China loses its allure

January 27, 2014

This week’s print edition of The Economist brings a worth reading story on China: life is getting harder for foreign companies there.

“According to the late Roberto Goizueta, a former boss of The Coca-Cola Company, April 15th 1981 was “one of the most important days…in the history of the world.” That date marked the opening of the first Coke bottling plant to be built in China since the Communist revolution.

The claim was over the top, but not absurd. Mao Zedong’s disastrous policies had left the economy in tatters. The height of popular aspiration was the “four things that go round”: bicycles, sewing machines, fans and watches. The welcome that Deng Xiaoping, China’s then leader, gave to foreign firms was part of a series of changes that turned China into one of the biggest and fastest-growing markets in the world.

For the past three decades, multinationals have poured in. After the financial crisis, many companies looked to China for salvation. Now it looks as though the gold rush may be over.”

Read full story.

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Trade Deals Take Global Commerce Back to the Future

January 17, 2014

Edward Alden argues in an article for World Politics Review that the United States and European Union are reasserting their control over global trade rules after two decades of stalemate with developing countries.

After the negotiations that led to the creation of the WTO in 1995, developing country officials were determined to never again allow the U.S. and EU dictate the final terms of a global trade agreement. For the past two decades, until this month’s modest agreement in Bali, they have made good on that threat. But through ambitious regional deals, the U.S. and EU are reasserting control over global trade rules.

“Never again. That was the sentiment I remember hearing over and over from developing country officials following the tumultuous completion of the Uruguay Round negotiations in 1993 that led to the creation of the World Trade Organization (WTO) two years later. Once again, most of them believed, the United States and the European Union had dictated the final terms of a global trade agreement and forced it down the throats of the rest of the world. These countries were determined to have far more say in the shape of any future deals.

For the past two decades, until this month’s modest agreement in Bali to adopt new “trade facilitation” measures, the developing countries have made good on that threat. They have insisted that any new global trade agreement, such as that pursued unsuccessfully over the past decade through the Doha Round, pay special attention to their needs and priorities in areas like agriculture, manufacturing and intellectual property rules. Their united opposition has made it impossible to conclude another big global trade round on terms acceptable to the U.S. and EU.”

Read full story.


Irans Willige Helferin der Anti-Israel-Lobby in deutschen Medien: “Journalistin” Katajun Amirpur oder wenn Angst vor der Wahrheit die Feder führt

January 10, 2010
Journalisten: Leute, die ein Leben lang darüber nachdenken, welchen Beruf sie eigentlich verfehlt haben. (Mark Twain)

Lieber Kolleginnen und Kollegen,

Frau Katajun Amirpur ist eine renommierte deutsch-iranische Journalistin und Islamwissenschaftlerin, die u.a. für die Süddeutsche Zeitung, die ZEIT und die taz publiziert.

Nach zahlreichen guten bis sehr guten Rezensionen über mein Buch “Die Deutschen und der Iran” (die meisten davon sind auf meiner Homepage dokumentiert) formulierte Frau Amirpur den ersten “Verriss”.

Ich nehme ihre Rezension auch deshalb ernst, weil sie der verbreiteten Haltung, die deutsch-iranischen Sonderbeziehungen trotz aller Menschenrechtsverletzungen und atomarer Ambitionen unkritisch weiterlaufen zu lassen, entgegenkommt.

Hier finden Sie Ihre Kritik.

und dort meine Erwiderung.

Die Evangelische Akademie Bad Boll hat mittlerweile den Vortrag über “Djihad und Judenhass”, den ich dort Ende November 2009 hielt, als Online-Text veröffentlicht.

Sie finden diese Veröffentlichung hier.

Mit den besten Grüßen

Euer Dr. Matthias Küntzel


Start-Up Nation: The Story of Israel’s Economic Miracle

October 24, 2009

The Story of Israel's Economic Miracle

“The West needs innovation; Israel’s got it,” write Dan Senor and Saul Singer, authors of Start-Up Nation: The Story of Israel’s Economic Miracle. They argue that the Israeli economic model, based on innovation, can help the West, in particular, “get out of its economic hole.”

Start-Up Nation addresses the trillion-dollar question: How is it that Israel – a country of 7.1 million people, only sixty years old, surrounded by enemies, in a constant state of war since its founding, with no natural resources – produces more start-up companies than large, peaceful, and stable nations like Japan, China, India, Korea, Canada, and the United Kingdom?

Drawing on examples from the country’s foremost inventors and investors, geopolitical experts Dan Senor and Saul Singer describe how Israel’s adversity-driven culture fosters a unique combination of innovative and entrepreneurial intensity.

As the authors argue, Israel is not just a country but a comprehensive state of mind. Whereas Americans emphasize decorum and exhaustive preparation, Israelis put chutzpah first. “When an Israeli entrepreneur has a business idea, he will start it that week,” one analyst put it. At the geopolitical level, Senor and Singer dig in deeper to show why Israel’s policies on immigration, R&D, and military service have been key factors in the country’s rise – providing insight into why Israel has more companies on the NASDAQ than those from all of Europe, Korea, Japan, Singapore, China, and India combined.

