REMARKS BY WILLIAM H. WEBSTER DIRECTOR OF CENTRAL INTELLIGENCE TO THE LOS ANGELES WORLD AFFAIRS COUNCIL

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP99-01448R000401640021-1
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 17
• Document Creation Date: December 22, 2016
• Document Release Date: May 29, 2012
• Sequence Number: 21
• Publication Date: September 19, 1989
• Content Type: MISC

Declassified and Approved For Release 2012/05/29: CIA-RDP99-01448R000401640021-1
REMARKS
BY
WILLIAM H. WEBSTER
DIRECTOR OF CENTRAL INTELLIGENCE
TO THE
LOS ANGELES WORLD AFFAIRS COUNCIL
LOS ANGELES, CALIFORNIA
SEPTEMBER 19, 1989
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WHEN PRESIDENT BUSH VISITED EUROPE IN THE SPRING, HE MADE
THE POINT THAT A HISTORIC SHIFT MAY BE UNDER WAY FROM EAST-WEST
MILITARY CONFRONTATION TO A GLOBAL EMPHASIS ON ECONOMIC
CONCERNS.1 ECONOMIC ISSUES ARE ALREADY A KEY PART OF OUR
FOREIGN POLICY AND NATIONAL SECURITY AGENDA. AND AS THE 21ST
CENTURY APPROACHES, IT IS CLEAR THAT ECONOMIC CONSIDERATIONS
WILL PLAY AN EVEN GREATER ROLE IN OUR RELATIONS WITH OUR ALLIES
AND ADVERSARIES ALIKE.
THERE IS NOW A UNIVERSAL RECOGNITION THAT ECONOMIC STRENGTH
IS KEY TO GLOBAL INFLUENCE AND POWER. NATIONS ARE ADJUSTING,
EVEN RESHAPING THEIR ECONOMIC SYSTEMS IN ORDER TO COMPETE IN THE
GLOBAL MARKETPLACE. AND WE ARE SEEING THREE TRENDS:
-- FIRST, THE SOVIET UNION, POLAND, HUNGARY AND OTHER
NATIONS WITH CENTRALLY PLANNED ECONOMIES ARE
RECOGNIZING THE FLAWS OF THEIR SYSTEMS AND THE NEED FOR
REFORMS;
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-- SECOND, THE WORLD'S FINANCIAL MARKETS ARE BECOMING
INCREASINGLY INTEGRATED;
-- AND THIRD, THERE IS GREATER INTERNATIONAL FOCUS ON
DEBT, TRADE BALANCES, AND TECHNOLOGICAL DEVELOPMENT.2
TODAY I WANT TO DISCUSS THESE ECONOMIC TRENDS -- TRENDS THAT
AFFECT OUR NATION'S POLICIES AND ECONOMIC COMPETITIVENESS. I
ALSO WANT TO DISCUSS SOME OF THE IMPLICATIONS THEY HAVE FOR OUR
NATIONAL SECURITY.
FOR QUITE A WHILE NOW IT HAS BEEN APPARENT TO THE SOVIET
UNION -- AND OTHER BLOC COUNTRIES -- THAT THEIR CENTRALLY
PLANNED ECONOMIES HAVE MAJOR PROBLEMS.
THE SERIOUS AND ONGOING ECONOMIC PROBLEMS IN THE SOVIET
UNION HAVE CONVINCED PRESIDENT GORBACHEV TO UNDERTAKE BOLD
REFORMS. PROGRESS ON THE ECONOMIC FRONT HAS BEEN SLOW. THE
BUDGET DEFICIT HAS SPIRALED AND THE DEMAND FOR GOODS AND
SERVICES HAS GREATLY EXCEEDED THE ABILITY OF THE REGIME TO
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SUPPLY THEM. ONE MOVE THAT COULD EVENTUALLY HELP AND THAT
GREATLY AFFECTS OUR SECURITY INTERESTS IS GORBACHEV'S PLAN TO
CUT DEFENSE SPENDING.3
OVER THE PAST TWO YEARS, GORBACHEV HAS MADE A NUMBER OF
CHANGES IN SOVIET NATIONAL SECURITY POLICY THAT REDUCE SOMEWHAT
THE BURDEN OF DEFENSE ON THE ECONOMY. THESE CHANGES INCLUDE
REACHING AN AGREEMENT ON THE I.N.F. TREATY AND WITHDRAWING
SOVIET TROOPS FROM AFGHANISTAN. AND IN A SPEECH AT THE UNITED
NATIONS LAST DECEMBER, GORBACHEV ANNOUNCED MAJOR UNILATERAL CUTS
IN SOVIET MILITARY MANPOWER AND EQUIPMENT.
