Economic growth follows stability, and it flees from disorder and strife. For business purposes that matters more than the form of government.
Navy Admiral, spy, technology innovator, university professor, corporate executive, board member, and savvy global investor, Bobby R. Inman is counted among the best and wisest who have held each of these titles.
Knowing the global breadth of his knowledge as it pertains to governments, societies, economies, and enterprises, we were delighted to entice him to speak at a Texas Enterprise gathering on the UT Austin campus on a topic he knows better than most, the international marketplace.
His full video remarks are worth the time, but following is a summary and partial transcript of his presentation. A few comments have been slightly reordered so that countries are appropriately grouped, but I’ve done my best to preserve his original meaning.
What do you need to find opportunity at the international marketplace?
- Stability. Economic growth follows stability, and it flees from disorder and strife. For business purposes that matters more than the form of government.
- Capital availability. What kind of investment climate do you find, and what is the tax climate? But I never saw a sound decision made purely on the basis of taxes…if there really wasn’t a solid business purpose underneath it, it turned out to be a bad outcome.
- Capable workforce, and an
- Education system that produces a capable workforce.
- Rule of law. If there are clear rules, regulations, and laws then its much easier to conduct business.
What are the disrupters to watch for and therefore be cautious about proceeding with business activity?
- Strife. Wars and terrorism disrupt and in some cases destroy business opportunities.
- Digital transformation. This is truly global, fundamentally changing ways business is conducted.
- Uncertainty. Where there is uncertainty, whether it is from regulatory approaches or from potential involvement in strife and wars, it is very unfavorable to a business climate.
- Fluctuating commodity prices. This may not be a long-term trend but certainly fluctuating commodity prices are having a very significant impact on business opportunities globally.
What is out there on the horizon?
- Central bank divergence. We [in the U.S.] are probably going to venture in mid-December through a quarter-of-a-point rise in interest rates, the first rise in nine years. The opposite direction of the European Central Bank, which is getting ready to further reduce rates. We’re seeing Japan and China’s sudden fluctuations. It’s not clear to me yet what impact these diverging paths are going to have on overall economic growth and stability.
- Volatile currency exchange rates are having very significant impact. You can have great success in sales and then do your currency translation and you suddenly discover that the profits have vanished substantially.
- Climate action. I don’t know what’s going to come out of Paris, but I have substantial worries that I don’t see a component of the discussions that looks at what the impact is on business, and what is the impact on economic growth. Yes on global warming, but we don’t know the long-term [economic] impact that will have.
The business climate around the world.
The recent election in Canada brought the liberals back to power. Young Mr. Trudeau may prove to be as colorful as his father was. He is moving a little more cautiously than his father did in taking over, not making change. He appears to still be supportive of strong economic growth, including in their energy industry.
In the U.S., the economy is growing but it’s going slowly. Two percent will not do the job we need over the long term. It needs to be back up to a robust 3 percent, 3.5 percent to be comfortable dealing with job growth, wage increases, and the rest of it. At this point, that growth is not visible, and I would make the case that at least some of that is uncertainty. I was disappointed that this many years into the recovery, capital expenditures by industry are in fact down, particularly this year. Trying to understand why would they be down, it’s uncertainty, particularly in the regulatory environment.
We can measure with certainty the impact of regulatory change. With the great interest in having long-term impact on global warming, EPA regulations have produced in the last four years a loss of 10,000 jobs in West Virginia, one of the most impoverished states in the country. So that’s a measurable outcome of the regulatory environment. It will be a long time before we learn or our grandchildren learn whether that also contributed over the long term to better outcomes from global warming.
Narcotics fueled violence is in Mexico, not from Mexican consumption, but from US consumption, getting the drugs to market in the US. There has been substantial legislative change over the last two-and-a-half years under President Nieto. He surprised a lot of us by using the period between election in July and taking office on the first of December to work with the opposition parties to come to some fundamental agreements on major regulatory changes, legislated changes including constitutional change to permit foreign investment in the oil business. It is too soon yet to know how it’s going to pay off because it’s not enough to get the legislation, it is how you execute the programs afterwards that makes the ultimate difference.
What is clear, there is an improving manufacturing climate in Mexico. They’re becoming an attractive place where things previously were going off to Asia, to China, elsewhere, now coming back much closer to the U.S. market and Mexico.
