By Leo Hindery, Jr.
Doha, Qatar – May 3-5, 2009
In discussing “Obama’s America: The Economic Scene”, while my primary focus will be the American economy and its impact on the Middle East and the world economy, I hope through my comments to also help you identify the opportunities that exist to enhance the economic future of the Middle East, to which we are all committed. I genuinely believe that these opportunities exist even in – and especially because of – these very difficult times in which we find ourselves.
It has been just about a century since the “unsinkable” Titanic sank [on April 15, 1912], mocking at the time the hubris of modern industrial technology. Now the world’s economic ship has definitely hit its own enormous iceberg, mocking this time the hubris of foolish overconsumption, unfair globalization, and unbridled financial deregulation.
This global economic crisis, which started as a pure financial crisis, has now been joined by trade aftershocks of almost unprecedented levels, and thus I believe it will last much longer than most governments, including my own, are currently predicting. The underlying systemic failures are now simply too great to quickly turn around, and I feel it will be 2011 before we start to see real recovery.
On the credit loss side alone, the International Monetary Fund just two weeks ago raised its estimate of total losses on U.S. assets to $2.7 trillion and on European assets to $1.1 trillion [source: New York Times, 4-22-09]. And of even more concern than these credit losses are the more than 130 million people worldwide who have already been pushed into extreme poverty [source: UN Millennium Campaign], and the many millions already driven into unemployment with little hope of near-term job recovery.
It is now incumbent upon leaders everywhere to figure out what needs to change and what is going to change. And as you will hear from me later, I am going to specifically call on the leaders of the Middle East to play an immediate role now – and an ongoing role hereafter – in the world’s significant institutions, especially the financial ones.
But before then, let me discuss two of the three major systemic failures which caused the mess we are in, namely, American consumerism run amok and globalization gone awry, both of which are in desperate need of attention. And except for one observation which I want to make later, I will largely leave it to others to discuss the failure of most of the world’s financial regulatory agencies to act effectively and responsibly.
Looking first at America’s hyper consumption, right up until the U.S. economy went into its tailspin, the spending habits of Americans accounted for about 71 percent of our nation's Gross Domestic Product [source: Bureau of Economic Analysis, Table 1.5.5], which is at least 5 and up to 10 percentage points higher than the level in most other developed countries and a full 30 points higher than the current level in China [source: Anne Krueger, SAIS, 4-22-09].
Economists are now predicting, with a lot of justification, that because of the dramatic changes in purchasing practices being brought on by the recession, American consumers’ percentage of GDP will soon drop to a level more in line with the other major developed nations and one that we ourselves haven’t seen in nearly thirty years. In other words, America is looking ahead to a very quick decline in our annual gross domestic product on the order of 5 to 10%.
While half or so of this decline from reduced U.S. consumption should be offset by the effects from reduced imports, other import-substitution initiatives, and government stimulus, the balance of this trillion dollar or so decline in GDP still represents a huge dislocation of the U.S. and global economies, which has to be made up somewhere. [note: U.S. GDP in 2008 was $14.3 trillion]
For years, we in America have had an economy driven mostly by periodic asset bubbles fueled by the combination of manufacturing and energy-related trade deficits, cheap credit generated through financial engineering, and hyper-consumerism, which is a toxic, unsustainable combination. And as everyone who didn’t already know has now found out, the United States has also been serving as the globe’s buyer of both first and last resort, which is also unsustainable.
Now let me talk about the second big failure, which is unfair and uneven globalization.
The problem is not with globalization's underlying premise of emphasizing each country’s respective comparative advantage, which is fine. Rather, the flaw has been that the United States and many other developed nations have often been unable to compete globally because of large-scale unfair (and sometimes illegal) subsidies, inhumane labor standards, poor environmental practices, and currency manipulation. These subsidized practices have overwhelmed our open-competition approach to trade and, especially in America, they have also led to the transfer of millions of jobs off shore and many million more workers from export industries into less productive and often lower-paying service jobs.
When modern-day globalization began to emerge in the 1980s, we were told that new high-quality service jobs would generally offset any lost manufacturing jobs, and that, measured economically, trade accounts (exports and imports) would always be close to being in balance.
