[Congressional Record Volume 140, Number 90 (Wednesday, July 13, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: July 13, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
 THE AMERICAN ECONOMY AND THE REST OF THE WORLD: TWO SIDES OF THE SAME 
                                  COIN

 Mr. SIMON. Mr. President, one of the most thoughtful observers 
of our economic scene is Felix Rohatyn of New York City.
  Recently, he gave the Albert H. Gordon Lecture on Finance and Public 
Policy at the John F. Kennedy School of Government. He calls on the 
United States, among other things, to deal with the jobs shortage in 
the underclass in a much more meaningful and creative way. He also 
calls on us to deal with our deficit.
  Both have to be done.
  As chair of the subcommittee that deals with retraining, I am all for 
retraining and education, but Felix Rohatyn is absolutely right when he 
says:

       The relentless downsizing of American business, together 
     with the defense cutbacks, cannot be offset just by 
     retraining and education.

  We need jobs programs that put people to work, that give them a lift, 
and that screen them when they come in to determine if they need 
training for basic literacy and skills acquisition. But to believe that 
we can do this on the cheap is living in a world of fantasy, and we 
have to do it on a pay-as-you-go basis. We cannot continue to have 
interest be the fastest growing item in the Federal budget.
  That means, inevitably, that we're going to have to raise additional 
Federal revenue. Those of us in politics don't like to talk about those 
kinds of things, but we had better level with the American people that 
our problems are simply going to compound unless we face up to the 
underclass situation and unless we face up to the deficit situation.
  I ask unanimous consent to insert the Felix Rohatyn statement into 
the Record at this point.

 The American Economy and the Rest of the World: Two Sides of The Same 
                                  Coin

                         (By Felix G. Rohatyn)

       It is a great privilege to deliver the Albert Gordon 
     Lecture at the Kennedy School. The Lecture is dedicated ``to 
     improved discussion and increased understanding of matters 
     related to finance and public policy''. In that context, I 
     would like to review the relationship of the U.S. economy to 
     the international realities of the so-called New World Order.
       I would like to put forward three general propositions:
       (1) That economic growth and social stability in the 
     developed world requires substantial and steady economic 
     growth in the large developing countries.
       (2) That this development will require further integration 
     of the western economies with the rest of the world through 
     open trade and investment policies;
       (3) That totally free market policies may not be the 
     panacea that they are cracked up to be. Just as the U.S. is 
     still trying to balance the benefits of free markets with the 
     requirements of individual security and the creation of new 
     jobs, so will other countries.
       The fall of the Berlin Wall and the collapse of communism 
     in Europe (Both East and West) have created a new historical 
     reality. Never before has the competition among the world's 
     leading powers been concentrated on economic, as opposed to 
     military and ideological, realities. On the world stage, 
     today, the competition is essentially driven by economics as 
     Western Europe, North America, Japan, China and South East 
     Asia approach the turn of the Century. Last week's vote on 
     NAFTA in the Congress and the Seattle Meeting of APEC are a 
     reflection of this situation.
       However, this has had another result, namely the widely 
     accepted conclusion that the colossal economic and political 
     failure of communism was due to the perfection of a 
     Reaganesque or Thatcherite version of free-market capitalism. 
     This conclusion is dangerous for two reasons:
       First, it is not true. Communism collapsed mainly because 
     of its internal inefficiencies and contradictions once modern 
     communications and technology made it impossible to continue 
     its isolation. Second, because it leads to the easy and 
     unproven assumption that pure market economies can deal with 
     technologically-driven productivity growth, defense cutbacks 
     and foreign competition; that they can, simultaneously, 
     provide high levels of employment and continued improvement 
     in the standard of living of a large majority of the 
     population.
       The danger in these assumptions is already visible in 
     Eastern Europe and the FSU. The expectations raised by these 
     prescriptions, superimposed on archaic systems and 
     psychological mindsets decades behind the times, were beyond 
     anything that could realistically be expected to come about. 
