DR. HENRY KISSINGER: Governor Voinovich and ladies and gentlemen, I have been asked to confine my remarks to 20 minutes. And if I do that, you can all say you were present at a historic occasion. I want to talk to you about the general foreign policy problem briefly. And then I would like to discuss the issues raised by Dan Yergin and by Summers, by Larry Summers, especially the impact on the political situation in the world of the economic crisis that now exists.

I cannot think of any period as a student of history where so many changes have occurred simultaneously in so many parts of the world. It was never the case that foreign policy had to be conducted on a global basis. Until very recently foreign policy was dominated by regions

Schindhelm & Associates, Inc.

Registered Professional Reporters (414) 271-0566

64

1 or was entirely regional.

2 200 years ago one could not have
3 compared, been able to compare the power of
4 England and the power of China because they had no
5 means of interacting on each other, either
6 militarily or in a substantial way economically.
7 Never before has it been necessary to conduct
8 foreign policy in real time so that events could
9 actually be observed by the constituencies that
10 would be affected by them.

11 Never before has there been a major gap
12 between economic and military power so that it is
13 now possible to be relatively powerful
economically and not very strong militarily and
15 conversely, like the Soviet Union was for a long
16 period, extremely powerful militarily and almost a
17 shell economically.

18 These are all new conditions. And never
19 before has the United States been engaged in
20 foreign policy on a permanent basis. No other
21 major nation has been populated entirely by
22 immigrants, has had two great oceans to protect
23 it, has until relatively recently never had to
24 confront a real danger to its existence. All of
25 this creates a unique situation for the United

65

1 States.

2 On the one hand, it makes us

3 extraordinarily optimistic about the possibility

4 to solve problems by overwhelming them with

5 resources. On the other hand, it makes it very

6 difficult for us to grasp that we are engaged in a

7 permanent process from now on which we cannot

8 escape.

9 We talk about NATO and the Marshall Plan

10 and the great constructions of the Truman and

11 Eisenhower period as the great innovations of

12 American foreign policy. And that is true. But

13 they were all put forward as temporary expedients

14 which would solve the problem, whatever the

15 problem was at the moment, Soviet aggression,

16 economic recovery of Europe, after which the need

17 for an American role would diminish or disappear.

18 If you read the debates of the late 40s,

19 50s, that was how these issues were presented.

20 Now we are in a situation where every solution is

21 an admission ticket to another problem. We cannot

22 separate ourselves anymore from the rest of the

23 world. And it's not a debate between isolation

24 and interventionism. It is a reality. And that

25 also is why someone like myself for whom the

Schindhelm & Associates, Inc.

66

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

present administration, frankly, was the second
choice, nevertheless, believes that foreign policy
is a nonpartisan effort.

The national interest of the United
States cannot be reinvented every few years. And
what we lack most is a coherent, permanent view of
the American national interest and the American
national purpose that we pursue from
administration to administration with, of course,
tactical differences and important debates about
specifics but nevertheless fixed in its major
directions.

Right now as Larry Summers says, we face
different situations in different parts of the
world. And we do it from a history of believing
that the sovereign remedy for all our problems is
the spread of democracy on the theory that
democratic countries do not quarrel with each
other. This may be true, but there is not enough
experience in the world to judge it. There
haven't been that many democracies over a long
period of time interacting with each other.

And there is also the question of how
quickly that process can succeed, and do we know
how to speed up a process that took us in the west

67

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

300 years, based on religions that affirmed the separation of religious organizations from political organizations, the Renaissance, the Enlightenment, the Age of Discovery, all of this took us 300 years to get to. And that now has to be compressed in Indonesia or Korea or whatever into a very brief period of time.

That is the fundamental challenge we face. And we face it while in Asia, as Larry Summers said, the nations really deal with each other as if they -- like the European nations did in the 19th century, as strategic rivals and not as part of a cooperative system.

At the same time Europe is unifying and will emerge if everything works as a unit that's strong economically as we are with more or less the same statistical capacities. And that will impose a major adjustment on us. And in the Middle East we have not only the Israel Palestinian problem but the problem how to preserve stability in the Gulf when the two major nations in the Gulf are still hostile to us. This is just a brief catalog of problems that we need to address as a nation and on a conceptual basis. And our difficulty has been, frankly, that we've

Schindhelm & Associates, Inc.

68

been pushing it ahead of ourselves, solving the
symptoms but not dealing in my view with the
fundamentals.

