- 7 -

in transferring scientific institutions to a profit and loss accounting system and so on. A considerable amount of time was devoted to the preparation of and a nationwide debate on three major bills of legislation related to the restructuring of the economy. The law on state enterprises, the law on cooperatives, and the law on individual (private) entrepreneurial activities. A great deal of effort will also go towards restructuring the higher management levels in the country - Gosplan (the State planning board), the Ministry of Finance, the banks, district ministries and institutions, and others. This preparatory work has now been completed for the most part. A new stage in restructuring the economy is now under way - introducing and putting into practice the new economic system. The law on state enterprises has been in effect since 1 January 1988. With it, under the term economic transformation, a new system of management is being set in place and from now on, this transformation will be implemented to a growing degree on the basis of economic considerations. During the first 3 years of the (current) 5-year plan, the multi-faceted restructuring (perestroika) of the economic system was conducted using former administrative methods which, understandably, limited the chances for success.

Economically-speaking, what have we achieved and where have we failed during these past 3 years? What are our short- and long-term tasks? The answers to these questions were given at the XIX All-Union Conference of the CPSU, in which I was honoured to have taken part. The conference appraised the achievements with self-criticism. Stock was taken of what had in effect been done, but more significantly, the emphasis was put on hitherto unused resources and opportunities. Errors and blunders made in the course of perestroika were analyzed. To put our achievements in a nutshell, we could say that we pulled our economy out of stagnation and a "pre-crisis" situation, and skirted the brink of an economic abyss, caused by the years of stagnation. However, a definite break with the past has not yet been achieved. The positive trends are not yet irreversible. We have achieved far less in 3 years than we might have but we are not discouraged by these results and we do not intend to let up on our efforts. On the contrary, we must muster together

- 8 -

all our energy and means to make a definite break with the negative trends so that the restructuring process will indeed be irreversible. The resolutions of the XIX All-Union Party Conference have set us on this course. Now let's move on to specific restructuring aims. There are three cardinal points: the first is a sharp turn towards consumer-oriented development of the national economy, towards priority for addressing all problems related to improving the standard of living of the population. The second is to set the national economy on a course of intensive development, above all on a basis of radical acceleration of scientific and technical progress. The third, finally, is to introduce fundamentally new forms of management. The latter is currently the most important goal, since breakthroughs in social reforms and in the intensification of the national economy depend, to a decisive degree, on the management system.

I shall begin with the first point, since it is precisely this which defines the global aims of the restructuring of the management system. First of all, it must be said that the living standards of Soviet citizens and the degree to which their needs are satisfied do not, by far, correspond to the industrial power and the level of development of science and technology and education achieved by the Soviet Union, one of the major and leading states in the world. Our people deserve a much better life than the one they have now.

We fell by the wayside gradually in dealing with social problems. Initially, this was due to the fact that as a result of a series of objective reasons, resources were redistributed primarily for the development of heavy industry, strengthening our country's defence system, or rebuilding those sectors of the economy destroyed by the war, and so on. It later became apparent that we had fallen behind in resolving social matters first and foremost because of the negative trends in economic development, which had clearly emerged in the past 15 years. Reference here is made to a sharp drop in economic growth rates, when at the end of the 10th 5-year plan, at the threshold between the 1970's and 1980's, our development reached a point of stagnation causing "pre-crisis" phenomena in the economy. This had a particularly adverse effect on the social sector because the previous leadership, in an attempt to curb the deterioration of the economic situation, opted for a significant redistribution of resources from the social to

- 9 -

the industrial sector of the economy. Resources for social purposes were allocated
according to the so-called "leftover" principle. Consequently, by the mid-1980's,
social indicators showed the country to have taken a step backwards with respect
to the years 1960-65.

Let's talk facts. The most urgent social problem at present is housing. By the early 1960's, we were building 2 million apartments and 100-110 million square metres of living space were made available in a 12-month period. The Soviet Union led the world in the number of apartments being built per thousand persons, which was only natural since we had been in last place among the developed countries as far as housing construction was concerned and we had a lot of catching up to do. In 1960, 23% of all capital investment in the USSR went towards housing construction.

What has happened since then? The Soviet Union has become one of the few
countries in the world to have reduced the area of housing built per thousand
people since 1960. In 1985, as in 1960, we built 2 million new apartments, but the
population had grown considerably in the same period and for this reason, the area
of housing per capita fell. Today, as we move into the final quarter of the 20th
century, 17% of Soviet citizens still do not have an apartment or house of their
own, and half of the apartments and houses in the country, particularly in rural
areas, do not have the necessary utilities. A roof over one's head has always been
and remains one of man's most cherished aspirations, so our first task in resolving
social problems was to overcome this stagnation in the housing field. This was not
easy because the construction industry was also lagging behind, people had simply
resigned themselves to the fact that the bulk of resources were allocated to indus-
trial construction, at the expense of housing. This is why we first had to fight
this notion that housing was the last concern, to mobilize reserves, and on the
whole, we have been successful. For the first time after many years of marking time,
the volume of housing constructed increased in 1986 and even grew substantially to
2.2 million apartments or 118.2 million square metres.

- 10 -

The volume of housing built also rose substantially last year. In 1987, 2.3 million new fully-equipped apartments were available for vacancy, offering an overall living area of 129 million square metres.

This upward trend didn't emerge overnight - it was due to accrued capital investment in housing construction and to the decision to re-redistribute up to 10% of industrial capital for housing and social-consumer purposes.

It is certainly not easy to make a breakthrough in housing construction rates. At the same time, the construction of schools rose by 1.7, in anticipation of the near future, when children will start school from the age of 6 and the second half-day stream will be eliminated. Construction of nursery schools and kindergartens must be increased by 1.5-twofold, so that the needs of the population in these kinds of services may be fully satisfied in the years to come. Construction rates and the openings of polyclinics and hospitals have grown nearly 0.15 times. And this growth in volume of various types of construction is carried out by one and the same contracting system. This explains why we must make wide use of the direct labour method and create housing developments for young people, encourage private construction workers and extend cooperative construction practices, that is to say to employ the widest possible means in order to solve the housing dilemma as rapidly as possible.

It is imperative that we produce 3 million new apartments annually by the beginning of the 1990's, meaning that current construction rates must be increased one and a half times, with simultaneous improvements in quality, gradually arriving at construction of the best possible equipped living space.

In conformity with the resolutions of the XXVII party congress, by the year 2000, the population will have at its disposal no less than an additional 40 million individual apartments or houses - more than 2 billion square metres of well-equipped

Trans.

* Currently, children in the USSR start school at the age of 7. Owing primarily to a shortage of classrooms, the school day is divided in two to allow two groups of children to use the same premises. Thus, children attend school either in the morning (from 8 am to 1 pm) or in the afternoon (from 1 pm to 6 pm).

- 11 -

[lc]

living space. That is half of what we have now. To achieve this would mean that by the end of the 1990's, each family would have its own apartment or house.

The food situation presents another very serious social problem. Not only is the consumption level of meat products low in comparison to that of other developed countries - 62 kilos per capita per year, whereas the figure is 75-80, and as much as 85 kilos, in other countries - but, according to estimates, the Soviet Union also lags behind most other countries in the consumption of milk and dairy products, of which it offers only a small, generally low-grade, variety.

The Soviet Union also seriously lags seriously behind other countries in the consumption of heat-loving vegetables, particularly during specific periods of the year. Soviet people eat only half the fruit intake prescribed by doctors, which has an especially adverse effect on the health of children. In a word, we must arrive at an immediate and radical improvement in our food habits.

Another problem is caused by the fact that one quarter of the meat we eat is produced on imported seed - during the last 5-year plan, we bought several tens of millions of tons of fodder per year, more than the Ukraine and Kazakstan together produce for the state.

We must therefore improve not only our consumption habits but put an end as soon as possible, namely by the early 1990's, to the mass import of food products.

In this respect, we now find ourselves in a worse position than we were in the beginning of the 1960's, when the USSR was a net exporter, and not importer, of food. Judging by the income earned from those exports, the needs of the population were better satisfied then, especially towards the late 1960's when, following the March (1965) plenum of the Central Committee of the CPSU, the volume of agriculture rose by 21% in the course of the 8th 5-year plan. Then what happened? During the 9th 5-year plan, agricultural output grew by only 13%, by 9% during the 10th and by 6% during the 11th, while the population grew by 4%. That is to say that during the 11th 5-year plan, we didn't move ahead one iota, meaning that the volume of agricultural production per capita has remained virtually unchanged since 1978.

- 12 -

According to the 12th 5-year plan, agricultural growth rates are to be raised 2.5 times and the volume of production increased by 14.4%. Extremely serious measures have been adopted to enable this goal to be reached: agricultural investment policy has changed, the use and extension of intensive technologies has been emphasized, there has been a radical change in the agricultural management system, a new economic mechanism has been introduced, more and more land is being leased to families and collectives, greater resources have been redistributed to improve the storing, safeguarding and intensive processing of agricultural products.

Agricultural development reached a definite turning point in 1986-87, when volume rose by 9%. In comparison to mid-year indicators of the 11th 5-year plan, grain production rose from 180-210 million tons, meat production from 16.2 to 18.6 million tons, milk from 94.6 to 103.4 million tons (Trans. - presumably litres) and so on.

Unfortunately, since the USSR was obliged to reduce its imports of food products by half, a considerable share of this additional production went to making up for import losses and therefore could not be sold to the population.

When agricultural growth indicators for the perestroika years are compared to those covering the period of stagnation, the results are clearly positive. But they must be compared first and foremost to the needs of the population and be assessed in light of the tasks yet to be fulfilled. In this light, it is obvious that the food supply problem is far from being fully resolved and efforts must be stepped up if substantial progress is to be made in the industrial production of agricultural goods in the next 2 to 3 years. To this end, new measures for major capital investment in support of agricultural and food production have been taken, as well as for the development of agricultural firms, for the all-round extension of agricultural contracts and the social restructuring of rural areas.

The third social concern posing a problem is the health situation. The "leftover" principle by which resources were allocated for the well-being of the population has resulted in a progressive reduction of the share of national income apportioned for health programmes. This share is now less than 4%. (Other countries budget health programmes at 8 to 12%.) This explains why our hospitals and polyclinics are extremely poor medical facilities, lacking in modern equipment, effective medicines and suffering from rudimentary accommodation and underpaid staff, etc.

- 13 -

The deterioration of our citizens' health can also be attributed to the fact that in the interests of increasing the income share of the budget, during the past 20 years the production and sales of vodka have increased twofold and that of wine, fourfold. This has had a disastrous effect on the health of the male population in particular, and also explains why the largest gap between the average life expectancy between men and women was to be found in the USSR, where according to 1984-85 statistics, men live 10 years less than women. This is one of the lowest average life expectancy rates anywhere.

Over the past 20 years, growing alcoholism and declining health coupled with a drop in average life expectancy led to a rise in the general and infant mortality rates.

Yet in the recent past, in the early 1960's to be more precise, the USSR had reached a fairly good health situation. At the time, it had the lowest mortality rate in the world - 6.7 per thousand persons, and the average life expectancy rate was 70 years - as much as in Japan, where this rate is now the highest in the world.

Since then, all nations have made substantial progress in this area, while the Soviet Union, among all other developed countries, had poor mortality rates in 1985 - 10.6 and an average life expectancy of 68 years, with an infant mortality rate of 26 per thousand newborns.

For these reasons, a radical improvement in the health situation has become one of the most urgent social problems. Following the April (1985) plenum of the Central Committee of the CPSU, a whole series of emergency measures were adopted, so that the health situation of the population could be improved without delay. The first of these measures was to fight alcoholism. Economists, sociologists and health officials believe that the decline in alcoholic beverage sales by hal in the past 2 years (and in spite of the increase in home-brew, revealed by the sharp rise in sugar consumption), has led to a drop of 37%, during the same 2 year period, in the mortality rate of able-bodied men from trauma, poisoning and accidents. And this, according to specialists, had a immediate effect on all other health indicators. The mortality rate dropped from 10.6 to 9.7 per thousand persons and the average life expectancy rate rose on average during the past 2 years.

- 14 -

It is also important that medical staff has received a 30% pay increase. The health budget increased by 5.4 billion rubles (by one quarter) above the tasks set in the 5-year plan.

As regards other aspects of social development, we should first of all mention the comprehensive programme for increased production of consumer goods and the creation of a highly developed services sector. During the last 5-year period, the volume of payable services offered the public increased by 25% and this 5-year plan aims to increase the figure by 50%. We are currently doing better than the plan initially projected.

The production of consumer goods poses a more complex problem. Light industry is still working at an unsatisfactory pace. In 1986, production grew by only 2%, and last year's volume by 1.4%. The reasons for this are long-standing: the equipment used in light industry hasn't been renewed for decades and amortization periods have been surpassed by as much as 40%. A massive equipment renewal is required but the USSR is not in a position to manufacture the equipment needed.

Specific measures have been adopted to change this situation but changes cannot be brought about in only one or two years - more time is needed. All the more so when one considers that the production of consumer goods has obviously been given short shrift in our country. Judge for yourselves: capital investment is only 8% in this sector despite the fact that it provides 37% of our country's income. Priorities are now changing, however, and everything related to the well-being of the population is being given over-riding consideration.

The measures adopted in the last few years have given rise to significant acceleration in the development of light industry and the entire sector of consumer goods production. In the first 6 months of 1988, the volume of consumer goods manufactured increased by approximately 5%.

Despite this, we must continue to double our efforts, not only and not so much quantitatively, but above all qualitatively. The USSR produces a large number of consumer goods, yet demand still remains unsatisfied owing to the poor quality of the goods manufactured. Hence the need to import.

In other words, another current problem is to improve the quality of consumer goods. With this in view, a series of serious measures have been taken: the discount parameters for poor-quality merchandise have been set, attractive prices of new products have been introduced, but unfortunately, they are badly controlled and in my opinion, have caused an unnecessary rise in prices. Such measures, however, are not enough. In deficit conditions, when the consumer has little choice and cannot

- 15 -

really control the quality of the goods by the ruble, we resort to the use of
administrative control measures. They include, notably, a state quality control
system aimed to protect the consumer from poor-quality merchandise, which has become
widespread.

Consequently, a major effort must be exerted to satisfy the effective demand of consumers more fully since there is a large and dangerous gap between this demand and its material response.

The national education system, and schools in particular, are also in need of
assistance. An additional 11 billion rubles have been allocated to this sector in
view of the reforms still to be carried out. In particular, teachers have received
a 40% pay hike and the material and technical facilities in schools have been
strengthened. For the time being, however, no new course for education has been fore-
seen, no efforts have been made to combine studies with productive labour or to
introduce new and more interesting textbooks. Further progress and development
of school reforms appear to require additional sizeable efforts.

Still another social problem, concerning our 57 million pensioners, has seriously
deteriorated in the past few years. Thirty years ago, in 1956, we adopted the best
pension legislation in the world, providing for the earliest possible retirement age
anywhere. Since then, prices have risen, needs have grown, yet many pensions
have remained at a virtual standstill. Now our pension scheme has begun to lag
behind those offered in other countries if we look at pension benefits and the
pension/wage relationship.

