Speech

STRENGTHENING THE WORLD ECONOMIC STRUCTURE

Secretary Henry A. Kissinger before the Kansas City International Relations Council.

Yesterday [in St. Louis] I spoke of the political challenges facing us in foreign policy-that we have a vast agenda ahead of us, that the world is poised on the brink of a new era of achievement or one of chaos, that America's role will be vital.

Our challenges in the economic field are no less urgent and important. Today I will discuss the international economic system and set forth a comprehensive American approach to the major issues at hand.

The paramount necessity of our time is the preservation of peace. But history has shown that international political stability requires înternational economic stability. Order cannot survive if economic arrangements are constantly buffeted by crisis or they fail to meet the aspirations of nations and peoples for progress.

The United States cannot be isolated-and never has been isolated-from the international economy. We export 23 percent of our farm output and 8 percent of our manufactures. We import far more raw materials than we export; oil from abroad is critical to our welfare. American enterprise overseas constitutes an economy the size of Japan's. America's prosperity could not continue in a chaotic world economy.

Conversely, what the United States does-or fails to do-has an enormous impact on the rest of the world. With one-third of the output of the non-Communist world, the American economy is still the great engine of world prosperity. Our technology, our food, our resources, our managerial genius and financial expertise, our experience of

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leadership are unmatched. Without us there is no prospect of solution. When we are in recession, it spreads; without American expansion, the world economy tends to stagnate.

For 30 years the modern economic system created at the Bretton Woods conference in 1944 has served us well. Its basic goals-open, equitable, and expanding trade, the stability and orderly adjustment of currencies, coordination in combating inflation and recession-have largely been achieved. World growth has surpassed any prior period of history.

But the system

now under serious stress. It faces shortages and disputes over new issues such as energy, raw materials, and food. And many of its fundamental premises are challenged by the nations of the developing world.

Obvious crises are the easiest to meet; the deepest challenges to men are those that emerge imperceptibly, that derive from fundamental changes which, if not addressed, portend upheavals in the future. These contemporary challenges to the world economic structure must be overcome, or we face not only an end to the growth of the last 30 years but the shattering of the hopes of all of mankind for a better future. Our economic strength is unmistakable. But what is tested now is our vision and our will-and that of the other nations of the world.

The Existing System

The international economic system has been built on these central elements:

• Open and expanding trade;

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Within this framework, over the past quarter century, the industrialized countries have maintained an almost continuous record of economic growth. The developing countries have made unprecedented advances, though their progress has been uneven.

After the experience of the 1930's the postwar system was designed-with the United States playing a leading role-to separate economic issues from political conflict and to subject them as much as possible to agreed multilateral procedures. The rules were designed to restrain unilateral actions that could cause economic injury to others.

The world's economic growth within this framework has been simultaneously the cause and the result of growing interdependence among nations. Revolutions in communication and transportation have shrunk the planet. The global mobility of capital, management and technology, and materials has facilitated the growth of industry. World trade has encouraged specialization and the efficient division of labor, which in turn have stimulated further expansion. The recession and inflation of the last few years-which spread around the world-have reminded us that nations thrive or suffer together. No country-not even the United States-can solve its economic problems in isolation.

Consciousness of interdependence has been most successfully implemented among the industrialized countries. When the energy crisis first hit us the industrial countries agreed that they would not resort to unilateral, restrictive trade measures to make up the payments deficits caused by high oil prices. That pledge was respected and will be renewed this year. And last fall, as the recession worsened, the President held a series of conversations with German, Japanese, British, and French leaders to devise a coordinated strategy for economic recovery. These policies have begun to bear fruit. The advanced industrialized countries have understood the imperative of coordinating their economic policies.

As our economies now turn toward expansion we must ensure that our policies remain coordinat

ed, particularly for the control of inflation with its economic costs and attendant social dangers.