What ties these three countries together beyond our day-to-day trade operations? It’s that prospect that North America could not only be energy independent but exporting energy. Mexico and Canada both export to us now but with the success of shale and the rest, we were on the verge of becoming – if we got rid of legislation that prohibits export – of having the first major impact on unfavorable balance of payments in my adult lifetime.
Now, the Saudis saw a threat to their dominance in the energy market with U.S. shale production. So they’ve been willing to lower their lifestyle slightly to go down to $50 a barrel as opposed to $100 a barrel. It has indeed dramatically impacted our drilling for new energy sources. I think what would change that would be Congress moving forward on legislation, and hopefully the president sign, to get rid of the ban on export of oil and gas. That would give a surge at the marketplace, which would be helpful in price.
My views on Cuba have been controversial for a long time. I believe we should have cancelled the embargo the day the Soviet Union fell apart. It had passed its utility at that stage. The reason I wanted to see it go was I want to see U.S. investment in Cuba, in infrastructure and the rest, so that we have some influence inside Cuba.
I would also note for you, I was totally wrong on what was going to happen on the political side. I fearlessly forecast Fidel would rule until he died. When he died, his brother Raul would take over. It wouldn’t last long. Well, Fidel would become seriously ill, and he handed over power. What I totally missed was that Raul has spent the previous decade sending bright young colonels out to look at how other countries were managing their economies. You had a very slow, very gradual lessening. You no longer have to have a black market to sell fruits and vegetables from house to house. You can have open markets. It’s still an impoverished economy in many ways. We will be better off and so will the Cuban people if we accelerate getting rid of the embargo and encouraging a potentially great agricultural market for the U.S.
We deal with communist governments around the rest of the world. Why are we afraid to do that on that small island? The fear earlier was when the Soviets were using it as a staging area and a huge intelligence collecting base. I understood why the control stayed, votes in Florida and New Jersey. But in a way, they voted for President Obama. In 2012, they voted for his election. I don’t understand why we waited six years to finally move on recognizing the Cuban economy.
This is not a place I would recommend to look for major expansion. There are pockets that are good but if you look at the region collectively, gang violence is the significant factor in so many of the countries. What’s particularly sad, a lot of those gangs were originally formed in U.S. prisons and when they were let out and were deported back, they just simply took what they learned to do and have expanded. Gangs are behind much of the illegal immigration we see coming out of Central America trying to get to the U.S. We see lack of stability, and corruption in government.
Go to the great continent of South America and you look first at Venezuela, Ecuador, and Bolivia. Elected primarily on anti-U.S. platforms, governing on anti-U.S. approaches. They’re not a friendly place for the U.S. to undertake business opportunities.
The opposite side of that coin, Colombia, Peru, Chile, and maybe now, even Argentina with the election Sunday, a week ago. The opposition candidate squeaked in, with not a very large majority, but he was a proven entity already from being president of the most successful soccer club in Argentina and then the very successful mayor of Buenos Aires. Most of all, he is not a Peronista. So this is the first time in a very long time that we’ve seen the possibility of a major change in the business climate in Argentina. If that’s followed up with specific changes to facilitate doing business, Argentina may be a place that we want to look at for some business expansion.
Chile is still the best place. It’s expensive but again, rule of law, free market economics. The great surprise and disappointment to me is Brazil. Twelve, 14 years ago, Brazil elected a far left workers’ party leader, Lula da Silva on his fourth try and I was wringing my hands about what was going to happen to Brazil. He turned out to be a more effective implementer of free market economic policies than his three conservative predecessors and the Brazilian economy took off and the currency value soared. Then after eight years he got his chief of staff elected, the first woman president of Brazil. She had a good first two years and then things began to go south. She did manage to get reelected in a runoff campaign but the economy was continuing to deteriorate.
We stand back and say, “What happened to Brazil?” It had a very solid manufacturing economy. Most of those sales were to the U.S. and to its surrounding countries, the Mercosur – Uruguay, Paraguay, Argentina, Brazil. As the currency went up their principal trading partner became China, but China wasn’t interested in the manufactured products. They wanted the raw materials and they wanted agricultural products and China bought them in large numbers, enough that even limits were put on what they could own in the agricultural space.
