 1974 lessened the sense of urgency. By autumn, consumption of oil was slightly below the level of the same time the year before (reflecting definite progress in conservation) and dependence on imports (a little over one-third of total oil consumption) remained unchanged. Domestic oil production has continued to decline, and although the oil and gas industry has decided to invest large sums in exploration and production, those investments will not show results for several years. The government's plan for Project Independence, finally presented to the public in November 1974, at least set an agenda for debate on policy.

Secretary Kissinger on November 14th, in the context of proposals for comprehensive agreements and cooperation by the consuming countries on many aspects of energy policy, outlined an American policy of drastic conservation and development of new sources, with a goal of reducing oil imports in the next decade to a level of one million barrels per day. Much of the American program will require further policy decisions and legislation before going into effect.

-12-

[LC]

Canada did not have to respond with drastic measures to the energy crisis, and it would be politically difficult to do so as long as large exports of oil and gas still go to the United States. It had some shortage in its eastern provinces which are dependent on imported oil, even though the country is a net exporter. Eventual completion of the pipeline from the Alberta oil fields to Montreal should give Canada the capability for self-sufficiency if it should choose to exercise it, but rising nationwide demand and prospective declining production from existing oil and gas fields raise questions for the next decade unless new sources are developed. Possessed of large potential energy resources in the Athabasca tar sands and possibly in Arctic oil and gas, Canada has adopted a policy of developing its energy at a rate suited to its own needs and not primarily for export.

Engaged in the search for a national energy policy, Canada has rejected the idea of a "continental" energy program with the United States. However, the relationship of the two nations in energy, as in other fields, remains a unique and complex one. Export of Canadian oil and gas to the United States will probably continue for some years, although at a declining rate unless and until new sources surplus to Canada's needs are developed.

## 2. Western Europe

Because the E.E.C. has not succeeded in the attempt to establish a common energy policy, the Europeans responded to the present crisis primarily on a national basis. The response was therefore diverse, and it was limited. Only the Netherlands embarked on a drastic, long-term program to save energy, achieving substantial results through a combination of government initiative and the response of the population and of private industry. Italy, despite its financial

[LC]

-13-

plight, has a poor record on conservation. France, after a year in which reduction of demand in real terms was negligible, has set a financial ceiling for oil imports in 1975 and taken measures to restrict consumption. Britain, which has done little to reduce consumption other than to let higher prices take their toll, is relying heavily on future oil and gas from the North Sea (and already mortgaging it) and on increased use of coal. Germany, like Britain, has raised coal production targets modestly. Both France and Germany are committed to a substantial growth in the production of nuclear energy.

The European Commission has recommended a broad and ambitious program of conservation and development of energy over the next decade, with emphasis on nuclear energy and gas. But the program has not been accepted by governments. Meanwhile, the member countries go their respective ways. The financial resources they have devoted to exploration and to technology in order to reduce dependence on imports do not compare, even in relative terms, with the efforts deployed in the United States. Nor have European governments begun to face hard choices such as Japan is already taking for the adaptation and restructuring of industry.

### 3. Japan

The oil crisis triggered by the October war had an immediate and severe impact on the Japanese economy, including further acceleration of an already high rate of inflation. The government's response was slow, confused, and ineffective. Its frantic pursuit of available oil earned considerable criticism in other consuming countries. Not until near the end of 1973 did the government introduce mandatory measures cutting oil and electricity consumption (by 10 and later by 15 percent in the industrial sector) and impose price control on petroleum

-14-

[LC]

products and other commodities. When the oil supply situation improved, it abolished the mandatory conservation measures and lifted price controls except on a few essential commodities. Higher prices and economic slowdown have worked to constrain oil consumption, which is estimated at 7 percent less in 1974 than in 1973, with imports of oil at about the same level (5.2 million barrels per day).

The Japanese government has established a new council to launch a national energy-saving movement and is preparing legislation to encourage efficiency of use. It has promised for the spring of 1975 a comprehensive energy policy, with projections of the nation's demand-supply situation in 1980 and 1985. According to the preliminary report, average annual growth of primary energy supply from 1973 to 1985 is estimated at 5.7 percent (as against 11.7 percent for 1962-1972), with a cut in the average annual growth rate of oil imports to about one-third of that for the 5-year period ending in 1973. But imported energy is still estimated to account for 82.3 percent of total primary energy supply in 1985, compared with 86.4 percent in 1972.

In order to reduce excessive dependence on imported energy, Japan is planning intensified development of its limited indigenous energy resources, development of nuclear power, and a long-term research and development program (aimed at the year 2000) on solar energy, geothermal energy, coal gasification, and other new sources. All this can make a difference, but there is no chance of a substantial reduction in dependence on imported energy and oil in particular.

In view of the limited energy supply and higher cost, Japan envisages further economy in energy consumption and slower economic growth. It accepts the necessity, in order to maintain a viable economy and social stability, of efforts to shift the economic structure from energy-intensive industries to those which

-15-

[LC]

are intensive in knowledge and technology. This structural change is a long-term solution for the energy problem, requiring reallocation of resources, labor, and investment.

### 4. International action

No agreed international action was taken in the latter months of 1973 to meet the embargo and production cuts decided by the Arab states or the price rises determined by OPEC. Indeed, the differing reactions by the United States, Japan, and the E.E.C. (and among members of the E.E.C.) illustrated a general view that each could serve its interests better through separate action. The first serious attempt to establish common approaches was the Washington conference of 13 nations in February 1974. The Energy Coordinating Group, which grew out of that conference, has been working out cooperative programs covering conservation and restraint of demand, development of new sources, emergency sharing, research and development, financial aspects, the possibility of meetings of consuming and producing countries, and the role of the international oil companies.

This work proceeded at a disappointingly slow pace but finally produced an emergency oil-sharing plan and a new International Energy Agency which came into being in November 1974. The agreement on sharing, which will be activated automatically when restriction of supply reaches a given point, is a major achievement helping to blunt the damaging effects of embargoes or cutbacks. The new agency, embracing all the Bilateral countries except for France and Norway and with a procedure of weighted voting likely to produce decisions, should be stronger than the E.E.C. or the O.E.C.D. and should play an important role as a policy-making and operational body. The real test, however, will be on the policies to be adopted rather than the institutions and the procedures through which they may be reached.

-16-

[Lc]

On the pressing financial question, international action has been limited to bilateral loans to ease the plight of countries in serious trouble (e.g., a large German loan to Italy), and to the establishment by the International Monetary Fund of an "oil facility" for loans to countries hit hardest by oil prices, mainly the poorest of the less developed countries. These arrangements provide for only a few billion dollars of loan money, whereas the deficits will be many times that. As Italy is followed by other consuming countries in reaching the limits of their borrowing capacity, with no drop in what they must pay for oil, the need for timely effective international measures to prevent the worst and to avoid a wave of destructive nationalistic actions and counteractions should be apparent. Belatedly, as illustrated by Secretary Kissinger's proposal of a fund starting with $25 billion for use in 1975, governments have realized the need for the availability of large common funds which can be used flexibly and linked to agreed policies and goals in the energy field.

However one looks at this record of response to the energy crisis, some conclusions are obvious. It has been halting, piecemeal, often inconsistent, and inadequate. Where drastic action is called for, it has not been taken. The governments have been timid. The general public has followed a philosophy of business as usual and hope for the best. Meanwhile, the financial crisis has grown, political dangers have increased, and international action is postponed.

### III. The Need for New Approaches: A Long-Term Strategy

In the light of this record we reaffirm the main recommendations of the earlier Report of this Task Force (June 1974): the need for a joint commitment by the Trilateral countries to the efficient use and the rational development of energy, meeting its high cost as may be necessary, with a general strategy and plan covering the next twenty years: and the requirement for early action, national and international, in fulfillment of that commitment.

-17-

[LC]

The common plan should establish a series of goals respecting levels of energy consumption, efforts for economy of use, rates of development, reduction of dependence on energy imported from outside the Trilateral area, and meeting the high cost of essential energy whether imported or produced at home. Obviously it is not wise or desirable to provide precise sets of figures to illustrate recommendations for a strategy which looks a decade and more ahead. But in the belief that some general targets for the next ten years should be established as a spur to necessary national and international action, we make the following recommendations.

## I. Growth and the level of demand

Our countries should hold the annual rate of increase in energy consumption over the next decade within the range of 2 to 4 percent.

This level will mean a drastic reduction of demand but should still permit a modest rate of economic growth.

The lower figure should be possible for the United States (which would still have the highest per capita consumption), and the higher figure for Japan (which would have the lowest per capita consumption), with Europe somewhere in between. These rates may be compared with those existing before 1973

* Energy consumption (million metric tons of coal equivalent)

<table><thead><tr><th></th><th>1972<br>actual</th><th>1975</th><th>1980</th><th>1985</th></tr></thead><tbody><tr><td>U.S.</td><td>2,425</td><td>2,573<br>(projected at 2% annual increase)</td><td>2,841</td><td>3,137</td></tr><tr><td>Canada</td><td>235</td><td>249<br>(projected at 2% annual increase)</td><td>275</td><td>304</td></tr><tr><td>E.F.C.</td><td>1,180</td><td>1,290<br>(projected at 3% annual increase)</td><td>1,495</td><td>1,734</td></tr><tr><td>Japan</td><td>345</td><td>388<br>(projected at 4% annual increase)</td><td>472</td><td>574</td></tr></tbody></table>

(Adapted from United Nations Statistical Yearbook 1973, pp. 348-350)

-10-

[LC]

Public policy will have an essential role in explication and persuasion, in enacting and enforcing standards, in allocating energy to different uses, in equitable distribution of fuels, in helping to plan and finance economic adjustment and change, in reorganizing systems of transport, and in sponsoring research. Governments should aim at avoiding the expansion of energy-intensive industries and services. For instance, they should drastically reduce the building of new airports and the movement of freight by air. Such decisions would be more acceptable if taken as a result of Triilateral agreement. Individual countries, of course, all have their special conditions; Japan, for example, has less margin before cutting into the bone of essential industrial production.

Limitation of civilian consumption will also be necessary. Here a balance will have to be struck between the price mechanism and the use of mandatory controls. (The social and political implications of conservation are considered in Part VI of this Report.)

### 3. Development of additional energy

> The effort to increase supply within the next few years must rest primarily on intensified production of known reserves of fossil fuels in areas of secure supply.

The first priority should go to the oil and gas resources of the North Sea and Alaska. The other major possibility is coal. Coal and its derivatives will not only supplement oil but in many instances will provide a substitute for it. Early decisions are necessary to perfect the technology for gasification of coal and extraction of oil from shale and tar sands, although significant

-20-

energy supplies from the latter two sources may not appear until the mid-
1980s. The private oil companies will continue to have a significant role
in the development of new sources, especially in investment decisions on
exploration and production.

The consuming countries should consult on the estimates
each should set for the production of coal, oil, natural
gas, nuclear power, hydro power, and oil from shale and tar
sands, for 1980 and 1985.

The resultant figures would indicate not only the goals for each country
and region but also the picture for the consuming countries as a whole,
including the possibilities for trade in energy resources between them. Each
of the Trilateral regions should strive to cover, by 1985, 15 percent of
total energy consumption with nuclear power.

For the period after 1985 a similar but much more tentative
set of goals should be set, with initial emphasis on research
and development and continuing flexibility to adjust programs
to scientific and technological change.

Oil shale, tar sands and nuclear power should by then be contributing
much more energy. While research on solar energy, geothermal energy, atomic
fusion, and other possible sources should be given full rein, our conclusion
is that the energy base from 1985 to the end of the century will still rest
largely on fossil fuels (increasingly on coal and its derivatives) and on
nuclear fission reactors.

[LC]

-21-

4. Reduction of dependence on outside energy

The United States and Canada should each strive for
a position of substantial self-sufficiency in energy
by 1985.

Although they might still be importing some OPEC oil (and the U.S. might be importing oil from Canada), the two countries should aim at holding imports of oil from uncertain sources to a level of less than 5 percent of total primary energy use. They should be, for all practical purposes, free to keep their economies going without disruption in case of a cutoff of OPEC oil; they would then not have to make demands on limited oil supplies available to other consuming countries and could even contribute to the total energy supply if they had built up additional export capacity in coal and other fuels.

The E.E.C. should reduce its dependence on uncertain imports of oil and gas, from the present 60 percent to 40 percent by 1985. Japan should reduce correspondingly from 86.4 percent to 80 percent dependence in the same period.

We recognize that neither Western Europe as a whole nor Japan can achieve energy independence for many years. The need is for immediate decisions proving a serious intent to move in that direction, for some noticeable progress within a few years, and for commitment to specific goals and time schedules. Further lowering of the above percentages for Europe and Japan should be envisaged

-22-

[LC]

after 1985, especially through the growth of nuclear energy, but the setting of specific goals can await intervening developments.

We do not regard possible imports of oil and gas from non-OPEC sources as likely to change the basic problem. Prospects exist for increased production and new discoveries in or off-shore Asia, Africa and Latin America, but since any country so favored would probably soon join OPEC, security of supply is uncertain. All possibilities, however, should be seriously explored. As to other fuels, the potential for coal supplies from Australia and South Africa is high.

The Soviet Union has vast reserves of energy, but its own increasing demands will limit its capacity to export. While some Soviet fuels should be available for Europe and Japan, the grandiose proposals under discussion by U.S. and Japanese companies with the Soviet government for the development and export of oil and gas seem to involve high costs and high risks, and should be weighed against comparable investments elsewhere.

