DRAFT 10/15/97

Dr. Henry Kissinger -- Fiat IAB, Belo Horizonte, October 5 1997

Mr. Chairman and Gentlemen,

I am not an economist, in fact when I was Secretary of State, the Secretary of
Treasury - Bill Simon -- once said to me that my knowledge of economics was
one of the best arguments against universal suffrage he had ever seen. Of
course he proved his knowledge of politics immediately thereafter when he
called the Shah of Iran at the height of the energy crisis "a nut". And when I said
to Bill Simon "You really cannot do this", "Oh you political people you always
get excited", he said, "I am going to have it solved by the end of the day". By the
end of the day he put out of statement saying "When I called the Shah of Iran a
nut" thereby repeating it "I was quoted out of context" -- poor Shah went to his
grave trying to figure out in what context he could be called a nut, without
offense. But what I want to do here is to discuss some of the political and
geopolitical implications of the current American international situation and then
apply it to Latin America.

Whenever I travel I am asked what is the American policy towards whatever the
region is in which I find myself. I'm embarrassed to say that very often there is
no set policy that you can describe in one series of propositions. Now I don't say
this as a criticism of the current Administration. The current Administration, and
some of you know, was my second choice in the last election, but in the present

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situation it has moved, in general, in a direction which I support. However, it
faces an extremely complicated domestic situation which Vernon (Jordan) will
explain in greater detail tomorrow and I will only mention it briefly. Even at the
time that I was in Government, there was a Government position generally
supported by the ruling party and then one could pick up a substantial slice of
the opposition party on the ground of national interest. Today, perhaps the most
vocal opponent of President Clinton in Foreign Policy is representative Gephardt
of his own party and on the Republican side the party is widely split into a variety
of groups and therefore on any foreign policy issue the Administration has to put
together a new coalition, and that coalition is no guarantee of lasting into the
next issue.

One classic example right now is China Policy. The Administration has totally
reversed its previous position, which I opposed, and is now in general moving in
a direction that I would support and which moreover every American President
and every Secretary of State since 1971 has supported. Nevertheless on the left
there is a sharp opposition on the ground of human rights and in the Republican
Party a number of people, leaders, are trying to use China Policy not on
geopolitical ground but as a way of organizing a new domestic constituency.
The Christian right and the anti-abortion people having failed to prevail
domestically are now attacking China on religious ground and on abortion
ground, believing probably correctly, that their domestic opponents do not feel
that strongly about China, about abortion in China and so that debate has almost

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[LY]

nothing to do with geopolitics and has almost everything to do with American domestic politics and therefore it is very difficult to develop a long-range view.

When Nixon and I where devising policy with all the uproar, we felt confident that if we developed a long-range policy we would find support for it with some turmoil, but except on Vietnam, we were quite confident that we would prevail. That is no longer the case, and that creates a totally new situation for the long-term conduct of American foreign policy, and it is compounded by the fact that there is no real national concern about foreign policy, there is no overwhelming danger to which we have to react, and there is a totally new class of Senators and Congressmen in office today. I was telling Vernon yesterday, in my day it was possible to go to leaders of the opposition party and say, once or twice a year, not every day, once or twice a year it was possible to go to them and say to them we know you disagree with this, but we tell you the national interest requires that you go along with it and most of the time, all of the time they gave you a good hearing, and most of the time they would go along with you. That is inconceivable today. Today everything turns into a battle and, as I said, with a new constituency.

And on top of this when you ask about Latin America, you have to remember that is just one of many issues. There is China Policy. How do we react to the emergence of a potentially powerful China? That raises the question which will also apply -- which I will come to when we get to Brazil: What is the United

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States opposing? Do we oppose growing strength in the other countries or the use to which this strength is put? Japan will be become more national in its orientation inevitably. India will emerge as a major country. We are now in an intense dispute with Europe about relations with Iran, that's the short-run problem. Then we have the long-run problem, how do we preserve the balance in the Gulf based on Saudi Arabia, which is precarious, against the two strongest nations in the Gulf (Iraq and Iran) with which we are not talking. Backed up by Turkey, which is precarious in some respects and under some assault from Europeans, for European domestic political reasons especially in Germany. You have to consider that this is being handled, this is the broad background in which we have to operate. If I have a criticism of the Administration it is not so much its policies, it is that they are so overwhelmed. First of all, very few leaders of the Administration come from a foreign policy background. Most of them had significant experience in domestic politics, and within that, much of it during the Vietnam War, so they look at things with a different perspective. Second, they have had the paradoxical bad luck that they have never had a crisis in foreign policy, so they have really never had a chance to operate the system under stress. Third, the immediate issues are so overwhelming, some of it (so out-stretched), that they have a tendency to deal more with tactics than with strategy. In fact their tactics are on the whole so skillful, that they have not had the need to go to long-term strategy. That's our problem. It is not easy to fix and probably cannot be fixed very quickly, and I repeat on the main trends I agree with Administration policy.