In conformity with the directives of the Central Committee of the CPSU, a
draft bill for new pension legislation is now on the drawing board. Once it has
been examined by central authorities, this document, like other major bills of
legislation dealing with the standard of living, will in all probability be published
for a nationwide debate on the subject. This draft will provide for a significant
pension increase, include minimum and maximum benefit ceilings which, incidentally,
are extremely low in the USSR.

- 16 -

In general, a definite breakthrough in all social sectors is being charted out and the economy is becoming more social-oriented. The changes brought about, however, are laborious and slow. The psychological background and mentality of officials, coupled with the historical consequences of the planning system, all point first and foremost to increasing industrial power - still ultimately the top priority, with all other concerns taking only second place.

The changes in our spiritual life are tangible - we can see and feel how much more interesting and newsworthy our newspapers, magazines, television and radio programmes and films are becoming. Yet many Soviet families still do not feel that everyday life has changed all that much, although the standard of living is improving considerably. The conditions of a deficit economy and chronic delays in the production of food and consumer goods have created a definite "perceptibility ceiling". If there is not enough meat to go around, a production increase of 4% will still not be felt by the people.

The June (1987) plenum of the Central Committee of the CPSU set itself the task of ensuring that within the next two to three years, every Soviet family will feel tangible improvements in the food situation, in the availability of consumer goods and services, as well as in better health benefits, education and housing arrangements.

At the same time, it is clear that we must not consume more than we produce and ultimately, social problems can be solved only if we work effectively. It is therefore extremely important that perestroika strives to enhance effectiveness and intensify the national economy. Furthermore, future social and economic development must take place in conditions of fewer resources. Why?

Our labour resources are limited owing to post-war demographic problems. Generally, over a 5-year period, the population of able-bodied persons increased by 8-12 million, but in the 7th 5-year plan, the increase was only of 4 million. The rise will be slightly greater in the 8th and 9th 5-year periods, but on the whole, by the year 2000, the average rise in the able-bodied population will be approximately 8 million less, than in the past 15 years.

- 17 -

This decline in labour resources and hence labour force will have to be compensated for by an additional increase in productivity and greater effectiveness. In addition, growth rates will have to be doubled to make up for the cut in resources and to guarantee acceleration. This means that already in the 7th 5-year plan, labour productivity growth rates will have to increase by one and a half times, and yet again by one and a half in the 1990's. By the year 2000, the general volume of production is expected to double and the productivity of social labour must increase by 2.3 to 2.5 times.

Moreover, we must move people currently working in commodities to the urgent services sector, thus solving the staff shortage in the health sector. There must also be a sizeable increase in the number of workers in schools and child educators in nursery schools, to cut down the teacher-pupil ratio and to allow children to begin their schooling from the age of 6 years.

The USSR is currently the world's leading producer of fuel and raw materials, both in bulk and in many other forms. The USSR extracts more than 5 billion tons of fuel and minerals per year, works 15 billion cubic metres of soil and fells 2 million hectares of forest.

It is obvious that such large-scale activity, or more appropriately interference with nature, causes the depletion of the best deposits and fields, obliging us to dig deeper into the soil and to push fuel and mineral projects further west and north. This is a highly costly operation. Growth rates in the mining industry are slowing down and the growth in fuel and raw materials extracted is decreasing. The volume of resources extracted in the past 5 years was 8%, as compared to 25% during the 9th 5-year plan.

It is time we started saving resources, it now being far cheaper to economize a ton of fuel than to produce it. For this reason, the 12th 5-year plan proposes to satisfy two-thirds of the demand for fuel and material resources by economizing and decreasing expenditure.

- 18 -

The relationship between capital investment and productive capital is also evolving. Our slow growth rates and the low savings of our national economy have cut capital investment growth, which was at 42% in the 9th 5-year plan, 28% in the 10th and 17% in the 11th. The growth of fixed productive capital has dropped accordingly: 30% in the 12th 5-year plan from 37% in the 11th 5-year plan and with still larger figures prior to that. Conclusion: we must learn to make better and more effective use of fixed productive capital and capital investment, both of which are much-needed to implement the social programmes and large-scale restructuring programmes already set. Where will these resources come from?

One source is to accelerate and achieve greater effectiveness in production. In the past two years, we have succeeded in increasing the growth of labour productivity in all sectors of the economy. From 1979 to 1985, the growth of labour productivity in industry hovered at 2 to 3%. In 1986, it moved up to 4.5%. In 1987, due to a slackening of the pace in January and February, when labour productivity in industry remained stationary, the annual average growth rate was about 4.1%.

Neither has the recent past been very favourable for returns on fixed productive capital: figures decreased on an average of 3% yearly, which is most undesirable for the economy. This decrease slowed down for the first time only in 1986 - returns decreased by only 1.3%. Our task is now to stabilize returns during the 13th 5-year plan and to aim for an increase in the following 5-year plan.

We therefore have some positive developments in this area as well, although there is still a long way to go towards making a radical improvement. The groundwork for such an improvement does not yet exist, consisting, as it does, of refurbishing technical resources, which is being undertaken only now, and implementing a new management system, to which we are now converting. For the time being, acceleration is progressing on the basis of time factors, namely better management, improved discipline, order and responsibility, additional incentives, etc.

Briefly, in order to implement the achievements of the scientific and technical revolution, we must first of all refurbish our technologies. In 1985, only slightly more than 3% of domestic machine-building production was refurbished, which is inadmissibly little. Yet there has been a breakthrough: in 1987, 9% of machine-building facilities were refurbished.

- 19 -

The task before us now is to refurbish an annual average of 13% by 1990. This means that 13% of the machines and equipment used in production will be withdrawn from it and replaced by the same percentage of new elements. On the whole, according to 1985 figures, some 70% of the machinery and equipment produced did not satisfy modern requirements. Their manufacture must be halted. According to our calculations, such an all-encompassing and fundamental renewal of equipment will require (no less than) seven years.

Refurbishing equipment alone is not enough, however, The new elements must be 1.2 to 2 times more productive and reliable than their predecessors and have a reduced metal content of 12-18%, according to a requirement put forward at the XXVII Congress of the CPSU. Only in this way can accrued effectiveness be guaranteed. Were the new elements to be no more than a superficial touching up of the old, no additional benefit could be derived from them.

Outdated technology cannot be expected to give us modern new equipment; consequently, new machine-building technologies are required. To this end, a programme is already being implemented for the accelerated restructuring of this branch of industry. If during the last 5-year plan alone 1.8% of machinery and equipment was renewed at plants in operation, this 5-year plan aims to renew 8-9%. To achieve this, new machinery is a must. Where is it to come from? Considerable sums have been allocated for lathe-building, and the production of equipment at ministerial tool-building enterprises is expected to increase fourfold. Reduced imports of food and metals have paved the way for increased imports of new equipment, mostly from socialist countries but also partially from capitalist countries.

The new equipment will be used in two shifts, and unique elements as much as three shifts, to guarantee maximum productivity. Here again, sizeable capital investment is needed.

In the last 5-year plan, the volume of capital investment in machine-building increased by 24%, and must increase by 80% in the current 5-year plan. Capital investment in this branch is in fact growing even faster. Unfortunately, the plan for re-building and introducing new power into this branch was not fully realized.

- 20 -

In general, the machine-building industry is experiencing difficult times: the goods manufactured and the equipment producing them are changing, the volume of production has dropped at many plants, contracts are not fully executed, sub-contractors breach their contracts, etc. All of this must be overcome so that the machine-building industry may be fully restructured. Our strategy is to start mass production of new machines at refurbished plants and to carry out a large-scale, fundamental technical reconstruction of all the sectors of the national economy on that basis.

These are two of perestroika's cardinal points - a socially-oriented and scientific and technical programmes. Only a general and harmonious development of both social and scientific and technical factors will allow perestroika to make any progress.

The third cardinal point of perestroika involves a radical reform of management practices. As of 1 July 1987, the law on individual (private) labour activities came into effect, as did the law on state enterprises (combines) on 1 January 1988 and the law on co-operatives on 1 June 1988. Since the beginning of 1988, 60% of all industrial production is being transferred to a profit and loss accounting and self-financing system. In this respect, the preparatory stage for the radical reform of management practices has, for the most part, been completed and the most difficult and responsible stage of putting the new laws governing economic life into practice has begun.

We have set ourselves the task of transferring the entire national economy to a new management basis in the next 3 years - 1988, 1989 and 1990 - so that the next 5-year plan, beginning in 1991, can begin with an entirely new comprehensive economic system in place.

The new transitional period for management began with the transfer of industrial enterprises to a profit and loss accounting and self-financing system. The idea behind this is to move to an economic management system with a developed market, convertible currency, a financial-credit mechanism, and strong material labour incentives. To this end, under the new management system, the law has provided for far-reaching autonomy for state enterprises. They need no longer subscribe

- 21 -

[c]

to state loans and the state, in turn, no longer pays their debts. Enterprises will operate fully on a profit and loss accounting, self-financing and self-management system. Their autonomy will be limited during the transitional period, however, and particularly in 1988, primarily because the transfer to a new economy is taking place in the middle of a 5-year plan, while the goals set by this plan remain in effect. They were set under the former management system and did not include self-financing. These goals are not simply registered on paper, they are brought to life by the allocation of funds from the budget under the former system to enterprises for their development, reconstruction and so on. The funds thus allocated have already gone towards the construction of machines or new equipment and therefore these considerations must be taken into account to one degree or another when setting economic standards and placing state orders.

Another restraining element is the fact that the transfer to a profit and loss and self-financing system for enterprises is being implemented while the old system of price-fixing is still in effect and this system does not guarantee that the interests served are shared by both enterprises and society. In is impossible to rely on these prices in production and production orders since the prices for many commodities needed by society are currently set at a deficit. And, on the contrary, an entire range of outdated products, which should be taken off the production line, has proved to be economically advantageous for the enterprise. Pricing and price-fixing reforms as a fundamentally important task of social management reform have been scheduled, as you know, for 1989-90.

With the old prices still in effect, it is not possible to make sweeping changes in the centralized supply system of material and technical resources, to replace it with wholesale trade and hence, during the transitional period, enterprises are limited in their use of resources. In this respect, during the transitional period, the state is obliged to place more orders so that it can retain direct administrative control of the quantities and standards of the most essential goods in production. On the other hand, instead of setting uniform economic standards for all enterprises, a new practice has been adopted in most branches whereby standards are set individually for each branch, in conformity with the tasks set by the 12th 5-year plan. In 1988,

- 22 -

the transfer of enterprises to the new economic system was carried under the aegis
of old institutions: Gosplan, Gossnab (State supply board), the Ministry of Finance
and other centralized administrative agencies and branch ministries. The functions
and structure of these institutions were transformed and cut considerably - on an
average of 40% - several months ago, once the 1988 plan had been worked out.

All of these developments have left their mark on the management system
introduced in the enterprise in 1988. State orders for industrial products were
increased by 90-100% according to branch, and the orders were established at the
ministries to which the enterprises were directly responsible. The new form of
state orders contained relics from former directive practices. Indeed, the way in
which state orders were formulated differed little from the way in which allocations
were made to the address plan* in the past: orders were handed down from above.
Similarly, ministries were given the right to set the economic norms governing the
share of enterprise profits tax to go to the state budget, to ministry funds and
to various other funds. Only the Ministry of Chemical Machinery ventured to work
out a special tax scale and uniform method for arriving at the required calculation.
Other ministries set norms for each individual enterprise, on the basis of the tasks
outlined in the 12th 5-year plan. As a result, the enterprises with the best turnover
were penalized and had a share of their profits levied in favour of less productive
units. The latter were exempted from paying for raw materials and their share of
profit tax to be paid was reduced considerably. In other words, the former ill-advised
practice of redistributing means from profitable enterprises to non-profitable ones
was retained. Bearing in mind that wage-fixing norms were not particularly successful,
since they did not encourage resource savings and once again, put profitable enter-
prises in a worse situation than non-profitable ones, it is clear why such economic
practices did not generate fundamental changes in production effectiveness and quality.

Trans.
* The address plan refers to enterprises or large works having a line or place in the state plan.

- 23 -

This administrative manner of transferring enterprises to the new economic system was criticized at the XIX party conference and measures have been taken to limit, in 1989, the share of state orders emitted to approximately 60%, whereas the rights of ministries in establishing state orders will be curbed considerably. On the basis of the lessons learned in 1988, economic norms will be set for those industrial branches, which will transfer over to the new economic system as of 1 January 1989. In an ever-growing number of enterprises, the wage-fixing fund will be established on the basis of production indicators alone, which should strengthen resource savings.

All of this and much more will serve a more faithful application of the law on enterprises. Fully consistent application of the law on enterprises will be implemented in the 13th 5-year plan. The concept of that plan is now being formed. It will be the first 5-year plan conceived on the basis of an entirely new economic system, which means that even in the drafting stage, individual economic norms for enterprises and management offices will be set according to new prices. The law governing state enterprises provides for two types of profit and loss accounting. The first type defines the wage-fixing fund according to standards and economic results with an additional material incentive fund supported by profits. The second type sets no standards for the wage-fixing fund, which will be set up on the basis of output, both profitable and non-profitable. In essence, the second system means transferring the enterprise or economic agency to a collective contract and it is clear that this system contains more encouraging incentives to increase the effectiveness of the enterprise and to achieve higher end results. Nevertheless, in the first stage of perestroika, the overwhelming majority of enterprises were transferred to the first type of accounting system and incentives for self-development proved ineffectively weak. At the same time, as an experiment, a whole series of enterprises and even branches of the economy were working on the second type of accounting, which was adopted as of 1988 in many industrial combines responsible to the Ministry of Geology. The first year of work showed that labour productivity had increased by 26% and the average wage by 12%.

- 24 -

Also, the plan was overfulfilled according to all indicators. The USSR is now experiencing a powerful movement by small collectives and families wishing to acquire collective leasing contracts. Thus, the collective consolidates the means of production which it uses in the manufacturing process and which it leases. The volume of means thus acquired depends directly on the results achieved. The means are distributed by the partners democratically, with decisions taken by general assemblies of the collective or by a soviet elected by it. All of this encourages implementation of the second type of accounting system in future. This is a crucial time in the economic reform process - the new pricing system is being overhauled. The aim is to draw domestic prices in the USSR much closer in line with those on world markets. This calls for a significant increase in our wholesale prices for fuel and raw materials, as well as state retail prices for bread, meat and dairy products. Incomes would be raised to make up for the drop in state subsidies and to prevent a decline in the standard of living of the population as a result of pricing reforms. Changes in the price-fixing system are also scheduled to take place - to reduce the share of prices fixed by the state and to increase those set freely or by contract.

Plans have already been made to complete the transfer from a centralized material and technical supply system to a multi-branch system of wholesale trade of the means of production during this 12th 5-year plan. Aside from setting new prices, the transfer will also be eased by a restructuring of the financial and banking sectors, which will allow for the issue of surplus currency to be halted.