So much has been written about the Middle East, but surprisingly little is understood about the story and strategy behind Israel’s economic growth. As Start-Up Nation shows, there are lessons in Israel’s example that apply not only to other nations, but also to individuals seeking to build a thriving organization. As the U.S. economy seeks to reboot its can-do spirit, there’s never been a better time to look at this remarkable and resilient nation for some impressive, surprising clues.

Reviews & Endorsements

“An eye-opening look at a side of Israel that most people never think about.” (The Week)

“There is a great deal for America to learn from the very impressive Israeli entrepreneurial model—beginning with a culture of leadership and risk management. Start-Up Nation is a playbook for every CEO who wants to develop the next generation of corporate leaders.” Tom Brokaw, special correspondent for NBC News, author of The Greatest Generation

“Senor and Singer’s experience in government, in business, and in journalism—and especially on the ground in the Middle East—come to life in their illuminating, timely, and often surprising analysis.” George Stephanopoulos, host of This Week, ABC News

“In the midst of the chaos of the Middle East, there’s a remarkable story of innovation. Start-Up Nation is filled with inspiring insights into what’s behind Israel’s dynamic economy. It is a timely book and a much-needed celebration of the entrepreneurial spirit.” Meg Whitman, former president and CEO of eBay

“Senor and Singer highlight some important lessons and sound instruction for countries struggling to enter the 21st century. An edifying, cogent report, as apolitical as reasonably possible, about homemade nation building.” Kirkus Reviews

“The authors ground their analysis in case studies and interviews with some of Israel’s most brilliant innovators to make this a rich and insightful read not just for business leaders and policymakers but for anyone curious about contemporary Israeli culture.” Publishers Weekly

To order the book, click here.


U.S. Federal Reserve makes stiff warning on deficit

June 4, 2009

Speaking before the Committee on the Budget of the U.S. House of Representatives in Washington, yesterday, U.S. Federal Reserve Chairman Ben Shalom Bernanke said Washington will need to bring down long term budget deficits and said a failure to do so could lead to future debt problems.

Bernanke highlighted rising pressure on long-term interest rates as a problem.

***

Chairman Ben S. Bernanke
Chairman of the Board of Governors of the United States Federal Reserve
Current economic and financial conditions and the federal budget
Before the Committee on the Budget, U.S. House of Representatives, Washington, D.C.
June 3, 2009

Chairman Spratt, Ranking Member Ryan, and other members of the Committee, I am pleased to have this opportunity to offer my views on current economic and financial conditions and on issues pertaining to the federal budget.

Economic Developments and Outlook

The U.S. economy has contracted sharply since last fall, with real gross domestic product (GDP) having dropped at an average annual rate of about 6 percent during the fourth quarter of 2008 and the first quarter of this year. Among the enormous costs of the downturn is the loss of nearly 6 million jobs since the beginning of 2008. The most recent information on the labor market–the number of new and continuing claims for unemployment insurance through late May – suggests that sizable job losses and further increases in unemployment are likely over the next few months.

However, the recent data also suggest that the pace of economic contraction may be slowing. Notably, consumer spending, which dropped sharply in the second half of last year, has been roughly flat since the turn of the year, and consumer sentiment has improved. In coming months, households’ spending power will be boosted by the fiscal stimulus program. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.

Activity in the housing market, after a long period of decline, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes seem to have flattened out in the past couple of monthly readings, though both remain at depressed levels. Meanwhile, construction of new homes has been sufficiently restrained to allow the backlog of unsold new homes to decline – a precondition for any recovery in homebuilding.

Businesses remain very cautious and continue to reduce their workforces and capital investments. On a more positive note, firms are making progress in shedding the unwanted inventories that they accumulated following last fall’s sharp downturn in sales. The Commerce Department estimates that the pace of inventory liquidation quickened in the first quarter, accounting for a sizable portion of the reported decline in real GDP in that period. As inventory stocks move into better alignment with sales, firms should become more willing to increase production.

We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast. Final demand should also be supported by fiscal and monetary stimulus, and U.S. exports may benefit if recent signs of stabilization in foreign economic activity prove accurate. An important caveat is that our forecast also assumes continuing gradual repair of the financial system and an associated improvement in credit conditions; a relapse in the financial sector would be a significant drag on economic activity and could cause the incipient recovery to stall. I will provide a brief update on financial markets in a moment.

Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.

In this environment, we anticipate that inflation will remain low. The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation.

Conditions in Financial Markets

Conditions in a number of financial markets have improved since earlier this year, likely reflecting both policy actions taken by the Federal Reserve and other agencies as well as the somewhat better economic outlook. Nevertheless, financial markets and financial institutions remain under stress, and low asset prices and tight credit conditions continue to restrain economic activity.

Among the markets where functioning has improved recently are those for short-term funding, including the interbank lending markets and the commercial paper market. Risk spreads in those markets appear to have moderated, and more lending is taking place at longer maturities. The better performance of short-term funding markets in part reflects the support afforded by Federal Reserve lending programs. It is encouraging that the private sector’s reliance on the Fed’s programs has declined as market stresses have eased, an outcome that was one of our key objectives when we designed our interventions. The issuance of asset-backed securities (ABS) backed by credit card, auto, and student loans has also picked up this spring, and ABS funding rates have declined, developments supported by the availability of the Federal Reserve’s Term Asset-Backed Securities Loan Facility as a market backstop.