     The best that could have been achieved would have been a 
     disappointment; the reality in many cases, turned out to be a 
     crushing letdown. Current conditions of inflation, 
     corruption, insecurity and humiliation have replaced the 
     political fear and relative economic security which 
     characterized communist regimes. The tradeoff, for many, is 
     not self-evident. In my judgment, there are two reasons for 
     these failures:
       First that the prescription was wrong. For socialist 
     countries in transition, economic ``shock therapy'' combined 
     with immediate democratization is in most cases, a 
     prescription for economic failure and/or political 
     reaction. Second, and equally important, is the fact that 
     we, in the West, with the most advanced economic and 
     political systems in the world, have not yet effectively 
     dealt with the need to equate freedom, fairness and 
     wealth. Liberals have consistently argued for freedom 
     combined with fairness; the result was redistribution of 
     wealth and the modern welfare state. Conservatives argued 
     for freedom and the creation of wealth; the result has too 
     often been significant gaps between social and economic 
     classes as well as a very weak safety net for those in 
     need of assistance. Until we resolve this dilemma, 
     economic and political solutions will be in difficulty in 
     all democracies.
       It seems to me that for political stability and democracy 
     to flourish in the world of the 21st Century, three 
     objectives have to be met:
       (1) The big, developed Western democracies, ie., the U.S., 
     Canada and Western Europe, together with Japan, have to 
     resolve the problems of structural unemployment and of 
     chronic budget deficits. The creation of adequate jobs with a 
     future is the biggest economic and social challenge now 
     facing the West. As a result of weak economies and flawed 
     fiscal policies, the U.S. and Germany in particular are now a 
     drain on the credit markets. They should, over time, along 
     with the other OECD countries become major sources of 
     investment capital for the rest of the world;
       (2) The big developing countries, China, India, the FSU, 
     Latin America must follow their own individual path to market 
     economies and sustained economic growth. Many SE Asian 
     countries have done so successfully. Cultural and historical 
     factors may be as important as economic theories in 
     determining individual countries approach to the market 
     economy. Social and political stability together with 
     currency stability are both required to attract the necessary 
     foreign investment and mobilize local savings.
       A recent article in the Wall St. Journal by Henry Rowen 
     suggested a possible scenario for the years 1990 to 2020 
     insofar as economic growth is concerned, dividing the world 
     into ``rich'' and ``non-rich'' countries. This scenario shows 
     that strong growth is required in the ``non-rich'' part of 
     the world economy simply to maintain minimum acceptable 
     growth in the developed world. Per capita growth in the OECD 
     would be about 1.5% per annum, while the ``non-rich'' 
     countries grow at about 3.5% per annum. Its achievement would 
     require mutually reinforcing economic policies on an entirely 
     new scale. The achievements of the Marshall Plan and the 
     Bretton Woods architecture are modest in comparison. In view 
     of the growing importance of exports for the U.S. economy, it 
     is easy to see that, if the developing world falters, the 
     U.S. will be in serious difficulties.
       It is clear that no one Western country, such as Germany, 
     Japan or the U.S. is capable of being the locomotive to 
     generate sufficient economic growth; it is questionable that 
     any one region is capable of doing so. The pressures created 
     by West Germany having to invest $100 billion per annum in 
     East Germany, combined with continued large U.S. borrowings 
     to finance our own budget deficits, have slowed the economies 
     on both sides of the Atlantic. For the first time in modern 
     history, the locomotive for the West must come from new 
     growth in the rest of the world.
       Nonetheless, the U.S. must take the lead to achieve this 
     objective, with long-term economic and trade policies aiming 
     at sustained economic growth in Latin America, China, India 
     and other South East Asian countries. Completing the GATT and 
     NAFTA agreements are vital aspects of that role. At home, the 
     U.S. must make continued progress in the related areas of 
     structural unemployment, budget deficits and savings and 
     investment. We must redefine our foreign policy so as to give 
     much greater emphasis to international economic integration 
     and growth policies. Like every major multinational 
     corporation, the foreign components of economic policy are 
     but the other side of the coin of domestic economic policy.