It is natural for Japan to diversify its sources of energy by looking both to the U.S.S.R. and to China. But it is doubtful whether Japan or any of the consuming countries could meet more than a small percentage (say 5 percent) of its total energy demand from those countries, and it would not be wise from a political standpoint to incur any substantial degree of dependence on them.

[LC]

-23-

## 5. Emergency sharing

We stress the importance of agreement on stockpiling and on sharing energy supplies in an emergency, and hope that all the Trilateral governments will accept the plan proposed by the Energy Coordinating Group.

It is essential that the provisions for sharing be linked to equitable standards for conservation; otherwise, the provident will merely be subsidizing the improvident.

The international oil companies should cooperate in making the emergency plan work and should make all the necessary information on reserves, supplies, and prices available to the participating governments.

## 6. Cooperation in research

Taking account of all the requirements of the long-term energy plan, the United States, Canada, the E.E.C. and Japan should work out a general framework for cooperation in energy research and development, within which the necessary specific arrangements can be made.

The Trilateral countries cannot afford separate and competing efforts in this field. On conservation, on many aspects of the development of nuclear energy, on experimentation with new and still unusable forms of energy, they must put science and technology to work where there are the best chances for achieving results.

[LC]

-24-

7. The financial burden

Financial problems will beset the consuming countries at every stage
of their long-term strategy, as they will be paying for high-cost energy
whether it comes from OPEC sources or from their own. But the most serious
stage, as indicated earlier, is the immediate one: now and the next few years
when huge sums of money in payment for oil are being transferred to the account
of producing countries. We shall not, in this Report, make specific recommendations
on such matters as emergency credits, arrangements between governments and
private banks, types and directions of investment for oil money, or the role
of the international financial institutions. We wish to stress three more
general points:

a. The financially stronger countries, frankly recognizing common political interests, should be prepared to help their partners whose economies have been thrown into crisis by the effects of the high price of oil. However, that aid should be conditioned upon the most rigorous measures of self-discipline and self-help on the part of the recipients and accompanied by joint commitments to preserve the international trading and financial system. All should recognize that emergency loans do not provide a lasting solution, and that the financially stronger countries such as the United States and Germany cannot assume the mounting burden of debt of the others.

b. The consuming countries must maintain continuing contact and negotiation with the producing countries to deal with the question of oil price in the context of the many other questions, both economic

[LC]

-25-

and political, in which both sides are interested. A confrontation on the isolated issue of oil price should be avoided. But the producing countries must recognize the crucial importance of that issue to the future of the world economy.

c. The consuming countries must begin at once to put themselves in a position where they are less dependent on imported oil. This is necessary both to reduce the drain on their financial reserves and to give them greater bargaining power for lower oil prices. Thus, for the price problem as for the supply problem, the need is for concerted and far-reaching action to conserve energy and to develop alternatives to imported oil.

## 8. Avoidance of nationalistic measures

> The consuming countries should avoid attempting to solve problems which derive from the energy crisis by nationalistic measures such as devaluation of currencies and new controls on imports or exports.

Such measures, which would only lead to a spiral of competitive actions, could gravely damage the trading and financial system and the interests of all concerned. On investments in energy the consuming countries should have an agreed policy so as to avoid duplication at a time when the need for capital will far exceed the availability of funds.

[LC]

-26-

#### IV. Relations with Oil-Producing Countries

Of the series of political challenges posed to the Triateral countries by the energy problem, the foremost is to the relations among themselves. But another challenge demands their immediate attention, that of relations with the oil-exporting countries, especially those in the Middle East. How is the adjustment to be made between vital consumer interests and the exercise by the producers of their new "oil power"?

In narrow terms, the main problem is one of persuasion: how to convince the members of OPEC to keep up the supply of oil, at bearable prices, during the period of continuing dependence. One method is diplomatic argument, which by itself is not likely to prevail against counter-argument based on tangible interest. Another method is economic pressure. No one consuming country, however, has the capacity to exert decisive pressure on the producers, and while consumer solidarity is useful and even necessary as a means of balancing the solidarity of the members of OPEC, attempts to mobilize collective economic pressure on them are not likely to be effective because the preponderance of bargaining power is on their side. Economic warfare, in the form of attempts to deny food or other supplies, will court political disaster without bringing the desired results. Military action must be ruled out.

These and other considerations argue for a broader and more positive approach, seeking common and reciprocal interests going far beyond oil which can be furthered by cooperation in a variety of forms, bilateral and multi-lateral. The ensuing paragraphs touch on these interests and opportunities. While some of them apply to all members of OPEC, most of them are particularly applicable to the producing countries of the Middle East, for they are at the heart of the problem.

-27-

1. The Arab-Israel conflict

The Trilateral countries have to recognize that the question of the
supply of oil cannot be separated from the existence of political conflict
in the Middle East. The prospect that a new crisis would bring a new reduction
or cutoff of Arab oil and again drive the consuming nations apart highlights
the need for an early settlement and for an agreed American-European-Japanese
approach to it.

This does not mean that the diplomatic roles would not be different;
the United States will continue to be more directly and deeply involved than
Europe or Japan in the process of mediation and negotiation and in maintaining
a balance with the Soviet Union and seeking its cooperation. But the negotiations
should not be solely in American hands, with the others shut out, nor should
the latter take refuge in statements of policy publicly placating the Arabs
which make more difficult the task of reaching a negotiated settlement. The
Europeans and Japanese will feel involved in the policy only if they have a
share in the peace negotiations; hence the need for a process of political
consultation. All should know the shape of an emerging settlement, especially
those which may be involved in guaranteeing it. In fact, American, European
and Japanese ideas on the general terms of a settlement, based essentially on
the principle of non-acquisition of territory by force and the right of all
states to secure existence, are not widely different. All have an interest, too,
in timely negotiations, for all will suffer from the consequences of the
indefinite deferral of a settlement. An agreed approach, allowing wide scope
for changing tactics and for the parties themselves to come together on the
final terms, should increase the chances both of Middle East peace and of
continued access to oil.

-28-

2. Common interests in security

The rivalries of local states and of outside powers have made the Middle East a region of dangerous instability. Members of the Trilateral group of nations, in different ways, can contribute to the security of the region.

Certain of the major oil-producing states regard it as important that the existing balance not be upset and that no outside power acquire predominant power in the area of the Persian (Arabian) Gulf. Some of the governing regimes have uncertain or unfriendly relations with other states of the region, or must deal with unstable internal situations. Their newly acquired wealth may serve as an invitation to subversion, revolution, or intervention from outside. Presumably they have a stake in the avoidance of strife and may see a benefit to their security in the assurance of Western interest and in the presence of Western forces in the area, so long as the latter serve not as a threat of intervention in conflicts of local states but as support for their independence and nonalignment.

Similarly, their acquisition of American or European arms for the fulfillment of plans for national defense, besides helping to reduce balance-of-payments deficits from oil sales, opens doors to broad cooperation in military and technological fields. The obvious political and economic advantages of such sales should not obscure the dangers of providing ever more sophisticated weapons, stimulating arms races or encouraging militarism. The danger of the spread of nuclear weapons to the region cannot be overlooked. The supply of arms is a complex matter, to which supplying and receiving countries should address themselves in a framework of common interest in security. We recommend,

-29-

[LC]

on the side of the suppliers, the establishment of some mechanism, possibly in
the framework of the Atlantic Alliance, so that they may consult, exchange
information, establish limits of competition, and coordinate decisions, bearing
in mind the desirability of eventual negotiation, including the Soviet Union,
for a general agreement on arms deliveries and arms levels.

3. National development programs

The highest priority in economic cooperation goes to helping the producing
countries carry out their programs for the improvement of agriculture and the
growth of basic industries. Besides meeting their wants, rapid development will
promote exports of the industrialized countries and cut down the oil money
balances. The countries of the Middle East and North Africa, on their part,
should see the need of coordinating their development programs so as to avoid
the building up of surplus capacities in their new industries over the next
few years.

The building of petroleum-related industries such as refining and
petrochemicals in the producing countries is natural and inevitable. The con-
suming countries should provide help, even though the temporary effect will be
to add to OPEC's bargaining power, create competition for their own industries,
and aggravate their situation regarding the cost and supply of oil products.

Similar considerations apply to further exploration for oil and gas in
the producing countries. The effort required for it might better be used to
develop energy in the consuming countries themselves. But if a basic purpose
is to create a many-sided structure of cooperation, this side can hardly be
left out. It is obviously related to the willingness of the producing countries
to continue to supply oil from existing wells.

-30-

The producing countries, even those with the largest reserves, are acutely aware that their oil is not inexhaustible. The industrialized countries can help them to prepare for the day when they will look to other sources. Nuclear projects for desalination and generation of industrial power (with effective safeguards against diversion of nuclear material to military use) and joint experiments in solar energy would serve this aim.

4. Negotiations on the supply and price of oil

Leaders of consuming countries have appealed directly for the lowering of prices, and leaders of some producing countries, notably Iran, have stated publicly why they do not do so, linking the question to inflation of currencies and the prices of other goods. This is a subject on which governments should talk seriously in private rather than polemically in public. It is, moreover, important to get the cooperation of some of the OPEC governments in sharing the burdens and risks of the recycling process and in making concessionary arrangements for the more needy oil-importing countries.

There are obvious limits on how far trade and prices should or can be handled on a government-to-government basis. But OPEC is not an ordinary phenomenon, the price of oil threatens the industrialized world with possible disaster, and there has to be a basis for discussion which the rulers of the major producing states accept. If talks covering the price of food, fertilizer, and other commodities can lead to greater understanding of difficulties on both sides and open the possibility of a better situation in respect of the supply and the price of oil, then they are well worth undertaking.

-31-

5. <u>Investment of oil money in the developed countries</u>

A wide field for cooperation exists in decisions on the investment of oil
producers' surplus funds in the consuming countries. This side of the eco-
nomic relationship provides for the first time a counterpart to the more familiar
one of the flow of investment in the other direction. It creates mutuality,
with each side having an interest in an inflow of resources for development
and a concern for retaining control of fundamental economic decisions. In ad-
dition to profitable investment, the oil-producing states presumably have an
interest in helping the consuming states to avoid serious economic dislocation
or collapse under the burden of payments for oil, which could disrupt their
own economies as well and strain political relations more than they wish.

The investment of producing countries' surplus oil funds in the develop-
ment of energy in the developed countries is a special case, for it raises the
question whether they will wish to contribute to the possible erosion of prices
and of the bargaining position they now enjoy. They may find that it is in
their interest to do so, since oil will always be a premium fuel and the
development of energy elsewhere will tend to make their own reserves last
longer. Involvement in this type of undertaking could help create in oil-
producing and industrialized countries alike a habit of looking together at the
total energy situation in the long term and as a world problem.

6. A larger <u>role in world affairs</u>

The oil-producing countries do not play a role in international con-
sultations and decisions relating to the world economy commensurate with their
now greatly increased wealth and power. For example, they now hold about 5 per
cent of the voting power in the World Bank and the I.M.F. The industrialized

[LC]

-32-

countries should encourage their increasing participation, both in existing and future international institutions and in informal association, in dealing with the familiar questions of finance, trade, and development. This will mean giving them more voting strength and top-level appointments, and larger responsibilities as well, with a corresponding reduction of the role of others. With the growing urgency of problems such as the balance of food and population, the effects of technological change, and protection of the world environment, the consuming and producing countries can cultivate responsible common interest in the exploration of possible responses and the building of new international institutions.

## 7. Special relationships

Another influence which may modify the picture of confrontation between consuming and producing countries as blocs at odds with each other over oil is the variety of political interests, cultural ties and other factors which differentiate individual members of one group from each other and strengthen relationships with countries on the other side. Thus, the fact that a European nation or the United States may have a close association with a particular producing country is both natural and generally useful, so long as it does not weaken the position of the Trilateral countries as a whole. If OPEC or the Arab bloc loses cohesion, it will be because the members are following their own interests as they see them, rather than because of outside pressure or manipulation. The Middle East, in particular, is a region of many conflicting local interests, and oil solidarity has not displaced all of them.

[Lc]

-33-

There should be no hard and fast rules on how to approach the oil-
producing countries either on oil matters alone or on the broader possibilities
of cooperation. The private international oil companies are no longer in a
position where they can make decisions or negotiate effectively with pro-
ducing states concerning levels of production or the price of oil. Deprived of
their assets in the producing countries (loss of the remaining equity being
only a matter of time), they may be less subject to their pressure and better
able to serve the interests of the consuming countries. But the governments of
the latter will be more directly involved with the producing countries than
in the past.

OPEC has not wished to negotiate with a bloc of all the consumers. In
the situation of the past year, in which supplies were uncertain, consuming
countries have naturally turned to whatever methods appeared to promise some
assurance that they would continue to get oil. Some of the bilateral agree-
ments they have made contain specifics on oil deliveries and prices over fixed
periods; some specify goods and services to be provided in return; others
merely set a general framework of cooperation in many fields. Fortunately,
this "scramble" for special arrangements did not do as much harm to general
consumer interests as some critics feared, and the benefits to those who made
them were often illusory.

There is much to be said for diversity of approach. As long as the
general interest in equality of treatment is met and bilateral deals neither
push up the price of oil nor unduly restrict the available supply, such
arrangements need not be discouraged. When made after consultation and within

[LC]

-34-

the bounds of the agreed strategy of consuming states, they may be useful in
keeping open doors and raising the total quantity of available oil supplies.