Against this background of cohesion the industrial countries can act with renewed confidence across the entire range of political, economic, and security issues. The annual ministerial meeting later this month of the Organization for Economic Cooperation and Development [OECD] is therefore of great significance. This body-composed of the industrialized countries of North America, Europe, and Asia-will assess where we stand and discuss even closer coordination and joint actions in economic policies. Secretary [of the Treasury William E.] Simon and I will represent the United States.

The Challenge From The Developing World

Global interdependence is a reality. There is no alternative to international collaboration if growth is to be sustained. But the world economic structure is under increasing challenge from many countries which believe that it does not fairly meet their needs.

The challenge finds its most acute and articulate expression in the program advanced in the name of the so-called Third World. This calls for a totally new economic order, founded on ideology and national self-interest. It is stimulated by resentments over past exploitation, and it is sustained by the view that the current system is loaded against the interests of the developing countries. One of the central proposals is that the prices of primary products should be set by international agreements at new high levels and then pegged to an index of world inflation. The objective, as with the oil price increases, is a massive redistribution of the world's wealth.

This challenge has many aspects. At one level it is an effort to make the availability of vital natural resources depend on political decision, particularly with respect to energy, but increasingly involving other materials as well. More fundamentally it is a result of the new dispersion of economic power among developed and developing countries that springs from the unprecedented global economic expansion of the last 30 years.

The United States is prepared to study these views attentively, but we are convinced that the present economic system has generally served the world well. We are prepared to consider realistic proposals, but we are convinced that poorer nations benefit most from an expanding world economy. History has proved the prosperity of

each nation requires expansion of global prosperity. This should be the focus of our efforts.

The United States is convinced that an international system overshadowed by the rivalry of nations or blocs will produce instability and confrontation. This will prove disastrous to every nation-but above all to the weakest and the poorest.

The United States therefore is committed to a cooperative approach. We recognize that an international order will be durable only if its members truly accept it. And while the participation of developing countries has increased, it is clear that the energy producers and the emerging nations in Latin America, Asia, and Africa have believed themselves to be outside the system. We have a duty to warn against, and to resist, confrontation. But we are prepared to strengthen and expand the international economic system.

A serious concern must be the needs of the poorest. They have been the most grievously affected by the food and energy crises of the past 2 years. Their fate affects us morally as well as materially. Their prosperity would contribute to ours. And their participation in the global economy is required so that all nations, and not only the richest, have a stake in the world which we are building.

Let me now turn to the three most urgent challenges on the economic agenda-energy, primary commodities, and food.

Energy

It is in energy that the challenge to the economic system has been the most effective and has had the most severe impact.

For years the United States and other industrial countries built their prosperity on ever-increasing imports of inexpensive foreign oil. Now we see that both the price and availability of those supplies can be determined by decisions over which we have no influence. Our jobs, our output, our future prosperity are at risk.

In response, at United States initiative, 18 major industrial countries created the International Energy Agency [IEA] to coordinate our efforts in a common strategy.

Our first responsibility was to protect ourselves against emergencies. We have to be prepared to deter the use of oil or petrodollars as political weapons or to defend ourselves if we are given no choice. To this end we and our partners have developed a comprehensive plan to build up oil stocks,

coordinate conservation measures, and share available supplies in the event of a new embargo. We have also agreed on a $25 billion "financial safety net" to protect against the stresses of large oil deficits and possible financial manipulation.

The second objective of the strategy is to bring pressure on the oil price through the market. If we act decisively to reduce the consumption of imported oil and develop alternative sources, we will sharply reduce demand. The producers can restrict production to maintain high prices and allocate the cuts among them, but at some point the severe decrease in demand will become a burden on those countries who seek maximum revenue for development.

Accordingly we and our partners first set joint conservation goals. We then reached preliminary agreement on a plan to stimulate alternative sources. The plan calls for cooperation in research and development and a common minimum price mechanism to protect domestic alternative energy sources from competition from imported oil. The ministers of the International Energy Agency meet later this month to accelerate the common effort. We shall propose ways to exploit our greatest asset-our technological capability and skill, particularly in the development of alternative energy

sources.