In markets for longer-term credit, bond issuance by nonfinancial firms has been relatively strong recently, and spreads between Treasury yields and rates paid by corporate borrowers have narrowed some, though they remain wide. Mortgage rates and spreads have also been reduced by the Federal Reserve’s program of purchasing agency debt and agency mortgage-backed securities. However, in recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen. These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings.

As you know, last month, the federal bank regulatory agencies released the results of the Supervisory Capital Assessment Program (SCAP). The purpose of the exercise was to determine, for each of the 19 U.S.-owned bank holding companies with assets exceeding $100 billion, a capital buffer sufficient for them to remain strongly capitalized and able to lend to creditworthy borrowers even if economic conditions over the next two years turn out to be worse than we currently expect. According to the findings of the SCAP exercise, under the more adverse economic outlook, losses at the 19 bank holding companies would total an estimated $600 billion during 2009 and 2010. After taking account of potential resources to absorb those losses, including expected revenues, reserves, and existing capital cushions, we determined that 10 of the 19 institutions should raise, collectively, additional common equity of $75 billion.

Each of the 10 bank holding companies requiring an additional buffer has committed to raise this capital by November 9. We are in discussions with these firms on their capital plans, which are due by June 8. Even in advance of those plans being approved, the 10 firms have among them already raised more than $36 billion of new common equity, with a number of their offerings of common shares being over-subscribed. In addition, these firms have announced actions that would generate up to an additional $12 billon of common equity. We expect further announcements shortly as their capital plans are finalized and submitted to supervisors. The substantial progress these firms have made in meeting their required capital buffers, and their success in raising private capital, suggests that investors are gaining greater confidence in the banking system.

Fiscal Policy in the Current Economic and Financial Environment

Let me now turn to fiscal matters. As you are well aware, in February of this year, the Congress passed the American Recovery and Reinvestment Act, or ARRA, a major fiscal package aimed at strengthening near-term economic activity. The package included personal tax cuts and increases in transfer payments intended to stimulate household spending, incentives for business investment, increases in federal purchases, and federal grants for state and local governments.

Predicting the effects of these fiscal actions on economic activity is difficult, especially in light of the unusual economic circumstances that we face. For example, households confronted with declining incomes and limited access to credit might be expected to spend most of their tax cuts; then again, heightened economic uncertainties and the desire to increase precautionary saving or pay down debt might reduce households’ propensity to spend. Likewise, it is difficult to judge how quickly funds dedicated to infrastructure needs and other longer-term projects will be spent and how large any follow-on effects will be. The Congressional Budget Office (CBO) has constructed a range of estimates of the effects of the stimulus package on real GDP and employment that appropriately reflects these uncertainties. According to the CBO’s estimates, by the end of 2010, the stimulus package could boost the level of real GDP between about 1 percent and a little more than 3 percent and the level of employment by between roughly 1 million and 3-1/2 million jobs.

The increases in spending and reductions in taxes associated with the fiscal package and the financial stabilization program, along with the losses in revenues and increases in income-support payments associated with the weak economy, will widen the federal budget deficit substantially this year. The Administration recently submitted a proposed budget that projects the federal deficit to reach about $1.8 trillion this fiscal year before declining to $1.3 trillion in 2010 and roughly $900 billion in 2011. As a consequence of this elevated level of borrowing, the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to about 70 percent in 2011. These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II.

Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate. Nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs. The recent projections from the Social Security and Medicare trustees show that, in the absence of programmatic changes, Social Security and Medicare outlays will together increase from about 8-1/2 percent of GDP today to 10 percent by 2020 and 12-1/2 percent by 2030. With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands.

Addressing the country’s fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability–defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth – requires that spending and budget deficits be well controlled.

Clearly, the Congress and the Administration face formidable near-term challenges that must be addressed. But those near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.

Federal Reserve Transparency

Let me close today with an update on the Federal Reserve’s initiatives to enhance the transparency of our credit and liquidity programs. As I noted last month in my testimony before the Joint Economic Committee, I asked Vice Chairman Kohn to lead a review of our disclosure policies, with the goal of increasing the range of information that we make available to the public. That group has made significant progress, and we expect to begin publishing soon a monthly report on the Fed’s balance sheet and lending programs that will summarize and discuss recent developments and provide considerable new information concerning the number of borrowers at our various facilities, the concentration of borrowing, and the collateral pledged. In addition, the reports will provide quarterly updates of key elements of the Federal Reserve’s annual financial statements, including information regarding the System Open Market Account portfolio, our loan programs, and the special purpose vehicles that are consolidated on the balance sheet of the Federal Reserve Bank of New York. We hope that this information will be helpful to the Congress and others with an interest in the Federal Reserve’s actions to address the financial crisis and the economic downturn. We will continue to look for opportunities to broaden the scope of the information and supporting analysis that we provide to the public.


U.S. treasury secretary Geithner urges combined U.S.-China efforts to boost global economy

June 1, 2009
 

United States Secretary of the Treasury Timothy Geithner

United States Secretary of the Treasury Timothy Geithner

Timothy Geithner, in his first visit to China as U.S. Treasury Secretary, presented a plan for the United States and China to work together to rebuild the global economy and restore growth.