Suddenly, Brazil found it had priced itself out of its local markets, and when the Chinese economy began to slump and they no longer wanted to buy the raw materials and agricultural impact, Brazil went from growing 5.5 percent to 6 percent to negative growth this year. On top of that, corruption. They are racked by the biggest corruption scandals in their history. The state-owned oil company had been used as a piggy bank to fund not only financial parties but to buy votes regularly in the Congress. It’s steadily spreading. Just this past week, the head of the largest investment bank was arrested for his role in helping flow the corruption through and the ramifications of that are still going on. There are major political figures on trial before the courts that have always been immune to prosecution in the past. How this is going to shake out is not clear. What is clear, it has made Brazil an unattractive place to do business in the short term.
The major investor in Africa is China. They have built infrastructure in a great many countries. They’ve left some unhappiness because much of the construction work was done by Chinese laborers. Nonetheless, if you stand back and look at the first decade of this century, there was 1 percent, 1.5 percent of growth broadly. That’s continuing halfway into this decade. So that says a significant part of that vast population are better off than they were 20 years ago.
Africa is also the one place where population has continued to explode. While in most of the rest of the world, we’ve seen declining population rates particularly in the modern industrial countries such as China. In Africa, it’s still booming which means their needs for economic growth are even greater. Country lines were drawn by the colonial powers not to be able to govern but to be able to get the raw materials that the colonial power wanted to have. As a result, there was no regard for tribes, ethnicity, or religions. A lot of the countries are just hard to govern.
Ghana is one of the brighter ones. There are only two major tribes there. Good, raw materials, discovery of oil offshore, a promising place to try. A substantial surprise to me was Rwanda. Again, the recipient of a lot of aid from China, and a president that is not a liberal democrat. He is much more in the spirit of Lee Kuan Yew in Singapore. We’re coming to the point of whether he can stay in power, because he will have to change the constitution. But the reality is, it’s now two decades yet from the genocide. He has done an amazing job at least on the surface of healing. He won’t let people talk about what tribe they were from. They are natives of Rwanda, not of a tribe.
Every Friday, they go out to clean. It doesn’t matter what your status is, in government, in business, in the society. Friday is for cleaning. So again, it’s reminiscent of Singapore and Lee Kuan Yew. There are also significant programs to teach young women how to be entrepreneurs and aimed particularly at the telecommunications industry and the not-for-profits.
So as a place to think about investing, s long as they can keep the political stability, Rwanda stands out. While there is corruption, it’s at a much lower scale than you see in a good many of the other African countries.
Go north of the Sahara, this is where the so-called Arab Spring began and had its greatest impact. We’re now four years past that start date. In Morocco, a young king has governed with some foresight. He has kept expectations within bounds of what he was prepared to permit, but there is a greater role by the popular vote. He selects the prime minister from the party that got the most votes. The prime minister recognizes there are limits on how far he can go. Economic growth is picking up. It’s not as great as it should be. To this point, cross fingers, Morocco has avoided the kinds of terrorist attacks that we see in so much of the rest of West to North Africa.
Algeria is a big unknown. The government lost an election a decade ago and refused to hand over the government, tightened the reins, but its leadership is 10 years older, and infirm. So it’s a place to watch. How do they transition to the next generation of leaders and do they manage to keep stability? Or does it turn toward the chaotic state of some of the other countries?
Egypt went through a dramatic shift. The overthrow of Mubarak, who had stayed too long, and the banning of his political party meant that the only organized political entity was the Muslim Brotherhood and they held elections and surprise, surprise, they won. They elected a president who had no interest in collaboratively sharing power. So the demonstrators came back to the streets. Why? Because they came the first time for economic reasons, not demanding democracy as we know it. They came back to the streets because they still saw no gains on the economic side. The army moved again. Marshall Sisi then stepped down and ran for election. He’s there now. We’ve held him out at arm’s length because he overthrew an elected government and took power. The reality is, he has returned stability to Egypt and there are beginning to be signs of economic growth. They have got a long way to go in the process. It is not a democracy, and will not be a democracy as we think of it. In turn, if you go back to what caused the people to come out in the first place, it is economic growth. It was stability they needed foremost.