Similarly, the dialogue now begun between the E.E.C. and the Arab League
is a promising means of opening up discussion on a wide range of possible
cooperation between European and Arab countries. Although there is no
authority on the Arab side which could make a general agreement, the Community
could open up the possibility of special arrangements with individual Arab
countries. The United States, Canada, and Japan have no reason to object to
such discussions or the agreements which emerge from them, again with the
proviso that they are in accord with an agreed general strategy and do not
damage the interests of others.

As a stimulus or as a supplement to general talks between governments of
consuming and producing countries, we suggest that the Trilateral Commission
should set up an expert group which could discuss unofficially with OPEC
representatives a whole gamut of issues such as energy, trade, monetary matters,
and relations with poor developing countries, on which the two groups have
both conflicting interests and opportunities for cooperation.

Seizure of such opportunities by both sides could open the way to a
large-scale multiplication and flowering of economic and political relation-
ships involving the Trilateral countries with the oil-producing countries.
If the initial period of shock and stress can be surmounted and the process
of cooperation can gain momentum, the vexing questions of price, recycling,
hot money, and production cuts may be dealt with in the perspective of a
growing mutuality of interest.

[Lc]

-35-

## V. Development of Energy in the Trilateral Region

We have already stressed the need for a common long-term strategy for the development of energy resources in the Trilateral countries themselves. Here we shall look mainly at the international political aspects. They are determined to a large extent by the fact that the resources in question are unevenly distributed. In brief, North America has a strong position in current production and proven reserves of fossil fuels, plus a vast potential for the production of oil from shale and tar sands when the technology for its extraction is further improved; Europe, except for North Sea oil and gas and a declining coal industry, is in a much less favorable position; and Japan has practically no natural fuel resources.

For Europe, North Sea oil and gas present the special problem of the speed of their development. The most rapid possible exploitation would help to reduce dependence on the Middle East. On the other hand, these are depletable resources; Norway is already limiting production for various domestic reasons, and Britain may do the same. We recommend that the policy decisions be taken on a European basis, taking into consideration the total European and Trilateral energy situation and bearing in mind that what Europe can do for itself, particularly in the next decade, will improve its position in regard both to independence of Middle East pressures and to relations with North America on energy sharing and energy development.

If the United States with its Project Independence and Canada with a national energy policy develop their respective resources only to fill their own respective needs, the Europeans and Japanese will surely question the

[LC]

-36-

usefulness of international solidarity on other aspects of the energy problem, not to speak of other matters. Nuclear energy cannot promise them substantial relief from heavy dependence on OPEC oil for a long time. They have an obvious interest in the development of North American fossil fuel resources for the purpose of sharing in the increased production.

It may not be easy for the United States and Canada to accept the proposition that their energy reserves should be exploited, and exhausted, more rapidly than they would plan in the light of their own long-term requirements. There is a need for full and frank discussion, within each country and in international discourse, in order to find an agreed balance and reconciliation of possibly conflicting interests. If the solidarity and cooperation of the Trilateral countries is necessary and desirable for reducing dependence on OPEC, for emergency sharing, for coping with high oil prices, and for moving ahead to develop nuclear power and other forms of energy for the future, then it should be valid as well for the development of known resources, whatever their location, within the Trilateral area.

Development of these resources on a large scale will require large new investments, as well as guarantees that the resulting high-cost energy will in fact have an outlet, for instance through long-term purchase contracts. The home countries should welcome the added foreign capital, and participating foreign interests would have to share in the risks and in the guarantees.

Governments of the Trilateral countries should try to agree on a set of general rules covering the priority of development of various resources, the degree of domestic and outside participation in investment, estimated volume of production, and the availability of a portion of the product for the export

[L.C]

-37-

market. Mutually advantageous bilateral arrangements, of course, should not have to await the conclusion of a formal multilateral agreement.

Under appropriate legislation, private and mixed and public companies might all have a role. There is room for wide variety in practice, allowing scope for private enterprise and market forces to do what they can do more efficiently than governments. The wider the area of agreement, the better the chances for an over-all long-term strategy to work. The sensitivities of Canada or Norway, of Britain or of the United States, are fully understood, and their sovereign governments have the last word, but our countries are not closed national preserves. It is legitimate and desirable, for example, that American companies should participate in the production of North Sea oil, Japanese companies in the mining of American coal, or an EEC consortium in the processing of Canada's tar sands.

This question is of the greatest significance as a test of Trilateral solidarity. Will it be seen as a conflict of national versus foreign interests, or of haves versus have-nots, or as an opportunity for contributions of different kinds to be made by all in the interest of a viable economy for the entire Trilateral region? If our nations do not succeed in finding common ground in dealing with themselves, it is difficult to see how they can stay together in dealing with the oil-producing countries.

## VI. Social and Political Change

There can be little doubt that more serious shortages of energy and more drastic adjustment of economic patterns and social lifestyles lie ahead. We

-38-

have noted that renewal by the Arab states of embargoes and cuts in exports,
perhaps more severe than the last time, is a serious possibility, and that
the drain on the money supply caused mainly by high oil prices is forcing one
consuming country after another to take measures in self defense. There is
nothing to be gained and much to lose if each tries to shift the problems
elsewhere, at the expense of other countries and of the international economic
system, in order to avoid facing them at home. Finally, the long-term energy
strategy recommended by this Report as the best course toward a more secure
future will make heavy demands on governments, private industry, and the public,
particularly in the area of energy conservation. Economic factors will by
themselves induce certain changes. But the situation will call for a considerable
degree of voluntary cooperation and of acceptance, voluntary or involuntary, of
governmental regulation of an increased sector of personal life.

We cannot predict precisely what changes and adjustments will be necessary.
The ground rule for civilian consumption should be for the state to ensure
a socially just use of energy at the existing price level. This is the condition
for the maintenance of a civilized life. Supplementary consumption, whether
for heat, lighting, or transport, might be tolerated but at a much higher price.

There will surely be a slower over-all growth of the economy, a restruc-
turing of production, a high rate of investment, and a retreat from some of
the more extravagant features of our consumer society. The cult of the auto-
mobile and the current methods of constructing, heating and cooling buildings
can hardly remain unaffected. In essence, there will be a reallocation of
capital, labor, technology, and available supplies of energy through the

-39-

[LC]

economics of scarcity. We foresee shifts from energy-intensive industries to others which consume less; from relatively non-essential (the highly developed packaging industry, for example) to more essential production; and from waste- ful to energy-efficient methods of transporting people and goods. Such shifts will mean changes in patterns of investment and of employment, a high level of technological unemployment, and perhaps a reduced working week. Serious social strains are bound to appear, especially if the economies of the in- dustrial nations, now exposed to rising costs for energy and for labor, con- tinue to be plagued by inflation and financial instability.

Not all our governments are strong, and it is a virtue of democracy that it is sensitive to the public mood. It is a real question, therefore, whether the necessary sacrifices will in fact be accepted by powerful elements in the body politic, be they politicians, civil servants, trade unions, business men, or an undefined mass of ordinary citizens. In such cases, there is instability and turmoil whether a government tries to face the crisis or to avoid it.

We foresee growing extremism, both of the right and of the left, which will feed on this instability.

Each nation, of course, will have to make its own decisions on how the necessary elements of social discipline, governmental control, and changes in customary modes of living can be reconciled with the vital need to preserve civic freedoms and democratic institutions. But none will be acting in isolation. Political chaos or the coming of anti-democratic forces to power in any of the Trilateral countries would be a most serious danger to their common security.

-40-

It is not possible to avert such dangers with vague formulas for solidarity and cooperation. On the economic side, the problems of industrial structure, the environment, and the mobility of labor will call for common planning and for a stronger international system than ever. Politically, sensitivity to each other's problems and agreement on sharing burdens and shortages provide the only way to keep the system from breaking down.

Because all our countries will have to get along with less energy, it is indefensible that they should differ widely in the burdens and the discipline they accept, as they now do on the most important matter of all, conservation. Obviously the standards and practices cannot be the same everywhere, but there should be, first, an acceptance of the principle of equity; second, an attempt to define what is equitable and to get agreement on it; and third, some mechanism, in the International Energy Agency or the O.E.C.D., which could establish general criteria and make judgments on each country's performance.

These social problems, in their consequences as in their causes, are in essence international. Our nations have to attack them together, in the context of the long-term strategy on energy and of common political interests. The steadiness required of governments and the dedication and self-discipline required of the people can hardly be sustained unless the latter are convinced that the enterprise is a vital one and that their efforts are being matched by those of their allies.

All these matters requiring cooperation could be more easily and sensibly handled if the European Community had common energy policies and could act as a unit in partnership with the United States, Canada, and Japan. Until that

-41-

[LC]

degree of unity exists, it is all the more important that all the Western European states, including France and Norway, be in a position to act effectively with other Trilateral countries through such bodies as the International Energy Agency and the O.E.C.D.

It would be useful to have, in addition, a non-governmental body of experts who could make a long-range evaluation of the social dynamics of the three regions, monitor the evolving situation, and report periodically to governments and to the Secretary General of O.E.C.D.

## VII. Conclusions

Our conclusions have already been given in the body of the Report. By way of resume, we wish to state five broad sets of conclusions while re-emphasizing, under some of them, a number of specific recommendations.

### 1. A long-term strategy

The Trilateral countries should have a common long-term strategy covering both the internal and the international aspects of the energy problem.

### 2. Institutions to make it work

Establishing the strategy and adapting it over time require continuous consultation and negotiation among the Trilateral countries and between them and the oil-producing countries. There must be an effective organizational structure for that purpose, including Trilateral institutions (such as the O.E.C.D. and the International Energy Agency) and an agreed division of labor between such institutions, their member governments, and the European Community.

-42-

[LC]

### 3. Internal goals

To reach a better balance between supply and demand in energy, our nations must take a number of concerted actions, especially the following:

#### a. Reduction of dependence on imports

The United States and Canada should aim at being substantially independent, with less than 5 per cent of energy demand filled by imports, in 1985 and thereafter. Western Europe should reduce dependence to 40 per cent, and Japan to 30 per cent, by 1985.

#### b. Conservation

All consuming countries should make major efforts for conservation and efficiency of use, holding the annual growth of energy consumption over the next decade below 2 per cent in North America, 3 per cent in Europe, and 4 per cent in Japan. Their peoples should be prepared for even sharper cuts if necessary and for a real (though presumably temporary) reduction in living standards.

#### c. Development of new sources

The common energy strategy should include setting rough national and Trilateral production goals, covering the period to 1985, for coal, oil, natural gas, nuclear power, and other forms of energy. Consequent decisions on investment for increased production, and for research on development of new sources of energy for the longer run, should be taken without delay. The Trilateral countries should plan together for future cooperation in the development of the extensive energy reserves of North America as an important means of meeting the long-run needs of the entire Trilateral area.

[LC]

-43-

d. Meeting the financial drain

The consuming countries should recognize the dangers of the current drain on their monetary reserves for oil payments and should do their best to bring about a reduction of oil prices. At the same time they should reduce the impact of the crisis through recycling arrangements, emergency loans to the more hard pressed, and cooperation among themselves and with producing countries on the investment of surplus oil funds, meanwhile taking action by conservation and development of alternative sources of energy to reduce the future size of the problem.

These actions will have far-reaching consequences for the structure of our societies and the lives of our citizens. The Trilateral countries, accordingly, should reach broad agreement on what those changes will be and on equitable standards for bearing the burdens of scarcity and adjustment. Both governments and peoples will have to show steadiness and a determination to preserve democratic institutions.

4. External goals

a. Relations with producing countries

The approach to the oil-producing countries should be based on the common interests and agreed strategy of consuming countries, but should also be attuned to the basic interests of the producers in security, in rapid economic development, and in a larger role in world affairs, and to the common interest of both consumers and producers in a functioning international economy. It is in that context that negotiation should take place on the supply and price of oil.

-44-

[LC]

b. <u>Arab-Israel conflict</u>

Although an Arab-Israel settlement will not in itself resolve the energy problem, renewed war or failure to reach a settlement could seriously aggravate that problem. The Trilateral countries, following a generally coordinated approach, should use their influence on behalf of steady progress in negotiations between the parties and achievement without undue delay of a peace settlement based on essential acceptance of the principle of non-acquisition of territory by force and the right of all states to secure existence.

5. <u>The need for unity</u>

The energy crisis has weakened the developed nations and driven them apart. They must re-create their unity. Only if they work together on energy strategy, and on the related problems of finance and trade, will they be able to repair the damage already done and move through the difficult transitional period to a new era of growth based upon dependable sources of energy. In working together they will create, in effect, a Trilateral energy community.

In the experience of this constructive enterprise our nations can begin to move the now floundering international economic system to higher and firmer ground.

[LC]

THE TRILATERAL PROCESS

The following contribution to the second report of the task force on relations with developing countries has been prepared by Prof. Richard N. Gardner on the basis of prior consultations with Dr. Saburo Okita and Dr. B.J. Udink. The final draft of the second report will be presented to the Executive Committee meeting in Kyoto in May 1975.