       On the domestic front, The Clinton Administration has made 
     a courageous start to reverse a decade of deficits, of 
     increased indebtedness and of a low savings rate. Much more 
     will have to be done, particularly in the areas of solving 
     the growth of entitlement programs such as Social Security, 
     Medicare and Medicaid, probably through some form of means 
     testing. However, providing security to the working American 
     will have to come pari passu with deficit reduction. 
     Universal health care is one component of that security, 
     providing it is realistically financed. Job opportunities and 
     financial security is a second component, and on that score 
     we are failing badly. The relentless downsizing of American 
     business, together with defense cutbacks, cannot be offset 
     just by retraining and education. These are important 
     components but they are inadequate, and a number of different 
     initiatives will be required.
       Among government actions, a large scale public works 
     program should be undertaken, federally financed and 
     supplementing state and local programs. A $250 billion ten-
     year program would be a fraction of what is needed to bring 
     this Country's infrastructure to satisfactory condition and 
     should be considered as a minimum first step; it could create 
     about 1 million new jobs annually and could serve as one 
     component of a defense conversion effort. High speed rail; 
     mass transit; airport construction and many others would be a 
     more effective use of defense contractors capabilities than 
     building redundant Seawolf submarines. The use of some 
     military bases, which are presently scheduled to be closed, 
     for CCC-type programs to train inner-city youngsters, would 
     be another benefit. The financing for such a program could be 
     separated from the federal budget, with special issues of 
     infrastructure bonds, secured by modest increases in gasoline 
     taxes or other recurring revenues. These would pay off the 
     bonds in 30-40 years and could make them eligible for 
     investment by private and public pension funds, which now 
     amount to about $3 trillion and will probably double in size 
     over the next ten years.
       In addition to such a program, new private sector 
     initiatives will have to be studied, such as shorter work 
     weeks, earlier retirements, and tax incentives for retirees 
     to start small businesses. The impact on productivity as well 
     as on the Federal budget must obviously be taken into account 
     with any of these approaches. But the agreement of the German 
     unions to Volkswagen's adoption of a four-day week must be 
     compared with the chaos created in France by the failure of 
     the French Government to support Air France vis a vis its 
     unions. The social and economic costs of long-term 
     unemployment are usually greater than the cost of creating 
     opportunities for those who want it.
       The U.S. Government should also be willing to compete 
     directly with other nation's industrial policies as they 
     affect key American industries. A clear example is the case 
     of Airbus Industrie, the European airplane consortium, which 
     has acquired 30% of the world's commercial aircraft market, 
     at the expense of the American aerospace industry. The 
     estimated subsidy invested by European governments of about 
     $30 billion over 20-25 years has been a spectacular success, 
     and Airbus could well be headed for 40-50% of the market over 
     time. A program should be developed between the Government 
     and the U.S. aerospace industry to assist in the development 
     of the next generation 600-800 passenger ``super-jumbo'' jet 
     as well as to the successor of the supersonic Concorde.
       While it is important for the U.S. to eliminate its budget 
     deficits over time and to become an exporter of capital 
     instead of an importer, the amounts of capital required for 
     world development dwarf any possible Marshall Plan, either 
     U.S. or even OECD led. The original Marshall Plan consisted 
     of about $16 billion to be disbursed over a four year period. 
     This would be the equivalent of about $100 billion in today's 
     dollars. To generate $25 trillion of new output in the 
     developing world over the next 25 years, as suggested in the 
     WSJ essay, could require as much as $15-$20 trillion of 
     investment. No combination of western public and private 
     investment can provide more than a fraction of this amount. 
     However, western expansionists trade and investment policies 
     will accelerate the required internal capital generation in 
     large developing countries.
       It is crystal clear that this reality requires major 
     developing countries to establish domestic capital markets of 
     sufficient depth, transparency and integrity so as to 
     encourage and mobilize domestic savings as well as tap into 
     the global savings pool represented by the rest of the 
     world's capital markets. These will be heavily influenced by 
     modern legislative reforms and financial and monetary 
     policies of currency stability and low inflation. A global 
     competition for capital will drive economic and political 
     reforms, which in turn will be needed to mobilize domestic 
     savings.