Tunisia, where it started, is the one example of first going to an Islamist government and when that wasn’t working, they went to a collaborative arrangement, three different parties involved. That’s coming along reasonably well but the challenge is terrorism. The terrorism has been aimed primarily at the tourist industry which is absolutely critical for the Tunisian economy to pick up. And now most recently, a couple of weeks ago, a terrorist attack on the presidential guards. That’s led to a declaration of emergency rule setting back the democracy gains. The reality is, if they’re going to grow, they need stability in the process.
That takes me finally to Libya. Gaddafi was overthrown. He was a bad guy, ran a tough government but there was no plan of what to do after he was overthrown. You end up with chaos. If you’ve been tracking the papers, probably the most alarming part, Sirte on the coast is the new haven for ISIS. ISIS leaders in Syria and Iraq, afraid they may be killed by the drone strikes, are moving to Sirte to run the operation from there, not giving up land but moving to what they presume is safe haven. So Libya is becoming more and more a safe haven for the largest single terrorist challenge that we face.
The European Union is trying to come to grips with the largest wave of migration that we’ve seen since the end of World War II. They hadn’t thought through, or anticipated anything like it. They’re having difficulty with it. The terrorists ran a brilliant gamut. I absolutely missed it when it started. That was taking someone who was going to be a suicide bomber in France and running him in with the refugees into Greece, getting him fingerprinted on these papers, disappearing, then blowing himself up outside the stadium in Paris. Fingerprints demonstrate “Ah, a terrorist who came through with refugees.” For the whole continent, suddenly, instead of looking at this wave of economic refugees, political refugees with compassion, now there’s that concern, “Are there terrorists hidden into those ranks in the process?”
As she does on most issues in Europe, Mrs. Merkel was the leader in trying to find the compassionate approach to deal with the refugees. Almost a million of those refugees have come into Germany. They had, in fact, a labor shortage. So their ability to train and use them and offer them economic opportunity is probably better than anywhere else except possibly Sweden on a much smaller scale. But she’s run into real troubles within her own political base. This could end up bringing to an abrupt end Mrs. Merkel’s tenure. She’s been the most dramatic leader in Europe since Margaret Thatcher who also suddenly lost her popularity, you may recall, over proposing a poll tax, which was vastly unpopular. It could turn out that Mrs. Merkel’s view of compassion for the vast migration may turn out to be her undoing. I hope that is not where it’s going to go.
Germany remains the best-performing economy in Europe. It had gone through a slowdown last year, but looks like it’s picking back up. It is the economy that drags along the rest of Europe. France was not all that far behind. I fear that the attacks in Paris, the impact on the tourist industry and the rest will disrupt their economy, and all of the emergency procedures because the fear of further strikes is real. It’s not imaginary, and we see also the prospect that attacks were planned in Belgium.
As you look at the southern tier, Spain appeared to be surging back, but they are now about to be saddled with a huge bankruptcy for the largest producer of solar power, notwithstanding the vast subsidies for solar power. That’s going to ripple through the Spanish continent. This may be the place to watch. When we’re seeing new parties they’ve tended to be either on the far right or the far left. There’s a new phenomenon in Spain, of a party in the middle attracting a lot of attention, not clear whether it’s going to developed. It would be nice to see a centrist effort come to power in one of those countries as a model for the others.
Portugal, Italy, Greece, all remain in fragile economic status, Italy is somewhat better off than it was two years ago. Russia under Mr. Putin, he remains enormously popular at home. There’s a steady flow everyday of news on their successes in Syria and their targets. Again, he hasn’t just gone after ISIS because there are substantial numbers of Central Asian people fighting with the rebels who’ve been holding Aleppo. When he goes after the Turkmen, this has Turkey in mind as much as it does the rest, with very complex problems to sort through. At $50.00 a barrel, their economy is hurting in the process. Clearly, any surge back would be helpful, but there’s no real threat to his political position. He’ll come up for reelection again in 2018, and he’ll win another six years. We can expect, as a minimum, that we have Mr. Putin to deal with till at least 2024. Meanwhile, we [U.S.] will have had elections in 2016, 2020, 2024.
Israel’s economy continues to boom. It’s an interesting illustration over the last 15 years of an absolute boom based on technology. Everybody has to do military service and they reached out to take the brightest of the graduates and put them in a couple of units and support their intelligence activity. They work together and then they finish their service and they went out and formed companies together and they’ve taken off in the process.