Instead, as you know, the United States has had a fairly persistent trade deficit, which now runs in the hundreds of billions per year and which has aggregated an almost unbelievable $7.2 trillion since 1980. Less well known is the fact that just while George W. Bush was President, we lost overseas 4.5 million manufacturing jobs and more than 2 million service jobs – contradicting the theory and the promise that a nation would never lose large numbers of both types of jobs at the same time.
The $4.7 trillion of trade deficits accumulated just during the Bush administration also made the American economy about $1.5 trillion smaller than it would have been otherwise [source: Peter Morici, Univ. of Maryland, 9-17-08], which is almost exactly the amount of GDP being lost as a result of American consumers pulling back on their spending.
In the world today, there are two general sets of business and trade rules. One set resides in the older developed countries, such as the U.S. and Europe, where companies still compete mostly on their own on the basis of their business acumen and product value differentiation. The other set resides in the world's largest emerging markets, most notably China, where there are elaborate policies to protect domestic enterprises, to induce foreign corporations to shift their production facilities and technology to them, and to anoint selected "champions" as the nations’ chosen global competitors with the full power of the states deployed to assist them.
The reason these conditions are of such great concern is that the global financial crisis of 2008 has now made it obvious to everyone that America’s economic security is inextricably linked to global prosperity and vice versa. And thus it is the whole world – and not just American citizens – that needs the U.S. to responsibly and substantially reduce its large trade and current account deficits and, as other nations do, meet more of its domestic demand with domestic production.
So, what do we need to do, specifically?
From the international front, President Obama got right to the point when, at the April G-20 meeting in London, he said that, “If there is going to be renewed growth, it can’t just be the United States as the engine.” (unquote) While the President’s comment was actually very brief, it was critically important, because it got to the heart of the cure for the global financial crisis and identified two imperatives:
- First, in order to generate the large-scale global demand needed to bring the world out of its severe recession, there must be much more balanced demand across the globe; and
- Second, the major “surplus nations” – specifically, China with its enormous $2 trillion of foreign currency reserves, Germany and the oil-producing nations – need to immediately deploy a significant portion of their accumulated foreign reserves where doing so will most stimulate the world economy, whether it be within their own economies, overseas, and, in order to assist the poorer countries, in a combination of long-term development loans and Official Development Assistance or ODA.
The G-20 should have forcefully made these fiscal stimulus obligations of the surplus nations a focal point of its concluding communiqué. Instead, however, they were largely ignored except in sidebar rhetoric. In turn, the actual “fiscal stimulus figure” which was settled on was far less than what we in the United States and the IMF see as necessary, the agreed “trade finance figure” aggregated only a paltry $3-4 billion of new money, and almost nothing was said about unfair and illegal trade practices. [source: Financial Times, 4-03-09]
On the U.S. domestic front, American business and especially the American government clearly have big oars to pull to help get the world’s economies moving forward again – and if they don’t pull them responsibly and early on, then we in the United States clearly have no standing to demand either actions by the surplus nations or any other major international response.
Accordingly, our new administration and Congress must quickly do everything they can to restore the essential tax-policy links between productivity growth and wage gains. This is important because all four past American administrations wrong-headedly took very specific actions to redefine U.S. national prosperity as individual wealth, which created the low-wage economy that has plagued a majority of our nation’s workers for three decades.
At the same time, because I believe President Obama’s first stimulus plan was too small by at least half, not nearly timely enough in some of its spend-out rates, and too underperforming against the only measure that really counts, which is job creation, the U.S. Congress now needs to enact a second stimulus plan, but one which this time puts nearly 100 percent of its monies toward creating long-term, high-value jobs.
Right now in the United States there are an unprecedented 28 million unemployed workers – the 13.2 million who are “officially” unemployed and the 14.6 million who, for political reasons, we don’t count but who are every bit as unemployed. And until a goodly number of these “missing” jobs are found, the U.S. economy will not recover, nor will many of the world’s other struggling economies.
And what none of us will ever be able to do is restore our economies to long-term health simply by pouring unlimited borrowed money into them on the flawed and unfair premise (and hope!) that it will "trickle down" to where it is needed. We have clearly shown this to be true in America, whether the money is given to high-income individuals, as Presidents Reagan and George W. Bush did, or distributed in the form of massive bailouts to the big banks and Wall Street firms, as is happening now.