The rapporteurs have been aided by consultations with a wide range of experts. A number of these individuals were consulted at a meeting chaired by Prof. Gardner and Dr. Okita in Washington in late September, just before the Annual Meeting of the World Bank and International Monetary Fund. Several others were consulted in discussions held by Prof. Gardner and Dr. Udink in Europe in early November. In each case, the consultants spoke for themselves as individuals and not as representatives of any institutions with which they are associated. Those consulted included the following:

Michel van den Abeele, Chef de Cabinet of Henri Simonet, Vice-President of the Commission of the European Communities

C. Fred Bergsten, Senior Fellow, The Brookings Institution

Jacques Alain le Chartier de Sedouy, Chef de Cabinet of Claude Cheysson, Member of the Commission of the European Communities

Richard N. Cooper, Professor of Economics, Yale University

Gamani Correa, Secretary-General of UNCTAD

William B. Dale, Deputy Managing Director, International Monetary Fund

Count Etienne Davignon, Director of Political Affairs, Belgian Foreign Ministry

Guy Erb, Overseas Development Council

Clyde Farnsworth, European Economic Correspondent, *The New York Times*

James Grant, President, Overseas Development Council

Joseph Greenwald, United States Ambassador to the European Community

Ravi Gulhati, Director, Development Economics Department, International Bank for Reconstruction and Development

Nurul Islam, Deputy Chairman of Planning Commission, Government of Bangladesh

Attila Karaosmanoglu, Chief Economist, Europe, Middle East, and North Africa Regional Office, International Bank for Reconstruction and Development

Abderahman Khene, Secretary-General of OPEC

Israel Klabin, Klabin Irmaos & Cia., Rio de Janeiro

Emile van Lennep, Director-General of OECD

Joseph Luns, Secretary-General of NATO

Robert S. McNamara, President, International Bank for Reconstruction and Development

Benedict Meynell, Director, External Relations Division, Commission of the European Communities

Cecilio J. Morales, Manager, Economic and Social Development
Department, Inter-American Development Department

Enrique Perez-Cisneros, Special Representative, Europe, Inter-
American Development Bank

J.J. Polak, Director of Research Department, International
Monetary Fund

Raúl Prebisch, Special Representative of the Secretary-General for
the United Nations Emergency Operation, United Nations

Gustav Ranis, Director, Economic Growth Center, Yale University

Mohamed Shoaib, Vice-President, International Bank for Reconstruction
and Development

A. Maxwell Stamp, economic consultant, London

Ernest Stern, Director, Development Policy, International Bank for
Reconstruction and Development

Ernest Sturc, Director, Exchange and Trade Relations, International
Monetary Fund

Anthony F. Tuke, Chairman, Barclays Bank International, Ltd.

Kaye Whiteman, Information Office, Development Cooperation Directory,
European Commission

Maurice Williams, Chairman, Development Assistance Committee, OECD

[LC]

OPEC, THE TRILATERAL WORLD AND THE DEVELOPING COUNTRIES:
NEW ARRANGEMENTS FOR COOPERATION 1976-1980

Summary

An extra $5 billion a year in Official Development Assistance (ODA) will be needed in the period 1976-80 to assure a 2% growth rate in per capita income in the approximately 30 low-income developing countries containing one billion of the world's people. Although it will be tempting to "write off" these countries as the economic and political crises deepen in the Trilateral region, such a policy would be politically unrealistic as well as morally unacceptable.

Moreover, a joint Trilateral-OPEC initiative that brings forth more aid from the OPEC countries would serve some very immediate Trilateral country interests. In a time of stagnant growth and rising unemployment, it is obviously advantageous to move funds from OPEC countries which cannot spend them on Trilateral country exports to developing countries who will.

Knowledgeable officials estimate that ODA from OPEC countries might reach $2 billion a year in the 1976-80 period. In these same years, the Trilateral countries should increase the size of their own ODA (about $9.4 billion in 1973 dollars) to keep pace with inflation. This will still leave $3 billion a year of ODA to be found.

To meet this need, it is proposed that a new international agency associated with the World Bank should borrow $3 billion a year at 8% from OPEC countries and lend it to low-income countries at 3%, in loans with 20 year maturities and 4-year grace periods, in each of the years 1976-80. This would require an annual interest subsidy

Summary - Page 2

of $900 million, of which $100 million could be raised from
World Bank earnings, $500 million from Trilateral countries,
and $300 million from OPEC countries.

The $3 billion-a-year fund should be managed by a tri-
partite governing body, with representation and voting power
equally shared between Trilateral countries, OPEC countries,
and other developing countries. Moreover, to facilitate OPEC
participation in the regular activities of the Bank and Fund,
OPEC quotas and voting rights should be raised from the present
5% to between 15 and 20%.

[LC]

In its report entitled "A Turning Point in North-South
Economic Relations" the Trilateral Commission Task Force on
relations with developing countries proposed a special effort
of cooperation between the Trilateral world and the OPEC countries
to meet the emergency needs in 1974-75 of some thirty low-income
countries of the "Fourth World" who have been particularly hard
hit by skyrocketing costs of oil, food, fertilizer and industrial
goods. It also outlined some basic concepts that might provide a
framework for cooperation between developed and developing countries
in the period beyond the short-term emergency. The task force
promised to present a specific program to strengthen the multilateral
development system in a second report to be issued in the spring of
1975.

To meet the emergency needs of the "Fourth World" in 1974-75,
our first report envisaged an emergency program of $3 billion in
extra concessional aid, one-half from the Trilateral world, one-
half from the OPEC countries. In the six months since our report
was issued, the proposed Trilateral-OPEC negotiation to produce this
shared effort of collaboration has not occurred. Nevertheless, the
United Nations has made some progress with its emergency program,
launched by the General Assembly at the special session of March-
April 1974, to help the most severely affected developing countries.

- 2 -

[LC]

As of November 1, commitments of emergency assistance to the most severely affected countries amounted to $2.7 billion, compared with the total of $4.6 billion estimated by the UN to be needed in 1974-75. (The deteriorating economic situation, together with a somewhat broader definition of concessional aid and of severely affected countries, caused the UN's estimate to be higher than that in our report of last June.)

Of the $2.7 billion in commitments to the emergency program, OPEC commitments account for about $2 billion, Trilateral commitments for about $700 million. The European Community has made a commitment of $150 million, with a promise of an additional $350 million (not counted in the $2.7 billion total) provided appropriate contributions are forthcoming from other donors. Japan has committed itself to a "minimum contribution" of $100 million. The United States has made no specific commitment, but has indicated its intention to increase food aid substantially above previously budgeted levels.

Were the U.S. to increase its food shipments in 1974 and 1975 by $250 million each year over 1973 levels, were the Japanese government to increase its commitment to the emergency fund by another $200 million, and were the European Community to provide the additional $350 million it has promised on a conditional basis, the target of the emergency operation would be quite close to being met. Implementation of the decisions taken at the World Food Conference for additional food and fertilizer aid and for an agricultural development fund to be subscribed by OPEC and Trilateral countries would also help to

- 3 -

assure the success of the emergency program. However, it would
still be necessary to assure that the committed funds were actually
disbursed in 1974-75 and that these funds were distributed among the
eligible recipients in accordance with their estimated needs. This
latter problem will be particularly difficult since the bulk of the
$2.7 billion that has been committed is in the form of bilateral aid
and only $224 million is "free money" committed to the Secretary-
General's special account. (Details on the estimated needs of the
most severely affected countries, on the commitments to the emergency
program, and on commitments to the special account are provided in
Attachments 1-3 at the end of this paper.)

The problem of North-South cooperation in development beyond
the emergency period is even more formidable. In his address to the
annual meeting of the Board of Governors of the World Bank Group on
September 30, 1974, Robert S. McNamara estimated that unless ways are
found to increase the present level of Official Development Assistance
(ODA)¹ in terms of real purchasing power rather than just in money
terms the billion people in countries with average incomes under
$200 million per capita will face a decline in their standard of
living amounting to 0.4% per capita per year between now and 1980.
To make possible a 2.1% annual growth in their per capita GNP -- a
modest rate of growth by any standard -- would require an increase
in ODA, in terms of 1973 dollars, from $9.4 billion in 1973 to $13.5
billion in 1980, an increase of about $4 billion. At present rates
of inflation, the level of ODA would have to reach $24 billion by

1. Official Development Assistance is defined as aid with at least a 25% grant element as compared with commercial loans.

- 4 -

[LC]

1980 in terms of then-prevailing prices. Taking account of anticipated inflation, not to mention a further deterioration in the world economy aggravating still further the problems of the low-income countries, an increase in ODA by $5 billion a year for the years 1976-80 at then existing prices is the very minimum that seems to be required. (McNamara's detailed estimates on ODA requirements are set out in Attachment 4.)

The case for supplying that additional $5 billion per year of ODA for the one billion people in the low-income countries is based on the considerations set forth in the first report of our task force. As we noted there, the Trilateral countries need the developing countries as sources of raw materials, as export markets and, most important of all, as constructive partners in the building of a satisfactory world economic and political order. The world's interrelated crises of population growth, environmental deterioration, mass poverty, mounting unemployment, growing social and political instability, proliferating nuclear and conventional weapons, and escalating terrorism and international conflict cannot be solved without attention to the needs and priorities of the developing as well as the developed world.

It will be increasingly tempting to "write off" some of the low-income developing countries in the Indian subcontinent and Africa if the economic and political crises deepen in the Trilateral world. But it is doubtful if the people of the Trilateral countries would find such a policy to be either morally acceptable or politically realistic if the moment ever came to carry it out. In terms of the

- 5 -

[LC]

long-term interest of the Trilateral world, it would prove ultimately
self-destructive.

To these considerations there can now be added another very
practical argument. In a time of stagnant growth and rising unemploy-
ment, it is clearly in the interest of the Trilateral countries to
move funds from OPEC countries which cannot spend them on Trilateral
country exports to other developing countries who will. To the extent
that aid contributions from the Trilateral world bring forth additional
aid contributions from the OPEC countries, they have a multiplier effect
on exports, employment and income, also helping the balance of payments.
Indeed, we need to think in terms of a second type of "Trilateralism" --
by which OPEC countries transfer a portion of their liquid balances
in the Trilateral world into long-term loans to the LDCs, who in turn
spend the proceeds on Trilateral country exports.

Assuming this case for increasing ODA is sound, two central
questions remain to be addressed: First, where is the extra $5 billion
a year to come from? Second, what changes in the structure of multi-
lateral development institutions seem to be required?

The Financing Problem

A solution to the question of long-term financing is clearly
going to require a major act of cooperation between the Trilateral
countries and the OPEC countries. To be sure, the OPEC countries
have already taken a number of initiatives to increase the flow of
concessional aid. Kuwait and Venezuela have substantially increased

- 6 -

[LC]

their existing aid programs. Iran and Iraq are selling large amounts of oil to India on concessional terms. Saudi Arabia has set up its own Development Fund and has made large commitments of aid to Egypt and other Arab countries. Libya, Abu Dhabi, and the Emirates are increasing their bilateral efforts. In addition, some major multi-lateral ventures among OPEC nations have been announced -- a $200 million Special Arab Fund for Africa, an Arab Bank for Industrial and Agricultural Development in Africa with an initial capital of $200 million, an Islamic Bank with an authorized capital of $2 billion, and an OPEC Fund. The capital of the already-operating Arab Fund for Economic and Social Development is expected to be increased substantially. While it is difficult to make precise estimates of what all this is likely to mean in actual aid disbursements, conversations with knowledgeable officials suggest that total OPEC disbursements of ODA are likely to reach $2 billion a year in the 1976-80 period. This will still leave a shortfall of $3 billion from the $5 billion of additional ODA each year that is estimated to be required to achieve minimum development goals.

It is highly unlikely that this additional $3 billion a year can be raised between Trilateral and OPEC countries by any of the traditional aid-giving methods. ODA is already in deep trouble in the Trilateral world. During the ten year period 1963-73, while the real income of citizens of the countries who are members of the OECD's Development Assistance Committee was growing by 60 percent, the real value of ODA supplied by these countries was actually declining by

- 7 -

seven percent. During the past year, a number of Trilateral
countries have further reduced their ODA in real terms. If the
Trilateral countries are to have any credibility in aid discus-
sions with the OPEC countries and the rest of the developing world,
they should agree at a minimum to maintain the real value of their
ODA for the remainder of this decade, applying an automatic upward
adjustment of bilateral and multilateral financial flows to keep
pace with inflation. Just to do this will require a formidable
effort of political leadership. It is hard to envisage the Trilateral
countries increasing their existing programs to cover any substantial
portion of the $3 billion a year ODA shortfall that will still remain.

The prospect of securing the $3 billion shortfall in ODA from
the OPEC countries is not much better. This shortfall is already
estimated on the basis of a $2 billion annual ODA effort of the OPEC
countries through their own bilateral and regional programs. A
$2 billion annual aid program would represent over 1% of the com-
bined GNP of the OPEC countries (a good deal more for indidual
OPEC donors like Iran and the Persian Gulf states) compared to average
aid levels of.30% of GNP for Trilateral countries. To put it differ-
ently, the combined GNP of the OPEC countries (exclusive of Nigeria
and Indonesia, whose income of around $100 per capita even with in-
creased oil revenues will exempt them from any substantial aid-giving)
is forecast by the World Bank at only 6% of the combined GNP of the
Trilateral countries as late as 1980. If the OPEC countries give
$2 billion a year of ODA in the years 1976-80 and the Trilateral

- 8 -

[LC]

countries maintain the real value of their existing aid levels, the ODA of OPEC countries will be about 10-15% of Trilateral levels during this period. If they are challenged to increase their ODA substantially to take up all or even half of the $3 billion shortfall, they are likely to reply that they are already doing much more than their share in terms of conventional burden-sharing formulae. Indeed, they will probably make the further argument that additional ODA burdens for them are particularly inappropriate, since they involve financial transfers from a resource base of oil that is being depleted, whereas the Trilateral countries can finance ODA from an industrial base whose output renews itself and even grows with each passing year.