THEN, IN JANUARY, GORBACHEV SAID THE SOVIET UNION'S ECONOMIC
SITUATION WAS SO "ACUTE" THAT HIS GOVERNMENT WOULD ALSO HAVE TO
CONSIDER REDUCTIONS IN MILITARY OUTLAYS. TWO WEEKS LATER, IN AN
ADDRESS TO THE TRILATERAL COMMISSION, GORBACHEV ANNOUNCED THAT
THE MILITARY BUDGET WOULD BE REDUCED BY 14 PERCENT AND THE
PRODUCTION OF ARMS AND EQUIPMENT BY NEARLY 20 PERCENT.5
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IF CARRIED, OUT, GORBACHEV'S MOVES TO REDUCE DEFENSE SPENDING
AND CUT SOVIET FORCES HAVE THE POTENTIAL TO GIVE A MUCH-NEEDED
BOOST TO THE CIVIL ECONOMY. A 14-PERCENT CUT IN DEFENSE
SPENDING WOULD RELEASE SUBSTANTIAL RESOURCES FOR INVESTMENT IN
THE CRITICAL MACHINE-BUILDING AND CONSUMER GOODS SECTORS. THE
SOVIETS THEMSELVES HAVE INDICATED SOME OF THE ECONOMIC BENEFITS
THEY HOPE TO GAIN FROM CUTBACKS IN DEFENSE, INCLUDING USING
SKILLED MILITARY MANPOWER IN THE CIVILIAN SECTOR AND CONVERTING
EXISTING MILITARY EQUIPMENT TO CIVIL USE.
THE BIGGEST POTENTIAL BENEFITS TO THE ECONOMY, HOWEVER,
WOULD COME FROM REDUCTIONS IN MILITARY RESEARCH, DEVELOPMENT,
AND PROCUREMENT. REDUCING WEAPONS PRODUCTION WOULD FREE UP
DEFENSE PRODUCTION CAPACITY AND CURB THE MILITARY'S DEMAND FOR
HIGH-QUALITY METALS, COMPUTERS, AND MICROELECTRONICS NEEDED IN
THE CIVIL ECONOMY.6
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ACCORDING TO THE SOVIETS, THE DEFENSE REDUCTIONS WILL BE
MADE THIS YEAR AND NEXT YEAR, BUT THE FULL IMPACT OF THE CUTS
WILL NOT BE FELT IN THE ECONOMY UNTIL SEVERAL YEARS AFTER THAT.?
AND EVEN THEN, LONG-TERM BENEFITS WILL NOT MATERIALIZE WITHOUT A
MORE DETERMINED EFFORT TO INCREASE THE ROLE OF MARKET FORCES IN
THE ECONOMY.
THE NATURE AND EXTENT OF SOVIET CUTBACKS ON DEFENSE ARE OF
GREAT NATIONAL SECURITY CONCERN TO OUR POLICYMAKERS. OUR
GOVERNMENT WILL BE VERY INTERESTED IN HOW THE SOVIETS
RESTRUCTURE THEIR MILITARY FORCES AND HOW THEY GO ABOUT
TRANSFERRING RESOURCES FROM THE MILITARY TO THE CIVIL SECTOR.
ANOTHER NATIONAL SECURITY CONCERN IS THE IMPACT THAT CUTS IN
SOVIET DEFENSE-RELATED RESEARCH, DEVELOPMENT, AND PROCUREMENT
WILL HAVE ON SOVIET ESPIONAGE ACTIVITIES.
