The World We Live In - 1984
Stanley Burbury Lecture Theatre, University of Tasmania - Thursday 12 July 1984
Since the last election, I have kept a self-denying ordinance and not commented on domestic politics.
I am not going to break that ordinance now, but I do want to talk about the world we live in and about two major aspects of international policy which are important for all free peoples.
I want to make one or two points which I regard as important about the relationship between the United States and Western Europe, and between the Western Alliance and Soviet Union .
Then I want to say something about the fundamentals of the world economy which, at the moment, are causing many people overseas a great deal of concern.
In recent times, there has been considerable friction within the Western Alliance, between the United States and Europe. This has been caused by lack of understanding of each other's point of view, by great differences of perception concerning the Soviet Union. It is unfortunate that neither Europe, nor the United States, spends enough time trying to understand the point of view of the other.
Unity and strength within the Western Alliance is of enormous importance for the maintenance of peace.
Yet despite this, I was at a Conference in January of this year in Brussels in which Europeans and Americans seemed to delight in scoring points off each other, as though they were opponents rather than allies. As one who believes greatly in the idealism and purpose of the United States, and in the great generosity of the American people, it concerns me that this is so. We need to ask ourselves how this has come about.
When the Alliance was first formed, Europe was war-torn and ravaged, weak and disunited. America was pre-eminently strong – economically and militarily. At the time, America was the only nuclear power. In these circumstances, leadership was relatively easy – America determined what was to be done.
Thirty five years on, a great deal has changed. 260 million people in the European community, most of whom are partners in the Atlantic Alliance, have developed their own sense of identity, their economies are rebuilt, they have naturally sought to assert their own sense of direction, their own purpose in the world.
It is not now a question of America determining the direction and Europe following. The need is to develop the direction, the objectives and the relationships of the Alliance as partners, rather than as leaders and followers.
The structures of the Alliance have not altered much since the foundation of NATO, but the economic and military capacity of the partners has altered significantly. Their political and psychological attitudes have also changed greatly, and none of this, I think, is adequately recognised.
Thus, we have the kind of resolution that was sponsored in the American Senate recently which, if passed, could have led disastrously to the withdrawal of America forces from Europe .
The significance of the resolution is that it was promoted by people who are greatly respected and who are spoken of as possible future presidential candidates.
The United States has continued to behave as though she should ordain policy, as was the case in the beginning, and Europe should automatically follow. The partnership will not work that way, and new means of co-operation need to be found.
I have great hope that Lord Carrington, former Foreign Minister for Britain, former High Commissioner for Britain to Australia, as the new Secretary General of NATO, will help to forge a safer and more secure relationship.
It is essential that America understands that Europeans are on the front line of any conflict between East and West in Europe . West Germany would be the first battleground.
It is essential that America understands that when it calls for trade sanctions against the Soviet Union, the economies of Western Europe are integrated with the East – something like 30% of Germany's exports go to the Eastern Bloc, while only about 4% of the United States' exports go in that direction.
Thus, economic sanctions bear disproportionately on different members of the Alliance. Europeans find it impossible .to understand how the United States could call for the abolition of the gas pipeline from the Soviet Union, which would bring power into cities and factories in Western Europe and, at the same time, lift the grain embargoes on trade with the Soviet Union.
There must be consistency in policy. There must be continuity in objective. Whatever the faults of Europe may have been, there has been a greater continuity in their policies than there has been in the United States - because in the last two American Administrations, there have been significant changes of policy, not only between Administrations, but within Administrations. President Carter at the end of his term was quite unlike President Carter at the beginning. And Mr. Reagan today is using very different words from those with which he began nearly four years ago.
Continuity and bi-partnership in United States policy may well be a pre-requisite for re-establishing an adequate degree of unity within the Western Alliance.
The United States, for its part, believes that America bears a disproportionate share of the cost of Western defence. In that they are correct.
The United States is also correct in believing that Europe pays insufficient attention to affairs outside of Europe, whether it be in South East Asia, in Central America, or the Middle East, and that Europeans are all too ready to criticise the United States, while making little effort of their own.
I want now to come to a more particular matter concerning the Alliance, and let me start by saying that my view of the Soviet Union has not changed.
I regard the Soviet Union as aggressive and as imperial. She is the only power to expand significantly her territories in the years since 1945.
At the same time, I regard the Soviet Union as cautious – she has not used force when she thought the circumstances would involve a major reaction by the Western Alliance - and so far her judgement in that has been right, as it was in Afghanistan.