Now let’s talk about those significant changes that I believe the global financial crisis is going to bring about regardless, starting with Changes in Political and Social Stability. We have known for many decades that revolutions and civil unrest almost never come from the poorest, simply because of citizens’ overriding needs to just survive. However, this global recession is already so deep and pervasive, and so hurtful to the middle class nearly everywhere, that political and social stability are clearly at risk:
- within Europe, which has experienced the most relative deterioration, especially in the countries of Great Britain and Spain;
- in several of the former Russian satellites, such as Moldova, Belarus, Georgia and the Ukraine, which seem not to be sustainable in their current geographic states;
- in Latin and Central America, where too many nations years ago embraced export-led growth – of minerals and agricultural products – almost to the exclusion of sustainable domestic growth; and
- in Africa, where exports are already down 40%, the Continent’s combined current account surplus of 3% has quickly plummeted to a deficit of 4%, and food security is in a perilous state [source: Benno Ndulu, Bank of Tanzania, 4-23-09].
By contrast here in the Middle East, while there will be givebacks of some of the very rapid progress made over the last decade or so in creating the region’s own vibrant middle class, the dislocation should be modest and short term, particularly if your substantial foreign reserves are turned toward creating sustainable private sector jobs in high-tech services and light manufacturing and toward reducing bureaucratic roadblocks, as I intend to later strongly recommend.
Changes in the World’s Balance of Power are clearly going to occur as well, and some are quite obviously already underway.
- First we are going to see much more active involvement by China in all international institutions, especially in the financial ones, plus further expansion of its already substantial influence in Southeast Asia and Africa and growing sway in Latin America through loans and ever more trade [source: NY Times, 4-16-09].
- Second will be a cessation of any efforts that might be underway by some countries in Europe to shift their European Social Model, with its commitment to thoughtful regulation and consensus, to America’s Free Market Capitalism Model with its now thoroughly discredited core principle of free-wheeling de-regulation. This doesn’t mean the end of Authoritarian State Capitalism as the third governing Model, but it does mean that the European Social Model has been the clear winner out of this financial crisis. [source: Mitchell Ornstein, SAIS, 4-23-09]
- Third will be at least a reordering of the European Union, if not an outright major reorganization. What appeared reasonable in both governance and finance when the EU involved only a few countries and the Continent was rapidly growing economically, clearly makes less sense, particularly to the founding nations, now that the Union has massively swelled in size, geography and ethnic diversity and the Continent’s economy is significantly contracting.
- Fourth will be the combination of a lot more ethnic or state-sponsored nationalism, a number of additional failed states, and perhaps as many as 30 or even 40 failures among the 60 or so small constitutional democracies that formed in the last quarter century.
- And fifth, and very significant, will be China’s development of a large “blue water” navy, including home-grown submarines with nuclear-armed ballistic missiles [source: Adm. Wu Shengli, 4-14-09]. And once China has this force and it is able to project power as far as the Indian Ocean, then there will be tensions of a sort we haven’t seen for twenty years, plus inescapable pressure in Japan to re-militarize or at least display much more visible missile-defense capabilities.
One of the most significant changes, both politically and non-politically, will be the Demystification of Western Competence in all things financial. Throughout the years in which the U.S. was outright punishing countries that departed from fiscal prudence, America was itself, as we all know, borrowing on a colossal scale. But now, with our federal finances even more dependent on continuing large inflows of foreign capital, it will be the countries that spurned the American Free Market Capitalism Model and instead retained overall control of their markets that will materially help shape America’s economic future. [source: John Gray, 9-29-08]
Importantly to this latter point, of great concern right now to many, myself included, is the perception that some in the Obama administration in fact want to forestall any significant reform and regulation of the proprietary financial trading system that led us into the worst financial collapse since the Depression. It would be the height of irresponsibility if America resurrected rather than reformed its failed financial institutions, and the proof of our concern will be whether or not we rein in the credit default swaps and other derivatives – and the too-big-to-fail firms that traded them – which ten years ago we unleashed on the world.
Within this framework, I now want to focus specifically on the opportunities to enhance the economic future of the Middle East, which as I have said are abundant. Though this is by far the most important part of my comments, it was necessary to first put the global financial crisis into context in order that the Middle East’s opportunities may be fully appreciated. For as has never happened in this region before, they flow out of very broken economies elsewhere and how those economies came to be broken.
As I hope I made clear throughout my earlier comments, in the world’s present distressed circumstance, an unprecedented expansion of government and of governments is the only way to make up for the staggering $4 trillion of credit losses that have been dropped on the world’s head. And the consequence of this will be that America and the other major developed nations, facing uncertain futures that they can no longer shape alone, will be even more starkly dependent on the world’s new rising powers.