DESPITE GLASNOST AND PERESTROIKA, THE INTELLIGENCE
ACTIVITIES OF THE SOVIET UNION AND ITS WARSAW PACT ALLIES HAVE
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NOT ABATED.8 WE WILL BE LOOKING TO SEE IF THE SOVIETS
COMPENSATE FOR CUTBACKS IN DEFENSE RESEARCH, DEVELOPMENT, AND
PROCUREMENT BY INCREASING THEIR EFFORTS TO ACQUIRE WESTERN
DEFENSE INFORMATION AND TECHNOLOGY.
THE SOVIET UNION IS BY NO MEANS THE ONLY BLOC COUNTRY IN THE
MIDST OF A VERY DIFFICULT ECONOMIC SITUATION. THE NEW
NON-COMMUNIST GOVERNMENT IN POLAND IS FACED WITH AN ECONOMIC
CRISIS THAT WILL TAKE YEARS TO OVERCOME, WHILE HUNGARY FACES
SERIOUS ECONOMIC PROBLEMS OF ITS OWN. BOTH NATIONS HAVE ASKED
OUR GOVERNMENT FOR SIGNIFICANT ASSISTANCE AS THEY MOVE TOWARD
REFORM.9
OUR GOVERNMENT'S POLICYMAKERS WILL BE FOCUSING ON THE WAYS
IN WHICH POLAND AND HUNGARY DEVELOP MORE MARKET-ORIENTED
ECONOMIES -- A TRANSITION THAT WILL NOT BE EASY. THESE
COUNTRIES ARE FACING MORE AUSTERITY MEASURES, AND OBTAINING
PUBLIC SUPPORT FOR AUSTERITY IS GOING TO BE A VERY DIFFICULT
POLITICAL CHALLENGE.
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OUR POLICYMAKERS WILL LOOK FOR WAYS THE U.S. AND OTHER
WESTERN ECONOMIES CAN ASSOCIATE WITH THE DEVELOPING PRIVATE
SECTOR ECONOMIES IN POLAND AND HUNGARY. OUR GOVERNMENT WILL
ALSO BE LOOKING FOR WAYS TO HELP THEM MANAGE THEIR DEBTS.
THE ECONOMIC CHANGES WE ARE SEEING IN EASTERN EUROPE DO, IN
FACT, HAVE GREAT BEARING ON OUR NATION'S SECURITY INTERESTS.
ONE OF THE MAJOR CHALLENGES FACING U.S. POLICYMAKERS IS
ENCOURAGING PEACEFUL CHANGE IN EASTERN EUROPE WITHOUT PROVOKING
EXPLOSIVE INSTABILITY.
THE SECOND MAJOR ECONOMIC TREND WE ARE SEEING IS THE FURTHER
INTEGRATION OF FINANCIAL MARKETS. THIS FINANCIAL INTEGRATION IS
A REVOLUTIONARY STRUCTURAL CHANGE IN THE GLOBAL ECONOMY.
TRADITIONAL DISTINCTIONS HAVE BEEN BLURRED BETWEEN DOMESTIC AND
INTERNATIONAL MARKETS, BETWEEN THE DIFFERENT KINDS OF FINANCIAL
TRANSACTIONS, AND BETWEEN WHO IS A MARKET PARTICIPANT AND WHO IS
NOT.10
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THE TRANSFORMATION OF INTERNATIONAL FINANCIAL MARKETS IS
CLEAR WHEN YOU LOOK AT THE.NUMBERS: FOREIGN EXCHANGE
TRANSACTIONS NOW EXCEED 300 BILLION DOLLARS PER DAY, AND ONE
WEEK OF FUNDS TRANSFERRED ON THE INTERNATIONAL MARKET IS LARGER
THAN THE SIZE OF THE THIRD WORLD DEBT. THE NUMBER OF
INTERNATIONAL BANKS IS NOW IN THE HUNDREDS, UP FROM JUST A
HANDFUL IN THE 1970S; AND NEW FINANCIAL INSTRUMENTS, SUCH AS
CURRENCY AND INTEREST RATE SWAPS, ARE GROWING IN THE MARKETS
FASTER THAN EITHER THE TRADERS OR THE REGULATORS CAN FULLY
UNDERSTAND THEM.11
WE ARE ALSO SEEING A GROWTH OF INTERNATIONAL CORPORATE