In a speech today at Peking University, Geithner stressed that there is much that both the United States and China need to do to rebalance the world economy. He called for China to make its currency more flexible in exchange for fiscal reforms in the United States. He also said China would need to diversify its economy beyond relying so heavily on exports for growth, and that the United States, in return, would focus on mitigating its ballooning deficit to protect massive Chinese investments in U.S. government debt.

Chinese media focused on Geithner’s implication that China should play a more significant role in global economic policymaking. China Daily says the primary goal of Geithner’s trip, which has included meetings with several leading Chinese economic policymakers, has been to reaffirm China’s faith in U.S. dollar-backed assets and still fears that U.S. budget deficit and loose monetary policy will prompt inflation, undermining Chinese holdings of both the U.S. dollar and U.S. Treasury bonds.

Below is the text of Timothy Geithner’s speech.

***

The United States and China, Cooperating for Recovery and Growth

 Treasury Secretary Timothy F. Geithner

Speech at Peking University – Beijing, China
June 1st, 2009

 It is a pleasure to be back in China and to join you here today at this great university. 

I first came to China, and to Peking University, in the summer of 1981 as a college student studying Mandarin. I was here with a small group of graduate and undergraduate students from across the United States. I returned the next summer to Beijing Normal University. 

We studied reasonably hard, and had the privilege of working with many talented professors, some of whom are here today. As we explored this city and traveled through Eastern China, we had the chance not just to understand more about your history and your aspirations, but also to begin to see the United States through your eyes. 

Over the decades since, we have seen the beginnings of one of the most extraordinary economic transformations in history. China is thriving.  Economic reform has brought exceptionally rapid and sustained growth in incomes. China’s emergence as a major economic force more fully integrated into the world economy has brought substantial benefits to the United States and to economies around the world.  

In recognition of our mutual interest in a positive, cooperative, and comprehensive relationship, President Hu Jintao and President Obama agreed in April to establish the Strategic and Economic Dialogue. Secretary Clinton and I will host Vice Premier Wang and State Councilor Dai in Washington this summer for our first meeting.  I have the privilege of beginning the economic discussions with a series of meetings in Beijing today and tomorrow. 

These meetings will give us a chance to discuss the risks and challenges on the economic front, to examine some of the longer term challenges we both face in laying the foundation for a more balanced and sustainable recovery, and to explore our common interest in international financial reform.

Current Challenges and Risks

 The world economy is going through the most challenging economic and financial stress in generations. 

 The International Monetary Fund predicts that the world economy will shrink this year for the first time in more than six decades. The collapse of world trade is likely to be the worst since the end of World War II. The lost output, compared to the world economy’s potential growth in a normal year, could be between three and four trillion dollars.

In the face of this challenge, China and the United States are working together to help shape a strong global strategy to contain the crisis and to lay the foundation for recovery. And these efforts, the combined effect of forceful policy actions here in China, in the United States, and in other major economies, have helped slow the pace of deterioration in growth, repair the financial system, and improve confidence. 

In fact, what distinguishes the current crisis is not just its global scale and its acute severity, but the size and speed of the global response.

At the G-20 Leaders meeting in London in April, we agreed on an unprecedented program of coordinated policy actions to support growth, to stabilize and repair the financial system, to restore the flow of credit essential for trade and investment, to mobilize financial resources for emerging market economies through the international financial institutions, and to keep markets open for trade and investment. 

That historic accord on a strategy for recovery was made possible in part by the policy actions already begun in China and the United States. 

China moved quickly as the crisis intensified with a very forceful program of investments and financial measures to strengthen domestic demand.

In the United States, in the first weeks of the new Administration, we put in place a comprehensive program of tax incentives and investments ¨C the largest peace time recovery effort since World War II – to help arrest the sharp fall in private demand. Alongside these fiscal measures, we acted to ease the housing crisis. And we have put in place a series of initiatives to bring more capital into the banking system and to restart the credit markets.  

These actions have been reinforced by similar actions in countries around the world. 

In contrast to the global crisis of the 1930s and to the major economic crises of the postwar period, the leaders of the world acted together. They acted quickly. They  took steps to provide assistance to the most vulnerable economies, even as they faced exceptional financial needs at home. They worked to keep their markets open, rather than retreating into self-defeating measures of discrimination and protection. 

And they have committed to make sure this program of initiatives is sustained until the foundation for recovery is firmly established, a commitment the IMF will monitor closely, and that we will be able to evaluate together when the G-20 Leaders meet again in the United States this fall. 

We are starting to see some initial signs of improvement. The global recession seems to be losing force. In the United States, the pace of decline in economic activity has slowed. Households are saving more, but consumer confidence has improved, and spending is starting to recover. House prices are falling at a slower pace and the inventory of unsold homes has come down significantly. Orders for goods and services are somewhat stronger. The pace of deterioration in the labor market has slowed, and new claims for unemployment insurance have started to come down a bit. 

The financial system is starting to heal. The clarity and disclosure provided by our capital assessment of major U.S. banks has helped improve market confidence in them, making it possible for banks that needed capital to raise it from private investors and to borrow without guarantees. The securities markets, including the asset backed securities markets that essentially stopped functioning late last year, have started to come back. The cost of credit has fallen substantially for businesses and for families as spreads and risk premia have narrowed.    