A substantial reform of the banking sector has been implemented in recent months. A new banking system has been introduced in the USSR, comprising five specialized banks: an industrial-development bank, an agrobank, a housing and social service bank, a savings bank and a foreign trade bank. All these banks have already set up their branches. Under the new system, the state bank of the USSR retains its role as the emissary core of the country and becomes the "bank's bank", no longer dealing with indirect credits for clients, as in the past.

- 25 -

Cooperatives have also been licensed to set up their own cooperative banks. The banking reform is now being consolidated and banks are preparing to transfer to a profit and loss accounting and self-financing system. In our view, specialized banks will be restructured into commercial banks. In time, each enterprise and organization will have the opportunity to choose which bank it wishes to deal with, which will make the banks more competitive. Under the terms of profit and loss accounting, banks will be more selective in granting credit and will be able to increase their funds with profits, thus developing by themselves.

One of the most important inherent radical management reforms involves the change in function of structural and higher-place management bodies. The previous administrative system created an inflated, heavy bureaucracy, which has ✓ no place in an economic system. For this reason, a radical transformation of ministries, departments and local bodies has been undertaken: their functions are changing, obsolete management offices are being liquidated and the management system is being cut down on the whole. Almost simultaneously, the middle management apparatus known as "glavk", an intermediary between ministries and enterprises (combines), is also being reduced. An attempt was made to simply rename this management agency "State industrial combine (GPO)", instead of cutting it down, but fortunately, those advocating a restructuring of the management system caught on to this in time, and this was prevented. Branch ministries must be transformed into economic-planning and scientific and technical headquarters for their region and refrain from engaging in operational functions in industry. These have been taken over by industrial combines. Owing to the changeover to an economic management system, the structures of Gosplan, Gossnab and the Ministry of Finance are being reorganized. Their numbers, like the number of ministries, are being reduced by 30-40%. The management apparatus in the republics is being reduced still further, ✓ by 50%. The importance of local management bodies is on the rise, but the new economic management system does not require as heavy bureaucracy as we had in the past, and consequently their numbers are also being cut.

- 26 -

At the same time, there is a wave of voluntary merging of enterprises into concerns and associateships in the country. The same is true of cooperatives. In Leningrad, to take one case in point, the first concern combining power and electrical machine-building enterprises has been established. These enterprises were formerly responsible to ministries. It appears that this trend will grow. In general, the new economic conditions have encouraged economic leaders to act according to a principle clearly enunciated in the Soviet Union: "Everything is allowed, except that which is expressly forbidden by law." In particular, individual state enterprises have begun, on their own initiative, to issue shares and bonds and to extend them to other enterprises and with their collectives. A resolution is being prepared in this respect which would allow such practices to develop and permit the creation of a securities market in the USSR. The cooperatives are especially active in this respect - they now number some 19,000 but this, we would like to think, is only a modest beginning. Cooperatives are springing up in every branch of the economy - in industry, construction, transport, among the intelligentsia, trade and services and, of course, in agriculture. We are aiming for a powerful cooperative sector in the economy, which will be actively represented on the market. The law on cooperatives gives them far-reaching freedoms in their activities. They may freely choose the goods and services they produce, they are managed democratically, they are free to issue shares, merge with other cooperatives, set up their own banks, and so on.

I wish to mention that during the nationwide debate on the law on cooperatives, the Ministry of Finance prepared, in secret from public opinion, a draft decree on the taxation of cooperatives. The law on income taxes for cooperatives was adopted with singular force of purpose.

The Presidium of the Supreme Soviet thus adopted this decree without discussing it with specialists or the cooperatives themselves. Once the decree had been published, public opinion rallied behind the cooperatives in their opposition to the decree. The Supreme Soviet was swamped with petitions to revoke the decree and the public succeeded in winning its case. The Supreme Soviet of the USSR did not ratify it and the issue of taxing the cooperatives is now back to square one, but this time, the opinion of cooperatives and the public will be sought.

- 27 -

Another important aspect of the radical management reforms undertaken concerns foreign trade relations and the economic mechanism which governs them.

As this brief overview shows, the restructuring process is far-reaching and diverse. In some areas, like housing for example, we have made great progress while in others we still lag seriously behind (i.e. in resource-saving or the full-fledged transfer to an economic management system). Looking back on the past 3 years to assess the situation objectively, we can see how our ways of thinking have evolved and how far ahead we have come both in deed and particularly in the plans we have made. During the period of stagnation, before perestroika, the worst possible insult for an economist was to be charged with advocating "market socialism", the very word "market" was virtually unpronounceable and such concepts as shares and convertible currency were simply considered incompatible with our society. The idea of self-management was a four-letter word, if I may use the expression, and the leasing contract was viewed as a step back to pre-revolutionary Russia. And now this is all being implemented not only in word but in deed. We have come a long way in the past 3 years, we have changed and now from different and loftier positions we can be more selective and self-critical when analyzing what has been achieved. This new assessment, standing where we do today, shows that we have in fact accomplished little, that perestroika is progressing slowly, that the fruits of this process are still not tangibly felt by many Soviet citizens, who are not yet actively participating in these developments. Why is this so? I think there are three kinds of factors which might explain why in the past 3 years we have not been able to bring about sweeping changes in the restructuring of the economy and have not succeeded in making perestroika irreversible.

Firstly, the abyss of stagnation, out of which we are scrambling has proved to be much deeper than originally thought. The forces of inertia, rooted in the old system, in the old ways of thinking, were also stronger than expected and they have the effect of chains holding back a developing economy.

- 28 -

It is my belief that in the course of perestroika, we grossly underestimated the financial deficit we had inherited. During the first two years of perestroika, insufficient measures were taken and in many ways we continued along the traditionall beaten path in an attempt to alleviate the disproportions discovered. Unfortunately, we were not successful in doing so. Moreover, in my opinion, a serious error was made by slapping a second price hike on wine and vodka. We got off to a good start in the campaign against alcoholism, beginning with the publishing of the appropriate resolution on 17 May 1986. The campaign quickly took on nationwide proportions and in the first year, the consumption of wine and vodka decreased one and a half times. Typical, that at the same time, the production of home-brewed alcohol also decreased, as revealed by the statistics on reduced per capita sugar consumption by 2-3 kilos annually. Subsequently, wine and vodka prices were raised a second time while the number of outlets selling the spirits were reduced. In many areas, the volume of sales was restricted by administrative measures. These were secret measures, adopted without any serious thought or discussion. As a result, the production of home-brew skyrocketed and the per capita consumption of sugar jumped to 4-5 kilos annually. Wine and vodka sales decreased by a further one third, but this was offset by an increase in home-brew. The state virtually forfeited its monopoly on the production of wine and vodka and consequently lost some 8-10 billion rubles per year in income. This further exacerbated the budget deficit and the nation's balance of payments. Added to this were the consequences of lower prices for oil and other types of fuel and raw materials, which were the USSR's primary export commodities to other countries. In value terms, a 9% drop in exports in 1986 and a further 2% drop in 1987 resulted in a curb on imports. Unilaterally, imports of consumer goods were reduced to a significant degree, which only worsened the financial imbalance.

The problem appeared to have been recognized and at the June (1987) plenum of the Central Committee of the CPSU a directive was handed down, registered in its resolutions, on the working out of a special programme to ensure financial balance.

- 29 -

One year has elapsed since then and no such programme has been either worked out or confirmed. Crucial and extraordinary measures are needed to solve this problem. This financial imbalance, both with regard to the financial situation of enterprises and to the deficit caused in the trading of consumer goods and services is one of the major factors holding back perestroika. The quicker we solve this problem, the sooner we can switch over to economic methods and incentives - the driving force behind our accelerated development.

In short, putting right the deformation of the socialist economy which transpired during the long reign of Stalin and the subsequent period of stagnation has turned out to be a much more difficult and painful task than originally thought. Secondly, opposition to the main force behind economic restructuring, namely management reforms, is far stronger and tenacious than expected. Unable to obstruct the development of the new type of economy, based solely on economic considerations, opponents have succeeded in extracting compromise in specific legal documents, in the wording of individual articles, which were purposefully left ambiguous (for example, articles on state order, on economic norms and others, in the law on state enterprises and many articles in the law on non-earned incomes, which interfere with individual labour and cooperative activities). Using this, they have succeeded, at least with regard to the plan for 1987, in inserting in the new formulation of state orders the old ways of the administrative system: a plan ordered by the all-powerful ministries. In a number of ways, they are still capable of paralysing the self-management system of enterprises, which in many instances is only official and not yet operational. Thanks to glasnost, it was possible to unmask the forces opposing perestroika, to uncover errors committed, and to take stock politically at the XIX party conference. The situation is now improving. Confidence in future victory has been inspired by last year's success of the progressive elements in society in putting down a project to re-route all northern rivers southward and by this year's reversal of the decree on taxing cooperatives. The law on cooperatives, which contains little compromise, few ambiguous provisions and is more in line with perestroika policies, is one of the greatest achievements of this past period. Who is against perestroika? Obviously a segment of the management apparatus and above all, those who, as a result of perestroika, will lose their

- 30 -

right to issue orders to enterprises under their authority, and hence will lose
their privileges. Another category to beware of are backward executives, afraid of
greater independence and of having work collectives participate in management,
thus playing a more important role in the enterprise. They have joined forces with
the management apparatus in their fight against a range of innovations. Finally,
not everyone is happy with the new direct relationship between wages and perfor-
mance, now established owing to perestroika. Many people are accustomed to the old
ways by which they were paid whether their work was satisfactory or not. In particu-
lar, state quality control offices at individual enterprises exposed the widespread
output of poor-quality merchandise, for which workers were nonetheless duly paid.
Now, for the same wages, unsatisfactory goods must be improved upon. Obviously,
this is not to everyone's liking. This, of course, refers to a minority of workers,
but they do exist. In their own way, alcoholics, one of the targets of the movement,
as well as plunderers, thieves of socialist property, speculators, whose who take
bribes and use their positions for personal gain, and other anti-social elements
also oppose perestroika which "scorches the earth under their feet". They will
resort to anything to survive.

Thirdly, the measures adopted for the transition to a new kind of economy
were not radical enough to shake off the forces of inertia and hindrance and to put
a quick end to the yoke of the administrative apparatus. New management concepts
were not formulated quickly enough and the first steps towards implementing them
were too feeble.

The XIX party conference doubled and even tripled the strength of perestroika
advocates. Perestroika in the economy has been reinforced by the decisions taken
on political and legal reforms. The resolutions adopted by the conference on
glasnost, on the struggle with bureaucracy, will clear the way for a more effective
restructuring of the economy than we have achieved to date.

Our society has no alternative to perestroika. As comrade Gorbachov said,
"There is no turning back.", and we are filled with optimism as we look and move
forward, freeing ourselves ever more of the old fetters and chains.

(Signature)

12 July 1988

[LC]

Andrew B. Somers

An American Express company

TRAVEL
RELATED
SERVICES

OCT 6 - 1988

October 3, 1988

To: J. D. Robinson III

Re: USSR - Aganbegyan

Attached is Aganbegyan July '88 analysis of
Soviet economic reforms, which you said you
might want to send to Henry Kissinger.

Andrew B. Somers
Deputy General Counsel

5827J/14

United States Department of State

Washington, D.C. 20520

OCT 1 1 1988.

ELLIOTT ABRAMS
ASSISTANT SECRETARY OF STATE
FOR INTER-AMERICAN AFFAIRS

DEPARTMENT OF STATE
WASHINGTON, D. C.

(202) 647-9210

Elliott Abrams is Assistant Secretary of State for
Inter-American Affairs.

He was born in New York City on January 24, 1948. He received his B.A. degree from Harvard College in 1969, a master's degree in International Relations from the London School of Economics in 1970, and his J.D. from Harvard Law School in 1973.

Mr. Abrams is an attorney who has practiced in New York and in Washington, D.C. He spent four years in the 1970s working for the United States Senate: as Assistant Counsel to the Senate Permanent Subcommittee on Investigations in 1975; as Special Counsel to Senator Henry M. Jackson in 1975-76; and as Special Counsel and then Chief of Staff to Senator Daniel P. Moynihan from January 1977 to June 1979.

In January 1981 Mr. Abrams became Assistant Secretary of State for International Organization Affairs. In this capacity he supervised United States participation in the United Nations system.

On December 10, 1981 he was sworn in as Assistant Secretary of State for Human Rights and Humanitarian Affairs, where he served until assuming his present position on July 17, 1985.

In August 1988 Mr. Abrams received the Secretary of State's Distinguished Service Award for his work in the Department.

Mr. Abrams lives in Washington, D.C. with his wife, Rachel, and their three children.

Discussion Draft, October 19, 1988

STRATEGIES FOR DEVELOPING COUNTRY DEBT

by C.E. Ritchie, The Bank of Nova Scotia

James D. Robinson III, American Express Company

Charles Sanford, Bankers Trust Company

A remarkable degree of consensus is building on three points regarding debts of less developed countries (LDCs):

First, LDC debts are a trade problem, a jobs and growth problem and a geopolitical problem, not just a banking problem. For these reasons, the governments of the industrial countries need to get actively involved in finding a solution.

Second, the current approach to resolving the LDC debt problem has helped, but it has not done enough.

* It has not restored the LDCs to economic prosperity and creditworthiness -- growth and development are unacceptably low, and new investment is sharply limited.

* It has not removed the cloud hanging over the banking system.

* It risks the progress that has been made toward democracy and market-oriented economies in Latin America.

* Debt fatigue is growing among both creditors and debtors.

Third, an essential element of the new approach must be, in addition to new credit, provisions for debt relief -- the negotiated, voluntary reduction of LDC debts and/or debt service through one or another of several mechanisms. The net transfer of resources away from the LDCs in debt service is crippling investment and growth, and sufficient new lending by banks to close the gap is simply not in prospect.

We believe the next step is to develop a new approach to the LDC debt burden that can link more varieties of financial support -- both new credit and debt relief -- to stronger and sustained commitments by the

-2-

LDCs to the market-oriented economic reforms that are essential to their
future economic health.

## General Principles

We believe a proper approach to the LDC debt problem should be based
on the following principles:

1. The ultimate objective is to restore access by the heavily indebted countries to credit markets on commercial terms by establishing the conditions for sustained economic growth.

2. There must be both the incentives and the disciplines to insure continuing implementation of sound, market-oriented government policies in the indebted countries. Debtors must act in good faith and not unilaterally repudiate their obligations.

3. There must be sufficient financial resources available to debtor countries to permit the productive investment needed for adequate economic growth rates, while reducing indebtedness indicators to levels consistent with a return to private credit markets.

Financial relief must be linked to structural economic reform.

4. There must be sufficient incentives to cause the principal creditors to cooperate in helping to contribute the necessary financial resources to the debtor countries, including debt relief when appropriate. Banks should not be expected to provide balance-of-payments financing indefinitely.