LINK-UPS. THIS IS DRIVEN BY EFFORTS TO ACQUIRE ADVANCED
TECHNOLOGIES, DISPERSE FINANCING COSTS AND RISKS, AND GAIN
ACCESS TO PROTECTED FOREIGN MARKETS. AS A RESULT, THE NATIONAL
IDENTITY OF FIRMS IN MANY KEY INDUSTRIES -- SUCH AS ELECTRONICS,
AUTOMOBILES, AND DEFENSE -- HAS BECOME BLURRED. TO SURVIVE,
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COMPUTER COMPANIES THAT WERE ONCE FIERCELY INDEPENDENT ARE
SCRAMBLING TO FORM ALLIANCES AND PARTNERSHIPS TO BROADEN THEIR
PRODUCT RANGES.12
THE INCREASED CAPABILITIES OF THE WORLD'S FINANCIAL SYSTEM
HAVE FACILITATED GREATER GROWTH AND EFFICIENCY OF THE WORLD
ECONOMY. FOR THE UNITED STATES, THESE CHANGES HAVE MADE IT
EASIER TO TAP JAPANESE AND EUROPEAN SURPLUS CAPITAL FOR
FINANCING U.S. TRADE AND FISCAL DEFICITS AND HAVE BROUGHT
PRODUCTIVE INVESTMENT TO U.S. SOIL. BUT THIS NEW FINANCIAL
ENVIRONMENT IS ALSO CREATING SOME POTENTIAL RISKS.13
THIS "GLOBALIZATION" OF FINANCIAL MARKETS HAS CREATED A
HIGHLY FLUID SITUATION IN WHICH POLITICAL AND ECONOMIC
DEVELOPMENTS IN ONE AREA ARE QUICKLY AND FORCEFULLY TRANSMITTED
TO THE REST OF THE GLOBE. AS A RESULT, MARKETS ARE INCREASINGLY
SENSITIVE TO NEWS. THE FIRST INDICATIONS OF BREAKING WORLD
EVENTS ARE OFTEN SEEN IN THE IMMEDIATE MOVEMENTS OF INTEREST
RATES, EXCHANGE RATES, AND CAPITAL FLOWS.14
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EVEN RUMORS CAN SEND MARKETS REELING. SEVERAL YEARS AGO A
RUMOR SPREAD THROUGH THE MARKET THAT THERE WOULD BE AN EMERGENCY
"GROUP OF FIVE" MEETING TO STABILIZE THE U.S. DOLLAR. WITHIN 30
MINUTES THE DEUTSCHE MARK AND THE YEN DROPPED MORE THAN TWO
PERCENT AGAINST THE DOLLAR. GIVEN THE SIZE OF OUTSTANDING
FOREIGN EXCHANGE POSITIONS, THE DROP REPRESENTED A SHIFT IN
WEALTH OF ABOUT 1 BILLION DOLLARS ON THE MARKET.15
SUDDEN SHIFTS IN EXCHANGE RATES AS A RESULT OF POLITICAL
EVENTS CAN STIMULATE FURTHER SPECULATIVE ATTACKS ON A COUNTRY'S
CURRENCY -- QUICKLY DRAINING FOREIGN EXCHANGE RESERVES IF A
GOVERNMENT CHOOSES TO INSULATE ITSELF FROM CURRENCY CHANGES.
ALONG WITH THE GLOBALIZATION OF INTERNATIONAL FINANCE HAS
COME THE GREATER USE OF THE FINANCIAL SYSTEM BY GOVERNMENTS AND
GROUPS WHOSE OBJECTIVES THREATEN OUR NATIONAL SECURITY
INTERESTS. THE INTERNATIONAL NARCOTICS MONEY LAUNDERING
INDUSTRY -- AS WELL AS TERRORIST ACTIVITIES, GRAY ARMS
10
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PURCHASES, TECHNOLOGY TRANSFER, AND NUCLEAR PROLIFERATION -- ARE
OFTEN FUNDED THROUGH THE WORLD'S FINANCIAL NETWORKS.16
PARTICIPANTS IN THESE ACTIVITIES FIND THE SPEED, EASE, AND
ANONYMITY ASSOCIATED WITH THE USE OF THE SYSTEM ATTRACTIVE FOR
THEIR PURCHASES.