These are important signs of stability, and assurance that we will succeed in averting financial collapse and global deflation, but they represent only the first steps in laying the foundation for recovery. The process of repair and adjustment is going to take time. 

China, despite your own manifest challenges as a developing country, you are in an enviably strong position. But in most economies, the recession is still powerful and dangerous. Business and households in the United States, as in many countries, are still experiencing the most challenging economic and financial pressures in decades. 

The plant closures, and company restructurings that the recession is causing are painful, and this process is not yet over. The fallout from these events has been brutally indiscriminant, affecting those with little or no responsibility for the events that now buffet them, as well as on some who played key roles in bringing about our troubles.

The extent of the damage to financial systems entails significant risk that the supply of credit will be constrained for some time. The constraints on banks in many major economies will make it hard for them to compensate fully for the damage done to the basic machinery of the securitization markets, including the loss of confidence in credit ratings. After a long period where financial institutions took on too much risk, we still face the possibility that  banks and investors may take too little risk, even as the underlying economic conditions start to improve. 

And, after a long period of falling saving and substantial growth in household borrowing relative to GDP, consumer spending in the United States will be restrained for some time relative to what is typically the case in recoveries. 

 These are necessary adjustments. They will entail a longer, slower process of recovery, with a very different pattern of future growth across countries than we have seen in the past several recoveries. 

Laying the Foundation for Future Growth

 As we address this immediate financial and economic crisis, it is important that we also lay the foundations for more balanced, sustained growth of the global economy once this recovery is firmly established. 

A successful transition to a more balanced and stable global economy will require very substantial changes to economic policy and financial regulation around the world. But some of the most important of those changes will have to come in the United States and China. How successful we are in Washington and Beijing will be critically important to the economic fortunes of the rest of the world. The effectiveness of U.S. policies will depend in part on China’s, and the effectiveness of yours on ours. 

Although the United States and China start from very different positions, many of our domestic challenges are similar. In the United States, we are working to reform our health care system, to improve the quality of education, to rebuild our infrastructure, and to improve energy efficiency. These reforms are essential to boosting the productive capacity of our economy. These challenges are at the center of your reform priorities, too. 

We are both working to reform our financial systems. In the United States, our challenge is to create a more stable and more resilient financial system, with stronger protections for consumer and investors.  As we work to strengthen and redesign regulation to achieve these objectives, our challenge is to preserve the core strengths of our financial system, which are its exceptional capacity to adapt and innovate and to channel capital for investment in new technologies and innovative companies. You have the benefit of being able to learn from our shortcomings, which have proved so damaging in the present crisis, as well as from our strengths.  

Our common challenge is to recognize that a more balanced and sustainable global recovery will require changes in the composition of growth in our two economies. Because of this, our policies have to be directed at very different outcomes. 

In the United States, saving rates will have to increase, and the purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past. 

In China, as your leadership has recognized, growth that is sustainable growth will require a very substantial shift from external to domestic demand, from an investment and export intensive driven growth, to growth led by consumption. Strengthening domestic demand will also strengthen China’s ability to weather fluctuations in global supply and demand.

If we are successful on these respective paths, public and private saving in the United States will increase as recovery strengthens, and as this happens, our current account deficit will come down. And in China, domestic demand will rise at a faster rate than overall GDP, led by a gradual shift to higher rates of consumption.  

Globally, recovery will have come more from a shift by high saving economies to stronger domestic demand and less from the American consumer. 

The policy framework for a successful transition to this outcome is starting to take shape.

In the United States, we are putting in place the foundations for restoring fiscal sustainability. 

The President in his initial budget to Congress made it clear that, as soon as recovery is firmly established, we are going to have to bring our fiscal deficit down to a level that is sustainable over the medium term. This will mean bringing the imbalance between our fiscal resources and expenditures down to the point – roughly three percent of GDP – where the overall level of public debt to GDP is definitively on a downward path.  The temporary investments and tax incentives we put in place in the Recovery Act to strengthen private demand will have to expire, discretionary spending will have to fall back to a more modest level relative to GDP, and we will have to be very disciplined in limiting future commitments through the reintroduction of budget disciplines, such as pay-as-you go rules.

The President also looks forward to working with Congress to further reduce our long-run fiscal deficit.

And, critical to our long-term fiscal health, we have to put in place comprehensive health care reform that will bring down the growth in health care costs, costs that are the principal driver of our long run fiscal deficit. 

The President has also proposed steps to encourage private saving, including through automatic enrollment in retirement savings accounts. 

Alongside these fiscal actions, we have designed our policies to address the financial crisis to carefully minimize risk to the taxpayer and to allow for an orderly exit or unwinding as soon as conditions permit. Across the various financial facilities put in place by the Treasury, the Federal Reserve, and the FDIC, we have been careful to set the economic terms at a level so that demand for these facilities will fade as conditions normalize and risk premia recede.  Banks have a strong incentive to replace public capital with private capital as soon as conditions permit. 

Let me be clear – the United States is committed to a strong and stable international financial system. The Obama Administration fully recognizes that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home. As we recover from this unprecedented crisis, we will cut our fiscal deficit, we will eliminate the extraordinary governmental support that we have put in place to overcome the crisis, we will continue to preserve the openness of our economy, and we will resolutely maintain the policy framework necessary for durable and lasting sustained non-inflationary growth.