5. The soundness of the global financial system must not be compromised by the provision of financial relief to the LDCs. Existing debt should be enhanced and liquified if it is to be reduced.

6. An institutional mechanism supported by the industrial countries is needed to provide leadership and discipline, and to facilitate

-3-

negotiations between banks and debtor countries by recommending and
supervising programs of economic reforms in each debtor country, as
well as administering the linkages to new financing arrangements.
Such support by industrial country governments should not and would
not be a bank bailout, but instead the means for governments to
achieve critical economic and foreign policy objectives.

7. The evolving debt strategy must be flexible so that it can be tailored, case-by-case, to the widely different circumstances of debtor countries, and can respond to unexpected developments.

A New Strategy

The key to a successful strategy for LDC debt is reviving and
expanding LDC economic growth. Such growth requires more investment --
both foreign and domestic. It also requires sound economic policies.
Both are necessary; neither is sufficient.

We believe that comprehensive market-oriented structural reforms
adopted by the LDCs in exchange for meaningful financial relief -- debt
relief and/or new credit -- are more likely to establish the conditions
for growth than the current approach. Soundly based growth in turn
improves the creditworthiness of an LDC, and thus the quality of its debt
held by financial institutions. The objective should be to create a
reinforcing cycle in which financial relief provides incentives for
sticking to needed economic reforms, and those reforms provide the
climate for new investment.

The governments of the industrial countries must take the lead in
developing the new strategy. Banks alone cannot provide a linkage
between reforms and financial assistance, since they lack the expertise
and the political authority. Nor can the World Bank or the IMF create an

-4-

effective mechanism without the political and financial support of the
industrial country governments.

The governments of the industrial countries are already deeply
involved with the LDC debt problem, through development of overall
strategies, informal pressures on banks to increase lending to LDCs as
part of debt renegotiating agreements, and arrangements of bridge loans
and central bank swaps to implement such agreements. Tax and regulatory
policies in the different countries have also greatly influenced how
banks have responded to potential LDC loan losses.

The next step of the G-7 governments should be to sponsor and
support a strategy that can provide the financial relief from banks and
the incentives for economic reforms that are both needed to restore LDC
growth to adequate levels.

Encouraging Policy Reforms in the LDCs

To establish credibility and creditworthiness, the LDCs themselves
must make major policy reform commitments to improve the climate for
private investment and foreign trade and to improve budget and trade
balances. Such reforms are in their own self-interest, because they
provide a framework for growth and economic development.

A number of LDCs have already made good progress on the needed
economic reforms; in others, progress has been uneven or unsustained.
Everywhere, internal political resistance to reforms is strong and the
possibilities of backsliding are considerable, especially when rewards
seem distant and unforthcoming and debt service burdens are heavy. More
tangible benefits in the form of debt relief or sufficient new lending
would provide the incentives for the LDCs to "stay the course" on the
admittedly difficult structural reforms while providing the necessary
political appeal at home.

-5-

To be eligible for consideration for such benefits under the new debt strategy, LDCs must have already demonstrated commitments to market-oriented economic reforms, as well as good-faith efforts to service existing debts. Poor performance to date should not be accommodated. However, countries that resume debt service obligations and provide meaningful and substantive commitments to economic reforms would also be considered.

As part of agreements, the LDCs must take steps to accelerate market-oriented policy reforms, such as ceasing to overprotect domestic industries; privatizing inefficient state enterprises and encouraging private competition; improving the climate for direct foreign investment; and reducing budget deficits, reforming tax systems and maintaining realistic exchange rates. Agreements should also specify that the fiscal benefits of debt relief for an LDC should be channeled primarily into investment rather than current consumption in order to maximize the potential for growth in the LDCs. The agreements may also cover environmental policies, such as protection of rain forests, which have suffered in the push to increase export earnings.

To help ensure continuing commitments to economic reforms, any debt relief or new credit provided should be subject to suspension or limitation for poor performance by the LDC. In practice, debt relief would be difficult to withdraw except for egregious violations of agreed-upon conditions, because the poor performer would probably lack the capacity to pay more and so would likely default. (New lending that serves only to maintain debt service has the same limitation.) Thus, limits on new credit for investment and trade would provide the most effective ongoing discipline. IMF and World Bank loans, which would still be required, should continue to be conditioned on borrower

-6-

performance. So should new lending from commercial banks in the form of trade finance, private sector loans and project loans, which would also continue in most cases.

## Providing Financial Relief to the LDCs

One essential condition for reinvigorating LDC economic growth is sufficient financial resources for productive investment. Sharply reducing or reversing the current financial resource outflow from LDCs is critical to their future growth.

Sources of financial relief are many for LDCs that undertake appropriate structural economic reforms. The World Bank and the development banks can and should provide project and structural adjustment lending. The industrial countries can and should provide direct development assistance as well as development and trade credit. Private investors should be an increasing source of capital, and repatriation of flight capital may ultimately be a major contributor. And over the medium term commercial banks should continue to provide financial support to the LDCs. Banks hold most of the debts of middle-income heavily indebted LDCs, and they benefit or suffer most from improvements or deteriorations in LDC growth and debt service capacity.

Both the structure and the magnitude of financial support from the banks will be determined by negotiations, country-by-country, between the banks and the debtor countries. However, such negotiations should be based on objective assessments of financing needs for an LDC made by experts from the World Bank, the IMF, the banks, and the debtor countries. The assessments would be consistent with growth targets for the country; its economic outlook; its own internal resources (including return of flight capital); and the terms of economic policy reforms.

-7-

Considerations of financial relief should not be based on prevailing loan prices in the thin secondary market, which are subject to the moral hazard risk of countries deliberately depressing the value of their debt.

At least initially, the primary form of financial relief would be through a reduction in debt service on long-term non-trade debt, through one of several mechanisms. For most of the heavily indebted middle-income countries, adding debt to debt will not lead to enough economic growth or expanded exports to improve long-term capacity to carry the larger debt, and it will aggravate short-term debt service burdens. Nor will banks provide enough new lending voluntarily.¹ Indeed, one of the lessons of this experience is that banks should not be in the business of providing balance-of-payments financing to developing countries.

Nonetheless, some extension of new lending by commercial banks in the form of trade credit, private sector commercial loans, and project finance is both appropriate and likely. Such lending, which should be on commercial terms, would grow as an LDC's economic prospects and debt service capacity improved.

Expectations of new private credit are realistic despite the provision of debt relief, as long as the debt relief is negotiated, not unilateral, and conditioned on economic reforms. The improvement in the debtor country's economic performance and the quality of its debt as result of such conditioned relief more than offsets the minimal negative impact of negotiated reduction in the quantity of its debt service. As the recent report of the Economic Policy Council of the U.S. United Nations Association concluded, "If debt service reduction is carried out

1. As Horst Schulman of the Institute for International Finance said on September 13, 1988, "the demand for bank financing from the developing countries exceeds the capacity and willingness of banks to supply it." Quoted in *Investor's Daily*, September 14, 1988, p. 14.

-8-

cooperatively and voluntarily through negotiation and mutual agreement by
the principal parties, and has the desired effect not only of reducing
outstanding claims against the country but of aiding economic recovery,
then 'credit-worthiness' will come sooner rather than later."²

## A Menu of Financial Relief Options

No single kind of financial relief to the LDCs is right for all
cases since LDCs vary in their current creditworthiness, debt service
capacity, and growth potential. The poorest LDCs, particularly in
Africa, will need some debt forgiveness, both on bilateral loans as the
Toronto Summit established, and for the smaller amounts of commercial
bank loans to these countries. Less poor LDCs with large debt burdens
and troubled economies may require sustained debt relief in the context
of long-term economic restructuring. Those with bright long-term futures
but large debts may need temporary debt service relief or new credit.

Mechanisms for encouraging banks to extend the appropriate financial
relief are essential. Creditors will not otherwise spontaneously take
the initiatives to provide sufficient financing support to restore LDC
growth. The type of mechanism for providing financial relief should be
determined by negotiations between the banks and the LDC, but with means
for achieving full compliance once a general consensus has been reached
among the banks. Such mechanisms would not prevent banks from taking
losses, either through the lost revenue and reduced asset values from
debt relief or through the opportunity costs of lending at below
commercial rates. Instead, the mechanisms would set a floor under bank

2. Economic Policy Council of the United Nations Association of the United States, "Third-World Debt: A Reexamination of Long-Term Management," September 7, 1988, p. 39.

-9-

losses to avoid jeopardizing the financial system, and to assure
equitability of treatment among all creditors.

The following examples provide "a menu of financial relief options"
that fairly balance the benefits, costs and risks of financial relief
between banks, debtor countries, and developed countries. Different
options will be most appropriate for different countries as well as for
different creditors. For most countries, several options could be
offered simultaneously to creditors, subject to the conditions that
creditors be treated equitably and the magnitude of the total relief be
sufficient to materially improve the debtor country's prospects for
strong growth. After the appropriate amount and types of financial
relief are determined by negotiations with the banks and an LDC,
technical experts would structure the relief options to assure
comparability. Banks would be entitled to choose the particular
financial relief option from the approved package that best meets their
business goals with respect to the LDC.

Debt-to-Bond Conversions with Discounted Principal or Interest Rates:

Exchanging existing loans at a discount for new bonds issued by the
debtor country with suitable guarantees can improve the asset quality of
bank portfolios while reducing the LDC's debts and/or debt service.

Exchanges of this kind are attractive exit vehicles for banks, and can be
implemented relatively easily. Such an exchange occurred early this year
in Mexico, although that transaction revealed the limitations of such
swaps without interest guarantees or creditor government support.

As the recent report of the Economic Policy Council of the U.S.
United Nations Association recommended, the effectiveness of debt-to-bond
conversions would be greatly enhanced by industrial country, IMF, or
World Bank guarantees of some part of the bonds issued, for example,

-10-

several years' interest, or part of principal, or some of both. Recent proposals by both the Japanese Government and the French Government envisage some such guarantees. Banks would recognize a loss in the exchange because of the discount, but would gain a higher quality asset because of the limited guarantee. Limits on the guarantee would put caps on the financial exposure incurred by the industrial country governments or the international institutions. The extent of the guarantee could also be negotiated depending on the size of the discount.

**Debt Service Reductions with Insurance:** Another option is a period of interest payment reductions, with some form of insurance that the reduced payments are made. This proposal, which has been developed separately at the Bank of Nova Scotia and Bankers Trust, would reduce for a period of time LDC interest payments. The reduced payments would ultimately be insured by industrial country governments after banks either paid premiums for direct coverage or established a self-insurance pool. Finally, the principal of the loans would be addressed either by: 1) collateralization by zero-coupon bonds of G-7 countries and bought by the LDC or in its behalf by the IMF or World Bank; or 2) exchange of loans at face value for perpetual bonds with an insured coupon.

The objective of this approach, which is described in more detail in an Annex, is to keep the loans on the banks' books at or near face value, yet provide significant debt relief to the LDCs with a minimal and contingent role for the industrial country governments. Banks might find it particularly attractive for their loans to countries with good medium-to long-term economic prospects. After a "workout" period of several years, market rates of interest could be restored.

**Debt Purchase at a Discount by an International Facility:** The most detailed debt purchase mechanisms is that in American Express's proposal

-11-

for the Institute of International Debt and Development (or $I_2D_2$).

Under this plan, a new international facility would negotiate with the banks the purchase of a less developed country's debt at a substantial discount. In exchange, it would issue bonds and participating preferred stock to the banks. The bonds would be consols (perpetual bonds) paying a floating rate tied to LIBOR with a cap; the stock would provide banks a share of an LDC's debt service payments in excess of the facility's own financing needs. Because of the discount, the facility's own debt service would be less than the LDC's present debt service requirements, permitting significant debt service relief to a participating LDC, contingent on its adherence to a mutually accepted adjustment program.

This mechanism would be particularly attractive for banks that wish to exit term lending to a particular LDC, and yet retain a stake in its potential improvement. Some banks may choose this option for loans to countries with relatively good prospects. For countries with less promising medium-term debt service potential, the majority of banks with loan exposure might elect this mechanism. Moreover, the severity of economic and financial problems in such countries may well require a long-term approach that can be best provided by a semi-public institution.

**Debt Buybacks:** For poor African and Latin American countries with a high amount of bilateral debts, reduction of the principal of the loans is required. The relatively smaller quantity of commercial bank loans to these countries should receive similar treatment to the partial forgiveness already provided on some bilateral loans, with debt buybacks at a heavily reduced price providing the best mechanism. Such debt buybacks are already in place for Bolivia and Jamaica. Using funds from the G-7 countries to help poor LDCs buy back their debts at heavy discounts may be the next step.

-12-

The Need for An International Debt Reorganization Facility

To tie together the necessary economic reforms and the requisite
financial resources, an international debt reorganization facility backed
by the industrial countries is needed. This entity would provide the
leadership and financing for country-by-country negotiations between
banks and debtor countries on programs that combine appropriate financial
relief for each LDC with substantive commitments by that LDC to
market-oriented structural reform. It should have the authority to
negotiate with the LDCs the economic reforms to be followed, to determine
with experts from banks and the LDC the financial resources needed by the
LDC for growth and investment, and to provide the mechanisms for
encouraging necessary contributions from the banks through debt relief or
new credit. It should also provide ongoing incentives and discipline for
both banks and debtor countries.

This facility should draw as much as possible on the resources and
staff of the World Bank, the IMF, and the development banks such as the
Inter-American Development Bank. Indeed, it could be part of or an
affiliate of either the World Bank or the IMF. Probably the most
attractive arrangement would be to make the facility a joint activity of
the World Bank and the IMF, since the Bank is concerned with overhang of
debt as an impediment to long-run economic development, and the Fund with
LDC debts as a shorter-term balance-of-payments question. A joint
facility would encourage cooperation between two institutions with vital
complementary roles. A new facility would also have the advantage of its
own mandate, financing arrangements, and distinct powers.

Ample precedent exists for such a joint facility. One example is
the Development Committee of the World Bank and the IMF. Set up in 1974
as a "joint ministerial committee," the Development Committee has

-13-

authority to have an executive and a small staff, with funding as needed to come in equal proportions from the Bank and the Fund. The Boards of both institutions have ultimate authority. Approval of such an entity does not need to be provided by the member nations of the Fund and the Bank, so a lengthy creation process can be avoided.

## Developed Country Commitments:

For this new facility to operate effectively, it will require financial commitments from the G-7 countries above and beyond present commitments to the IMF and the World Bank. Such financial guarantees or contingent commitments from the industrial governments would bridge the gap between the LDCs' need for debt relief or new money and their commitment to sound structural reform, by providing the resources to facilitate various financing options for reorganizing LDC debt burdens.

Governments also must be involved in providing the appropriate regulatory, accounting, and tax treatment of old and new bank assets that are part of any debt relief. Regulatory incentives that allow banks to spread out losses, recognize improvements in asset quality, and minimize "free riders" are essential to encourage bank participation.

Since bilateral loans represent a large proportion of the debt of several countries, similar financial relief to that provided on bank loans can and should also be engineered on bilateral government loans under the auspices of the Paris Club.