The conclusion seems inescapable that an agreed sharing of the $3 billion in extra ODA per year is unlikely to be found except through a wholly new approach. Such an approach would start with the recognition that the relevant characteristics of the OPEC countries differ so fundamentally from those of the traditional aid donors that an attempt to share ODA on the basis of percentages of GNP will neither produce a sense of rough justice as between the Trilateral and OPEC groups or the necessary volume of financial flows. The Trilateral countries represent an annual GNP of over 2 trillion dollars, but as a group cannot generate large amounts of foreign exchange. The OPEC countries represent $150-200 billion of GNP but are accumulating surplus foreign exchange at the rate of $60 billion a year. A new approach would proceed on the basis that the OPEC countries, being

[LC]

- 9 -

highly liquid but not yet rich, should provide a disproportionately large amount of the extra financial flows with a disproportionately small concessional aid element, while the Trilateral countries, being still very rich but not very liquid, should supply a disproportionately small amount of the extra financial flows with a disproportionately large amount of concessional aid element.

One of the most politically attractive ways of combining OPEC and Trilateral resources along these lines would be through an interest subsidy, subscribed mainly by Trilateral countries, to transform large amounts of lending from OPEC countries on commercial terms into ODA on terms suitable to low-income countries. To be specific: a new international agency associated with the World Bank could borrow the $3 billion estimated to be required each year from OPEC countries at an interest rate of 8% and could lend the money to low-income countries at 3% (very easy terms at present rates of inflation).

According to studies by the World Bank staff, it requires a subsidy fund of 23.45% of the face value of a loan to subsidize a 5% interest differential for project lending (slow disbursement) and a subsidy fund of 34.61% of the face value of a loan for program lending (more rapid disbursement), assuming loans to low-income countries with 20-year maturities and 4-year grace periods. The required subsidy fund increases, of course, if easier repayment schedules are permitted. But lending on the basis described above could meet the needs of the low-income countries in view of the fact that the present rate of inflation reduces the burden of repayment and of the fact that the IDA would continue its own more concessional

- 10 -

[LC]

lending program of 50 year loans with 10 year grace periods and
only a 3/4 percent service charge. Given a blend of project and
program lending under the new $3 billion program, the subsidy
needed would be about 30% of the annual lending or about $900
million a year. (For calculations of the subsidy required under
different assumptions of interest-rate differentials, maturities
and grace periods, see Attachment 5.)

Some $100 million of this amount could be provided each year from
the profits of the World Bank's regular loan operations. Of the
remaining $800 million a year, $500 million might be provided by
the Trilateral countries, $300 million by the OPEC countries. Since
the Bank's profits are mainly attributable to resources made avail-
able by the Trilateral world, the effective division of the subsidy
fund would be two-thirds Trilateral, one-third OPEC.

The most obvious political advantage of this proposal is that
comparatively small amounts of additional resources would be required
from any one country. For example, based on the burden-sharing
formula used in the fourth IDA replenishment, the United States
share of the subsidy fund would be $170 million a year. An American
President could point out to Congress that this relatively small sum,
supplemented by contributions from other Trilateral countries, was
moving $3 billion of extra OPEC funds to the low-income countries.
Further in support of the proposal it could be argued that moving
$3 billion from OPEC countries unable to spend it to low-income
countries who can do so would stimulate employment and income in

[lc]

- 11 -

the Trilateral world. Based on the fact that about one-third of procurement from World Bank group lending has been in the U.S., the $170 million U.S. contribution would add about $1 billion to U.S. exports. Other Trilateral countries could enjoy a similar "multiplier-effect" on their exports from their contributions to the interest subsidy.

With all proposals of this type, one is tempted to ask what the "catch" is. How is it possible for such a modest subsidy fund to finance such large amounts of capital flows? The answer is that if the subsidy fund is made available each year in the specified amounts only a small portion will actually be needed to cover the interest payments and the remainder of the subsidy fund can be invested at commercial rates (8% is assumed in the estimates given above). Moreover, and this point should be faced frankly, the estimates assume, in accordance with normal World Bank group lending experience, that there is some lag each year between the new money being made available by OPEC and the actual disbursements of the new agency. Thus there is an 8% interest cost only on that portion of the $3 billion annual borrowing that is actually disbursed to the low-income countries. In short, the only "catch" in the proposal is that the traditionally slow disbursement schedule of multilateral lending agencies means that something less than the full $3 billion will be coming to the low-income countries in the first years of the plan.

- 12 -

[LC]

To take care of this problem, some increased short and
middle term lending might be needed from the IMF recycling
facility. To facilitate IMF lending to the low-income countries
at rates well below the 7% IMF rate, another much smaller "subsidy
fund" might have to be contemplated. This could be financed from
modest sales of IMF gold holdings on the private market. (Such
gold sales could not be used to supply the $900 million subsidy
needed each year for the long-term lending program without unduly
depressing the free market gold price and quickly depleting the
IMF's gold holdings which are now $6-1/2 billion at the official
gold price.)

The Restructuring Problem
---

The problem of institutional restructuring is directly related
to the financing problem. The OPEC countries are unlikely to parti-
cipate in the kind of multilateral venture described above unless
they come in as equal partners with the Trilateral countries, with
voting and other arrangements reflecting the financial contributions
they are being asked to make. In the Fund and Bank as they are pre-
sently organized, the OPEC countries have quotas and voting rights
equal to 5% of the total. The Arab members of OPEC have quotas and
voting rights equal to 2% of the total -- roughly the share of Belgium.
The OPEC countries are not likely to regard these arrangements as
satisfactory in any new venture in which they are asked to put up
the bulk of the financial resources. (The distribution of quotas
and voting rights in the IMF is given in Attachment 6. The quotas
and voting rights in the World Bank are substantially the same.)

[LC]

- 13 -

One approach to this structural problem would be to increase the quotas and voting rights of the OPEC countries in the Fund and Bank to reflect their new economic power. In the quinquennial review of Fund quotas that is now underway, those close to the negotiations envisage an increase of the total OPEC percentage to about 9-10% of the total. This would be less than half of the voting power presently enjoyed by the United States alone or by the countries of the European Community as a group.

A larger increase in the OPEC share seems to face opposition for several reasons. First, the traditional "objective" indicators relied on most heavily in these quota reviews (GNP and trade statistics but not including foreign exchange reserves) do not justify a larger increase. Second, and clearly more important, there is great resistance on the part of most Fund members (developing as well as developed) to accept reductions in their percentages to make possible more than modest OPEC increases. The United States, in particular, which now has 20.80% of the votes in the Fund, is reluctant to lose its present veto power on amendments to the Fund Articles, which require three-fifths of the members with 80% of the voting power. Third, there appears to be some fear that a more substantial increase in the OPEC share -- to 15% or more, for example -- would raise the spectre of an "OPEC veto" on important financial questions (such as the issuance or cancellation of SDRs, which require an 85% vote).

- 14 -

[LC]

The general interest of the membership of the Fund and Bank, including that of the Trilateral countries, would seem to indicate a more forthcoming attitude toward increases in the quotas and voting rights of OPEC countries. Traditional indicators used in previous quota reviews are simply not sufficient guides in the radically new situation in which the world now finds itself, where the OPEC countries will soon dispose of at least half the world's monetary reserves and where they are being asked to make major financial contributions to IMF recycling plans and to the purchase of World Bank bonds. In the light of these considerations, an increase in the OPEC share to between 15 and 20% in the Fund and Bank would seem more appropriate than the 9-10% now envisaged. The larger quota increases would mean more OPEC funds available for the Fund and Bank's regular operations. The increased voting power of OPEC would pose no real threat of an "OPEC veto" over SDR issuance and IMF amendments since the OPEC countries have not voted as a bloc on such matters and are not likely to do so. In the World Bank, similar "veto" problems do not arise -- the voting majority required for the approval of loans is 50% (actual votes are very rare). As major contributors, OPEC countries are likely to be prudent in their judgment of loan proposals. In any event, a 15-20% OPEC voting share would not fundamentally alter the balance of power in the Bank's Executive Board; the Trilateral countries would still have about half the votes on a weighted-voting basis.

Yet even a 15-20% share for OPEC countries in the Fund and Bank's regular operations would not solve the problem of providing

- 15 -

them with an equal voice in the management of the $3 billion-a-year program for the low-income countries that has been proposed above. Putting the $3 billion in the hands of the World Bank's "second window," the International Development Association, would not be the answer either: voting in the IDA is related to cumulative contributions. Since IDA began operations at the beginning of the 1960s, the OPEC countries would have an even smaller voice than under the 15-20% share proposed for them in general Fund and Bank management. What seems to be required, therefore, is a "third window" for the $3 billion-a-year fund with its own special management arrangements.

These special arrangements could be modelled after those suggested by the Shah of Iran at the beginning of 1974. The Shah proposed a special fund associated with the World Bank which would have a governing body composed equally of representatives from developed countries, from OPEC countries, and from other developing countries. The governing body would choose an executive board from a list of qualified persons nominated by the Bank and Fund. This tripartite approach would seem to be a reasonable one, considering the very large OPEC contribution to the special concessional aid operation here proposed (all of the $3 billion each year plus $300 million of the $900 million annual subsidy), and considering also the legitimate interest of other developing countries in the management of the special aid program. The actual administration of the aid program would be carried out by the officers and staff of the World Bank group, which represents a concentration of experience and technical skill that would not be easy to duplicate.

- 16 -

[LC]

More than changes in voting arrangements and formal managerial structures may be required, however, to provide the OPEC countries, and particularly the Arab members of OPEC, with confidence in the World Bank group and its new "third window." The adoption of Arabic as one of the working languages of the Bank and Fund would help, as would greater attention to Arab sensibilities in the scheduling of meetings (this year's annual meeting was scheduled on Ramadan). Special courses, some of them in Arabic, should be organized by the Bank's Economic Development Institute in a major effort to train bright young leaders from OPEC countries for service with the World Bank group or for comparable responsibilities in their own governments.

Gradually, the top management of the Bank and Fund ought to include a larger number of OPEC country nationals, including nationals from Arab countries.

Such a restructuring of the world's major international financial institutions will not be easy -- no major adjustment of established organizations ever is. It will provide a major test of the willingness of the Trilateral world to come to terms with new economic realities and to share power with those whose cooperation is now essential to preserve a working world economy.

Both the Trilateral countries and the OPEC countries, it should be remembered, have a shared interest in facilitating the latter's participation in multilateral development institutions. The Trilateral countries benefit because the multilateral institutions secure the increased resources they need to function effectively

- 17 -

[LC]

and to avoid being gradually eclipsed by OPEC institutions with aid programs that are not only geographically limited but often politically linked. The OPEC countries benefit by being able to invest in the obligations of multilateral institutions backed by the guarantees of the rest of the world's economic powers; they also get a "buffer" between themselves and low-income developing countries who might prove difficult when it comes to repaying loans or using aid effectively. Both sides also get a chance to develop a working partnership in the financial field that may eventually lead to more satisfactory negotiations in other areas, including energy questions and oil prices.

## Other Questions

There are a number of other questions that have not been considered here that should be examined in the second report of our task force. Among them are the following:

1. **Trilateral-OPEC aid coordination.** Even with a major new effort of multilateral cooperation along the lines proposed above, the bulk of Trilateral and OPEC aid efforts will continue to be through bilateral and regional channels. It would be useful to have a forum in which the Trilateral and OPEC countries could examine their aid programs with respect to levels and types of assistance and distribution among recipient countries. Possible forums to be considered for this purpose are the new IMF/IBRD Development Committee, which includes recipient developing countries; the Development Assistance Committee of the OECD, which includes only Trilateral countries, but

- 18 -

[LC]

which could be broadened to include OPEC donors; or some new
Trilateral-OPEC forum to be specially created. Pending the
decision on such a forum, OPEC countries could be encouraged
to participate on an *ad hoc* basis in OECD and World Bank consortia
and consultative groups. Moreover, if the mandate of OPEC could be
broadened to include aid questions, useful cooperation could be
developed between the OECD and World Bank staffs, on the one hand,
and the OPEC secretariat on the other.

2. The special problems of the "middle class" countries.

There is a real danger that in concentrating on the approximately 30 low-income countries of the "Fourth world" we will neglect the very real problems of the new "middle class" -- countries like Mexico, Brazil, Turkey, Malaysia and Korea. These nations have made rapid progress in the past, but they are likely to face serious financial problems in the future due to the higher cost of food and fuel, particularly if slow growth in the Trilateral world dims prospects for their exports. Substantial amounts of financing in between commercial lending and ODA may be needed if the recent gains of these countries are not to be jeopardized. Should this take the form of conventional World Bank lending, loans from an IMF "oil facility," or something else?

3. <u>Soviet participation.</u> In our first report, we emphasized
the desirability of including the Soviet Union in multilateral efforts,
not only in the interest of detente and global solidarity, but because

- 19 -

the Soviet Union has substantial economic capabilities and has benefited from the increase in raw material prices. Full Soviet membership in the Fund and Bank system seems unlikely, but could the U.S.S.R. be induced to participate in the interest subsidy for the $3 billion fund in the World Bank's "third window"? If not, could the U.S.S.R. be persuaded to contribute to some parallel UN effort under the auspices of the General Assembly, whose activities could be coordinated with those of the World Bank group? Or should the Soviet Union simply be urged to expand its own bilateral aid programs?