Now, I would, however, like to spend the
rest of my remarks on the political implications
of the economic issues that have been presented to
you by Larry Summers and I'm sure by Daniel
Yergin. Let me add for not immediately that I'm
not an economist. In fact, when I was in
government, the Secretary of Treasury at the time
once said that my knowledge of economics was one
of the better arguments against universal suffrage
that he knew. He then immediately proved his
knowledge about politics by calling the Shah of
Iran at the height of the energy crisis a nut.

And when I complained to him, he said
you political types always get so excited. I'll
have it solved by the end of the day. The end of
the day he said, when I called the Shah of Iran a
nut, saying it a second time, I was quoted out of
context. Poor Shah went to his grave trying to
figure out in what context he could have been
called a nut without offense.

But let me now raise a number of foreign
policy questions with respect to the international

Schindhelm & Associates, Inc.

69

financial crisis. One is systemic and the other
has to do with the solution. When you hear a
presentation which says that Japan, Indonesia,
Southeast Asia, China, Russia, South Africa are
all simultaneously in crisis, you ask yourself
what is it about the system that produces
simultaneous crises in so many countries at the
same time. And how can you talk of an operating
global system if the countries that represent the
majority of the population are somehow, world
population, some are not part of it, at least
during this period.

I want to stress, I have enormous
respect for Secretary Rubin and Larry Summers. Of
the people I have seen in Washington, they could
not be a more open minded group and a more serious
group of addressing these issues. And I don't
disagree with many or any of the solutions that
Larry Summers presented here except for one
proviso. That proviso is you are all elected
people. You know you have to live in a political
environment.

It does not help a political leader to
be confronted with solutions that undermine his
political viability. At any rate, it does not

Schindhelm & Associates, Inc.

70

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

produce enthusiasm for the solutions. And so
there is a gap in my view between the intellectual
approach and the politically feasible approach.

First as a layman I want to state what I
believe to be the biggest systemic weakness of the
current system. There is -- there has never been
a period in the post-war period, in the post-war
era, where the economic growth depended so
largely, almost exclusively, on private capital.
There has never been a period when private capital
was so fungible. There has never been an
information system by which resources could be
shifted around the world with such speed and in
such quantity.

Now, you might say that these are all
positive elements. But it has created a category
of investments that are heavily and maybe
exclusively speculative. And it has created a
series of financial possibilities that are geared
to very short-term profits controlled by people
who have an extraordinarily sophisticated
understanding of financial markets that cannot be
shared by the central banks of smaller and middle
sized countries.

If you look at the Southeast Asian

Schindhelm & Associates, Inc.

71

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

crisis, for example, it is not true that these
countries conducted poor economic policies. They
had more or less -- they had their deficits under
control, they had their inflation under control.
They were privatizing. They were welcoming
investment, and investment was flowing in.

What they did not understand was the
impact of the differential currency rates as the
dollar was appreciating, the yen was
depreciating. Their currency being tied to the
dollar gave in many of these countries a
possibility to borrow in the American market, then
lend it in their own market and make a windfall
because interest rates in their own market were
higher than in America. This threw in capital
with many very sophisticated instruments. And the
result of it was a series of bubbles, especially
in the real estate market, especially in
Thailand. My point is that the Southeast Asian
crisis started as a speculative crisis.

Now, I know people tell me, and it's
probably true, that it's very hard to separate
speculative capital from other capital, and it's
very hard to find mechanisms for doing it. On the
other hand, I do not believe that it will be

Schindhelm & Associates, Inc.

72

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

indefinitely tolerated, that there will be periods
of boom followed by IMF programs that impose
enormous posterity followed by another period of
boom.

Some way Euro political leaders, some
way will be found. I may not know how to find
it. And if it isn't found on a national basis
which is probably impossible, it may well be found
on a regional basis. At any rate, this is one
fundamental problem. And I recognize that it is
hard to separate speculative from equity
investment. But equity investment will do all the
things Larry says. Equity investment ties the
fate of the countries together because the
well-being of the investor is tied to the
well-being of the country. And this will indeed
help the whole economy.

This is not true of pure speculative
measures. This is a systemic problem, the
political problem that I feel very strongly
about. It is that the IMF programs have only put
a tremendous political burden on the countries
involved. The IMF was never designed to
restructure the whole world. The IMF is not
staffed by people who are competent fundamentally

Schindhelm & Associates, Inc.

73

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

to judge the political evolution of the countries
that they're trying to help.

And the result is that we find, for
example, that in Russia an essentially political
problem is dealt with by economic means. And in
Indonesia an essential economic problem has been
dealt with by stressing political objectives with
the risk in Russia that 12 months from now we will
face exactly the same problem that we are facing
now. And in Indonesia that we may have started a
revolutionary process in a country of 200 million
whose end -- which is the key to Southeast Asia,
whose end is not yet foreseeable.