To enhance the political feasibility of industrial country financing, especially in the U.S., two requirements may need to be met. First, up-front cash contributions should be kept to a minimum, with most financial obligations being contingent liabilities to be called for if and as needed. Second, industrial countries with balance-of-payments

-14-

surpluses should be asked to contribute proportionately more than
countries with balance-of-payments deficits.

The financial commitment of the G-7 governments in support of LDC financial relief need not be large in terms of up-front outlays. Among the variety of debt relief options suggested, most require only stand-by guarantees from the industrial countries, either directly or through the IMF and World Bank. At most, the direct financial commitments from all industrial countries would be a few billion dollars, which would be recovered when and as the LDCs recover financial and economic health.

The benefits to the industrial countries are three-fold. First, the LDC financial relief that G-7 support can bring about will encourage growth in trade with the LDCs, with resulting increases in exports, business activity, and jobs. Second, democratic and market-oriented governments in geopolitically important countries can be sustained and supported. Third, G-7 financial support provides backing for the industrial countries' financial systems, which otherwise would remain excessively exposed to troubled LDC loans.

Such government financial involvement is not a bank bailout. Banks will take real losses in any of the proposed options. Government support simply means that the future bank losses do not undermine the financial system. In fact, governments would not be assuming new liabilities, but only making explicit liabilities that they already implicitly face through bank deposit insurance systems and their central banks' role as lender of last resort. Moreover, the extent of financial involvement will be negotiated, and government representatives can and should assure that any liability is minimized and recompensated. True bank bail-outs would occur only if the LDC debt problem is left untreated or is mishandled, and important parts of the banking system fail as a result.

KISSINGER ASSOCIATES

TWENTY-SIXTH FLOOR
350 PARK AVENUE
NEW YORK, NEW YORK 10022
(212) 759-7919
TELEX: 4970885
TELECOPY: (212) 759-0042

Mr. James D. Robinson III
Chairman
American Express Company
American Express Tower
World Financial Center
New York, New York 10285-5100

October 27th, 1988

Dear Jim,

Thank you so much for sending along a copy of your recent speech, the draft joint statement of "Strategies For Developing Country Debt", and recent press clippings.

I was particularly struck by the cogency of the draft joint statement. As you know, I could not more strongly support your underlying thesis that the resolution of this most critical global problem must be based upon a foundation of western political will to create the objective conditions for constructive solutions.

Please keep me informed of your progress on this paper and let me know if I can help in any way.

SUITE 1021 • 1800 K STREET, N. W. • WASHINGTON, D. C. 20006 • (202) 872-0300
TELEFAX (212) 753-7248

AKIO MORITA
CHAIRMAN
CHIEF EXECUTIVE OFFICER

SONY
SONY CORPORATION

6-7-35, KITASHINAGAWA
SHINAGAWA-KU, TOKYO 141, JAPAN

TELEPHONE: (03) 448-2600

CABLE ADDRESS:
SONYCORP TOKYO
TELEX: J 2262

October 25, 1988

Mr. James D. Robinson, III
Chairman
American Express Company
American Express Tower
World Finance Center
New York, NY 10285-5100
U.S.A.

Dear Jim:

Thank you very much for your letter of September 26, regarding the involvement of Japanese firms in the United Way. The information you have kindly provided me with is indeed helpful in promoting further understanding of its organization, operation, and objectives.

I was especially impressed by the activity of A Joint Chamber and Partnership Program, "The New York-Japan Initiative". As you may be aware, I have attached great importance to keeping good community relationship in our overseas business operation. Your idea that the Japanese management living and working abroad should participate in key public policy making and business initiative, for the development of both communities, is indeed valid and one which I share with you.

The information you have sent me will be shared among the members of Keidanren for further consideration. I will have Mr. Nukazawa, Managing Director of Keidanren, study them to promote and stress the importance of community relationship, and furthermore, encourage their participation as local community members.

Thank you again for the valuable information. I believe that this will help us immensely in improving our status quo. Meanwhile, I look forward to seeing you in the near future.

With warmest regards,

AM/ac

cc: Mr. Kazuo Nukazawa, Managing Director, Keidanren

AMERICAN CANCER SOCIETY
19 West 56th Street
New York, N.Y. 10019
(212) 586-8700

THE TENTH ALFRED P. SLOAN, JR. MEMORIAL AWARD DINNER

November 21, 1988

Mr. James D. Robinson, III
Chairman & CEO
American Express Company
American Express Tower
World Financial Center
New York, NY 10285-5100

Dear Jim:

The battle against cancer continues. And those who help lead this momentous struggle are singled out, from time to time, for deserved recognition.

On Wednesday, March 8, 1989, the American Cancer Society will present its Tenth Alfred P. Sloan, Jr. Memorial Award to Sherry Lansing in the Grand Ballroom of the Waldorf-Astoria Hotel in New York.

Sherry is being honored for her extraordinary work on behalf of cancer research and control, including her efforts in support of Dr. Armand Hammer's crusade in these critical areas. While her remarkable achievements in the motion picture industry have been widely celebrated, less well known is her passionate work--most of it anonymous--in the search for cancer treatments and cures.

In addition to the many influential guests on hand at the dinner, our journal magazine will be distributed to a host of significant businesses and individuals who support the programs of the American Cancer Society. This journal is being designed as an up-to-the-minute layman's handbook on cancer with valuable information on prevention, detection, and treatment. People will surely keep it.

I hope you will join me and lend your support to the American Cancer Society and at the same time pay tribute to Sherry Lansing by purchasing advertising space in the journal magazine. A reply form is enclosed for your use.

Thank you and I look forward to hearing from you.

enclosure

Sherry Lansing
1989 RECIPIENT

DINNER CHAIRMEN

Dr. Henry A. Kissinger
E. John Rosenwald, Jr.
Gerald Tsai, Jr.

JOURNAL CHAIRMAN

Leo-Arthur Kelmenson

VICE-CHAIRMEN

Edgar M. Bronfman
Ralph Destino

PREVIOUS RECIPIENTS

Laurance S. Rockefeller
Mary W. Lasker
Elmer H. Bobst
Sen. Edward M. Kennedy
Mrs. Gerald R. Ford
Benno C. Schmidt
Frank Borman and
the People of Eastern Airlines
Dr. Armand Hammer
Richard L. Gelb
Dr. Lewis Thomas

30 Rockefeller Plaza

New York, N. Y. 10112

Room 5600

SEP 12 1988

(212) 649-5600

September 6, 1988

Dr. and Mrs. Henry Kissinger
435 East 52nd Street
New York, New York 10022

Dear Nancy and Henry:

The beautiful, restored Rainbow Room will be the setting for Historic Hudson Valley's gala dinner dance on Monday, November 14, 1988. Brooke Astor, Richard Jenrette, David Rockefeller, and I are all delighted to serve as Co-Chairmen of the evening, and recalling your generous support last year, we hope that you will join us for this very special occasion.

From New York City to Albany, Historic Hudson Valley is leading the effort to preserve the cultural and historical resources as well as the natural beauty of the Hudson River Valley. Our goal is to foster public awareness and appreciation of the Valley's rich heritage.

Historic Hudson's newest project, Montgomery Place, opened to the public in June. We are proud to add it to our unique family of properties which includes: Washington Irving's home, Sunnyside; Philipsburg Manor; Van Cortlandt Manor; Union Church of Pocantico Hills; and Federal Hall National Memorial, our affiliate in New York City.

By joining with us on November 14, you will not only help support Historic Hudson Valley's important preservation efforts but its education programs as well which we offer the public at our properties along the Hudson River.

We ask that you provide special leadership for this event by taking a table of ten for $10,000 or $5,000. Your support will be noted in both the invitation and the dinner program.

It promises to be a wonderful party, and I look forward to hearing that you will be joining us.

Laurance S. Rockefeller
Trustee, Historic Hudson Valley

HAK: Re: SUNY/NAR Institute of Govt.

You have been asked to join the 10-member selection committee to pick the first recipient of the Nelson A. Rockefeller Public Service Award, which will be presented at the June 16 dinner. (It doesn't look like you will be able to attend.)

They hope the dinner and award will become an annual event (and that you will be a permanent member of the selection committee.)

The selection committee will be made up of NAR's "former associates and friends" and will meet once or twice yearly in NYC.

Agree to join selection committee ✓

regret with explanation

Infocd Allarighits Secy. 2/25/88

ssm

THE DIME SAVINGS BANK
OF NEW YORK, FSB

FEB 24 1988.

HARRY W. ALBRIGHT, JR.
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
(212) 326-6188

589 FIFTH AVE.
NEW YORK, N. Y. 10017

February 22, 1988

The Honorable Henry A. Kissinger
Kissinger Associates
350 Park Avenue
New York, New York 10022

Dear Henry,

On behalf of Donald Blinken, Chairman of the Board of the State University of New York, I am writing to invite you to become a member of the Nelson A. Rockefeller Public Service Award Selection Committee.

Some time ago, The Board of Overseers of the Nelson A. Rockefeller Institute of Government, which is a part of the State University, determined that the time had come to have a dinner in honor of Governor Rockefeller. The theme of this dinner would be to commemorate Governor Rockefeller's life and contributions to public service. As a part of the event, an award - tentatively designated as the Nelson A. Rockefeller Public Service Award - will be given to an individual whose own accomplishments and record of public service best exemplify what Governor Rockefeller himself was all about.

The purpose of the dinner is not merely to recognize the role which Nelson Rockefeller played in our nation's life, but importantly, to reaffirm his belief that there is no higher calling than public service. At a time when young people are avoiding public service and the word politician is held in growing disrepute, this message seems more urgently needed than ever.

The hope is to make this dinner, and the award, an annual event, much like the Governor Alfred E. Smith dinner. Governor Mario Cuomo, Mrs. Nelson A. Rockefeller, and Donald Blinken have agreed to co-chair the first dinner, which will be held on June 16th of this year at the Waldorf Astoria here in New York City.

We believe that the success of this concept will depend greatly on the quality of the award recipients: they must be of the highest calibre. This is where we are looking to you for

MEMBER FEDERAL DEPOSIT INSURANCE CORPORATION

Page 2

assistance. With the help of Mrs. Rockefeller and Nelson
Rockefeller, Jr., we have put together a list of ten of Governor
Rockefeller's former associates and friends to serve as the
Selection Committee to choose the first recipient (and future
recipients, if our hope of an annual dinner is realized). We
would be most honored if you would agree to serve on this
committee.

I do not anticipate that this would be a burdensome
responsibility for you to undertake. A meeting or two here in
New York is all that would be required. Please let me know at
your earliest convenience whether you would be willing to help us
in this exciting endeavor.

With warmest regards,

April 26, 1988

DRAFT for discussion purposes

GUIDELINES FOR NAR PUBLIC SERVICE AWARD

Nelson Rockefeller believed in public service and that government could and should be a positive force in all our lives.

He believed in democracy and the American political and governmental systems. To that end he devoted his talents, his energy and his vision.

As an innovator, he was not afraid of change. He believed that "there is nothing wrong with America that Americans cannot right" and he devoted his adult life to proving this proposition.

A committed champion of justice and equality for all, Nelson Rockefeller was a dedicated defender of our national values, and a public servant of uncompromising integrity, wisdom and compassion.

He believed that the true test of leadership was to educate the people and to have faith in their final judgment.

Nelson Rockefeller inspired all who came into contact with him by setting an example.

The purpose of the Nelson A. Rockefeller Public Service Award is to commemorate this great American's lifelong commitment to public service. The recipient should be an individual whose own accomplishments and contributions through public service exemplify those of Governor Rockefeller: someone who deserves to be recognized for what she or he has accomplished and whose recognition will likely encourage others to follow suit.

The recipient should be an American citizen who has spent at least some part of his or her professional life in government service, either at the local, state or federal level. Moreover, the first recipient should be an individual of widely recognized merit and stature whose selection will serve to enhance the prestige and credibility of this new award.

ISSN: 0738-3169

[LC]

AMERICAN
FOREIGN POLICY
NEWSLETTER

NATIONAL COMMITTEE
ON AMERICAN
FOREIGN POLICY, INC.

232 MADISON AVENUE
SUITE 603
NEW YORK, N.Y. 10016
Telephone: (212) 685-3411

VOL. 11 — No. 2

$2.00 A COPY

APRIL 1988

Professor Hans J. Morgenthau
Founder

Deputy Secretary of
State John C. Whitehead
addressing the National
Committee on American
Foreign Policy on March
16, 1988

Professor George Schwab
Co-founder and Editor

Deputy Secretary of State John C. Whitehead presenting
the Hans J. Morgenthau Award to David Rockefeller on
March 16, 1988

## Foreign Policy Address by
The Honorable John C. Whitehead
on the Occasion of the Presentation
of the Hans J. Morgenthau Award to
David Rockefeller

It is a pleasure for me to be back in New York tonight among friends and to take part in a tribute to a man I admire and whose friendship I cherish.

Since its founding in 1974, the National Committee on American Foreign Policy has fought for clear-headedness in America's dealings with the world. Believing (as did the historian Thucydides) that "identity of interests is the surest of bonds," the committee has stressed the importance of alliances to American security even as it has generated greater public awareness of Soviet aims and intentions.

(Continued on page 2)

## The United States at the
United Nations
by
Ambassador Vernon A. Walters

As I look forward to the 43rd United Nations General Assembly—my fourth as United States permanent representative—I recall the instructions of President Reagan as he sent me here in 1985. The President asked me to work to reform the United Nations, not to wreck it. The importance he places on the United Nations is manifested in his attending the General Assembly five times—more than any other American President in history.

Once again, our President has shown his courage as the leader of the free world, for the United Nations is not

(Continued on page 6)

Secretary of State George P. Shultz and former Secretary of State Henry A. Kissinger, previous recipients of the Hans J. Morgenthau Award, sent the following congratulatory messages:

### Secretary Shultz's Tribute to David Rockefeller

My congratulations to this evening's most distinguished honoree, David Rockefeller, on his receiving the prestigious Hans J. Morgenthau Award.

Throughout his career, David Rockefeller has recognized that foreign affairs is not always a "zero-sum game." We do not necessarily advance our own vital interests at another nation's cost. On the

CONGRATULATORY MESSAGES (Continued on page 2)

-1-

AMERICAN FOREIGN POLICY Newsletter

APRIL 1988

FOREIGN POLICY ADDRESS

(Continued from page 1)

Like its foremost founder, Hans J. Morgenthau, the committee has counseled realism as the foundation of foreign policy and prudence as the foremost political virtue. In his great work, *Politics Among Nations*, Professor Morgenthau made the following striking comment:

"History shows no exact and necessary correlation between the quality of motives and the quality of foreign policy."

He drove home his point by asking these disturbing questions:

"How often have statesmen been motivated by the desire to improve the world, and ended by making it worse? And how often have they sought one goal, and ended by achieving something they neither expected nor desired?"

It used to be said that Disraeli stood out in the House of Commons "Like a flamingo in a barnyard." So do Hans Morgenthau's writings stand out from the average treatise on government.