[wc]

Attachment 1

Most seriously affected countries: balance of payments projections, 1974 and 1975, as at 1 September 1974
(Millions of dollars)

<table><thead><tr><th rowspan="2"></th><th colspan="2">Projected over-all deficit</th><th colspan="2">Current account deficit</th><th colspan="2">Net inflow of capital</th><th colspan="2">Projected deficit as percentage of imports (c.i.f.)</th></tr><tr><th>1974</th><th>1975</th><th>1974</th><th>1975</th><th>1974</th><th>1975</th><th>1974</th><th>1975</th></tr></thead><tbody><tr><td>Bangladesh</td><td>375</td><td>407</td><td>612</td><td>657</td><td>237</td><td>250</td><td>28.3</td><td>30.0</td></tr><tr><td>Central African Republic</td><td>19</td><td>25</td><td>39</td><td>49</td><td>20</td><td>24</td><td>21.6</td><td>25.0</td></tr><tr><td>Chad</td><td>16</td><td>30</td><td>68</td><td>80</td><td>53</td><td>90</td><td>10.1</td><td>17.1</td></tr><tr><td>Dahomey</td><td>9</td><td>14</td><td>23</td><td>30</td><td>14</td><td>16</td><td>5.5</td><td>7.7</td></tr><tr><td>Democratic Republic</td><td>45</td><td>...</td><td>70</td><td>...</td><td>25</td><td>...</td><td>12.2</td><td>...</td></tr><tr><td>El Salvador</td><td>48</td><td>...</td><td>78</td><td>...</td><td>30</td><td>...</td><td>10.0</td><td>...</td></tr><tr><td>Ethiopia</td><td>...</td><td>...</td><td>...</td><td>...</td><td>...</td><td>...</td><td>...</td><td>...</td></tr><tr><td>Ghana</td><td>23</td><td>82</td><td>-7</td><td>85</td><td>-30</td><td>3</td><td>3.6</td><td>10.9</td></tr><tr><td>Guinea</td><td>21</td><td>-10</td><td>92</td><td>70</td><td>71</td><td>80</td><td>13.9</td><td>-5.8</td></tr><tr><td>Guyana</td><td>16</td><td>16</td><td>74</td><td>48</td><td>58</td><td>32</td><td>5.9</td><td>5.2</td></tr><tr><td>Haiti</td><td>8</td><td>-8</td><td>50</td><td>67</td><td>42</td><td>75</td><td>7.4</td><td>...</td></tr><tr><td>Honduras</td><td>33</td><td>44</td><td>84</td><td>104</td><td>51</td><td>60</td><td>8.9</td><td>10.2</td></tr><tr><td>India</td><td>820</td><td>880</td><td>1,919</td><td>2,270</td><td>1,099</td><td>1,390</td><td>16.8</td><td>15.7</td></tr><tr><td>Ivory Coast</td><td>57</td><td>77</td><td>153</td><td>203</td><td>96</td><td>126</td><td>5.7</td><td>6.7</td></tr><tr><td>Kenya</td><td>84</td><td>137</td><td>197</td><td>274</td><td>113</td><td>137</td><td>8.9</td><td>12.3</td></tr><tr><td>Kenya</td><td>...</td><td>...</td><td>...</td><td>...</td><td>...</td><td>...</td><td>...</td><td>...</td></tr><tr><td>Laos</td><td>...</td><td>...</td><td>...</td><td>...</td><td>...</td><td>...</td><td>...</td><td>...</td></tr><tr><td>Lesotho</td><td>...</td><td>...</td><td>87c</td><td>...</td><td>95c</td><td>...</td><td>...</td><td>...</td></tr><tr><td>Madagascar</td><td>32</td><td>25</td><td>88</td><td>82</td><td>...</td><td>56</td><td>10.3</td><td>7.6</td></tr><tr><td>Mali</td><td>42</td><td>32</td><td>53</td><td>46</td><td>11</td><td>14</td><td>30.9</td><td>24.6</td></tr><tr><td>Mauritania</td><td>17</td><td>16</td><td>26</td><td>28</td><td>9</td><td>12</td><td>9.6</td><td>8.3</td></tr><tr><td>Niger</td><td>30</td><td>22</td><td>31</td><td>23</td><td>1</td><td>1</td><td>21.1</td><td>19.6</td></tr><tr><td>Pakistan</td><td>155</td><td>78</td><td>485</td><td>513</td><td>330</td><td>435</td><td>8.6</td><td>3.8</td></tr><tr><td>Senegal</td><td>69</td><td>67</td><td>133</td><td>109</td><td>64</td><td>42</td><td>13.0</td><td>11.5</td></tr><tr><td>Sierra Leone</td><td>31</td><td>20</td><td>70</td><td>62</td><td>39</td><td>42</td><td>14.8</td><td>8.7</td></tr><tr><td>Somalia</td><td>27</td><td>29</td><td>56</td><td>59</td><td>29</td><td>30</td><td>18.6</td><td>18.7</td></tr><tr><td>Sri Lanka</td><td>69</td><td>100</td><td>152</td><td>185</td><td>83</td><td>85</td><td>9.7</td><td>13.0</td></tr><tr><td>Sudan</td><td>46</td><td>30</td><td>90</td><td>122</td><td>44</td><td>92</td><td>8.5</td><td>4.9</td></tr><tr><td>United Republic of Cameroon</td><td>25</td><td>42</td><td>43</td><td>67</td><td>18</td><td>25</td><td>5.6</td><td>8.2</td></tr><tr><td>United Republic of Tanzania</td><td>120</td><td>124</td><td>229</td><td>218</td><td>109</td><td>97</td><td>16.4</td><td>16.5</td></tr><tr><td>Upper Volta</td><td>10</td><td>17</td><td>82</td><td>73</td><td>72</td><td>56</td><td>7.4</td><td>12.6</td></tr><tr><td>Yemen</td><td>11</td><td>...</td><td>54</td><td>...</td><td>43</td><td>...</td><td>5.0</td><td>...</td></tr></tbody><tfoot><tr><td>TOTAL<sup>d</sup></td><td>2,257</td><td>2,293</td><td>5,044</td><td>5,524</td><td>2,787</td><td>3,231</td><td></td><td></td></tr></tfoot></table>

Source: United Nations Emergency Operation, based on data and analysis supplied by the staffs of FAO, IMF, UNGCTAD and IERD.

a/ Minus sign indicates surplus.

b/ Minus sign indicates net outflow.

c/ Balance on trade account.

d/ Sum of listed amounts, excluding Ethiopia, Khmer Republic, Laos and Lesotho.

Source: United Nations Doc. A/9828, 6 November 1974

May 15, 1975

MEMORANDUM OF CONVERSATION

DR called upon Ambassador Kwon Min Jun on Thursday, May 15, 1975 at the Mission, 40 East 80th Street, at 8:15 a.m. accompanied by CMB officers, Messrs. Fenn, Pierre and Reed.

The meeting was held in the rearranged living-conference room. No tea, other beverage or cigarettes were offered (in contrast with elaborate offerings on last visit, July 18, 1974). (Note: the atmosphere, however, was extremely cordial.) DR advised the Ambassador that, based on the conversation of our last visit and the fact that the Government of North Korea is looking forward to a peaceful solution to the Korean situation, the Secretary would welcome an opportunity for informal and private discussions between the USG and the Govern-ment of North Korea. The Ambassador responded (the conversation was translated by Mr. Kim Chung Gol, First Secretary) that the position of his Government was made clear in the April 18 speech in Peking by President Kim, which enunciated that Korea was one country and the solution to problems had to be Korean. The steps to achieve this goal have been made clear in the past, and again enunciated on April 18. These positions cannot be changed. The situation depends entirely on the USG. The Ambassador continued by noting that the South Korean authorities are maintaining an authoritarian and fascist government whose aim is to oppress the people. The government prevents the people from speaking out. "The US should not continue to support Park. North Korea will never try to export revolution to South Korea, but there may be an explosion from within. The South Koreans want to end the era of facism and repression and this is a reasonable demand. Park is isolated from his people. "No one can say, Mr. Rockefeller, that the people of Korea will remain like this -- they will rise up."

DR noted that the war in Vietnam has been an unfortunate experience and unpopular with the people in the US. DR said that Secretary Kissinger wanted to make it crystal clear to the Ambassador and the leadership in his government that the end of this experience by the US in South Vietnam should not be misinterpreted that the USG was abandoning its responsibilities in other countries. "It does not mean, Mr. Ambassador, that the USG is giving up its commitments."

The Ambassador responded by saying that "Korea was going to be reunited sooner or later". "We do not insist on a communist regime in South Korea -- there is a way for a peaceful solution. However, South Korea needs to rid itself of the fascist regime." DR noted that the USG supported its commitments to the govern-ment in South Korea. However, should that government change through the democratic process, DR felt sure that the USG will continue to support the new regime. DR said, "The USG would not look favorably to outside influences" (referring to North Korea). "Mr. Ambassador, please note that the USG has a treaty with South Korea which has been ratified by the Congress. The Secretary of State would like to assure you and your government that, if there is aggression by your side, the USG would respond promptly and vigorously." DR said that the Secretary indicated that this action would be "the last thing that they would want to have happen". The Secretary wanted to firmly make clear the USG's position relating to its commitments so that there would be no misunderstandings. DR softened his tone and again reiterated the Secretary's belief that conversations between the two governments on an informal and private basis would be "useful". DR noted that, if this proposal was agreeable to the government of North Korea, he,

[lc]

2.

the Secretary, would designate a senior responsible person to work on this project. The Ambassador said that the Secretary's position on South Korea was an issue and, if there are preconditions to having conversations, this was an issue in itself. The Ambassador could not accept any preconditions. The Ambassador asked DR "why is it necessary for you to station your troops in Korea." He immediately followed this question by saying "if issues between us are solved, then we don't need negotiations".

DR stated, "Mr. Ambassador, we need to start where we are -- quiet conversations are needed and we should start soon -- the Secretary of State would be willing to cooperate. I hope you understand that I am a banker, not a diplomat."

The Ambassador responded, "Mr. Rockefeller, if relations continue to be strained between our two countries, there will be no solutions. However, we are hopeful of talks, especially in view that we are completely aware of Kissinger's remarks as well as President Ford's statements -- it will be hard for us to find a solution." The Ambassador again stated that there be no preconditions to negotiations. "You talk about your commitments to South Korea -- there we have a position -- we have never dropped a bomb on your country -- our intentions are clear -- peace or war does not depend on us -- we want to solve the problem peacefully (i.e. referring to US troops in South Korea).

"Mr. Ambassador, the only precondition the Secretary of State would need, in order to pursue discussions, is that you are seeking a peaceful solution to problems ... therefore, I see no difficulty in having these talks." "Mr. Ambassador, I believe there is a better chance for understanding if the two sides can talk quietly and not for public consumption."

Ambassador Kwon asked whether the message from the Secretary could be interpreted in this way. "Yes, Mr. Ambassador, the Secretary would be pleased to have his representative have quiet conversations and, in fact, you could meet on the neutral ground of my house or any other suitable place."

The Ambassador asked to have the following message conveyed to the Secretary: "There is no change in the position of our government. Our position is to solve the question of unification of Korea in a peaceful, independent and democratic fashion. We have never changed from this position. Last year, at our Supreme Peoples Congress we stated a proposal to enter into negotiations with the US and we look forward to a fair solution to our problems. We feel that, if two sides sit together, we can find a solution."

DR: "I understand that you would like to have the Secretary designate someone to meet with you and now the question remains as to the time and place for such a meeting."

DR advised that he was embarking on a world trip, which included visits to South Korea, Japan, Soviet Union, Czechoslovakia, East Germany, Belgium, Holland and "fishing in Norway". DR assured the Ambassador that his visit to South Korea had nothing to do with this meeting, that it was a long-planned business trip to visit the CMB branch, and the Ambassador and his team seemed understanding on this delicate point.

The Chase Manhattan Bank, N. A.
1 Chase Manhattan Plaza
New York, New York 10015

David Rockefeller
Chairman of the Board

CHASE

July 21, 1975

Dear Henry:

We very much hope that you and Nancy will be able to attend this luncheon, which will be held at my family's estate at Pocantico Hills in Tarrytown, New York, on Saturday, September 6. Cocktails will be served at 12:00 noon, with luncheon to follow at 12:45 P.M.

The Chase Manhattan Bank, N.A.
1 Chase Manhattan Plaza
New York, New York 10015

CHASE

December 29, 1975

The Honorable Henry Kissinger
Secretary of State
Department of State
Washington, D. C.

Dear Henry:

I was very glad to catch up with you briefly last week. We think of you so often, both with sympathy for what you have to go through and with gratitude for what you are doing.

For the past few years, Ridgway Knight, who retired from the Diplomatic Service (his last job was Ambassador to Portugal), has been a political adviser to Chase in Europe. He writes me periodic reports on different countries. The most recent one he wrote on France I found of particular interest, and enclose a copy thinking you might like to glance through it. Ridgway lives in France, is bi-lingual in French and English, and his observations seem to be very astute.

Jerry Bremer promised to give me a date in January when you might be able to meet with the Pesenti-Andreotti group for dinner. As soon as I hear from him, I will be glad to try to arrange to get them here.

I hope you and Nancy are getting some rest over the holidays. I talked to Nelson yesterday in Hawaii. He and Happy seem to be having a fine time in Mauna Kea.