       In order to be able to rely mostly on private capital flows 
     and capital formation, developing countries must meet two 
     basic requirements: A stable currency and a stable social and 
     political environment. Runaway inflation brought about 
     economic collapse and nazism in post WWI Germany; runaway 
     inflation, today, is still the biggest enemy of investments 
     and stability, witness the events in the FSU at present. The 
     control of inflation and the transition to a market economy 
     argue against overnight ``shock therapy'' solutions such as 
     are imposed today on former communist countries. Memories are 
     notoriously short, but WWII ended less than fifty years ago 
     and it would be well to review what happened then. Despite 
     the Marshall Plan; despite the fact that the European 
     economies had experience with market economies and the 
     technical and administrative infrastructures to comprehend 
     them; despite the ``German-economic miracle'' beginning with 
     currency reform in the 1950s; it took most of Europe 10 to 20 
     years to regain fully convertible currencies and a relative 
     level of political stability. I would argue that the task of 
     bringing Western Europe back from the catastrophe of WWII was 
     easier, politically and economically, than the task facing 
     the FSU and, possibly, China today.
       Eastern Europe, while a daunting challenge, appears to be 
     more manageable, with the exception of Yugoslavia. West 
     Germany has essentially taken over the responsibility for 
     East Germany, albeit at huge cost. Poland, despite a 
     political setback, has strong current growth. The other 
     countries all have histories of Western type economies and 
     politics, interrupted by forty years of communism. It is hard 
     to overemphasize the importance of opening up trade 
     opportunities for Eastern and Central Europe. This can be 
     done not only by encouraging the EC to open its markets on an 
     accelerated time table, but by reopening some FSU markets to 
     these countries as part of Western economic assistance 
     programs to the FSU. The economic stability of Europe 
     requires the integration of Maastricht; the social stability 
     of Europe requires the orderly inclusion of Eastern and 
     Central Europe into the EC through more aggressive trade and 
     investment policies.
       While the prospects and the requirements for a successful 
     transition of both the FSU and China are quite different, I 
     remain convinced that a gradual approach to economic as well 
     as political transition is most likely to succeed. In other 
     words, I believe that Deng Xiao-Ping is more likely to 
     succeed than Boris Yeltsin. Every major U.S. corporation that 
     has undertaken significant restructuring programs has done so 
     on a multi-year basis. Early retirements have been combined 
     with programs to cushion the shock of lay-offs, with definite 
     goals set on a year by year basis. New York City avoided 
     bankruptcy in the 1970s with a multi-year plan along similar 
     lines. The same approach should be applied to inefficient 
     state enterprises, even those that lead to total shutdowns. 
     The sacrifices required, in the form of lower standards of 
     living and higher unemployment, by the quick dismantling of 
     state enterprises and total decontrol of prices is 
     politically unsustainable in the long run. The U.S. is in a 
     poor position to argue for the compatibility of sacrifice 
     with democracy; when a 4 cent tax on gasoline is deemed to be 
     a terrible burden, we should be very modest when calling on 
     others to sacrifice. There are also other models than those 
     of Thatcherite Britain or Reaganite America for these 
     countries to aim for. Japan's spectacular postwar development 
     took place under a one-party system and significant 
     government guidance to the private sector economy. France has 
     followed the path of a mixed economy. Similar approaches 
     could succeed in former communist countries if we recognize 
     that individual countries will have to follow individual 
     paths.
       Russia and some of the other members of the FSU will 
     require special treatment. Both democratization and economic 
     reform have gone part way and have stalled as a result of 
     inflation, economic collapse and political resistance of non-
     democratic forces. Boris Yeltsin seems to be our best hope, 
     but it would not be surprising if Russian democracy turned 
     out to be more authoritarian than our ideal model or if 
     regional pressures caused significant structural changes to 
     occur. The economy will also need much more time and far more 
     outside financial and technical assistance to make the 
     transition than any of the other major countries. In the case 
     of Russia and possibly Ukraine and Belarus, very large scale, 
     long-term international economic assistance programs will 
     probably have to be set up. It is doubtful whether the 
     technical and administrative infrastructure in the FSU is 
     adequate to manage such a program, or has the ability to 
     attract and generate sufficient private capital.