In China, the challenge is fundamentally different, and at least as complex. 

Critical to the success of your efforts to shift future growth to domestic demand are measures to raise household incomes and to reduce the need that households feel to save large amounts for precautionary reasons or to pay for major expenditures like education.  This involves strengthening the social safety net with health care reform and more complete public retirement systems, enacting financial reforms to help expand access to credit for households, and providing products that allow households to insure against risk.  These efforts can be funded through the increased collection of dividends from state-owned enterprises.

The structure of the Chinese economy will shift as domestic demand grows in importance, with a larger service sector, more emphasis on light industry, and less emphasis on heavy, capital intensive export and import-competing industries.  The resulting growth will generate greater employment, and be less energy-intensive than the current structure of Chinese industry. Allowing the market, interest rates, and other prices to function to encourage the shift in production will be particularly important.

An important part of this strategy is the government’s commitment to continue progress toward a more flexible exchange rate regime.  Greater exchange rate flexibility will help reinforce the shift in the composition of growth, encourage resource shifts to support domestic demand, and provide greater ability for monetary policy to achieve sustained growth with low inflation in the future. 

International Financial Reform

 These are some of the most important domestic economic challenge we face, and these issues will be at the core of our agenda for economic cooperation. 

But I think it is important to underscore that we also have a very strong interest in working together to strengthen the framework for international economic and financial cooperation.  

Let me highlight three important areas.

At the G-20 Leaders meeting, we committed to a series of actions to help reform and strengthen the international financial architecture.

As part of this, we agreed to put in place a stronger framework of standards for supervision and regulation of the financial system.  We expanded and strengthened the Financial Stability Forum, now renamed the Financial Stability Board.  China and other major emerging economies are now full participants, alongside the major financial centers, in this critical institution for cooperation.  We will have the chance together to help redesign global standards for capital requirements, stronger oversight of global markets like derivatives, better tools for resolving future financial crises, and measures to reduce the opportunities for regulatory arbitrage. 

We also committed to an ambitious program of reform of the IMF and other international financial institutions.  Our common objective is to reform the governance of these institutions to make them more representative of the shifting balance of economic and financial activity in the world, to strengthen their capacity to prevent future crisis, with stronger surveillance of macroeconomic, exchange rate, and financial policies, and to equip them with a stronger financial capacity to respond to future crises. We also committed to mobilize $500 billion in additional finance through the enlargement and membership expansion of the IMF’s New Arrangements to Borrow in order to provide an insurance policy for the global financial system.

As part of this process of reform, the United States will fully support having China play a role in the principal cooperative arrangements that help shape the international system, a role that is commensurate with China’s importance in the global economy.

I believe that a greater role for China is necessary for China, for the effectiveness of the international financial institutions themselves, and for the world economy. 

China is already too important to the global economy not to have a full seat at the international table, helping to define the policies that are critical to the effective functioning of the international financial system.

Second, we must cooperate to assure that the global trade and investment environment remains open, and that opportunities continue to expand.  As economies have become more open and more closely integrated, global economic growth has been stronger and more broad-based, bringing increasing numbers out of poverty, and turning developing nations into major emerging markets.    The global commitment to trade liberalization and increasingly open investment played a critical role in this process ¨C in the industrialized world, in East Asia, and, since 1978, in China.  As we go through the severe stresses of this crisis, we must not turn our backs on open trade and investment – for ourselves and for those who have yet to experience the fruits of growth and development. The United States, China, and the other members of the G20 have committed to not resort to protectionist measures by raising trade and investment barriers and to work toward a successful conclusion to the Doha Development Round. 

And third, one of the most critical long-term challenges that we both face is climate change.  Individually and collectively, there is an urgent need to ensure that each and every country takes meaningful action to deal with this threat.  Reducing land and forest degradation, conserving energy, and using clean technology are important objectives that complement both our efforts to achieve a new, sustainable pattern of growth and our goal of reducing greenhouse gas emissions. China and the United States already are working closely through the Strategic and Economic Dialogue in areas such as clean transportation, clean and efficient production of electricity, and the reduction of air and water pollution.  We must continue these efforts for the sake of our natio ns and the planet.

Conclusion

In the last few years the frequency, intensity, and importance of U.S.-China economic engagements have multiplied.  The U.S.-China Strategic and Economic Dialogue that President Obama and President Hu initiated in April is the next stage in that process.  I look forward to welcoming Vice Premier Wang, State Councilor Dai and their colleagues to Washington to participate in the first meeting of the U.S.-China Strategic and Economic Dialogue.

 Our engagement should be conducted with mutual respect for the traditions, values, and interests of China and the United States. We will make a joint effort in a concerted way “同心协力”.  We should understand that we each have a very strong stake in the health and the success of each other’s economy. 

China and the United States individually, and together, are so important in the global economy and financial system that what we do has a direct impact on the stability and strength of the international economic system.  Other nations have a legitimate interest in our policies and the ways in which we work together, and we each have an obligation to ensure that our policies and actions promote the health and stability of the global economy and financial system.

We come together because we have shared interests and responsibilities.  We also have our own national interests.   I will be a strong advocate for U.S. interests, just as I expect my counterparts to represent China.  China has benefited hugely from open trade and investment, and the ability to greatly increase its exports to the rest of the world.  In turn, we expect increased opportunities to export to and invest in the Chinese economy.   