I also regard the Soviet Union as being paranoiac about its own security. All this makes for a strange mixture and a very dangerous country.
I don't believe the Soviet Union can be changed by external pressure. The Soviet machine is set in certain directions and the most powerful people within the Politburo would only be able to change policy marginally and slowly.
This means it is important to understand the nature of the Soviet Union. I suspect the country is still 75% Russian and, maybe, 25% Communist, but that makes her nonetheless dangerous. If Soviet leaders persuaded their people that they must endure further hardship for the safety of Mother Russia, then those hardships would be endured. One thing the Soviet people have demonstrated for over a thousand years is an almost limitless capacity to endure and survive hardship under enormous difficulty. There is no suggestion that that capacity has in any way diminished.
This is a country that we all have to live alongside if the world we know is to survive. It is important, therefore, that there be the best possible understanding of the Soviet Union and the closest possible knowledge of Soviet leadership by leaders in the West.
Because of my view of the Soviet Union, I have supported the United States' re-armament and obviously support the placement of cruise missiles in Europe. We need to remember it was European NATO partners who originally asked for these missiles to be placed on their soil – it was not a United States request. Then, the United States was responding to her European partners.
Even so, the re-armament has now gone so far that I would not mind if five year programmes were extended to eight. I doubt if the military are able to spend effectively the great increases in funds being voted to them.
From this point, I start to diverge from the conduct of foreign relations between East and West in the last two to three years.
Many people in North America have not understood that a period of growing strength for the West creates momentarily a period of greater danger for world peace, unless the purpose for which that strength is sought is very clearly known and understood.
The Western Alliance as a whole, and the United States in particular, has not spoken with clarity, with precision, with consistency on these issues.
Lord Carrington, in a famous lecture, criticised what he called 'Megaphone Diplomacy'.
We need to remember that, whatever we might think of the Soviet Union and her objectives, if we are to survive on this earth we all have to survive.
It is not within our capacity to change the system within the Soviet Union or in Eastern Europe however much we might think that would be desirable.
To attempt to change that system from without, or to attempt to do it by military means, would cause total catastrophe. That is why it is so important to understand the nature of the Soviet Union and to conduct Western policies with total precision and absolute clarity, with no possibility of misunderstanding.
The West, and in particular the United States again, has not understood that the management of strength requires a sophistication and a delicacy in touch much greater than at a time of weakness.
If an American President is not respected, if the United States is perceived to be weak and lacking in resolution, it probably does not matter much what that President says. But when a President is perceived to be strong and very determined, when the country is re-arming, it matters very much indeed.
There was a good deal of criticism of the 'evil empire' speech. That is a matter of taste. Some might have said it would be better for the Secretary of State to use these terms. Others might have said it would be better for the terms not to be used at all, since America was then speaking of people with whom the United States has to share this earth.
But they are not the words and the phrases to which I object most strongly in the conduct of relations between East and West.
The kind of words to which I object are ones which can be construed as implying a sacred duty to the United States to ensure that each person has the right to live in liberty and democracy, with a Government of his or her own choice. Words such as those used by President Reagan in his address to the Tenth Anniversary Dinner of The Heritage Foundation.
For example, in that speech President Reagan said: 'The goal of the free world must no longer be stated in the negative … it must be stated in the affirmative. We must go on the offensive with a forward strategy for freedom … we must foster the hope of liberty throughout the world and work for the day when the peoples of every land can enjoy the blessings of liberty and the right to self government.'
Now, we all know that is not possible and such words, therefore, should not be used in speeches to the Republican faithful.
When the United States negotiators confront their Soviet counterparts and say 'Don't listen to what the President said at that Republican meeting… THIS is the real policy of the United States', I have not the slightest doubt that the Soviet leadership would read the meaning as the direct opposite and they would pay more attention to that which they were asked to ignore.
If we believe, as I do, that if the Soviet Union had a chance to bury the West completely – without too much damage to herself – she would do so, it is not necessarily so strange if the Soviet Union believes that of us, especially when words are used which can be so construed.
The short point here is that the leaders of major powers cannot afford to use one set of words for domestic purposes and another set for international purposes. The language needs to be totally and absolutely consistent so that policies can be understood
This is the first requirement for greater safety in relations between the major powers.
Secondly, it is enormously important that the President of the United States and the General Secretary of the Soviet Union meet. I differ from the commonly accepted view that they should only meet after enormous preparation, to put their signatures on things that have previously been agreed by their subordinates.