       A stable convertible rouble is still unattainable, but it 
     is ultimately necessary. The international financial 
     community, through the IMF, created additional Special 
     Drawing Rights which allowed members to increase their 
     borrowings in the 1970s in order to deal with the oil crisis. 
     This amounted to about $8 billion (equivalent to about $15 
     billion currently) to be spread over seven years. A similar 
     approach could be taken for the FSU in order to finance a 
     multi-year program to stabilize the currency, or currencies 
     as the case may be.
       In addition, FSU participating countries could be 
     encouraged to provide 10-20 year concessions to Western 
     companies or consortia to acquire control of, and operate, 
     some important sectors of the economy in order to accelerate 
     transition. Control would thereafter revert to local 
     interests. Guarantees for the protection of private property, 
     debt repayment and profit remittance would have to be 
     provided by the local governments and supplemented by broad 
     investment guarantees by the Western Governments.
       I am aware of the fact that such a program could be 
     described as ``Western neo-colonialism'' and may be 
     politically unacceptable in the FSU. There may not be very 
     attractive alternatives, however, and it would be well to be 
     realistic about what is required. West Germany is committed 
     to invest about $10 billion annually in East Germany, 
     probably for the next 7-10 years to provide for its 
     transition costs. East Germany, with less than 10% of the 
     population of the FSU, is probably twenty years ahead of the 
     FSU in its infrastructure, overall educational levels and 
     technological and administrative competence. The requirements 
     of the FSU are many times the amounts invested in East 
     Germany, but its ability to receive and disburse them 
     effectively are inadequate; this will require both time and 
     significant foreign participation. The ``Grand Bargain'' 
     proposed by Harvard's Graham Allison and Robert Blackwill was 
     an idea ahead of its time. Some version of the Grand Bargain 
     will, however, be required.
       China is a different case. It has allowed gradual economic 
     liberalization, beginning with agriculture; it has maintained 
     up to recently, a relatively stable currency while 
     maintaining a politically authoritarian system. It has had 
     the support of large amounts of capital and know-how provided 
     by overseas Chinese as well as foreign trade surpluses and 
     other capital inflows. So far, the result has been an 
     economic boom, huge inflows of capital and, in certain 
     regions, significant advances to a market economy at 
     spectacular growth rates. However, the lack of a modern 
     administrative, legal and credit structure; an inadequate 
     public infrastructure; and some of the more negative aspects 
     of rapid economic development (i.e. recently increasing 
     inflation; rampant speculation; corruption; crime) leave the 
     question of the future of China still unanswered. Huge 
     differences exist in the pace and level of economic 
     transition between the coastal regions and the rest of the 
     Country and between urban and rural areas. The challenge to 
     the Chinese Government is to get administrative and financial 
     mechanisms in place that enable national policies to be 
     carried out effectively. Equally important, is the 
     development of a capital market of sufficient size to raise 
     the huge sums necessary, both domestically and abroad, to 
     meet China's needs. Direct investment will not be sufficient 
     without the creation of such a market and an independent and 
     responsible Chinese Central Bank is integral to such a 
     development. As far as the U.S. is concerned, the issues of 
     human rights, weapons proliferation and our significant trade 
     deficit with China will remain as continued impediments to 
     a totally open relationship.
       Our economic relationship with Japan is beginning to change 
     as China becomes a more important factor and as Japan's own 
     economic and political problems force a reassessment of their 
     own situation. The Clinton Administration is absolutely 
     correct in attempting to obtain a measurable reduction in our 
     balance-of-trade deficit with Japan, based on measuring 
     sectoral activity. Equally important, however, is to push 
     Japan to open its doors to U.S. direct investment as broadly 
     as we have maintained open investment on the part of Europe 
     and Japan. Japan (and to a lesser extent Germany) maintains 
     an almost impenetrable net of bank-insurance-industrial 
     cross-ownership and control which makes direct foreign 
     investment very difficult if not impossible. It is as 
     important to open up Japanese direct investment markets as it 
     is to remove trade barriers; it is equally important for 
     Japan to continue and accelerate its role as a heavy investor 
     in developing countries.