In Russia the real problem is that the
economy in many respects is a virtual economy.
The virtual prices, virtual taxes. None of the
programs are really ever fully carried out.
People say that Russians don't pay taxes. That
isn't exactly true. About 32 percent of the GDP
goes to taxes. But only 8 percent of it is paid
in cash, and 92 percent is paid, they pay their
taxes in barter arrangements requiring the
government then to resell what they have acquired
in the payment of taxes which is an unbelievably
inefficient system and means in effect that many

Schindhelm & Associates, Inc.

74

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

of these things don't have the value in which they
are listed.

They have wages, wage agreements that
are not paid, and one could go on through a whole
list. Until these issues are settled, and until
there is a real economy, until there are real
reforms, none of these funds are going to help.

And yet I must tell you frankly, if I
was Secretary of State and Yeltsin called up and
said this country is going to go to pieces if you
don't help me, would I have the nerve to say first
change your political system, and after you've
done it, come back to me? I don't know. At some
point it will have to be done.

I make this qualification only to point
out that I have sympathy for Washington. But 12
months from now when this thing blows up again if
these reforms aren't really carried out, it will
be election year in America and election year in
Russia. So the likelihood of making this tough
choice is unlikely. My basic point is it is a
political problem.

Let me talk about Indonesia. Indonesia
was one of those economies that was doing fairly
well. When the IMF tried to address its problems,

Schindhelm & Associates, Inc.

75

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

it dealt with real issues, that is it had -- there
was corruption, there was crony capitalism, there
were monopolies, all those things that needed to
be changed, except they had not produced a
crisis. They were independent of the crisis over
a longer period.

The crisis was mostly a speculative
crisis. The attempt to fix all of them
simultaneously led to a flight of capital that was
greater than anything the IMF could possibly
provide. In fact, greater than the IMF had
provided up to now. So it had the contrary
effect. And now we face in Indonesia a problem of
a disintegrating governmental legitimacy and the
old question, what comes first, the economic
stability or political progress, and how do you
define political progress in a country of 13,000
islands that has had a one-party government for
its entire history.

And I must say, when I read that we have
sent our Secretary of Defense there to tell them
not to suppress rioters, I wonder whether there
isn't a subtler way of doing that that does not
turn into a possible invitation to riots.

But that isn't my key issue. My key

76

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

problem is we have to bring the economic and
political requirements into some balance. We
cannot impose huge drops in standards of living
with the prospect of three, four, five years down
the road they will return to some degree of
normalcy and not be prepared for significant
political upheavals.

I do not think it is wise to cut off the
IMF now, but I do believe that a way should be
found to reform the IMF, either to limit its
activities to strictly economic issues or to
broaden its composition so that it can handle
political issues.

Secondly, I believe that it is in
general a necessity to look at the long-term
problems that America faces. We are now so
powerful that we may have the illusion that
foreign policy is not a key problem and that we
can focus entirely on domestic issues. And it is
said that that's what our public wants. And you,
ladies and gentlemen, are better judges of knowing
what the public wants than I am.

But I want to remind you of one thing.
Historically democratic publics have not forgiven
their leaders for disasters that occurred even

Schindhelm & Associates, Inc.

77

when they resulted from policies the public seemed
to want. Chamberlain was the most popular man in
England in 1938 and was finished in 1940.

So in many respects, in all respects I
would say, America is the hope of the world. But
one of our challenges is expressed in a proverb
that a Chinese once laid on me. I would say laid
on me because I'm not sure there are as many
Chinese proverbs as they tell us. I think they
make them up as the situation develops.

And that proverb goes like this. When
there is turmoil under the heaven, little problems
are dealt with as if they were big problems, and
big problems are not dealt with at all.

When there is order under the heavens,
big problems are reduced to little problems, and
little problems should not obsess us.

My point is let's make sure A, that
we're dealing with big problems and secondly, that
we're reducing them to little problems. Thank you
very much.

(Applause.)

HAR REMARKS
FROM

NATIONAL GOVERNORS ASSN
MILWAUKEE, WISCONSIN

AUG. 4, 1998

CLEJ

9 DR. HENRY KISSINGER: Governor Voinovich
10 and ladies and gentlemen, I have been asked to
11 confine my remarks to 20 minutes. And if I do
12 that, you can all say you were present at a
13 historic occasion. I want to talk to you about
14 the general foreign policy problem briefly. And
15 then I would like to discuss the issues raised by
16 Dan Yergin and by Summers, by Larry Summers,
17 especially the impact on the political situation
18 in the world of the economic crisis that now
19 exists.