DURING THE NEXT FEW YEARS, U.S. POLICYMAKERS WILL BE LOOKING
AT THE IMPACT OF INCREASED FINANCIAL INTEGRATION ON WORLD
ECONOMIC STABILITY. THEY WILL ALSO BE LOOKING AT THE WAYS IN
WHICH THE INTERNATIONAL FINANCIAL SYSTEM CAN BE USED BY
GOVERNMENTS AND GROUPS WHOSE OBJECTIVES THREATEN OUR SECURITY
INTERESTS.
THERE ARE A NUMBER OF OTHER ECONOMIC ISSUES THAT AFFECT OUR
OWN SECURITY AS WELL AS THE STABILITY OF AN INCREASINGLY
INTEGRATED GLOBAL ECONOMY. AMONG THESE ISSUES ARE THIRD WORLD
DEBT, TRADE IMBALANCES, AND RAPID TECHNOLOGICAL DEVELOPMENT.
11
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DESPITE THE ACHIEVEMENTS OF THE BRADY PLAN, SUCH AS THE
RECENT MEXICO AGREEMENT, THIRD WORLD DEBT IS STILL A MAJOR
CONCERN.17 WHAT HAPPENED IN VENEZUELA EARLIER THIS YEAR SHOWS
WHAT CAN HAPPEN IF THIS ISSUE IS NOT CAREFULLY ADDRESSED. YOU
MAY RECALL THAT THE VENEZUELAN GOVERNMENT'S AUSTERITY MEASURES
ANNOUNCED IN MARCH CAUSED WIDESPREAD RIOTING IN CARACAS AND
OTHER MAJOR CITIES, RESULTING IN MORE THAN 300 DEAD.18
BECAUSE ECONOMIC PROBLEMS SUCH AS THESE COMPLICATE OUR
POLITICAL RELATIONS OR CAN LEAD TO POLITICAL INSTABILITY, THEY
ARE CERTAINLY ON OUR NATIONAL SECURITY AGENDA.
DURING THE NEXT FEW YEARS, U.S. POLICYMAKERS WILL BE CLOSELY
LOOKING AT THE STRATEGIES THIRD WORLD NATIONS PURSUE TO MEET
THEIR FINANCIAL OBLIGATIONS. CERTAINLY AN IMPORTANT PART OF
U.S. POLICY IS ENCOURAGING DEBTOR COUNTRIES TO WORK WITH THE
WORLD BANK AND THE I.M.F. TO DEVELOP SOUND ECONOMIC PLANS. OUR
GOVERNMENT WILL ALSO HAVE GREAT INTEREST IN THE REFORM MEASURES
12
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THESE COUNTRIES ADOPT -- MEASURES THAT COULD SIGNIFICANTLY
AFFECT POLITICAL STABILITY.-
THE OTHER ECONOMIC ISSUES I MENTIONED -- TRADE IMBALANCES
AND TECHNOLOGICAL DEVELOPMENT -- ILLUSTRATE A POINT THAT IS
BECOMING INCREASINGLY CLEAR: OUR POLITICAL AND MILITARY ALLIES
ARE ALSO OUR ECONOMIC COMPETITORS.
TRADE IMBALANCES HAVE FOCUSED ATTENTION ON THE TRADE
BARRIERS THAT EXIST IN COUNTRIES WITH WHICH THE UNITED STATES
HAS LARGE TRADE DEFICITS -- PARTICULARLY JAPAN AND THE NEWLY
INDUSTRIALIZING COUNTRIES IN EAST ASIA. LAST YEAR, OUR TRADE
DEFICIT WITH JAPAN ALONE REACHED 52 BILLION DOLLARS.19
AS WE APPROACH THE 1990'S, U.S. POLICYMAKERS WILL BE VERY
INTERESTED IN IDENTIFYING PROTECTIONIST MEASURES AND OTHER
IMPEDIMENTS TO REDUCING TRADE IMBALANCES. THEY WILL BE
INTERESTED, AS WELL, IN THE REACTION OF ECONOMIC COMPETITORS TO
MEASURES THE U.S. MAY TAKE TO CORRECT IMBALANCES.