Israel is no longer dependent in any way, shape or form on the aid they get from us. Access to military hardware is important but they could drop a couple of billion dollars a year in economic aid with no significant impact on that booming economy. But they need stability. I won’t dwell on this point except simply to note to have any prospect of a political settlement between Israel and the Palestinians, you need leaders on both sides who want a solution at the same time and can deliver their constituencies. Mr. Netanyahu is not interested and President Abbas can’t deliver Hamas in Gaza, and it is not absolutely clear to me he could even deliver the West Bank in the process. So no near term progress there.
Age and health have led us into fairly rapid successions in Saudi Arabia. King Abdullah was succeeded by his brother, Prince Salman who’d been the governor or Riyadh before becoming the Crown Prince. Probably the best we could have hoped for is a leader favorably oriented toward the U.S. Salman is not an admirer of the current U.S. administration. He has begun a process of transition to the next generation and took the son of his brother, the former Minister of Interior and Crown Prince, and made him the Crown Prince. He is broadly respected in the West. Well he took his own son, 32 years old, and made him Deputy Crown Prince, Minister of Defense, he is in charge of the operation in Yemen where they brought military forces from a number of countries and now this last week, we’ve learned they’ve also hired mercenaries from Colombia to go in to fight.
At this point, it looks like they’re stalled in the process. The only group that seems to have prospered from the ongoing fight between the Shia and the Sunni in Yemen are Al Qaeda and that Al Qaeda offshoot remains focused on trying to bring terror directly to the U.S.
Whether there’s going to be disruption within the royal family over the succession is a big question mark for me. I noted that they’ve gone out to float a $1 billion debt for the first time – they previously carried no debt. That’s the impact of continuing to produce the maximum level at just $50.00 a barrel while not wanting to reduce the lifestyle of the large royal family in the process. We’re headed toward a crunch point on that issue whether it’s the next year or the year after. Salman’s health is not good. When it comes to succession there is the point to worry.
Iran. There is a nuclear agreement. They’re proceeding toward complying with the requirements to implement it. When they get a little further along, we return $150 billion that has been frozen back into their hands. For those optimists who thought somehow reaching this agreement would lead to warmer relations with Iran and wanting to do business with us, the Ayatollah and the Iranian Revolutionary Guards who are in charge have made it very clear that there will not be any warming. So you see a flood of aircraft headed in from Western Europe, from Russia, from China, looking to do business when Iran has that $150 billion to dispose. It will not be a climate where US business will be welcome or favored in the process.
Finally, Iraq, Syria, ISIS. We’re at a point now where boundaries that were put in place after World War I may be about to be undone permanently in the process. Whether Iraq can stay together as a country is a big question mark. There’s still great oil wealth. They’re pumping oil at this point at a level almost parallel to Saudi Arabia. So a lot of money is flowing in. Hard to tell where it’s going. Life doesn’t seem to be getting better for the average Iraqi in that process.
The best business climate is up in the Northeast in the Kurdish area and they’re also the ones that have demonstrated the will to fight if they’re given the capability. The reality is that much of the Sunni area is still under the occupation of ISIS and it’s a brutal occupation on an ongoing basis in the process. Even as unhappy as the Sunnis are under occupation, they’re reluctant to sign up with the Iraqi government that they believe is not only Shia-dominated but hostile toward their own interest. Iran continues to be a major player in the process. So whether you end up with a cohesive Iraq or three different countries, it’s not going to play out this year but over the next two or three years.
In Syria, we see a lot of movement with Mr. Putin having decided to get involved. The general media interpretation was that he wanted to hold up Assad. His primary motivation is that there are more than 2,000 Chechens fighting with ISIS. He concluded he would rather fight them in Syria and Iraq than back in Russia in the process. His ability to do that requires the Syrian army as the ground force supported by Russian commandos, the same ones that trained in the Ukraine and Crimea and they’re already in Syria in the process. So we’re moving towards some kind of a political shuffle. It may take the form of the U.S. organizing the coalition that moves against ISIS in Iraq and Russia organizing the coalition along with France that moves against ISIS in Syria. ISIS is the number one threat at this point as they’ve demonstrated in Paris and Beirut, the Russian airliner, and the extent to which they are prepared to export violence globally. We may see more of that coming out of Libya. You won’t get ISIS suppressed unless there are coalitions that move.