In the end the key to the international effort will be what America does. We use fully half of the industrial world's energy. If we bring our consumption under control, so will other industrial countries. Indeed other countries are already ahead of us in adopting new taxes and other programs to curb energy use. But if we do not act now, while recession is holding down demand for oil, our vulnerability will grow again when our recovery gains

momentum.

The choice is clear: Either we pass now an effective program of energy conservation and energy development or we become dependent on foreign sources for half our oil within a few years and correspondingly vulnerable to political pressures or manipulation.

The Congress has before it President Ford's energy program. Its decision is therefore critical to our future well-being and that of the international community.

Ultimately producers and consumers of energy must develop a new and balanced relationship. A first attempt at dialogue at the preparatory meeting called by [French] President Giscard

d'Estaing in April did not succeed.

The United States wants to say now that it is prepared to attend a new preparatory meeting. We believe that the meeting should be prepared through bilateral contacts between the consumers and producers. The United States will initiate such contacts with its partners in the IEA, with the Government of France, and with the producers. Our own thinking on the issue of raw materials, and the manner in which it can be addressed internationally, has moved forward. We can thus resume the dialogue in a new atmosphere. Let me now turn to the issue of raw materials.

Commodities

The threat to our national security from a disruption in supplies of most raw materials is limited. We depend on imported raw materials for only 15 percent of our total needs; only 3 percent of our raw materials are imported from developing countries.

But we do have a concern for a flourishing world economy. In raw materials interdependence is as real as in energy. There exist common interests in a reliable and flourishing trade on mutually beneficial terms. It is in our interest, because the growth of the industrial nations will increasingly depend on raw material imports and because our growth depends on a healthy world economy. It is in the interest of developing countries, because their exports are often the principal source of development financing. It is in the interest of the world community, because the poorer countries can gain a sense of responsibility and participation only from the sense that their concerns are taken seriously.

The United States is aware of the dependence of many countries on their earnings from a single commodity. It is legitimate and reasonable that they should seek a reliable, long-term stable source of earned income for their development.

However, we do not believe that tying commodity prices to a world index of inflation is the best solution.

First, price indexing would strengthen those least in need of help because most raw materials production still takes place in the industrial countries, and price indexing would harm those most in need of help because the poorest, most populous states are net importers of raw materials. Finally,

such a scheme would introduce artificial rigidities which is likely to result in misallocation of resources and scarce capital and underutilization of needed productive capacity in many parts of the world.

We are prepared to discuss these issues in a cooperative spirit. We understand that development of many mineral resources is becoming increasingly dependent on heavy capital investment. The efficient development of lower-grade ores now depends on sophisticated technology and very large-scale operations. We recognize that excessive swings in commodity markets entail heavy, perhaps growing, costs. In periods of slack demand substantial excess capacity often appears. In peroids of tight demand skyrocketing prices force costly adjustments in manufacturing processes and pricing. We realize that the role of private capital, which traditionally has been responsible for development of most overseas minerals, is being increasingly challenged on political grounds. To deal with these issues the United States will adopt the following approach.

First, since both producers and consumers want a more reliable basis to do business, we will propose that the Multilateral Trade Negotiations now under way in Geneva develop new rules and procedures on such questions as freer access to supplies and markets, promotion of mining and processing industries, and settlement of disputes.

• Secondly, we are prepared to discuss new arrangements in individual commodities on a caseby-case basis as circumstances warrant.

⚫ Thirdly, we will propose that the World Bank [International Bank for Reconstruction and Development] explore new ways of financing raw material investment in producing countries. We are particularly interested in exploring new ways of mobilizing capital and bringing together with outside management and skills.

It is clear that both producers and consumers have much to gain from the settlement of the disputes over raw materials.

It is also clear that these issues are becoming of fundamental importance to the world's economic and political-future. They have been brought to the center stage of world diplomacy. They represent an area of potential division. But