20 I cannot think of any period as a
21 student of history where so many changes have
22 occurred simultaneously in so many parts of the
23 world. It was never the case that foreign policy
24 had to be conducted on a global basis. Until very
25 recently foreign policy was dominated by regions

Schindhelm & Associates, Inc.

64

1 or was entirely regional.

2 200 years ago one could not have
3 compared, been able to compare the power of
4 England and the power of China because they had no
5 means of interacting on each other, either
6 militarily or, in a substantial way, economically.
7 Never before has it been necessary to conduct
8 foreign policy in real time so that events could
9 actually be observed by the constituencies that
10 would be affected by them.

11 Never before has there been a major gap
12 between economic and military power so that it is
13 now possible to be relatively powerful
14 economically and not very strong militarily and
15 conversely, like the Soviet Union was for a long
16 period, extremely powerful militarily and almost a
17 shell economically.

Schindhelm & Associates, Inc.

65

1 States.

8 escape.

66

(ic)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

Schindhelm & Associates, Inc.

67

1 300 years, based on religions that affirmed the
2 separation of religious organizations from
3 political organizations, the Renaissance, the
4 Enlightenment, the Age of Discovery, all of this
5 took us 300 years to get to. And that now has to
6 be compressed in Indonesia or Korea or whatever
7 into a very brief period of time.

8 That is the fundamental challenge we
9 face. And we face it while in Asia, as Larry
10 Summers said, the nations really deal with each
11 other as if they -- like the European nations did
12 in the 19th century, as strategic rivals and not
13 as part of a cooperative system.

14 At the same time Europe is unifying and
15 will emerge if everything works as a unit that's
16 strong economically as we are with more or less
17 the same statistical capacities. And that will
18 impose a major adjustment on us. And in the
19 Middle East we have not only the Israel
20 Palestinian problem but the problem how to
21 preserve stability in the Gulf when the two major
22 nations in the Gulf are still hostile to us. This
23 is just a brief catalog of problems that we need
24 to address as a nation and on a conceptual basis.
25 And our difficulty has been, frankly, that we've

68

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

Schindhelm & Associates, Inc.

69

(lc)

during this period.

environment.

Schindhelm & Associates, Inc.

70

(w)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

Schindhelm & Associates, Inc.

71

(10)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

Schindhelm & Associates, Inc.

72

(10)

1. indefinitely tolerated, that there will be periods of boom followed by IMF programs that impose enormous posterity followed by another period of boom.

5. Some way Euro political leaders, some way will be found. I may not know how to find it. And if it isn't found on a national basis which is probably impossible, it may well be found on a regional basis. At any rate, this is one fundamental problem. And I recognize that it is hard to separate speculative from equity investment. But equity investment will do all the things Larry says. Equity investment ties the fate of the countries together because the well-being of the investor is tied to the well-being of the country. And this will indeed help the whole economy.

18. This is not true of pure speculative measures. This is a systemic problem, the political problem that I feel very strongly about. It is that the IMF programs have only put a tremendous political burden on the countries involved. The IMF was never designed to restructure the whole world. The IMF is not staffed by people who are competent fundamentally

Schindhelm & Associates, Inc.

73

(lc)

1 to judge the political evolution of the countries
2 that they're trying to help.

3 And the result is that we find, for
4 example, that in Russia an essentially political
5 problem is dealt with by economic means. And in
6 Indonesia an essential economic problem has been
7 dealt with by stressing political objectives with
8 the risk in Russia that 12 months from now we will
9 face exactly the same problem that we are facing
10 now. And in Indonesia that we may have started a
11 revolutionary process in a country of 200 million
12 whose end -- which is the key to Southeast Asia,
13 whose end is not yet foreseeable.

14 In Russia the real problem is that the
15 economy in many respects is a virtual economy.
16 The virtual prices, virtual taxes. None of the
17 programs are really ever fully carried out.
18 People say that Russians don't pay taxes. That
19 isn't exactly true. About 32 percent of the GDP
20 goes to taxes. But only 8 percent of it is paid
21 in cash, and 92 percent is paid, they pay their
22 taxes in barter arrangements requiring the
23 government then to resell what they have acquired
24 in the payment of taxes which is an unbelievably
25 inefficient system and means in effect that many

Schindhelm & Associates, Inc.

74

(wc)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

Schindhelm & Associates, Inc.

75

(lc)

Schindhelm & Associates, Inc.

76

(LC)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

Schindhelm & Associates, Inc.

77

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

(Applause.)