       Mexico and the rest of Latin America will be heavily 
     dependent on the success and the extension of NAFTA. The 
     creation of a total American market reaching from Canada to 
     the tip of Argentina is clearly in our interest as well as 
     those of Canada and all of Latin America. NAFTA is a key 
     first step and was a critical and courageous win for the 
     Clinton Administration. At the same time, we should make it 
     clear that NAFTA and the ultimate creation of a Continental 
     American market is not exclusive of other regions. Powerful 
     economic forces will push China, Korea, SE Asia and possibly 
     Japan to create an economic trading zone that could someday 
     be exclusive of the West. Germany, if European union fails to 
     come about, could drift toward similar arrangements with 
     Austria, Poland, Czechoslovakia, Hungary and, possibly 
     Ukraine. Such developments would be profoundly inimical to 
     our interests. We need not embrace Asia at the expense of 
     Europe as was recently hinted at by the Seattle APEC Meeting. 
     Common values, histories and languages still play an 
     important role in the world. President Clinton must continue 
     his fight against protectionism throughout the West by 
     providing a bridge, instead of a moat between Europe and 
     Asia.
       Which brings me back to the U.S. economy and the U.S. role 
     in the world. I stated at the beginning of this lecture my 
     belief that we have yet to prove that free market capitalism 
     can successfully close the triangle of political freedom; the 
     creation of wealth; and the fairness of its distribution. It 
     may be that this is impossible and that the price of 
     political freedom and the creation of wealth requires the 
     sacrifice of job and income security for significant parts of 
     the population. This is Reaganism and Thatcherism at its 
     purest and, more or less, describes the recent attitude 
     (implicit rather than explicit) of most Western governments, 
     including the U.S. This is not good enough and recent 
     statements by President Clinton and Senator Bill Bradley 
     pointing to the need for security by the average American 
     underline this fact. Before we push other countries too hard 
     with respect to the appropriate role of Government and to 
     what models they should follow, we had better be further 
     along in providing satisfactory answers to these problems 
     ourselves while closing our own budget deficits and 
     stimulating our economy. It is also clear that progress on 
     the domestic economy is necessary for the process of 
     international integration. A stronger U.S. economy would have 
     removed the threat to NAFTA caused by fears of domestic 
     unemployment; a stronger French economy would reduce the 
     threat to GATT created by internal pressures on the French 
     Government.
       A recent article in Business Week described GE's growth 
     strategy for the 21st Century as being focused on aggressive 
     investment in China, India and Mexico. The Chairman of GE, 
     Jack Welch, is quoted as saying: ``If I'm wrong, we will lose 
     $1 or $2 billion; if I'm right, we will own the 21st 
     Century''. I think he is making the right bet. The future of 
     our economy is organically, and permanently, tied to the 
     developing world and the process of integration must be 
     accelerated. Economic integration can allow for different 
     political and social paths to be followed as countries 
     experiment with what is best for them. Access to large 
     amounts of development capital will, however, be central to 
     every country's performance and the competition for that 
     capital will be fierce. It may be worth reviewing whether 
     current U.S. financial institutions (as well as global 
     institutions) are appropriate to support the level of capital 
     formation and investment needs to be faced over the coming 
     decade. Just as new public instutitions were created for the 
     1930s and 1940s, we may need again to consider the need for 
     institutional development to support economic change and 
     international exchange rate stability.
       The world may be a lot safer today than it was before the 
     Berlin Wall fell; I say ``may be'' because safety is relative 
     and lots of dangers remain. What is certain is that safety 
     can be buttressed by economic growth and that American growth 
     is heavily dependent on the rest of the world. Our ability to 
     solve our own economic and social problems is heavily 
     dependent on our leadership in helping other countries to 
     solve theirs; the reverse, however, is equally true. These 
     are two sides of the same coin.

                          ____________________