Professor Morgenthau posited that modern political

CONGRATULATORY MESSAGES (Continued from page 1)

contrary, more often than not the most effective way of promoting our basic goals is by working with others to achieve their basic goals.

This is what American statesmen understood in the aftermath of the Second World War when, in a dazzling burst of political and economic creativity, they laid the foundations of today's world. And that is what David Rockefeller has always understood. He has worked to strengthen the bonds of friendship and understanding between the world's three great industrialized democratic regions: Northern America, Western Europe, and Japan. As a banker and a statesman, he has recognized the problems of the developing world and the need to deal with North-South issues.

Today all Americans have come to realize that major changes are at work in the world. Developments in science and technology are altering the world profoundly—too profoundly, in fact, for conventional habits of thinking to grasp. Much of this change stems from the energy and dynamism of the industrialized democracies and especially from their private sectors. Thus working with our allies in Europe and Japan to understand and manage change and to explore the meaning of the global transformation now underway has become more crucial than ever.

David Rockefeller has been a pioneer in this vital process of understanding and managing change. He knows that our alliances and friendships provide a foundation for problem solving on the scale demanded by the world ahead, and he has worked tirelessly to reinforce that foundation. In recognizing and honoring his outstanding achievements, the National Committee on American Foreign Policy brings honor to itself as well.

George P. Shultz

Dear David:

Dr. Kissinger's Tribute to David Rockefeller

Were it not for the fact that I must be in Europe to deliver a speech I agreed to many months ago, I would surely be there tonight as you receive the Hans Morgenthau Award of the National Committee on American Foreign Policy. As one of its past recipients, I am pleased and proud to welcome you, my good friend, to this very special fraternity (with apologies to Jeane Kirkpatrick!).

Hans Morgenthau was a seminal figure in the study of contemporary international relations. Always passionately devoted to the pursuit of peace, he nonetheless grounded his principles in the realities of power and national interest, without which lasting peace is an illusion.

It is fitting that you, who have contributed so much to the betterment of the world—not as a well-intentioned idealist but as a far-sighted pragmatist whom Hans would recognize and respect—should be the recipient of the award that bears his name.

My warmest congratulations to you and to the National Committee on this splendid occasion.

-2-

APRIL 1988

thought is divided into two schools. The exponents of one of these schools believe that given an adequate abstract blueprint, good societies and attractive policies can be constructed at any time and in any place. They reason that the only possible explanation of the failure of governments and policies is bad judgment, bad institutions, or ill will.

Adherents of the second school believe that government is the art of maximizing preferable outcomes in a world in which we cannot always get what we want when we want it. They subscribe to the "realistic" school of thought that Professor Morgenthau did so much to advance in his life's work. This division into two schools—one "utopian," one "realistic"— is evident time and again in discussions of world affairs and American foreign policy. For example, there is no doubt whatever that the spread of democracy throughout the world is a good thing for the United States. As a matter of principle, belief in self-government is the very sinew of our political life. As a matter of practicality, we know that democratic nations prefer prosperity to adventurism and peace to war.

Yet the realistic policymaker also knows that the first flush of popular enthusiasm soon pales to disillusionment unless the democratic impulse is channeled into the creation of durable democratic institutions. Our own nation's experience under the Articles of Confederation underscores this point. Our awareness of the fragility of fledgling experiments in self-government has influenced our government's dealings with the world's new and rejuvenated democracies.

- In the Philippines, we have supported the Aquino government's efforts to spur economic recovery and defeat the antidemocratic, communist insurgency.

- Similarly, U.S. policy toward Korea has encouraged the development of democratic institutions, and, happily, Korea's recent elections demonstrate both a public commitment to democracy and a determination on the part of that nation's new leadership to strengthen democratic processes.

- Throughout Latin America, our government is working with new democratic forces to encourage the progression from democratic intentions to democratic habits and institutions.

- And, finally, to take a recent and dramatic example, our government is working resolutely to encourage a rapid restoration of democracy in Panama.

Last Friday, President Reagan ordered that a number of steps be taken against the illegitimate Noriega regime. Yesterday Noriega tried to expell one

of our diplomats, a move that we rejected because we do not recognize his authority to order our diplomats out of the country. Today a faction of the Panamanian Defense Forces apparently staged a coup attempt that failed. It is still not clear precisely what occurred, but it does suggest that even the military is no longer united behind Noriega. Of course, once democratic government and constitutional order are restored in Panama, the United States will work with the government of Panama to help to restore the nation to economic health.

Utopians will tell you that all of our efforts to assist and encourage democracy are unnecessary, for they believe that democracy is like Jack and the Beanstalk. One need only plant the stalk to produce a healthy plant that will inevitably thrust heavenward. But utopian misperceptions, time and again, have yielded a bitter fruit. Such misplaced optimism calls to mind George Orwell's comment about H.G. Wells: "He wore the future around his neck like a millstone."

In truth, a growing democracy requires care and nurture in a climate of safety and encouragement. Similarly, the forces of expansionism and tyranny benefit from climates conducive to their growth. Consequently, U.S. policy supports the forces of freedom in places such as Afghanistan, Angola, and Cambodia because history, realism's data bank, tells us that aggression unpenalized is aggression encouraged.

Let me briefly describe our principal foreign policy goals for 1988 as they relate to three areas vital to American interests. On many issues utopians would suggest a different direction. But experience suggests that realism is the path to progress.

First, U.S.-Soviet Relations.

A half dozen years ago, it was suggested that the United States embrace a unilateral freeze on nuclear weapons. What would be the prospects for peace and arms reduction today if we had followed that imprudent counsel?

- Would the INF Treaty signed in December by President Reagan and General Secretary Gorbachev be before the United States Senate, awaiting ratification?

- Would we be entertaining the hope of a satisfactory conclusion to the Strategic Arms Reduction Talks?

- Would progress have been achieved on the other elements of the president's four-part agenda for U.S.-Soviet relations?

- Would we have completed a first summit? Would we be planning for a second summit later this year?

-3-

APRIL 1988

[il]

In fact, we have concluded an INF Treaty that eliminates an entire class of U.S. and Soviet weapons and requires unprecedented measures of verification. What's more, if the Soviets are prepared to match our efforts, a verifiable agreement leading to a 50 percent reduction in strategic nuclear weapons will be possible this year.

But a realistic policy cannot stop there. We must and we will strive for further progress in arms control and will be directed in these efforts by the needs of European defense and NATO's priorities.

- We must eliminate the disparities in conventional weapons in Europe.

- And we must achieve a verifiable ban on chemical weapons.

Furthermore, we will not stop at arms control. We will continue to pursue human rights issues, both as they relate to individual cases and to principles such as those enshrined in the Helsinki Final Act and other international human rights instruments. We will do so because it is right. We will do so because all nations must take treaty obligations seriously. We will do so because the historical record is clear: Governments that do not respect the rights of their own citizens will not respect their international obligations or the civilized norms of the world community.

A second concern of our foreign policy in 1988, as in previous years, is the spread of democracy in Central America.

Ten years ago Costa Rica was the region's only civilian-led democracy. Today the military dictators who held power in Guatemala, El Salvador, and Honduras have been replaced by civilian presidents chosen in competitive elections.

Nicaragua is the odd man out. It is a sad story. For the last eight years, its leaders have monopolized the government by skillfully combining brute force, cunning, and a genius for propaganda.

Nicaragua poses, as is often the case in American foreign policy, a choice between the path of realism—a difficult trek that will lead ultimately to a free and democratic Nicaragua—and the path of utopian wishfulness. Had the United States in recent years not taken the realistic path—combining diplomatic persistence and military strength—and stuck to it, the Guatemala accord would never have been reached. Yet following the Guatemala accord, in one of those mistaken gestures of which Professor Morgenthau wrote—the kind that begins in good intention and ends in calamity—the House of Representatives voted to withdraw support to the Nicaraguan Resistance.

Immediately Daniel Ortega began to speak once

again not of peace but of war. He vowed to exterminate the contras and is attempting to fulfill that pledge. During the past twenty-four hours, the Sandinista Army has invaded Honduras in considerable numbers in conjunction with its attack on Nicaraguan Resistance forces in the area. We are consulting with the Honduran government and will honor our commitments to assist Honduras in defending its national sovereignty and preserving its territorial integrity. The administration has a long-standing commitment to those who are fighting for freedom in their native Nicaragua.

Will the United States Congress regain its sure footing? Will America continue its journey on the path of realism? Or will U.S. policy take a detour to fantasyland? On the answers to those questions hangs the fate of freedom in Nicaragua and the fragile democracies that are its neighbors.

In the Middle East two long-standing conflicts have caught the attention of the world. There, as elsewhere, we have applied the mutually-reinforcing strengths of military power and diplomatic persistence. In the strategic area of the Persian Gulf, we were faced last year—as a result of the Iran-Iraq War—with the prospect of a disruption of oil supplies, interference with neutral shipping, and the potential buildup of Soviet influence in a region essential to the United States and the West. Many people counseled that we do nothing. A few suggested direct military intervention. We chose a middle—and, I believe, realistic—course. We initiated a policy that was limited yet bold and firm. By reflagging tankers and placing them under the protection of the U.S Navy we have guarded U.S. and allied interests and provided the leadership for other Western governments to follow. We affirmed to Arab governments that we are hearty and reliable allies, even as we discouraged Soviet adventurism. It is another area where our policy has worked.

The turmoil in the West Bank and Gaza demonstrate that the status quo is no one's ally. Secretary Shultz's recent visits to the Middle East—for consultations with Prime Minister Shamir, foreign Minister Peres, King Hussein, President Mubarak, and President Asad—demonstrate our commitment to moving the peace process forward. As President Reagan noted yesterday, "Peace will not be imposed by us or by anyone else. It will and must come from the genuine give and take of negotiations. That's what we're working to set in motion now."

We believe that the parties to the Arab-Israeli conflict will be more likely to agree to negotiate if there is agreement in principle both on the negotiating process and on general principles regarding the substance of what will be negotiated. Secretary Shultz's proposal envisages negotiations in two phases. The first phase

-4-

APRIL 1988

proposes the negotiation of transitional arrangements to bring about significant changes in political conditions in the West Bank and Gaza. The second phase would begin on a date to be specified. Its purpose would be the achievement of a final settlement based on Security Council resolutions 242 and 338 in their entirety. We envision that these negotiations would proceed on a fast track and hope that negotiations on transitional arrangements could begin around May 1 and that final status negotiations could begin around December 1.

As you know, Prime Minister Shamir arrived in Washington on Monday. He has met with the President, the secretary of state, and congressional leaders. Discussions have been friendly, frank, and constructive. We know that our initiative will not be easy for any of the parties to accept. It has been designed to meet many and various concerns. We think it is a very sound approach, and we are asking our friends to respond positively and with a sense of urgency.

Because this is a special audience, I will ask your indulgence to "talk shop" regarding a matter critical to America's ability to execute a coherent, effective foreign policy. As many of you know, America's foreign affairs budget constitutes a mere 1.5 percent of federal spending. Our budget is a painfully thin and rigid creature. In a perfect world—though not perfect for the taxpayer—every department of government would have all the funds it needs. In a perfect world every congressman would have three subcommittees, and every inventive staff proposal would become a useful law. In a perfect world the wish would be father to the act. There would be no need of executive discretion, for there would be no need of management, much less decisiveness. But we live in a world of budgets and restraints, of crises that require action and conditions that require flexibility, discretion, and authority. In such a world—the real world in which U.S. foreign policy must operate—combining skin-tight budgets with the restricted flexibility that results from Congress's penchant for excessively earmarking funds is ill-advised indeed. The multitude of amendments that dictate State Department operations have become major hindrances. Congress's "micromanagement" of America's foreign policy budget must stop. At stake is the ability of the United States government to formulate and execute a coherent foreign policy.

I am reminded that brevity is the soul of wit and, more important, the chief virtue in a dinner speaker. Thus it is time to close. Besides, I just remembered the story about the general who talked so long that he gave new meaning to the phrase "the army and navy forever." I leave you with this thought.

In 1770 troops of his majesty's government were put on trial for their lives in the colony of Massachusetts for the incident that came to be called the Boston Massacre. How much it speaks of the principles and decency of those who founded our republic that the frightened soldiers found their champion in none other than John Adams! What did the young defense attorney tell the jury? He told them this:

> Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence.

The American experiment began in principles of realism. By continuing to pursue principled and realistic policies, it shall be sustained.

Thank you very much.

Now let me turn to my principal duty this evening, which is to present the Hans J. Morgenthau Award.

A few months before the United States entered the Second World War, one of America's foremost business leaders spoke on behalf of the U.S.O. here in New York City. His name was John D. Rockefeller, Jr.: "I believe," he said, "that every right implies a responsibility; every opportunity, an obligation; every possession, a duty."

The man we honor tonight has long since made that code his own. Few men, in this or any time, have equaled his dedication to improving the human condition and to advancing the public good. More than twenty nations have bestowed honors on him in recognition of his dedicated service to peace and economic improvement. Pick the issue—international finance or trade or development or education—or spin the globe—Europe, Asia, Latin America, Africa—and there you will find that David Rockefeller's leadership has left its mark.

He is chairman of the Chase Manhattan Bank's International Advisory Committee and a director of the Institutue for International Economics. He is chairman of the Americas Society, an organization comprised of several groups that assist Latin American development through private-sector initiatives and cultural and intellectual exchanges. He is honorary chairman of the Japan Society, an Honorary Trustee of International House, and a member of the Advisory Council of the Bilderberg Conference.

He played a key role in the formation of the International Executive Service Corps, a group of private-sector volunteers who help private enterprises in developing countries with technical and managerial assistance. He chaired the corps from 1964 to 1968

-5-

APRIL 1988

and currently serves as a director and member of the Executive Committee.

In 1973 David Rockefeller helped found the Trilateral Commission to promote cooperation and understanding among the nations of Western Europe, Japan, and North America. He is currently the commission's North American chairman. And from 1970 to 1985—among the most dynamic years in American foreign policy in the postwar period—David Rockefeller served as chairman of America's foremost forum for exchanges and views on international issues, the Council on Foreign Relations.

I am indeed proud to say that he has been my friend for many years. David, I can think of no one more deserving of this award.

Ladies and gentlemen, I present the recipient of the 1988 Hans J. Morgenthau Award conferred by the National Committee on American Foreign Policy, David Rockefeller.

Copyright© by the National Committee on American Foreign Policy.
All rights reserved.

THE UNITED STATES AT THE UNITED NATIONS

(Continued from page 1)

overwhelmingly friendly to the United States. One must remember that among the 159 nations that constitute the United Nations, the democratic nations are in the minority. I am nevertheless working at the United Nations at the bidding of the President to do my part to increase the number of friends of the United States and decrease the number of enemies and ultimately to increase the number of friends of freedom and diminish the number of its foes.