Why is that important to us? Their success in recruiting, including in this country, has come from the prospect that they’re winning. This affected youngsters seeing what they think is a winning entity and wanting to be part of it. If they are visibly losing, they will lose a lot of that attractiveness that’s now fueled the recruiting – we haven’t come up with any other way to defeat their success in recruiting on the internet. I began looking at this problem 20 years ago. We were worried about Al Qaeda recruiting at the mosques. Very little recruiting takes place now at the mosques. It’s almost all done online. It’s very sophisticated. So back to my earlier comments about digital revolution, even the terrorists have learned the power of the digital opportunity to access and gain adherence to their cause.
In Turkey Mr. Erdoğan is concerned about holding on to power. He lost an election, lost the majority, stalled on putting up a government for four months, called another election and they had a lot of violence, explosions, all blamed on the pro-Kurdish group and sure enough, the election results flowed in his favor. He’s moving toward trying to move power to the presidency. He’d served his maximum terms as Prime Minister so he got elected to presidency. Now, he’s trying to pull all the power there.
His decision to shoot down the Russian fighter bomber is an intriguing one to me. What purpose? That was certainly not the first violation in the process. It turns out that while they were allegedly warning the pilot they weren’t even on the same radio channels to communicate with the aircraft. What he did with that action was to halt momentum toward Russia coming together with the west on cracking down on ISIS in the process. We got this interesting perspective of two powerful, arrogant leaders in Erdoğan and Putin who are now on a head-on clash disagreement. But Turkey is a member of NATO, so that does impact all of us in in the prospect, how it plays out. I remind you of Article 5: An attack on one is an attack on all.
The decision to keep support forces in Afghanistan, both the U.S. and other NATO countries, now out to 2017, was a painful decision for the president, who’d wanted to be able to retire saying he had ended wars in the process. Whether the Afghan military has the will to fight and the capability without direct US air support is a huge question. There’s a new effort just underway to try again, get the Taliban and the Afghan government to talk peace. I’m not very optimistic. It would be wonderful if it would work.
Obviously, the potential, hugely dominant power is India. Mr. Modi has his hands full in trying to get the Indian economy moving. Just by the numbers, there are over 300 million people, almost the entire population, living in poverty levels still in India without regular access to electric power. I’m old enough to remember when the rural electrification agency brought electric power to rural Texas and the dramatic change that brought from having to study by kerosene lamps to electric lights. What that meant ultimately is a surge for the economy. When I think about 300 million people without electric power, in the poverty line, and where do they get the electric power they get now? Over 60% of it is coal fired. So, go back to Paris and the climate talks and the potential long-term impact on global warming and ice melting. Can you do anything to bring 300 million people out of poverty and improve their lives? I hope somewhere that eventually gets into the debate.
ASEAN [Association of Southeast Asian Nations] has worked for a long time as probably the most successful of the long-term trade agreements. When I came to the private sector 33 years ago, I came to Austin to compete with Japan. The Japanese government had been growing 10% a year for 25 years. They were buying property all over the US. They were competing. We were unfavorably competing with them, quality control, all our wheels up. Then the property bubble burst, and they’re now approaching 20 years of succeeding recessions, deflation.
That led to five different prime ministers from opposition parties never lasting longer than a year. LDP got back into power. Mr. Abe is a Nationalist. Right now, he is snuggling close to the U.S., a security treaty and looking to expand collaboration with the U.S. As long as he concludes we’re a reliable ally, that’ll continue. But let Russia go into Estonia, Lithuania, or Latvia, then what will be Mr. Abe’s judgment on his ability to rely on U.S. nuclear guarantees.
That also transfers into the Korean peninsula, because South Korea has some of those same concerns. North Korea remains one of the most erratic places. I’m not sure anybody has influence there. China had a lot of influence, and they still have the flow of petroleum products as a lever they could play. President Xi and China has been very direct that he wants to see a nonnuclear Korean Peninsula, but it is hard for me to understand what would motivate their young dear leader to give up his burgeoning nuclear capability if we’ve already agreed in Iran to move from prohibiting proliferation to managing proliferation. We just wait 10 years to see it happen. Why should he give up his leverage at this point?