I believe they should meet to get to know each other so that they can judge each other's reactions – and if they have a personal knowledge of each other, maybe they would have some capacity to speak and exchange views on points of major danger, and thus avoid the danger. The purpose of the first meeting should be to meet - and meet alone. That might seem a small achievement but it could well be critical.
Thirdly, there needs to be a return to quiet diplomacy. It is quite hopeless to make major proposals publicly, on television. Every time a new proposal is made, the currency becomes depreciated. Each proposal appears to contain concessions that were not in the last, and that puts doubt on the credibility of the earlier proposals. It provides the appearance of making concessions when such an appearance should be avoided.
But more important than that, when the proposals are made publicly, the relationship is such that each side is determined not to give any political advantage to the other and, therefore, the proposal is immediately condemned and both sides find they get their feet locked in concrete. The possibility for manoeuvre and for agreement is further diminished.
Fourthly, making proposals publicly and successively can itself be very dangerous, because if the Soviet Union wanted to go through the American proposals of the last 12 or 18 months and put all the concessions together, it might well find it has a package taken from United States proposals that the West itself would not be able to live with.
Fifthly, in relationships between major powers, ideology must be put aside. Because ideologies are so different, relationships must be conducted on a pragmatic basis if there is to be any hope of agreement, any recognition of live and let live, which alone could lead to a reduction in world tension.
I know that all of this would require very considerable change in the conduct of leadership on behalf of the West. I also believe that such changes are enormously important if the world is to be made more secure.
We need to recognise that the stronger we are in the West, the greater care we need to exercise in the conduct of our international relationships.
We must also understand that because of the nature of the Soviet Union, the burden of constructive policy falls disproportionately on the West, and on the United States as the most significant member of the West.
Let me know turn to an issue which I regard as of even greater urgency and as of even greater importance than the strategic political issues about which I have just spoken.
And that is the world economy.
You might regard this as an unusual view since there is a strong and vigorous recovery in the United States; since unemployment there has fallen; since inflation is well down; some new investment seems to be occurring, and there appears to be the beginnings of recovery in many parts of the Western World, including Australia.
I recognise the achievements that the current American Administration has made in terms of employment, inflation and growth, but despite all this there are some major fundamental, economic imbalances within the United States' economy itself, and between the United States and other countries, that cause serious concern for the future.
The issues revolve around two particular questions – that of the United States deficit, and that of the indebtedness of major Third World countries.
Unless action is taken on both counts, the recovery that has been moving forward strongly in the United States will, for much of the rest of the world, become the recovery that never was.
We need to understand that the debt crisis of Third World countries, but of South American countries in particular since about 400 Billion Dollars of Third World debt is concentrated in that Continent, has really translated itself into a crisis for the world financial system.
It is important to understand how this has come about.
When the OPEC countries increased their oil prices so much during the 1970s, many major countries started to worry about re-cycling of what were known as the surplus oil funds. They should have been worried about other matters, because American, European and Japanese banks took these funds on deposit from oil producing countries and on-lent the funds to major Third World countries, particularly South America .
This was the origin of much of the debt problem. The banks saw the possibility of high profits, large loans with small overheads and, of course, they operated on the simplistic and false view that Governments don't default. They must have had a short understanding of history, because Governments have defaulted, and will default again. Many Governments saw this kind of lending by commercial banks as a much cheaper and better form of aid than official development aid that appears on a government budget – and so they encouraged their major financial institutions to pursue this process.
Thus, the banks lent too much, they forgot normal bankers prudence, they made loans to South America in circumstances in which they would never have dreamt of making similar loans to any corporation. And, of course, Third World countries borrowed too much.
This has now resulted in a continuing crisis in a situation in which the debtor countries cannot repay the loans as they are written. In 1985/1986, the total debt service requirements in South America are about 55 Billion Dollars - for Third World countries as a whole, .about 101 Billion Dollars.
There is no hope of that money being found. Many of the loans are, in the technical term, 'non performing'. That means the borrower is not repaying and does not intend to repay. If it were a normal commercial loan, I suppose the bank would have sold up the farm, or the business, but being a country, they are more polite, and just call it 'non-performing'. This avoids having to write off the loan as a loss, which would have disastrous results for the banks' Balance Sheets.
To maintain this position, a consortium or collective of international banks have had to go on lending more money so they could be repaid their own interest. Banks that did not want to do this had their arms twisted by their own central banks, and were thus forced to do so.
It does not seem to me to be a very good basis on which to conduct international economic relations.