We want China to succeed and prosper.  Chinese growth and expanding Chinese demand is a tremendous opportunity for U.S. firms and workers, just as it is in China and the rest of the world. 

Global problems will not be solved without U.S.-China cooperation.  That goes for the entire range of issues that face our world from economic recovery and financial repair to climate change and energy policy.

I look forward to working with you cooperatively, and in a spirit of mutual respect.


American Jewish Committee testifies before U.S. Congress for Iran Sanctions Act

March 13, 2009

ajctestimony

TESTIMONY OF JASON F. ISAACSON
DIRECTOR OF GOVERNMENT AND INTERNATIONAL AFFAIRS
AMERICAN JEWISH COMMITTEE

BEFORE THE SUBCOMMITTEE ON INTERNATIONAL MONETARY POLICY AND TRADE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ON H.R. 1327, THE IRAN SANCTIONS ENABLING ACT OF 2009

WASHINGTON D.C., MARCH 12, 2009

Mr. Chairman, members of the Committee,

I am honored to testify on behalf of the American Jewish Committee in support of the Iran Sanctions Enabling Act. AJC is grateful to Chairman Frank and to you, Chairman Meeks, and to the other sponsors of this important legislation for developing early in the new Congress this well-crafted tool to address the grave threats posed by Iran’s regime.

My testimony will highlight two key points:

First, stopping Iran’s nuclear program is a matter of the greatest urgency – because Iran is so close to achieving nuclear capability, and because a nuclear Iran would alter the world as we know it in terrible ways.

Second, this legislation – clarifying the authority of state and local governments, and investment companies, to divest from entities that invest heavily in Iran’s energy sector – can significantly assist the overall effort to halt Iran’s nuclear program.

Iran is on the doorstep of nuclear arms capability. It has already crossed a significant threshold – amassing enough enriched uranium to make, with further enrichment, its first nuclear bomb. Admiral Mullen, the Chairman of the Joint Chiefs of Staff, discussed this conclusion last week, and the International Atomic Energy Agency documented it in its February 19 report.

Iran’s installation of thousands of new centrifuges, including next-generation units, increases its ability rapidly to enrich to bomb grade – and thus “break out” of its Non-Proliferation Treaty constraints. Iran could probably conceal its breakout even if IAEA inspectors remain in the country, because Iran routinely refuses to provide critical information and access to inspectors. Once Iran decides to break out, it may be too late for the international community to stop it from producing a bomb. That gives us breathtakingly little time to act. And Iran could marry a nuclear warhead with advanced missiles it already possesses that could strike the Middle East and beyond, including much of Europe.

President Obama and Congress recognize America’s strong interest in preventing Iran from obtaining a nuclear weapon. Some observers may see a nuclear Iran primarily as an existential peril to Israel, a country it has repeatedly threatened and has used proxy forces to attack. I do not want to minimize that very real danger – nor the need for bold international action to prevent it. But I want to highlight that a nuclear Iran would pose an even broader threat – throughout the Arab Gulf, to the entire region and, indeed, to global peace and security.

Already, Iran projects its power throughout the Middle East. Nuclear arms would embolden Tehran to pursue its expansionist agenda even more aggressively. And the international community’s options for vigorous response would be constrained, for fear of provoking nuclear retaliation. I will give you a few examples of what may lie ahead:

A nuclear Iran could dominate the world’s most abundant sources of energy – the Gulf and the Caspian Basin. Challenged, Iran could attempt to close the Strait of Hormuz – through which roughly 20 percent of the world’s oil production passes. Or it might seek to realize its expansionist vision by taking territory from one or more of the smaller Gulf States.

Over the last 15 years, AJC has paid periodic visits to the Gulf, conferring with governments allied with the United States in the struggle against terrorism and extremism, and supportive of efforts to advance regional peace. We regularly hear on these visits the concerns of Gulf leaders about Iran’s assertion of regional power, and its attempts to radicalize their societies. It isn’t only Israel that perceives the perils of a nuclear Iran. From North Africa to the Levant to the Gulf, pragmatic Arab governments and civil society leaders recognize the danger of a further empowered Iran; many look to the United States for assurance that this nightmare can be averted, and that America will safeguard their security. Unless the United States and other powers act boldly and promptly, these governments may feel compelled to accommodate Iran, procure their own nuclear weapons, or both. These developments would assuredly destabilize the region, challenge U.S. power, and imperil the Nuclear Non-Proliferation Regime.

Iran already has a potent presence in the Palestinian territories and Lebanon – through its active support of Hezbollah and Hamas. The Palestinian Authority, Egypt, Jordan, and others – not to mention Israel – are deeply concerned about Iran’s activity. The threat would be magnified, and prospects for regional peace and the protection of human rights severely complicated, were Iran to possess nuclear capability.