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Now let me talk about Latin American and about one geopolitical problem, one among many, that concerns me and for those of you who disagree with me, rest at peace, very few people do, but they may in the future. The geopolitical problem that concerns me, is the mismatch between economic theory and political reality; between the brilliant expositions we have heard here, and the much cruder thinking of those who make foreign policy decisions. Let me give you one recent example which does not concern Latin America directly. If we live in a truly global economy, and if containing China is a real problem, you would think that we would automatically rush to the assistance of Thailand when it gets into financial difficulties, if only symbolically, yet the fact is that the United States did nothing to help Thailand and that this represented the wide consensus. I am sure my party would have violently opposed any assistance to Thailand, and I doubt that the President was even given the recommendation by anybody to do so but what has happened now is that China offered 1 billion dollars, Japan offered 3 billion dollars. Japan has offered the creation of a super fund with more favorable conditions than the IMF for Asia. And while it will not pass -- it will not go through now, especially not against our opposition -- it shows the mentality, that in practice we have promoted the regionalism which we oppose in theory. And that if we are really serious about containing China, about which I have a different view anyway, our action was the exact opposite.

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Last week I met with a very senior Thai, former Prime Minister, not part of the corrupt present group, opposed to the present group, with a very good record, and he said to me "of course I understand what you are doing, this is all part of your containment policy against China". I said "if we want to contain China we would build you up not bring you down". He said "no, no, no, no, it is more complicated than this, you are trying to bring down all of Asia and that way you don't have to worry about China". Now it is easy to prove that this is ridiculous, but this was a senior person accompanied by others so this is on one level.

But now let me get to levels that concern regional groupings and Latin America.
My friend Fernando (Henrique Cardoso) and I have periodic debates about
Mercosur. I suspect him -- in his charming non-confrontational way -- of trying to
build up Mercosur in a way that reduces -- shall we say kindly -- the role of the
United States. If NAFTA were not to be expanded Fernando would not spend
sleepless nights on the subject and he would rather try to figure out how Brazil
can pick up some of the potential applicants and put them into its grouping. And
I feel about this the same way I felt about India when I was asked, last year,
about the Indian nuclear program, in a press conference, and I said "if I were
President of the United States, I would conduct exactly the same policy with
respect to that program that President Clinton is conducting. If I were Prime
Minister of India, I would conduct exactly the policy that India is conducting, and
somewhere in between we have to find the solution".

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I feel that about Mercosur. I am not bothered by the emergence of a trading block in Latin America. In fact when one looks at your statistics, it is almost inevitable, that it is a natural fit, but at some point in that process there has to be a reconciliation otherwise it will degenerate into a confrontation which would hurt both sides. What that point is I am not here to say, but I want to point out a number of things.

The economic world which has been so brilliantly described here is based on the uniformity of motivations all over the world simultaneously and it is assumes that these motivations are always economic motivations. The globalized world presupposes perfect judgments at every point and moment in time, and toleration for the adjustments that imperfection inevitably produces. But the political world is not global and political leaders become sustained in office without being able to present these charts that the vast majority of their electors wouldn't understand and would not even look at. So it is inevitable that political leaders will resist the operation of the economic system at a point when it becomes excessively disadvantageous to their own political positions.

I talked to many bankers that returned from Hong Kong and they are all wallowing in extreme self righteousness about the stupidity of my former student, I regret to tell you, Mahatir, the Prime Minister of Malaysia. I am sure he would fail an economics examination. On the other hand, I am assuming that

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somebody who has stayed in office for 25 years through more or less honest elections must know what he is doing in handling his political process and therefore he must believe he is in touch with some under-current in Malaysia and probably in South East Asia. I (am not so much in favor of this position) which I think is amateurish, but inherent in the global economic system as it now exists, is the reality that governments do not always act perfectly either because they are incompetent or because they are competent and feel it is not the right time to act. Even the highly competent Brazilian government is not going to tackle the exchange rate that Fernando described before October next year in more than the gradualist way that it is now dealing with it and I think they will get away with it probably.