This situation is compounded by the United States deficit. It is running at 180 - 200 Billion Dollars per year. The deficit was about 50 Billion when Mr. Reagan came into office and he, as the President most committed to get rid of the deficit, has increased the United States deficit more than all other Presidents in the history of the United States combined.
That is quite an achievement.
He has, I am advised, increased welfare spending at a rate three times faster than President Carter. That is not generally understood - it would not be generally accepted - nevertheless, it happens to be accurate.
The American deficit may not matter so much to other people if it were merely an internal U.S. problem, and if the United States was able to fund that deficit from internal sources – but the United States cannot, because its commitment to savings is small, running currently at something under 4% of income per year. The comparative Australian figure would be over 12 per year.
Since the American deficit is then, 5% of Gross National Product they have only two ways of financing the deficit. They can print money, which Mr. Volcker of the Federal Reserve plainly does not want to do and should not.or, they can keep interest rates high and bid in money from overseas - and this is what has been happening.
Those who last year were predicting a fall in American interest rates and a fall in the value of the dollar because of the American trade imbalance were forgetting that both these factors are governed by the fundamental of the United States' internal deficit.
Since that has to be financed by funds from overseas, interest rates have to be kept high enough to draw in money from overseas. That means the U.S. dollar has to be kept strong. If there is any break in confidence in the value of the American dollar, interest rates have to rise further to re-establish confidence in the dollar. This has already happened two or three times during the course of this year.
While the high deficit lasts, interest rates will rise rather than fall.
One significant danger for President Reagan is that at some point, because of fundamental imbalances, increases in interest rates may not maintain confidence in the value of the American dollar, and that would create an enormously serious situation.
All of this is very much related to the South American debt problem, because every percentage increase in American interest rates adds 4 Billion Dollars onto the annual repayment of South American debtor countries. Since interest rates have increased between 2 and 3% over the last 6 or 8 months, it is easy to see the impact that that has had on these countries.
South American debtor countries can be characterised by unemployment levels of 25% or more; a fall in real income over the last 2 to 3 years of up to 30%, which is more than living standards fell in Australia or the United States during the great depression; by annual debt services charges of around 40of total export income, but which in 1982 were 66% of export income.
They are characterised by inflation rates that are enormously high and run to over 500% in Argentina; by debt servicing charges which are greater than any prospect of new loans, thus creating a situation in which debtor countries in great difficulty, are making a net annual contribution to creditor countries, in particular to the United States.
The linkage for that statement is plain. Over 90% of American government expenditure is on consumption. Money that has to be drawn in from overseas to fund the American government debt largely goes on consumption. Thus, the annual transfer payments being made by those debtor Third World countries are going to support current consumption levels in the wealthiest country in the world. It is an unhappy but factual situation.
A number of South American countries are also characterised by disillusionment with military government, and there are emerging democracies in a number of countries that ought to be supported.
Against this background, South American countries economically cannot repay the loans as they are now written. Politically they cannot repay the loans - any leader who tried to would be strung up by his boot heels.
Their crisis, therefore, translates into a crisis for the United States, German and British banks – many of which are significantly vulnerable. A number have lent up to 250 of their total capital and shareholders funds to South American countries alone.
Thus, the banks are perceived to be at risk. Because banks are perceived to be at risk, they are subject to rumour and at any point the financial markets know that a rumour could be true. In these circumstances, confidence is already seriously breached.
Because of South America, the banks are in great difficulty. If anything else goes wrong, they would be in a diabolical trouble.
The banks are more specifically in danger:
1. from the default from South American countries, and
2. from corporations shifting their assets. It is not just a question of guaranteeing depositors and creditors.
If a corporation has a Line of Credit available for a particular enterprise, it wants to know that that Line of Credit is held with an institution that will not interrupt it because of circumstances in South America .
Thirdly, the banks are at risk because much of the OPEC oil money was placed on deposit 'on call' at 7 days or less.
And, fourthly, the banks most exposed to South America are at risk because those not exposed might well get tired of the business of sending more good money after bad so that they can be paid interest on loans that they themselves have already written off.
One of the great problems of this situation is that American banks have not written off their debt. European banks have written off some but not very much.
An overall approach to this problem is an urgent necessity.
It is not good enough just to muddle through to meet crisis after crisis as it arises and hope that confidence can be sustained in the financial system. The prospect of recurring crisis needs to be removed.
It can be done. The processes which would need to be put in place are clearly understood and known, but governments on both sides of the Atlantic continue to say this is a problem for debtors and creditors alone to sort out.