13
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PERHAPS THE MOST FORMIDABLE ECONOMIC CHALLENGE WE FACE IN
THE NEXT DECADE IS IN THE AREA OF HIGH TECHNOLOGY.
TECHNOLOGICAL ADVANCES CAN REVOLUTIONIZE MAJOR INDUSTRIES IN A.
FEW YEARS OR EVEN A FEW MONTHS -- AN EXAMPLE OF THAT IS THE
IMPACT MICROELECTRONICS HAS HAD ON THE COMPUTER INDUSTRY. AND
JUST AS IMPORTANT AS DEVELOPING A NEW TECHNOLOGY IS BRINGING IT
TO THE MARKETPLACE QUICKLY.
THE NATIONAL SECURITY IMPLICATIONS OF A COMPETITORS' ABILITY
TO CREATE, CAPTURE, OR CONTROL MARKETS OF THE FUTURE ARE VERY
SIGNIFICANT.
DURING THE NEXT FEW YEARS, JAPAN AND SOME OF OUR OTHER
ECONOMIC COMPETITORS WILL CONTINUE TO MAKE TECHNOLOGICAL STRIDES
IN HIGH-TECH INDUSTRIES IN WHICH THE UNITED STATES HAS LONG HELD
THE LEAD. TELECOMMUNICATIONS AND DATA PROCESSING ARE JUST SOME
OF THE AREAS IN WHICH THE JAPANESE AND OTHER INDUSTRIALIZED
NATIONS ARE GROWING INCREASINGLY COMPETITIVE.20
14
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THIS IS CLEARLY A CHALLENGE FOR AMERICAN BUSINESS. AND AS
SECRETARY OF COMMERCE MOSBACHER HAS SAID, IF AMERICAN BUSINESS
SACRIFICES RESEARCH FOR SHORT-TERM PROFITS, THE UNITED STATES
WILL END UP TRYING TO LIGHT THE ROAD TO THE FUTURE WITH
LANTERNS, WHILE OUR COMPETITORS ARE LIGHTING IT WITH LASERS.21
IN HIGH TECHNOLOGY AND IN VIRTUALLY EVERY OTHER ECONOMIC
AREA, U.S. POLICYMAKERS WILL BE INCREASINGLY FOCUSING ON WHERE
THE PLAYING FIELD IS NOT LEVEL AS FAR AS U.S. INTERESTS ARE
CONCERNED. THEY ARE LOOKING AT THE STRATEGIES OF OUR ECONOMIC
COMPETITORS, AS WELL AS THE EFFORTS BY FOREIGN GOVERNMENTS TO
TARGET MARKETS AND FINANCE RESEARCH, DEVELOPMENT, AND PRODUCTION.
AS THE ECONOMIC TRENDS I HAVE DISCUSSED TODAY UNFOLD, THE
CONNECTION BETWEEN ECONOMICS AND NATIONAL SECURITY WILL BECOME
EVEN GREATER. THE INTELLIGENCE COMMUNITY LOOKS AT THESE
DEVELOPMENTS FROM A STRATEGIC PERSPECTIVE, EXAMINING WHAT IS
OCCURRING, THE FORCES AT PLAY, AND THE WAYS THAT ACTIONS TAKEN
15
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ABROAD CAN DIRECTLY AND INDIRECTLY AFFECT OUR NATIONAL SECURITY
INTERESTS.
INTELLIGENCE ON ECONOMIC DEVELOPMENTS AND OTHER ISSUES HAS
NEVER BEEN MORE IMPORTANT. POLICYMAKERS ARE TURNING TO US FOR
TIMELY AND OBJECTIVE ASSESSMENTS ON BOTH FAST-BREAKING EVENTS
AND LONG-TERM GLOBAL TRENDS. I ASSURE YOU THAT THE MEN AND
WOMEN OF AMERICAN INTELLIGENCE WILL CONTINUE TO SUPPORT OUR
GOVERNMENT AS IT DEVELOPS AND CARRIES OUT POLICIES THAT NOT ONLY
ADDRESS OUR NATION'S CONCERNS BUT MOVE US ALL TOWARD A BETTER
AND A SAFER WORLD.
16
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