The shadow cast by a nuclear-capable Iran, which Dr. Emanuele Ottolenghi, director of the Brussels-based Transatlantic Institute, affiliated with AJC, outlines in his just-published book “Under a Mushroom Cloud,” clearly pales in comparison with the dangers of Iran actually launching a nuclear weapon, or transferring a nuclear device to a terrorist proxy. These prospects cannot be discounted – because the consequences are too dire to discount. A dirty bomb in the center of Chicago, London, or Tel Aviv is, horrifyingly, in the realm of possibility. If Iran’s leaders wished to make good on their oft-repeated promise to wipe Israel off the map, we could not necessarily rely on deterrence to dissuade them – not in a country whose rulers have demonstrated their willingness to sacrifice millions of their citizens to achieve their vision.

What can be done to stop Iran’s nuclear drive? The best answer is to offer the regime incentives for ending its defiance of international law – and powerful disincentives to pursue its current course. The United States has played a crucial leadership role in trying to mobilize the world’s economic powers to impose tough sanctions. The urgency of the threat and the severe consequences of failing to end it compel the United States to intensify these efforts.

First, our government should make abundantly clear that we will not allow a nuclear Iran – and that the UN Security Council demand that Iran verifiably suspend enrichment is not negotiable.

Second, we should offer Iran incentives – as EU and U.S. negotiators have previously tabled – for ending its nuclear enrichment and meeting its non-proliferation obligations.

Third, we should make it unbearably costly for Iran’s regime to continue its defiance – even as we make it clear to Iran’s people, against whom we hold no brief, that the choice lies with their regime.

The United States has been a leader in mobilizing international support for addressing the Iranian threat. As Iran closes in on nuclear capability, we must continually ratchet up the price of its defiance.

If our Administration pursues engagement with Iran, simultaneously intensifying sanctions is critical. Only tough sanctions would prevent Iran’s rulers from seeing our overtures as a sign of weakness and motivate them to be forthcoming in negotiations. Firm goalposts and deadlines also are crucial to prevent Iran’s regime from hiding behind negotiations as it completes its quest for nuclear arms.

Congress, as in the past, has a critical role to play in maintaining the necessary focus on this urgent issue, and in providing the Administration – and now, with the legislation before you, providing state and local authorities across the country – the proper tools to address it.

In addition to existing U.S. efforts and repeated UN Security Council sanctions measures, it is imperative that further, targeted U.S. sanctions be implemented – including ones that Congress has passed but that still have not been implemented. Such further sanctions will discourage large new investments and contracts that help maintain Iran’s regime. This is where the Iran Sanctions Enabling Act will make a significant contribution.

Iran’s strained economy is the regime’s Achilles’ heel, and provides our most effective leverage – especially now, with oil prices sharply depressed. Oil and gas exports account for some 80 percent of Iran’s export revenue and about half the government’s budget. The regime relies on foreign companies to develop its energy industry, and even to provide it with gasoline for domestic use – because it doesn’t have refining capacity to meet its own needs. Foreign energy companies essentially sustain Iran’s economy and its regime.

Billions of dollars of U.S. public employee pension funds and other public funds are invested in the foreign corporations that most heavily engage in Iran’s oil sector – accounting for a significant portion of investment in these companies. A movement of concerned citizens is sweeping America to curb investment of public funds in these companies. Ten states have enacted laws – including California, with the largest plans in the country, by far – and others have instituted policies divesting from Iran. Members of the armed forces and first responders – who know first-hand the damage that Iran’s activity inflicts – are among those who have advocated for divestment most strongly.

Taken together, the divestment mandates already on the books at the state and local level affect more than half a trillion dollars in assets – a sum that is growing as grassroots concern spreads. As Senator Deutch knows – in fact, in large part because of Senator Deutch’s efforts – the State of Florida alone already has directed its pension funds to divest nearly $1.3 billion from these companies, unless the companies change their ways.

Divestment, and the attendant negative publicity, impels companies to reassess their investment in Iran – especially because most of the laws give companies an opportunity to avoid divestment by halting such investments. Many companies already have chosen to do just that. Divestment also discourages companies from beginning new business in Iran.

Thus, divestment discourages the heavy international investment in Iran’s oil and gas infrastructure that Iran’s regime desperately needs, and thereby significantly adds to the economic pressure on the regime.

Iran is a highly risky investment environment, for numerous reasons. The volatile government and the Iranian Revolutionary Guard own and control much of the economy, especially the energy sector. Corruption is rife, and the business environment opaque. Credit and credit guarantees have become less available, especially with the designation of large Iranian banks for their involvement in proliferation and/or terrorism. Available credit often costs more or comes from less reputable institutions – or both. Iran’s deep economic crisis heightens the risk of doing business there. Companies investing heavily in Iran’s energy sector also risk U.S., EU, and international sanctions.

For all these reasons, and more, companies that engage heavily in Iran’s energy sector are subject to extraordinary risk. Investing in these companies could subject a pension or other fund to undue risk. State and local governments – or investment fund managers – that choose to divest from these companies are acting with prudence and exercising their legitimate authority to protect the assets under their stewardship.

The Iran Sanctions Enabling Act would protect only divestment from companies that invest more than $20 million in Iran’s energy sector. These are the very companies that are subject to U.S. sanctions for their activity in Iran – activity that U.S. companies are forbidden from doing.

The American Jewish Committee strongly supports this legislation, and wishes to express our appreciation for the opportunity to testify before the Subcommittee on this critical matter. I would also be remiss if I did not thank my colleague Debra Feuer for her exceptional work on this issue.

Thank you, Mr. Chairman.