All the best to both of you for 1976. I hope Peggy and I may have a chance to see both of you before too long.

[CONFIDENTIAL](C)

WHITHER FRANCE

## SUMMARY AND CONCLUSION

Even though the latest poll continues to give a 52/48% advantage to the left opposition were legislative elections to be held today, Giscard's majority should survive by a small margin at the legislative elections due in the Spring of 1978, on the condition that the current favorable measures for the unemployed are extended. The strongest reasons for this opinion are that the forces of the left are now too divided to re-capture the extent of unity which prevailed in the 1974 presidentialities, that the slow but steady growth of socialist strength further strains the relationship with the stationary communists, the extensive politisation of the French people slows down shifts in political opinion and because at the actual time of voting fear of the unknown should favor the government.

Should Giscard dissolve the Assembly before the end of its 5-year term, the above prediction should find itself re-inforced since dissolution should logically come at a time when Giscard would expect to win.

**_Reservation_ :** Should unemployment benefits be painfully reduced as compared to the present 90% for those laid off because of the recession (the measure now specifies that these benefits cannot exceed one year), I expect that enough additional strength would accrue to the left to ensure its victory. Indeed, there are now over 1.000.000 fully unemployed according to France's minimal method of counting (unsatisfied demands for employment) and the 2 to 3% recovery expected in 1976 should not be enough to reduce unemployment. In 1977, the year before elections, things should be on the mend, though unemployment should remain well above the level France has traditionally known (since the political implications are so clear, the extension of the exceptionally generous unemployment compensation measures is likely).

Regarding the longer term future, i.e. after the next legislative elections, the preservation of a free society and of a market economy (even though circumscribed and tempered by greater government intervention) will depend on Giscard's success in developing his "Liberal Society of an Advanced Type" and in winning over enough moderate Socialists to his cause. Needless to say the latter will depend on his success in creating the former. The odds seem about even.

[LC]

C. M. B. SUITE No

2.

## PREFACE - A BIT OF ATMOSPHERE

When one travels extensively in Europe, one cannot help but be impressed in France by the greater volume of recriminations and expressions of fear of the future as compared with other European countries and specially Germany. This, notwithstanding a basic similarity with the latter in rates of unemployment, both full and partial; this is more surprising still in the light of France's more generous unemployment compensation for the victims of the depression (90% of wages vs. 68%), not to speak of appreciably faster hourly wage real increases in France during 1975, as epitomized in the threefold increase in French savings in October 1975, as compared to October 1974 (4.5 billion francs vs. about 1.5 billion francs). This sensitivity, or perhaps volatility, is not new. However, for being an integral part of the French character, it does not simplify the task of those called upon to govern France.

## INTRODUCTION

In looking at France's future, the businessman's principal concern should be political. Indeed, from the economic point of view, business conditions for those established there should continue to be relatively good, avoiding the high peaks and deep valleys of other countries, such as Italy and Germany. Once again, the explanation lies in French traditions and in the French character. Notwithstanding its membership in the EEC, and Giscard's occasional claim to its leadership, France remains deeply protectionist and the arch-practitioner of "Charity begins at home". Furthermore, a generations-old preference for stable employment over wage levels and high gross profit margins tend to reduce the impact of cyclical swings.

Countering these ancient forces favorable to the employer, the latter must now deal with the greater aggressiveness of labor unions, often with subversive political aims taking precedence over the pursuit of greater wellbeing for the worker within the greater prosperity of the system. Thus, more days lost to strikes, greater absenteeism, abuses of the social security system, and a frequently irresponsible

[LC]

C. M. B. SUITE No 3.

attitude on the part of the labor "social partner".
However, whether or not these handicaps are signi-
ficantly greater than elsewhere in Western Europe
is difficult to tell. Certainly more so than in
Germany and Belgium but certainly no more than in
the U.K. and Italy.

What are the major political options which lie in
France's future ?

Theoretically these would seem to be three in number:

a) Will the present <u>politico-economic-social</u>
<u>system</u> endure? i.e., with a pluralistic
democracy utilizing the market system
tempered by increasing government manage-
ment of the economy and with a gradually
more favorable redistribution of national
income in favor of the non self-employed
(where France lags well behind Germany, the
U.S. and Britain, and even trails Italy).

b) Will the present system be replaced by
communist socialism?

c) Or, instead, will the present capitalist market economy be replaced by a socialist order essentially Marxist in its economic philosophy, while political pluralism and individual freedom will be preserved?

While the third option - economically Marxist but
<u>politically democratic and pluralistic</u> - is so unlikely
as to lie without the realm of the <u>politically possible</u>,
it must be considered at some length because of
Mitterand's strong attraction to it.

The Socialist leader alleges to believe the diffi-
culties facing the industrialized capitalist states
of Western Europe are such as to make it possible to
envision the development of a broad and powerful
entity, Marxist-Socialist economically, while
Social-Democratic politically, and strong enough to

[LC]

C. M. B. SUITE No 4.

assert itself vis a vis Moscow as Yugoslavia did in
1948. To succeed such a grand design would require
quasi-simultaneous action in two or more major W.E.
countries so as to even hope to be able to keep
Moscow at bay (When Tito successfully asserted his
independence in 1948, the USA still enjoyed its
nuclear bomb monopoly and the USSR had not recovered
from the devastation of WW II).

Likewise, to be successful, such a median course would
have to enjoy the enduring support of the communists,
a hypothesis which nothing in the record justifies.
Should the communists profess to play the game at
first it can only be assumed that they would proceed
to take over after the coalition of the left had
come to power.

Finally, there would seem to be no precedent for a
workable combination of economic collectivism with
political democratic pluralism and freedom of the
individual.

Of the remaining two options, which is the likelier ?
Maintenance of the status quo (with limited reforms)
or substitution of a thoroughly Marxist order, however
much superficially coated with a Western veneer?

Let us start with a Summary Recapitulation of Political
forces.

(next page)

[LC]

C. M. B. SUITE No 5.

SUMMARY RECAPITULATION OF POLITICAL FORCES

Forces and Factors militating
for status quo (with a con-
trolled evolution)

- The Establishment

- The U.D.R. (Gaullist political party)

- The Independent Republicans
  (Giscard d'Estaing).

- The small Centrist Political Groups.

- A small minority of the
  Socialist Party

- A small minority of organized labor (approx. 10%)

- The small percentage of French
  workers who are unionized,
  about 25%

- A large majority of the Army cadres, essentially apolitical and obedient to constituted authority.

- About half of the conscripts

- The profound realism of the French people which underlies their superficial ebullience

- Broad distribution of private
  property and their deep
  attachment to it.

- Extensive politization of the French people

- The growing realization of UK economic mess and its negative impact on wages, all of which has a minor restraining effect.

Forces and factors working for the
substitution of a new marxist
order.

- The Communist Party

- Trotskiite, Maoist, and other leftist splinter groups.

- The vast majority of the Socialist Party

- 90% of organized labor.

- A very small minority of the cadres (though a major CP effort has been made for some time among NCOs).

- Their short term excitability which at times can lead to sudden and powerful mass movements.

- The division of GNP which is less favorable to workers and employees in France than in all other EEC countries.

- Envy and jealousy which are very strong among the French.

- Unemployment (in inverse proportion to the amount of compensation granted the unemployed).

- Widespread feeling that we have entered a new economic phase (following quantum jump in oil prices, etc.) and that the old regime is not up to dealing with the new situation.

[LC]

C. M. B. SUITE No 6.

## DISCUSSION

When we consider the above forces and counter-forces, a kind of stalemate comes to mind. This coincides with the state of France at present which remains roughly cut in half as it was in the April/May 1974 national elections. The next ones - for parliament - will be in the spring of 1978, or over two years from now. A poll just released confirms this immobilism, showing only a minute shift in the last 12 months and this notwithstanding all the jeremiads over economic decline (48% for the government in December 1975 vs. 47% in December 1974). Between now and the elections, what will be the major currents striving for the advantage ?

### A. Re an Overthrow of the Status Quo

As a premise, we should be able to assume that the present order will not be overthrown by the use of revolutionary force even though the French communist party has followed the current Moscow line enjoining the faithful to rekindle their revolutionary fervor and recover their capability to be the "cutting edge of the proletariat" when the establishment of its dicatorship comes within range of the possible. The Communist cadres have been taken in hand; the doctrinal doubts and wavering which had accompanied the "Union of the Left" campaign in favor of Socialist leader Mitterand for President have been dispelled; once again they are solid in the knowledge that past and present talk of the "Union of the Left" and of "The Common Program" does not affect the purity of communist doctrine, regardless of the socialists' gain in popularity, however galling this may be.

Notwithstanding the above, it does not seem to be in the cards that between now and the legislative elections of 1978, the regime would be violently overthrown. For the required revolutionary situation to develop the economic situation would have to deteriorate further and/or the number and plight of the unemployed would have to worsen considerably.

### B. Re Preservation of the Status Quo

The fortunes of the Establishment and today's free society and market economy will largely be identified

[LC]

C. M. B. SUITE No 7.

with what President Giscard d'Estaing actually does to implement his vision of a "liberal society of an advanced type". According to his pronouncements, such a society would remain liberal, but would be adapted to the new economic conditions facing the industrialized nations, notably through considerable social and tax reforms and a strengthening of the government's "tools" to manage the broad lines of the economy.

At the heart of Giscard's grand design must be the intention to form a powerful center-left political block, including his Independent Republicans, the small political formations of the Center and most of the old Gaullist forces now in the UDR. Very important in his planning must also be the winning over of those more moderate socialists who, in the last analysis, would rather achieve their aims by evolution than by revolution. Since the Right would have no alternate refuge, it should support Giscard in the end, regardless of its lack of enthusiasm for his liberalism. (In view of the propensity of the Right for suicide, notably in France, we can assume that some rightists will remain in useless, however splendid isolation). If Giscard succeeds, he would have an effective majority with which to govern and to adapt France to modern times.

Essentially, Giscard's success depends on how many Socialists he succeeds in winning over from their party. Unfortunately, prospects are dimmed by the class feelings and traditions, so strong in France, which make it a class betrayal for a "Worker" to mingle his vote with those of the "Bourgeois". Notwithstanding his car, and more often than not his week-end cottage, the "red" heritage from the last century remains deeply ingrained.

Things would be different should Mitterand awake from his dream of a Marxist-Social democratic millennium achieved in collaboration with the communists. While this is not impossible since the Socialist leader is genuinely dedicated to individual freedom and democratic pluralism, it is not likely because of his pride and ambition that he would through his support to Giscard, becoming perhaps his Prime Minister - or Vice-President should the French constitution be amended. Rather, like Achilles, he might retire to his tent.

[LC]

C. M. B. SUITE No 8.

As to Giscard's intended reforms, he may, in actual fact, not have the sustained determination and necessary ruthlessness to make the sufficiently radical changes to bring about a "Liberal Society of an advanced type", with a strong appeal for the non-communist left. At the same time, the Communist party has also lost some of its power of attraction over this same left, by showing its true colors not only in Portugal but also in France.

What about the on-going efforts to sap the present socio-political edifice ?

At the price of repetition, the Union of the Left is no more than a shell to which lip service is paid for fear of the onus which would accompany its denunciation. Behind its façade there are two principal forces.

1. The one identified with Mitterand's already described dream. While self-deluding, this Socialist current has gained considerable strength, as shown in recent by-elections, since it corresponds to the aspirations of many Frenchmen who want real change while also desiring freedom and distrusting communist professions of democratic faith.

2. The other current is gaining less in breadth but more in depth. Its mainstream is represented by the patient and relentless communist drive for power; it is fed by the many leftist rivulets of anarchy, Trostkiism, Maoism, etc., bent primarily on sapping and destroying present institutions.

While much is made of communist annoyance with these "infantile leftist diseases", the party is confident it can capitalize on these parallel activities, counting on its ability to control them when the time comes.

Taken together, a mathematical sum of these two currents should constitute a majority by the time the French vote for a new Parliament in 1978. However, it is extremely unlikely that "Unity of the Left",

[LC]

C. M. B. SUITE No 9.

and its mystique, can be recreated to the extent
which existed in the Presidentials of 1974. There-
fore, it is not unreasonable to expect that enough
moderate leftists will switch at the last moment
so as to permit the Giscardian coalition again to
win by a small margin.

Thus, essentially for a number of tactical reasons,
combined with certain traditional facts of French
life, the present regime should be able to survive
through the 1978 legislative elections. Should
Giscard dissolve the Assembly and call for elections
sooner, this forecast would be reinforced by the
likelihood that such action would coincide with
lightened prospects for his success. At the risk
of saying the obvious, the long run will depend in
France, as in other Western societies, on the evo-
lution of the economy, on the manner in which
governments tackle the changes in the terms of trade
between industrialized countries and those producing
oil and raw materials and on their effectiveness in
handling internally the effects. Much will also
depend on what happens in neighbouring countries.
Will the Communists gain the upper hand in Italy?
Will Germany continue to remain essentially wedded
to change and reform within the system?

Perhaps the most important single factor is how the
unemployed will be treated. My relative optimism over
the short term is based on the assumption that the
exceptional compensation granted to those laid off
because of the recession (90%) will be prolonged inde-
finitely after expiration of the 12 month originally
specified, and this notwithstanding the obvious infla-
tionary effects of such a step. If, perchance, this
should not be the case, and the unemployed should
suffer a sharp drop in their living standards, or
should they be made to feel increasingly like social
outcasts, this should be enough to tip the scales in
the spring 1978 elections in favor of the left.