The march of freedom is on its way—in Latin America, in Africa, and in other parts of the world. There are of course dangerous exceptions to this rule of growing freedom for the peoples of the world. For example, Nicaragua is a country held hostage by a dictatorial, tyrannical regime. Many other countries that began their independence with Marxist–Leninist regimes more interested in obtaining military hardware and factories for guns and tanks have now realized that their people can't eat the war machines provided by their Marxist–Leninist patrons. They have realized that by moving their countries to a freer, more democratic form of government that encourages private production and competition in agriculture, they are experiencing successes in feeding their people.

We are making gains in this effort to make the voice of freedom heard in the United Nations, and many there like the sound of it. They see and hear there that it is not the tradition of free democratic nations to invade and

conquer their neighbors. This is, however, most definitely the practice of Marxist–Leninist dictatorships across the globe.

It is the United Nations, which many nations view as the forum of mankind, that affords for some nations the only place where they can meet and talk with representatives of other nations. Also, one must remember that against all the complaints about the expense to the United States of the United Nations, the fact is that it costs the individual taxpayer an average of only 80 cents per year. Also, keep in mind that since the United Nations has provided this forum for letting off steam, there has been no war between the superpowers.

Mindful of all these thoughts and in anticipation of another General Assembly, I shall review the most recent General Assembly, for we certainly must plan our steps using the past as a guide. For the purpose of this article, I shall mention a few long-term United States foreign policy goals and look back to the 42nd General Assembly in order to survey our successes and failures on a few key issues.

The United Nations is engaged in a major way on key foreign policy issues on which there is a strong consensus in the United States: bringing peace to the Persian Gulf, effecting a settlement of the Arab–Israeli conflict, getting the Soviets out of Afghanistan and the Vietnamese out of Cambodia, and promoting universal respect for human rights and fundamental freedoms. These are some of the issues that will remain high on our list of foreign policy priorities for the rest of this administration and beyond.

U.S. Foreign Policy Goals in the Security Council

The United States has supported the United Nations secretary general's initiative to form a coalition determined to bring an end to the war between Iran and Iraq. A major step was taken last year: Security Council Resolution 598—adopted with the support of all council members—not only orders the parties to end the war but also defines the shared commitment of the international community to a settlement.

Following the adoption of Resolution 598, the secretary general conducted intensive discussions, including two rounds of talks with Iran and Iraq, to seek agreement on ways and means to implement the resolution. Although Iraq agreed to comply, Iran, despite deceptive signals to the contrary, has maintained its commitment to the path of war. In order to persuade Iran to comply with the resolution by agreeing to an immediate cease-fire and withdrawal of its forces to the in-

-6-

APRIL 1988

[w]

ternational frontier, the five permanent members of the Security Council are now actively working on a second resolution that would impose an arms embargo on Iran. The United States is urgently seeking the passage of this resolution which is intended to enforce Resolution 598. Half-measures such as the proposal for a United Nations naval force in the gulf are not workable, for in an attack situation, who would decide whom to shoot, what to shoot, when to shoot? A United Nations committee would have to be organized to make these decisions, which would take weeks or months to effect. Obviously, it is ludicrous to think that this could be a viable situation. In addition, this proposal would play into Iran's hands by addressing only one aspect of the conflict and by allowing the land war to continue unabated.

Throughout most of 1987, deceptive calm prevailed at the United Nations concerning the Arab-Israeli conflict. The Security Council was focusing its attention primarily on Iran/Iraq. All of this changed when widespread violence erupted in the occupied territories in late November.

Between December 18 and February 1, the Security Council was in almost continuous session on the occupied territories. Four resolutions were put to the vote. The United States supported one, abstained on two, and voted against the last resolution. Though our votes were different, our goals were the same: the reduction of tension in the occupied territories, Israeli compliance with the Fourth Geneva Convention, and movement toward an overall peace settlement in the region. We voted for Resolution 607, which calls on Israel to refrain from carrying out the deportations of individuals from the occupied territories. This action is in direct violation of Article 49 of the Fourth Geneva Convention, which prohibits individual or mass forcible transfers "regardless of their motive." This resolution seemed to further our goals of reducing the tensions in the occupied territories and Israeli compliance with the Fourth Geneva Convention. We abstained on Resolutions 605 and 608 whose impact appeared ambiguous.

Resolution 605 made generalized criticisms of Israeli policies and practices while ignoring the fact that Israeli lives are also at risk and that Israeli security forces have been faced by provocations and, in some cases, life-threatening situations. Resolution 608 called for the continued condemnation of Israeli deportations. The United States believes that our position was adequately reflected in Resolution 607 and that repeatedly raising this issue in the Security Council does not serve a useful purpose. Finally the United States voted against Draft Resolution 19466—the fourth time the Security Council met to consider the situation in the West Bank and the Gaza Strip since the demonstrations and violence erupted there in December.

The United States believes that the three resolutions adopted during this period express the Security Council's views on this subject. Further resolutions, in our view, would be redundant and inappropriate. At worst, they could detract from diplomatic efforts that have been designed to address the current unrest, which is a symptom of the failure to achieve a solution of the Palestinian issue and a just and lasting peace for all concerned. The United States used its veto power on this resolution because we believe that it was an untimely effort to involve the Security Council in issues that are being dealt with through diplomatic channels.

The administration is working with Israel and its Arab neighbors to bring about agreement on the substantive principles that should govern direct negotiations as well as on the procedural aspects of such negotiations. We are addressing short-term problems in the occupied territories as well as an overall peace settlement. We need to remember two things: (1) the U.N. Security Council has played an important role in this area by establishing Resolutions 242 and 338 as the basis of all subsequent diplomatic efforts; (2) at some point the United Nations, particularly the Security Council, may again play an important role in guaranteeing a just and durable settlement.

## Some Issues Address in the General Assembly

The United Nations has been working since 1982 to bring about a negotiated settlement in Afghanistan. Talks sponsored by the United Nations yielded considerable progress, albeit progress purchased with the blood of Afghan resistance fighters. At the same time, the political costs of continuing the occupation in the face of near universal international disapproval figure in Soviet calculations. Nine U.N. General Assembly resolutions, adopted with ever-increasing majorities every year since 1980, underline Moscow's isolation on this issue.

The spotlight that the United Nations focused on Afghanistan played an important part in inspiring General Secretary Gorbachev's February 8, 1988, announcement. Gorbachev announced the Soviet Union's willingness to withdraw its forces during a ten-month period starting May 15, 1988, provided that an agreement on modalities could be reached at the Geneva negotiations two months in advance of that date.

This announcement appears to have improved prospects for a settlement in Afghanistan. Although important details remain to be worked out, we welcome Mr. Gorbachev's announcement as a positive sign of serious Soviet intent to withdraw from Afghanistan. U.N.

-7-

APRIL 1988

Under-Secretary General Diego Cordovez is conducting the final rounds of negotiations in Geneva with the government of Pakistan and the present regime in Kabul, another major hurdle preceding any settlement in Afghanistan. The central issue is rapid Soviet withdrawal from Afghanistan. Soviet failure to do so, using one pretext or another, would only demonstrate its duplicity and its disregard for the overwhelming desire of the international community, as expressed through annual General Assembly resolutions, for Soviet withdrawal.

I shall now turn to some other foreign policy concerns of the United States and their handling in the 42nd Session of the General Assembly, where U.S. interests advanced on several fronts in spite of the massive withholding by Congress of our assessed contributions.

Overwhelming record majorities demanded the withdrawal of foreign forces from Afghanistan and Cambodia despite strenuous efforts by the Soviet Union and Vietnam to gain support for their positions.

Seventy-nine member states—a record number—voted with the United States to reject an effort to bar Israel from the General Assembly.

U.S.-supported resolutions criticizing human rights abuses in Iran and Afghanistan obtained larger margins of support this year than ever before.

Resolutions on human rights in Chile and El Salvador were more balanced than in past years, and the United States repeatedly criticized Cuba's deplorable human rights record. This continuing attempt to add Cuba to the list of countries condemned for violations of human rights has led the Cuban government to invite to Cuba a U.N. inspection team from the U.N. Human Rights Commission. Because of our unyielding pressure and Cuba's recognition of an almost certain defeat if the U.S. resolution came to a vote, the U.N. inspection team represents a success far greater than we expected. Last year we didn't even get past a procedural vote. Now we have the prospect of an inspection team opening the doors of Cuban prisons. The team is mandated to visit Cuba under the standard commission guidelines. It will have access to both individuals and institutions. The delegation will report its findings to the Human Rights Commission at its 1989 meeting.

In many areas we win on issues that are never brought to a vote, thereby eliminating them from any kind of tally taken to show U.S. success at the United Nations. Also in this category are important resolutions adopted by consensus, including one uniting all countries in an effort (1) to prevent and control AIDS and (2) to strengthen international cooperation in the war on drugs through the preparation of a draft convention against illicit traffic. The resolution on AIDS explicitly

recognizes that AIDS is a typical virus, which is an important inclusion for us because it counters Soviet propaganda that U.S. biological warfare was behind the epidemic.

In past U.N. General Assembly resolutions, the United States was directly and repeatedly condemned many times in affairs in which the United States had no part. Protracted U.S. diplomatic efforts resulted in the near disappearance of explicit critical references to the United States—that is, name calling—from General Assembly resolutions relating to apartheid and the Middle East. In fact, in the 42nd U.N. General Assembly, there was no name calling of the United States in any of the Namibia resolutions.

In another important U.S. drive, the United States and other Western countries defanged and then eroded support for the Soviet Union's major initiative on international security, a vaguely worded but pernicious attempt to rewrite the U.N. charter under the guise of a new "comprehensive system of international security." C.S.I.S., as it is referred to, attempts to create a duplicate mechanism or revise the U.N. Charter in order to strengthen the United Nations. (What is really needed is for member states to discharge their political commitments under the U.N. Charter). The proposal contained in the draft resolution is particularly inappropriate. The establishment of an experts group presupposes that there are major deficiencies in the existing U.N. system. The proposal is an attempt to remove consideration of the U.N.'s organization and future from the agenda of its rightful controllers—the General Assembly—and place it in the hands of an anonymous group removed from national control. In a time of great financial difficulty for the United Nations, it is ill advised to launch such a massive, ill-defined initiative.

Given the vagueness of this proposal, its uncertain financial implications, and its usurpation of the power of the General Assembly, the General Assembly had to tell its sponsors that it is unsatisfactory and that member states would be prepared to consider revised, more specific proposals in subsequent sessions in the appropriate committees or specialized agencies. On December 7, 1987, the General Assembly plenary adopted Resolution 41/93 regarding the Warsaw Pact proposal for a "C.S.I.S." by a vote of 76-12 (U.S.)-63. Seven delegations did not participate in the vote. The withholding of support for C.S.I.S. in the 42nd General Assembly becomes more dramatic when compared with last year's plenary vote of 102-2 (U.S.)-46 and 8 absent. Since last year, 45 U.N. members states changed their positions on C.S.I.S., mostly in a negative direction, thereby agreeing with the U.S. position.

Of course, there were disappointments as well. The

-8-

APRIL 1988

General Assembly criticized the U.S. trade embargo against Nicaragua in a resolution seeking to isolate the embargo from the broader issues of Central America. It also adopted a Nicaraguan-sponsored resolution demanding U.S. compliance with the International Court of Justice ruling on Nicaragua. We do not accept the compulsory jurisdiction of the International Court of Justice on matters of foreign policy. It would be a violation of the Constitution to do so. We cannot, within the limits of the Constitution, allow U.S. foreign policy to be determined by a body outside the United States. Furthermore, what will surprise many who are familiar with the loud protests and not the facts is that of the fifteen members who sit on the International Court of Justice, ten represent countries that do not accept its compulsory jurisdiction in these matters. Where are the protests against these countries?

On the issue of terrorism, the assembly's resolution unequivocally reaffirmed its condemnation of terrorism and met our principal objectives; yet it contained some language on self-determination, which is susceptible to harmful misinterpretation. For example, the resolution reaffirms the "inalienable right to self-determination and independence of all peoples under colonial and racist regimes and other forms of alien domination and .../upholds/ the legitimacy of their struggle, in particular the struggle of national liberation movements." We were concerned that some would misread this statement and think that it suggests that the end of self-determination justifies terrorism as a means. We, therefore, voted against this resolution.

Finally, the West found little support for its opposition to resolutions encouraging armed struggle in South Africa and designating SWAPO as the "sole and authentic representative of the Namibian people." Since 1978 the United States has supported Resolution 435, which provides for free elections under U.N. supervision and the withdrawal of South African forces from the territory. The main issue in relation to Resolution 435 is resolving the practical question of the timing of the removal of the 40,000 Cuban troops so that the essential requirements of both parties can be addressed. In Angola today the fact remains that both a civil war and a conflict involving foreign expeditionary forces are at issue. It is the position of the United States that all foreign combat forces in the region must be withdrawn. This means not only the withdrawal from Namibia and Angola of South African forces but also the withdrawal from Angola of Cuban and other foreign troops.

An issue of paramount importance to the United States is the progress of administrative and budgetary reform. The reform movement started when the United States and other countries voiced dissatisfaction over the way U.N. funds were spent and the rapid growth of

the U.N. budget in the late 1970s and early 1980s. The perception arose that "those who have the votes don't pay the bills, and those who pay the bills don't have the votes." In 1985 Congress passed the Kassebaum-Solomon Amendment that called for the withholding of 20 percent of our U.N. assessment until the United States and other member states were given a say over U.N. spending proportionate to their contributions.

In response to this amendment and other strong signals from major contributors, the United Nations established a group of experts. This Group of 18, composed of the United States, the United Kingdom, France, China, Sudan, Argentina, Yugoslavia, India, Singapore, Mexico, Zimbabwe, Brazil, Algeria, Cameroon, the Soviet Union, Japan, Nigeria, and Norway, worked during much of 1986 and proposed more than 70 recommendations for administrative and budgetary changes. At the 1986 General Assembly, member countries accepted most of these recommendations. The General Assembly also modified the budget process to include consensus approval of the overall funding level before the detailed budget is prepared. This procedure, in effect, gives each country a veto over U.N. spending and satisfies the intent of the original Kassebaum-Solomon Amendment. U.N. member countries understood that this budget reform would be followed by full payment of the U.S. assessment. Congress has not allowed us to fulfill our part of the bargain.

The implementation of the administrative and budgetary reforms has been mixed, but substantial progress has occurred in some areas. On the administrative side, the Secretary-General has reduced U.N. professional staff by almost the full 15 percent targeted for the three-year period ending in 1989, and the reductions in clerical and support staff are also proceeding. The United Nations has also reorganized a number of major departments to eliminate duplication and to increase efficiency and has reduced expenses for staff travel and consultants by approximately 30 percent. The staff cuts and other economies allowed the General Assembly to adopt in December, for the first time in U.N. history, a budget for the next two years that is smaller in real terms than its predecessor.