That does take me finally to China, the second-largest economy. Let me detour before I get there. We hear so much condemnation of the role the U.S. plays in the outside world, particularly with the younger generation in this country. You do look at the chaos in Iraq and in Libya and the rest. I would simply remind this audience, that we fought a world war, but we planned to rebuild the defeated countries. We trained the people to go in and first establish order, then to provide vital services and food, and then local governments, and then regional governments, and finally national governments: strong, functioning democracies. These became the third and fourth largest economies in the world and it took six years to do it in both cases. The idea that you can go topple a despot that you don’t like, for human rights or whatever reason, and not plan a six-year-commitment of what you’re going to do afterwards is pure folly in my view.
Finally, on China, President Xi carefully planned for 5 years his ascent to power. He was the vice president, the vice chairman of the Military Commission, president of Central Military School, head of the Central Party as secretary. He recognized that the greatest threat to the Communist Party-sustained control in China was corruption. He didn’t say much about it until he got in office and then he set out with a very carefully-structured crackdown.
When I was out there for the first time, the U.S. government would let me go as a tourist back in ’05. Everywhere I went, what they talked about was the one-child policy, who was going to take care of the grandparents, and corruption. “They capture, they catch the little guys, never the big ones.” Well, Xi Jinping has fundamentally changed that. He has gone after them all across the energy industry. It’s hard to do business in the energy industry now in China because of so much uncertainty across the remaining leadership. That leadership has been – much of them in jail, they come out of the energy industry.
The military, two major four stars who were on the Central Military Commission are in jail. They were selling promotions. If you wanted to get promoted to one star you to pay off the other and that is continuing to go on now.
They’re reorganizing the country. They appeared to have studied what Putin did when he took over in 2000 in Russia. They went from 189 separate administrations to seven regions and he appointed those leaders. Xi Jinping appears to be headed toward that same restructure both in the PLA and then the governance structure. He is determined the Communist Party will govern China. No weakening there. Anything that appears to threaten that, including the digital revolution, is under intense scrutiny and observation.
There is a great entrepreneurial spirit. Deng Xiaoping unleashed it. There are now more billionaires in China than there are in the U.S. There’s a pretty conscious display of that wealth, but there are still about 600 million Chinese who have benefitted from the surge. There’s another close to 500 million who have not. This regime had intended to bring in another 300 billion of those into the improving economy, on the basic premise that as long as the middle class was expanding, they’d be willing to stay out of politics.
Three decades of growth in a 10 percent range, and it fell off to 9 percent three years ago, and 8 percent two years ago, 7½ percent down to maybe 7% percent this year, probably at best in the high sixes next year. Still, for that scale economy, that’s a lot of growth. But it will not produce the continued expansion of middle class that you need if you are going to be sure they’re willing to stay out of politics.
When’s the next big decision point, 2017? That’s when of the current seven members of the Standing Committee, five of them will reach the 65-year retirement age in 2017. I don’t expect to see all five of them retire because one of those is the guy who runs the anti-corruption campaign. I don’t see Xi being willing to hand that off while that is still a major factor both in getting rid of a real problem and consolidating his own power. But we’ll see a number of others pop up at that point in time. His term runs out in 2022. Just as I reminded you on President Putin, we’ve got two elections, in this case before, he ends his term.
China and the U.S. are totally different cultures, totally different political systems, with some natural entrepreneurial instincts and talent; the challenge is to find areas where you can collaborate. What I say to them, we will never be allies. We don’t have to be enemies. We will always be competitors. To what degree can we be friendly competitors and where not friendly, can we build fences to limit how adversarial it becomes?
As a place to do business, I have to give you an ambiguous mark at this point. They’re very slow at making decisions. Plus, they’ve got one extra problem. Of that wealth that was amassed in the great run up since ’78, a lot of it was from corruption, a lot more from favoritism, probably more from favoritism than corruption. But the government has put very tight controls on moving money out of China. The primary purpose is to find the dirty money, as they refer to it, going out. But for businesses who want to invest in the U.S., individuals who want to invest, the challenge for them is how much money can they get clearance to move out? As they want to make major purchases, if they can do it on trading stock and don’t have to spend cash, then they have the approval to go. But if it is to put money to work in this country, which many Chinese would like to do, their challenge is getting approval of the Ministry of Defense.
Admiral Inman concluded with a brief Q&A session which is included in the video.