December 22, 1975

April 9, 1976

The Honorable Henry A. Kissinger
Secretary of State
Department of State
Washington, D. C.

Dear Henry:

Just before I saw you in Washington a week or two ago, I had a
visit with Arthur Hartman who expressed to me concern about the
political activities of our mutual friend, Johnny Agnelli. Art
indicated to me that the newspapers which he owns and close
associates of his have been supporting a line closely identified
with the Italian Communist Party. Knowing that Johnny is a friend
of mine and is a member of our bank's International Advisory Com-
mittee, he felt that I should be aware of these concerns.

As a result of my talk with Art, I asked our European Political
Adviser, Ridgway Knight (you may recall that he retired from the
Foreign Service a few years ago having last served as Ambassador
to Portugal) to go to Italy to make some inquiries on his own and
to talk with Johnny. This Ridgway has now done and has given me.
both a verbal report and a confidential memorandum. I enclose a
copy of the memorandum which I believe you will find of considerable
interest. If after reading it you have any further thoughts or sug-
gestions, please let me know.

I was extremely disappointed that I was unable to join you yesterday at the meeting you had with a group of businessmen here in New York under the auspices of Pete Peterson. I saw several of those who attended the meeting and can assure you that all of them were extremely impressed by you and by your extraordinarily clear presentation.

So much is going on, I do hope we will have a chance to get together
again before too long.

Best regards.

41 Rue Cambon Paris 1er
BP 456 75026 Paris Cedex 01
Tel. 260 33 80

Ambassador Ridgway B. Knight.
Director International Relations - Europe

PERSONAL AND STRICTLY
CONFIDENTIAL.

Mr. David Rockefeller
Chairman of the Board
The Chase Manhattan Bank
New York

5 April 1976

Dear David,

Following Joseph Reed's telephone call, I went down
to Italy and spent about three quarters of an hour
with Gianni Agnelli, Thursday evening April 1, in
his spectacular Campidoglio penthouse. I also spent
considerable time with our Chargé d'Affaires and
others in and out of the Embassy.

THE CONVERSATION WITH GIANNI AGNELLI

While not substantive, I nevertheless place some
significance on the _obvious attempt to charm me_ made
by our friend Gianni.

After a brief exchange of courtesies, I said that
I had asked to see him to express the disappointment
and unhappiness felt by you and a number of your
mutual friends, over the unfriendly, and even hostile
articles appearing in newspapers and other publica-
tions enjoying his direct or indirect financial
support. I mentioned, inter alia, the recent spate
of reporting and editorial comment about alleged CIA
activities in Italy climaxing with names of alleged
CIA's agents.

[LC]

C. M. B. SUITE No 2.

Without a second's hesitation, and as if he had guessed the reason for my call, Agnelli with great volubility insisted on the complete editorial independence not only of "Republica" and "Expresso", but also of all the other media in which he had financial interests. He stressed that now more than ever, after the Lockheed affair, Watergate, CIA financing of the press and politicians in Italy, it would be dynamite for him to try to do anything with a view to influencing the editorial opinion of the press.

Referring to his brother-in-law, Carlo Caracciolo, who is his man in the press world, (Comment : and who started life with hardly a nickel to his name), he impatiently said that for twenty years he had suffered from his brother-in-law's press initiatives, since everyone considered that Carocciolo was Agnelli's incarnation in the press world, whereas, in fact, "he had no influence on him whatsoever".

(I should add that the above sweeping disclamer was repeated several times during the conversation).

Thereupon I commented that, since it was so tricky and difficult for him to influence editors in his publications, it might be possible to give help to other editors who are "waging the good fight" and who are in financial difficulties. "Such as whom ?" interjected Agnelli. When I mentioned "Il Giornale Nuovo", he made a disparaging comment about that "sheet without influence, with a circulation of a mere 140,000 copies". (Comment : if I mentioned Il Giornale Nuovo, it was only at the suggestion of our Embassy, which believes that it is the best paper in Italy, and whose circulation is actually 267,000 per the latest audit figures. Incidentally, it was formed about two years ago by the editor and a group of journalists who seceded from Agnelli's "La Stampa".)

Agnelli went on to say that it was difficult to attack the PCI because of its general clean record, "the fact is that it is involved in only one scandal and that in the city of Parma."

Agnelli volunteered that, with a view to be useful, he had bought the Italian rights to an article recently published in the New Republic concerning

[LC]

C. M. B. SUITE No. 3.

the financing of Italy's Communist Party, "Italy's Russian suggar daddies". Since I had already discussed this with the Embassy, I was able to comment that, unfortunately, this article had not been reproduced in any of his papers. In fact, the *only* thing which had appeared was a weak and highly sanitized article by "La Stampa" U.S. editor, which did not do justice to the original.

Agnelli blamed this method of handling on his editors' objections to publishing such "serious allegations" without more documentation and corroboration. I commented that I could only hope that the same high standards of journalism would apply to allegations of CIA financing of the Christian Democrats and wire pulling of the Italian political scene.

I went on to suggest that it might be possible to question the democratic and liberal façade of Berlinguer and the PCI which was having such dangerous effects on non-communist circles in and out of Italy. Agnelli's only response was a vague general agreement while looking into the distance as his voice trailed off.

To my suggestion (again at our Chargé d'Affaires' informal suggestion), that Confindustria could play a more useful and positive part in Italy's current critical situation, he merely commented that Confindustria had no political character and that it was not its role to intervene on that plane.

I then referred to the numerous reports - including cover pictures of himself - that he might soon play a key political role, perhaps heading a government of technicians. (Comment: I should add that such articles had prominently appeared in Agnelli's own press. One statement even went so far as to describe Gianni as perhaps "Italy's de Gaulle").

I found his denial interestingly *weak and unconvincing*. He said that he had no political ambitions at this time and alleged that "for all intents and purposes", the present government is essentially a government of technicians.

Mid-way during the conversation, I expressed my appreciation for his March 18 appearance on television and radio. On this occasion he had made a more

[LC]

C. M. B. SUITE No 4.

balanced statement than usual, expressing his oppo-
sition to the "Historic Compromise", while making
other comments more pleasing to the left. Agnelli
beamed, commenting "this should give you a good
example of what I am up against. Even my own editors
quoted only what I said favorable to the left and
did not carry what I said against the "Compromesso
Storico". "Whether we like it or not", he added,
"TV, radio and the press are controlled by the PCI".

At various times during the conversation, Gianni
Agnelli initiated the following points :

- He emphasized that economic factors and considerations were determining. However, when I expressed skepticism, pointing to the extreme politization of the Italian scene, he did not defend his assertion saying, instead, : "what can one do politically in a country where the Communists have one third of the votes, attract over half of the youth and control virtually all important regions and municipalities ?".

- Agnelli pointed to the bandwagon psychology of the average Italian. He commented that Italians, because of their history, were acutely sensitive to where power lies, are unfailingly attracted to it, and "let us face it. U.S. power has seemed on the decline for some time now.". In addition to referring to Vietnam, Agnelli mentioned the Pike report, the Church report, the Lockheed scandal, our destruction of the CIA, the Congress' paralyzing intrusion into Foreign policy as exemplified by Angola; and more generally the self-destructive binge on which the U.S. seems to be bent, at least as seen from abroad.

- Gianni also sharply warned us against tough American conditions connected with financial loans. He said that, regardless of any economic justifications, the possible political and psychological impact should receive priority consideration. "Unlike France, there is no latent natural hostility towards the U.S. in Italy, but such hostility could easily be stimulated by budgetary and fiscal conditions which could be represented as causing painful economic hardships and unemployment."

[LC]

C. M. B. SUITE No 5.

COMMENT

Gianni Agnelli was obviously unhappy over the burden of my message. Yet, I had the definite impression it made no impact. It was as if he had expected it and had concluded beforehand what he was going to answer.

Several times he expressed regret that you and others among his American friends should feel the way they do. Yet, they should understand that he can do nothing in view of all the circumstances now prevailing in Italy. He will try and explain the situation better to you at the IAC in Brazil.

I could not help but be struck by how little effort he made to brighten and soften his answer. I would have expected an attempt to placate us with expressions of his desire to be helpful while warning us that we should not expect too much because of the current Italian situation, etc. Instead, he only repeated his powerlessness to influence his editors and re-emphasized the full independence of his brother-in-law, Carlo Carocciolo and of his press operations.

In all frankness, I left our tête-à-tête with a feeling that I had been talking with a man with a closed mind, one who had carefully weighed all the pros and cons and had definitively decided on his course of action.

For whatever it may be worth, the general impression in Italy is that Agnelli has concluded to the inevitability of the PCI coming to power, and that he is acting accordingly.

Some believe that he has been working out a deal for quite some time and point to the relative labor peace which has prevailed in the Fiat empire. Others insist that political prominence remains the one prize which he has not yet plucked and go so far as to allege that he will be the first head of state after the PCI comes to power.

Quite apart from the above, Agnelli's public statements are now clearly weighed in favor of the "progressive" Left, including the PCI. Simultaneously, the occasional "saving statements" he may make to preserve a more balanced appearance receive little, if any, notice in the media.

[LC]

C. M. B. SUITE No 6.

AGNELLI AND THE I.A.C.

On my last day, I lunched with Rudolfo Rinaldi. While refraining from going into details, I told him the general purpose of my visit and deadpanned to him the substance of Agnelli's response. Rinaldi thereupon assumed that I had been taken in by Agnelli's profession of impotence, expressing his view in strong terms that "Gianni had already made his deal with the PCI".

Incidentally, Rudolfo favors not extending Agnelli's membership in the I.A.C. He has some other Italians in mind and would like to see Italy's representation increased from one to two, with one member from the private and the other from the public sector. He recommends Carli as one of the two, even though rumors associate him with Gianni in some of the political hypotheses and conjectures before the house.

From the point of view of CMB as a whole, I suggest we reflect very carefully before taking action against Agnelli's membership. At the risk of seeming defeatist, I fear it is too late to reverse the tide in Italy. It is quite right for the U.S. government and the Embassy to wage a last ditch fight. Indeed, if it did not do so, the effects would be grave not only in Italy but elsewhere. Furthermore, since any Italian government will need to deal economically with the U.S., such a hard position now can only be useful and lead a subsequent PCI dominated government to deal more carefully with us.

However, I wonder if the same reasoning applies to a private entity such as CMB. Were exclusion - or non-renomination to the IAC - sufficient to change Gianni Agnelli's political position, I would favor such action. As it is, I am satisfied that his mind is made up and that such action on our part would not have the desired effect and, instead, embitter vis à vis CMB a man who, at least during the initial phases of the transition, is bound to play a large role.

In sum, I lean towards our following the example of the U.S. government part way. I suggest that you and his friends be very tough with Agnelli concerning his present attitude and actions, while simultaneously retaining him on the IAC. I am satisfied that such

May 11, 1976

Messrs. David Rockefeller, Chairman of the Board
F. X. Stankard, Executive Vice President
J. H. Bish, Senior Vice President
J. V. Reed, Jr., Vice President

NORTH KOREA

At the recent Chase Bank/U.N. Reception, I invited Mr. Chung Gol Kim, First Secretary, the Office of the Permanent Observer to the U.N., to have dinner with me at my apartment on Friday, May 7th. Mr. Kim was accompanied by Pak Si Ho, 2nd Secretary, and Leo Pierre also joined us.

The evening was pleasant, the conversation general - basically dealing with our lives in New York City. Apparently, the Koreans still grate under the twenty-five mile travel limitation imposed on them. Other than that, they seemed reasonably happy in the extremely dull and monastic type of life which they live here in New York.

At the very end of the evening, the conversation turned to the subject of U.S.-Korean relations. Mr. Kim emphasized once again the desire of the Democratic People's Republic of Korea to peacefully negotiate the unification of their country. He reiterated their feeling that such a unification would be extremely beneficial to both the United States and to the world. He also stated that such a joining could certainly take the form of a Federation/Confederation rather than a direct union, and that this would give both Koreas an opportunity to continue their present "life styles". Also present were the usual veiled threats about the consequences to the U.S. if we failed to heed the desires of all Koreans for unification, and continued to block this course (by means of our attitude and support for the ROK), rather than to lend encouragement to both sides to settle this issue.

Mr. Kim was extremely upset with regard to reports they had received of a U.S. build-up in South Korea. They firmly believe a report (from a source unidentified to us) that the United States has increased by four thousand troops its presence in South Korea, and has introduced into South Korea a new type of aircraft with nuclear capability. Mr. Kim did admit that he believed that such aircraft remained in control of the U.S. Military in the country.

Mr. Kim stated that his government was most anxious about these latest developments, adding that it could not stand idly by in the face of such provocation. We wondered aloud that - why in the face of their desire to talk anywhere and at anytime, our government should take these steps.

.../...

7617617

THE SECRETARY OF STATE
WASHINGTON

August 17, 1976

COPIES TO:
S
RF-ws

Dear David:

Nancy and I are so disappointed that we will not be able to spend the weekend of August 20th with you and Peggy in Maine. As you know, we had hoped very much that we could get up to see you following the Convention, but somehow my calendar never seems to open up.

I hope that you will give us another rain check, for there is nothing we would rather do. In any event, we want to thank you and Peggy for your hospitality and your patience with my impossible schedule.

Mr. David Rockefeller,
30 Rockefeller Plaza,
New York, New York.

MICROFILMED
BY S/S-I