Going forward then, it is your own substantial foreign reserves that can, if thoughtfully deployed, quickly turn what to date have only been sovereign wealth fund-type investments into significant contributions to overall global prosperity and, importantly, into opportunities for much enhanced leadership in the world.
With respect, for far too long the major successful Middle East countries have themselves also been accumulators of large foreign reserves and too eager consumers of other countries’ products and services, and they have not sufficiently sought leadership in either geopolitics or geo-finance. It is now the Middle East governments collectively, however, which have the grand opportunity to become “major powers” in their own rights.
Initially, these new roles may be hard to accept for cultural, bureaucratic and political reasons and because your governments have been marginalized for decades from significant leadership roles in the West’s major institutions. However, if the financially stable Middle East countries do not assert themselves right now – when the rest of the world needs them to – then I believe your countries will remain very large investors in global prosperity but they will not be, as they are entitled, leaders of the global economy.
The parallel for my recommendation is China, which clearly – and understandably – now intends to assert its own visibility and leadership. But I would argue that China will have a much more difficult time doing so than would the major Middle East countries, simply because of China’s obvious geopolitical and military aspirations and the clear inequities associated with its trade and industrial policies.
Your serious and significant leadership is needed and warranted within the World Bank and the IMF, within the reform efforts aimed at the major banks and investment houses, and, for historical and cultural reasons, within the world of Official Development Assistance or ODA, especially in Africa and throughout the Islamic world. And on a personal level, because I spend so much of my own time on foreign assistance, I especially welcome the day when the names of the prosperous Middle East countries stand visibly alongside USAID’s throughout Africa, the so-called “Stans”, and large areas of South Asia.
As for specific investment opportunities, there are now many new ones that will provide you with very long-term, stable profits, and they will be found in the stimulus and economic development initiatives to which President Obama has committed the United States. Within the renewal and resuscitation of the U.S. economy – especially within our green economy, health care reform, and infrastructure rebuilding efforts – there are countless waysto:
- reduce the current extreme overweighting of your portfolios in financial instruments;
- establish hedges against the inevitable declining percentage of energy from fossil fuels; and
- remove the rancor and nationalist responses which have often attached to your sovereign wealth fund investments in certain American companies, facilities and natural resources.
Right now, President Obama needs investment “partners” to help effect his stimulus agenda, and many of his areas of emphasis would be very attractive investment opportunities for the Middle East. Importantly, you would also gain great insight into making similar job creation, education and “greening” investments in your own nations. And by truly partnering with us and the other developed nations in the resuscitation of our economies – rather than just passively investing in our economies – the nations of the Middle East would make even more compelling and timely the global leadership roles to which you are entitled. In closing, let me say we already know that the IMF has formally declared this period to be the “Great Recession of 2008”, and it will be remembered always – and tragically – for the tens of millions of people worldwide who have been driven into extreme poverty and the tens of millions of jobs lost.
In so many areas, President Obama has made a promising start toward refloating America’s and the world’s economies – and, to his credit, he has forthrightly and honorably begun to reach out to the leaders of the Middle East and elsewhere around the world for collaboration. However, in the areas of stimulus, financial reform, and reform of globalization, President Obama has not yet been nearly bold enough, which is why this time in history is such an important time for Middle East government officials and business leaders to seize the opportunities before them.
So, let’s also remember this period for our having all said, as loud as we could, “never again” to unbridled financial markets deregulation with its self-proclaimed “Masters of the Universe”. And let’s remember it especially for having fostered responsible, respected and permanent leadership positions for the prominent Middle East countries in the world’s multinational financial, government, and development institutions.
This has been a great privilege for me. Now I am happy to answer your questions in the time we have left.
Leo Hindery Jr. chairs the Smart Globalization Initiative at the New America Foundation and is formerly CEO of AT&T Broadband and its predecessors, Tele-Communications, Inc. (TCI) and Liberty Media. He is now an investor in media companies as Managing Partner of InterMedia Partners, LP in New York City. He is the author of “It Takes a CEO: It's Time to Lead With Integrity” (Free Press, 2005). During 2007-2008, he was Senior Economic Policy Advisor for U.S. Presidential candidate John Edwards, and later unofficial economic advisor to now President Barack Obama.