That is a very high risk policy and one that runs the risk of a total lack of confidence in the financial system and consequential breakdown. If that arises, all the statements in the world by central banks, Presidents or Prime Ministers, will not re-establish confidence.
The debts of these Third World countries need to be re-scheduled on the basis of certain principles.
Firstly, they should be re-scheduled over a considerable period of years - in some cases it might have to be up to 20 years.
Secondly, annual payments should be within the capacity of a particular country, taking into account social and economic factors. The annual payments required from a particular country should not demand further belt-tightening from people who are presently in abject poverty.
Third, the programme should leave resources for development in such countries.
Fourth, the programme should end the net resource transfer from debtor countries to the United States, Japan or Europe .
Almost certainly it will be found that such a programme won't provide sufficient funds to keep banks out of trouble in the short term. It will not be possible to get enough money out of those debtor countries to avoid major problems for the Balance Sheets of banks, and therefore for their viability, and for confidence in the system. Thus, Governments and central banks will inevitably have a role to play.
Once an examination has been undertaken of particular countries and what annual obligation can be expected of each country, it is then possible to make a judgement as to how much the programme is going to affect the Balance Sheet and viability of any one of these international banks.
Let me make it quite plain - the management of the bank should not be protected, the profits of the bank should not be protected, the shareholders funds should not be protected - but the viability and continuity of the institution must be protected and, therefore, there is a limit to the losses that can be incurred.
It is that limit which will determine in each case the extent of the support required from Governments or central banks.
Such a programme can be put in place by a number of techniques, and, indeed, a number have already been suggested.
I would favour a division of the International Monetary Fund being given responsibility for negotiating - with debtors, creditors and governments.
It certainly needs to be some party that stands apart from the principal problem. The principles I have suggested are important, they could be applied by a number of devices – the technique would be significant but not critical.
There are other matters we need to be aware of.
There are suggestions on both sides of the Atlantic that the debts could be greatly reduced by a transfer of assets. Imagine a South American President or Prime Minister going to his people and saying 'Well, we haven't got a debt problem any more, but we don't own any mines or farms.'
It is not a viable political solution.
As part of an overall approach, OPEC countries should be persuaded to place their funds which are on 7 days call on a much longer term deposit basis.
One would hope that this kind of programme would allow other forms of lending to resume, because countries that are viable, that have met their debts, are to a significant degree paying a price for the present difficulties.
The available bank funds are committed to providing more loans to those most indebted countries so that the banks can be repaid their own interest. That reduces the capacity for lending to viable Third World countries, and such lending is obviously important.
The problem is also very important from Australia's point of view, because while it win be denied, there is now a good deal of pressure from American banks and the American government to buy South American rather than Canadian or Australian. That affects our resource industry significantly. It is simply a question that the more business done with South America, the more pressure on American financial institutions is reduced.
I ought to add, incidentally, that Australian banks were not in the business of lending to South America, and for that we can be very grateful.
All this is a serious problem that ought to be tackled – the recent Summit Conference in London skated over the issues. The tendency on both sides of the Atlantic seems to be to blame incompetence in Third World economic management. Obviously, there is truth in that, but the banks are also to blame for having lent too much, and governments are to blame for having encouraged them.
There is no point in attempting to apportion blame because we face a major problem which affects the whole free world. A much more important fact is to recognise that there is a problem to be dealt with which goes right to the heart of the financial system.
The kind of action required demands a Statesmanship of a high order – it would not be easy but it is possible, it is necessary.
There is no magic required for the solution – just a determination to act before crisis after crisis utterly destroys confidence.
There are now a number of respected analysts in New York and other places who believe that on current, existing policy the whole system is headed for breakdown.
Against a background of one of the strongest recoveries in the post-war years, the New York Stock Market would seem to be screaming confirmation of that view.
We should understand that at certain times in history, decisive action is required if disaster is to be avoided, and our leaders need to display a little historical imagination and a considerable degree of political courage.
Confidence in the financial system is frail and seriously damaged – it could so easily get beyond the capacity of Presidents, Prime Ministers, or central banks, to sustain.
The muddle-through philosophy at present operating could succeed – let me make that plain – but it is an enormously high risk policy. When there are policies available that would avoid risk entirely, it seems to be the utmost foolishness to maintain the present course.
While the situation is dangerous, I have total and absolute confidence that it can be managed securely and safely and with absolute certainty, provided timely and appropriate action is taken.