A key disappointment in the area of reform is the inability of the U.N.'s Committee for Program and Coordination to agree on a budget ceiling and a contingency fund for the 1988—1989 budget. The new process will begin later this year with the outline for 1990–1991. We had hoped to accelerate the process by a year, but the U.S. failure to pay even half of our U.N. dues last year made other countries unwilling to move the new process forward. The initial shock of our withholding

-9-

APRIL 1988

created the impetus for reform; but reforms are unlikely to take full effect in an organization that is paralyzed by financial instability.

Another area of reform that is of great concern to the United States is that of secondment, which refers to a practice by which governments "second," or lend, their nationals to work at the United Nation for fixed periods of time. Since the United Nation's beginning and even before that time, the Soviet Union and other Eastern European countries have seconded almost all of their nationals who work for international organizations. We believe that this contravenes the idea embodied in the U.N. Charter of an independent international civil service whose first loyalty should be to the organization. The practice, however, is not one that can be changed overnight because many countries believe that the General Assembly should not dictate to member states the conditions under which their nationals serve in the Secretariat. There are, however, signs of tangible change in the approach of the Soviet Union in this area, and we will be reporting on such progress in connection with the presidential determination.

This is the point at which we find ourselves now in the United Nations. I have listed some of our initiatives, some of our successes, and some of our failures. I am

confident that a movement in our favor and in favor of greater freedom for mankind has occurred. If the United States intends to use the United Nations as a serious arm of our foreign policy in the Middle East, Afghanistan, and other areas, we must treat it as a serious institution. We cannot continue to neglect our financial commitments to the United Nations and then expect that our opinions, policies, and positions will carry significant weight in the world body. The United Nations is not a perfect organization from the U.S. point of view; nor will it ever be. After all, the world is hardly a perfect place; therefore, the United Nations can hardly be perfect. It is an organization of 159 member states that gather to discuss problems and issues of common concern. We must work to improve the way it serves our needs but should maintain realistic expectations about the results that will be achieved. As long as I am the U.S. permanent representative to the United Nations, we will continue to press hard for U.S. objectives in order to advance U.S. foreign policy interests in the world body and bring greater freedom to all the peoples of the world.

## From the Pen of a Political Realist

Like his predecessors, Gorbachev seeks to expand the influence and power of the Soviet Union. Regardless of the refinements he has introduced into Moscow's public-relations techniques, he has preserved the long-term objective of pushing for global pre-dominance.

Richard Nixon

## National Committee News

Unforseen circumstances, including the outbreak of an epidemic of hepatitis in Shanghai, have forced the NCAFP to reschedule the fact-finding mission to the People's Republic of China. It is anticipated that the trip will take place in the fall of 1988. Those who are interested in going should call the office: (212) 685-3411.

## Notes on Members

Morris Abram recently led a four-day mission of American Jews to Israel. Said he about the reaction of Israeli soldiers to Palestinian demonstrators who regularly pelt them with stones, bottles, burning tires, and human excrement: "They [the soldiers] are pushed

to the breaking point. And some do break. But those that do are disciplined,...unlike any other army in that part of the world."

Viola Drath recently returned from conferences on economics and defense in Munich and Brussels. Her evaluations of issues pertaining to defense, including the debate on the modernization of short-range missiles in the wake of the INF treaty, were broadcast by "Europe Today" over National Public Radio and Multicom's three-time zone channels.

Ambassador Fereydoun Hoveyda is the author of "The Reaction of the Western Intelligentsia to Khomeini," "Letter from New York: New Year's Eve and

*(Continued on page 12)*

-10-

APRIL 1988

FOR THE RECORD

On March 7, 1988, the National Committee on American Foreign Policy sent the following telegram to President Ronald Reagan, Secretary of State George P. Shultz, Deputy Secretary of State John C. Whitehead, Ambassador Vernon A. Walters, Senator Claiborne Pell, and Representative Dante Fascell.

A plethora of contradictory suggestions have been advanced about how to bring under control the unrest in the territories administered by Israel. The danger is that haphazard opinions and reflex reactions may, under media pressure, be translated into official policies that will prove to be detrimental to the long-range security interests of the United States.

For more than a decade, the National Committee on American Foreign Policy has argued that in view of the overarching rivalry between East and West, power-political realism dictates that the United States do everything possible to contain the destabilizing Soviet influence in the Middle East. Soviet power flourishes in conditions of unrest. Consequently, promoting an environment conducive to order, peace, and stability is essential, as is augmenting the security and viability of U.S. friends and allies.

The PLO has proved to be a force inimicable to U.S. security interests in the Middle East. It has continued to intimidate Palestinian Arabs and devastate Lebanon, a once peaceful country. The PLO failed to overthrow King Hussein in the early 1970s, turned Jordan into a battlefield, and failed to defeat or disrupt Israel.

In view of these facts the NCAFP believes that the security interests of the United States will be served by:

1. not participating in an international peace conference that will empower the Soviet Union to increase its influence in the region, a view shared by, among others, Doctors Kissinger, Kirkpatrick, and Brzezinski;

2. encouraging the two stable sovereign states directly concerned with the issue of the Palestinian Arabs—Jordan and Israel—states that have already established a peaceful bilateral relationship to an extent—to negotiate in order to end the tragedy;

3. encouraging responsible Palestinian Arabs to participate in the negotiating process under the Jordanian umbrella.

Because of the complexity of the issues, which trascend the Sinai question in peace negotiations held between Israel and Egypt, it is to be expected that the negotiations between Jordan and Israel will be long and arduous.

On March 19, 1988, the National Committee on American Foreign Policy sent the following telegram to President Ronald Reagan, Secretary of State George P. Shultz, Ambassador Vernon A. Walters, Congressmen Robert Byrd, Dante Fascell, Claiborne Pell, and Jim Wright.

The current difficulties between Nicaragua and Honduras—which are fueled by Soviet military aid to the Sandinistas—the apparent unwillingness of the Sandinistas to abide by the Arias peace plan, and the deteriorating position of the Resistance validate the in-depth confidential report that was received by the National Committee on American Foreign Policy some months ago. Because the NCAFP knew that the report was based on intimate knowledge of what was happening in Central America, it publicized its fear that the policies of the United States were bringing about the destruction of the Nicaraguan Resistance at the moment that Soviet military aid to the Sandinistas was increasing. The NCAFP warned of the probable demise of the Nicaraguan Resistance. For years the NCAFP has warned that U.S. indecision in Central America is weakening the country's position in that region.

-11-

APRIL 1988

Notes on Members (Continued from page 10)

Gorbachev on American TV," and "Superman at Fifty." They were published in Paris in *Revue des Deux Mondes* in January and March 1988. Bard College has appointed Dr. Hoveyda Bard Center fellow for cinema. In a series of lectures in 1988, he discussed "Rossellini, Neorealism, and Education Through Film," "The New Wave, Thirty Years Later," and "Cinema Existed Before Literature."

Ambassador Jeane J. Kirkpatrick told the Senate Armed Services Committee in January 1988 that the agreement to ban medium- and shorter-range nuclear missiles is a bad agreement. Even though the treaty "leaves Europe somewhat more vulnerable, the Soviet Union somewhat less vulnerable, and the alliance somewhat weaker," Dr. Kirkpatrick urged its adoption. Failure to ratify the treaty would, in her opinion, reinforce the view in Europe that the United States lacks a coherent policy.

Professor Vojtech Mastny served as rapporteur in February 1988 for the conference on "Developments and Prospects in Eastern Europe." It was held at the Aspen Institute in Berlin. He recently lectured at the

Kennan Institute in Washington on Stalinist purges and Soviet foreign policy, 1948-1953.

Professor Kenneth Maxwell obtained major funding from the Ford, Gulbenkian, and Luso-American Development Foundation for the establishment of a new Camoes Center for the study of the Portuguese-speaking world. The center will be established at the Research Institute on International Change at Columbia University, and Professor Maxwell will be its director. The center will be concerned principally with research and publications involving historical investigation as well as public affairs.

Professor Elie Wiesel and his wife, Marion, hosted at their home a reception in honor of Prime Minister Yitzhak Shamir of Israel. In remarks to guests, who included NCAFP members Kenneth Bialkin, Ambassador Jeane Kirkpatrick, Joan Peters, and George Schwab, the prime minister reaffirmed his stand on the issue of bilateral negotiations and declared that violence in the administered territories will not induce Israel to negotiate. Other guests included Alan Dershowitz, Mayor Edward Koch, Ambassador Benjamin Netanyahu, Norman Podhoretz, and Liv Ullmann.

Hon. Francis L. Kellogg
President

Prof. George Schwab
Senior Vice President

William Pickens III
Treasurer

Hon. Seymour M. Finger (on leave)
Executive Director

Joanne Cummings
Vice President

Harriette Levine
Secretary

Hon. Arnold A. Saltzman
Honorary Chairman

Joan Peters
Vice President

Rhoda Plotkin
Deputy Executive Director

$2.00 a copy

Subscription price $10.00

A Bimonthly Publication

National Committee on American Foreign Policy, Inc.
232 Madison Avenue, Suite 603
New York, New York 10016

I wish to become a member of the National Committee on American Foreign Policy. (Membership includes a subscription to the Newsletter.) Please enroll me in the category checked.

<table><tr><td>( ) Corporate member</td><td>$1,250</td><td>( ) Sponsor member</td><td>$250</td></tr><tr><td>( ) Patron member</td><td>1,000</td><td>( ) General member</td><td>100</td></tr><tr><td>( ) Benefactor member</td><td>500</td><td>( ) Academic member</td><td>35</td></tr></table>

My check for $__________ is enclosed.

Name ____________________

Address ____________________

_______________________________________

Telephone No. ____________________

ISSN: 0738-3169

SUBSCRIPTION ORDER

I wish to subscribe to the *American Foreign Policy Newsletter* for

( ) one year $10.00

( ) two years 18.00

Name ____________________

Address ____________________

NOTE: The Newsletter is sent free to all members in good standing of the National Committee on American Foreign Policy, Inc.

-12-

HARRY W. ALBRIGHT JR.
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
516-227-6001

1225 FRANKLIN AVE.
GARDEN CITY, NEW YORK 11530

MAY 27 1988

May 18, 1988

Mr. and Mrs. Henry A. Kissinger
435 East 52nd Street
New York, New York 10022

Dear Nancy and Henry:

I want to take this opportunity to tell you how glad I am to know that you will serve on the Dinner Committee of the first Nelson A. Rockefeller Public Service Award Dinner. I also want to personally thank you for agreeing to buy a table at the event. Your support -- and that of others -- reconfirms how much the Governor meant to us.

Enclosed in the invitation is a response card. Please return it soon, noting your guests on the reverse side, so we can begin seating the dinner. An advisory regarding tickets will be sent to you in early June.

Until I see you on June 16th, my deepest thanks for supporting this special occasion.

The
Nelson A.
Rockefeller
Institute
of
Government

State University
of New York

411 State Street
Albany, New York 12203
518-472-1300

Mrs. Nelson A. Rockefeller
Mr. Donald M. Blinken
*Honorary Co-Chairs*
Mr. Harry W. Albright, Jr.
*Endowment Chair*

Dr. T. Norman Hurd
Endowment Secretary

Endowment Committee

Mr. Alexander Aldrich
Mr. Frank A. Augsbury, Jr.
Honorable Abraham D. Beame
Mr. R. Burdell Bixby
Mr. Joseph H. Boyd, Jr.
Dr. Ernest L. Boyer
Mr. Peter Brennan
Mr. James M. Cannon
Mr. Joseph W. Canzeri
Honorable Hugh L. Carey
Honorable Barber B. Conable, Jr.
Mr. Sol Neil Corbin
Ms. Evelyn Cunningham
Honorable Alfonse M. D'Amato
Mr. Henry Diamond
Honorable D. Clinton Dominick
Mr. Robert R. Douglass
Mr. George A. Dudley
Mr. Richard L. Dunham
Mr. James A. FitzPatrick
Mr. Manly Fleischmann
Mr. Joseph A. Gimma
Mr. Albert H. Gordon
Mr. Richard W. Greenebaum
Mrs. Kitty Carlisle Hart
Mr. William D. Hassett, Jr.
Mr. James G. Hellmuth
Mr. George Hinman
Mr. Roger W. Hooker, Jr.
Mrs. Jane Pickens Hoving
Mr. John Brayton Johnson
Honorable Henry A. Kissinger
Mrs. Henry A. Kissinger
Mr. Edward M. Kresky
Mrs. Edward M. Kresky
Mr. Charles T. Lanigan
Honorable Louis J. Lefkowitz
Honorable Sol M. Linowitz
Mr. Edward J. Logue
Mr. Robert MacCrate
Mr. Alton G. Marshall
Mrs. Maurice T. Moore
Mr. Hugh Morrow
Honorable Emil Mosbacher, Jr.
Mr. Neal L. Moylan
Honorable Daniel P. Moynihan
Mr. Vincent O'Leary
Mr. Richard Parsons
Mr. Roswell B. Perkins
Mr. Fioravante G. Perrotta
Mr. Carl H. Pforzheimer, Jr.
Mr. Robert W. Purcell
Mr. Steven H. Rice
Dr. W. Kenneth Riland
Dr. William J. Ronan
Mr. Richard M. Rosenbaum
Mr. Oscar M. Ruebhausen
Mr. William St. Thomas
Mr. Charles A. Schoeneck, Jr.
Mr. John J. Sheehy
Honorable Stanley Steingut
Mr. Willis H. Stephens
Mr. Lewis Bart Stone
Mr. Joseph C. Swidler
Mr. Jacob B. Underhill
Mr. Edward H. VanNess

Honorable Robert F. Wagner
Mr. Darwin R. Wales
Mr. Peter J. Wallison
Mr. James J. Warren
Mr. Philip Weinberg
Mr. Michael Whitman
Ms. Ann C. Whitman
Mr. Frank Wille
Honorable Malcolm Wilson
Mr. Richard N. Winfield

An Endowment Campaign
For Effectiveness and Independence

March 16, 1988

Dear Nancy:

On Thursday evening, June 16 the first Nelson A. Rockefeller Public Service Award Dinner will take place at the Waldorf Astoria in New York City. Happy Rockefeller, Governor Cuomo and Donald Blinken, Chairman of the SUNY Board of Trustees, will serve as Honorary Co-chairmen. I am honored to be the Dinner Chairman and would like to invite you to join me and other distinguished citizens by becoming a member of the Dinner Committee.

The event will commemorate Nelson Rockefeller's life-long commitment to public service. All proceeds will benefit the Nelson A. Rockefeller Institute of Government/SUNY. The Institute is a unique center that serves as a catalyst for joining private and voluntary sectors with government and higher education to explore and recommend solutions for the critical issues facing New York State.

An important part of this event will be conferring the first "Nelson A. Rockefeller Public Service Award." The awardee will be an individual whose own accomplishments and contributions to public service exemplify those of Governor Rockefeller. Chaired by Clifford R. Wharton, Jr., the Award Selection Committee includes former President Gerald Ford, Ernest L. Boyer, Shirley Chisholm, Sol N. Corbin, Kitty Carlisle Hart, Lane Kirkland, Henry A. Kissinger, Edward M. Kresky, Daniel Patrick Moynihan and William J. Ronan.