But, the global economic system has two aspects now. In my view it exaggerates the upside in the sense that when a country becomes fashionable or a region becomes fashionable money pours into that region and while the bankers after the event bewail the consequences of their actions, I am not familiar with any banker who has ever warned a potential client to take it easy or maybe there are, but there are certainly enough bankers who try to ride the wave. So the upside may become too dramatic and be reflected in what was shown in some of the charts -- in big construction booms and bubbles which then have to be worked out. And when they begin to be worked out, there is something in what Mahatir says because there is the element that, say, the IMF would be concerned with. But there is something that the speculators are

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concerned with, who either want to get their money out very quickly or who want
to take a ride.

On the down side, these types to whom I've spoke last week, claim that – and I
am no expert on this – that the devaluation of the (Thai currency) baht from 25 to
30-32 (per US dollar) was something that the IMF would have recommended but
they felt that going beyond that was political and speculative and added to their
difficulties unnecessarily. I am not saying they are right about the numbers, I
have no judgment whatever about the numbers. But we've seen it in Mexico,
where a sudden outflow of capital caused by misjudgment of the finance minister
exaggerated an adjustment that certainly needed to be made. One can see
many similar problems.

Right now Latin America benefits from three aspects of the American economy: Low interest rates, growth in the U.S., and an approach of openness to cross-border trade and investment. But it is not foreordained that all three factors coexist simultaneously. It is even possible that what we are living through now and the next few years, are the good old days that it will never get better than this for other countries. It is also the case that the sluggish economic performance of Europe and of Japan keep commodity prices low, and low commodity prices are one of the elements in preventing the inflation which is such an important factor in the rise of the standard of living of the poorest

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element of the population in Brazil and somebody had told me in Argentina as well.

Then there are secular aspects of the political process. The reformed government in Argentina and Peru for example *have been in office too long*. And their opposition has a huge temptation to attack the weak spots of the economic performance which are inevitable. High unemployment, too slow a rise in the standard of living. So, all I am saying is that the assumption that everything will work as we now see it is improbable, and therefore, there will be a tendency for national solutions. Now you can argue the WTO and the IMF will smooth all of this out on a global basis, and if they do, I'll be thrilled. I believe however, that for the same reasons that we did not help Thailand we would not help a lot of other countries and that for this reason, I favor regional groupings that are held together by something other than pure economics.

And this gets me back to why I favor this Western hemisphere trade pact (Free Trade Area of the Americas 2005), whatever the name is, whatever it is that president Clinton proposed in Miami which unites NAFTA and Mercosur down the road. (And this gets me back to) why I think it is a terrible omission by the US not to proceed with fast track authority earlier and the inability imposed on the administration by the Congress of coming forward with a precise program. Now I think I am not bothered by Mercosur provided it is understood, on all sides, that sooner or later we need a larger grouping.

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Indeed, if I had my way, I would say, Mercosur and NAFTA should be joined in some fashion and then they should join into a free trade area with the European Union and those statistics that were shown here make all of that perfectly sensible. I would favor that because it would enable us to have policies to smooth out some of these difficulties that otherwise would become the playthings of speculators. Now I know this would be a super regional grouping and then the question is how do we deal with Asia. We deal with Asia the way that Asia deals with us. On the basis of mutual interest which still would favor the removal of trade barriers but which would enable us to deal with it in a more coherent fashion that it is done now. So, when I ended government 25 years ago, Brazil had a GNP of US$50 billion and a per capita income of $500. Now it has a GNP of $850 billion and a per capita income of roughly $5000. This is fantastic progress.

One reason the Western Hemisphere relationship and the Western Europe relationship are important is because these are regions of the world in which strategic conflicts are practically excluded. There will be no wars here. There will be no invasions of other countries. There will be no use of force to vindicate one's political position. This cannot be said of east Asia or of Africa and therefore, dealing with the problems I've described, is a great opportunity.

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So, my basic point, even if you disagree with this or that aspect, is that the
political and economic side of world structure must be brought into some
relationship with each other. Otherwise, if we rely entirely on economics to
straighten out the difficulties that will inevitably arise -- the swings will be too
great, the government will look too impotent, and some of the attitudes that
developed in the 19th century, when it was also believed that economics would
take care of itself, will reappear demanding that government solve some of the
problems. So that is my basic message to you, and those of you who disagree
with me will be told by Vernon tomorrow that there aren't many people in
Washington who would agree with this necessarily. So let me stop here. Thank
you very much.