 Good afternoon. Thanks again for coming to CSIS on this balmy Wednesday afternoon in November, December. You know, it's given me a lot of pleasure to be here today and to introduce Bill Brock who's going to kick us off. But before I do, I really want to thank the Alcoa Foundation for its contribution to what has been a pretty interesting series of events that we've held here on competitiveness and manufacturing. Today we're going to be talking a little bit about industrial policies in some other key countries that are emerging as potential competitors if one likes to think of them that way. But the person who is going to moderate and share the session really doesn't need a whole lot of introduction. Bill Brock has been a senator, a USTR, Secretary of Labor, and we're most proud of the fact that he's here at CSIS on an increasing basis and chairs our international policy round table. So let me introduce to you to Bill Brock. Thank you very much. Well, thank you for coming. Just for the record we've been having. This is the third of this particular series that Alcoa was kind enough to support at the beginning. And what we've been looking at for those of you that have not been able to do the earlier two sessions is basically the global economy, the context that that establishes for the United States and for those partners that we have around the world. And particularly we've been looking at the question of how does this different world, fundamentally different world, how does it change the way we look at the conduct and composition of both domestic and international economic policy? You've got to be my age to realize just how fast the world has changed and how much it's changed. I try to tease my children or college students when I'm talking by asking them the question, you know, how long has the internet been around? And people say 20, 30 years. Most of them it's been around longer than they have. And when you say, well, it's only 15 years old in terms of its application or availability for the people of this country, it's really hard to understand the transformation that has brought, that that has brought. And it's very difficult when you look at this country and it's a political makeup and I'm not talking about the dysfunctional nature of this town at the last few years, but just in terms of the way we compose and agree upon our relations with other countries, our domestic policies, there are a lot of people who argue that it's really tough for a system like ours to be as able to adapt to this changing world as some of our competitors are. And we began by looking, and I guess, John, in the first session we had about how we address everything from currency issues to the potential for trade protectionism. Could we, as a country, afford not to engage in some of the practices that some of our competitors engage in? And if we could, how would we do it? Or if we couldn't, what would be the alternative? Should we adjust changes in policy areas that would give us more flexible tools to adapt? The last session we had, we looked at defense and the importance of the defense base in this country, which is continuing and strong, and its importance to manufacturing writ large in this country. Today we're moving to four specific countries that may, which can give us some examples of what others are doing. And on the basis of that, think about what that implies for us. The questions I'm sure you've seen in your agenda will begin with what is the competitive environment in these four countries, Brazil, China, Germany, and Russia. How has that evolved over the past decade or so? What are their policy approaches for stimulating a manufacturing? And how is their policymaking environment responding to perceived theirs or ours successes and failures? So it's an adequate agenda for an afternoon's conversation. And we've got some really wonderfully able people that I will give you a very brief mention of their credentials, which are extensive. Otherwise we could spend the whole meeting talking about what they've done. But let me begin by Rick Burt, who was former ambassador to Germany, managing director of McLarty Associates. He came to McKenzie before McLarty as a successfully concluding nuclear arms treaty as the chief negotiator in the strategic arms reduction talks with the former Soviet Union. Prior to that, of course, he was the U.S. ambassador to the Federal Republic of Germany in the late 1980s. Charles Freeman, most of you would be thoroughly familiar with Charles. He holds a Freeman chair in China Studies here at SESIS. He concentrates on the political economy of China and other parts of East Asia and U.S.-China relations, particularly trade and economic. Andrew Kitchens just came in. Welcome. We were dragging him from one meeting to the next. You're good to come. He's a senior fellow and director of the CSIS Russia and Eurasia program. He's internationally renowned expert on Russian foreign and domestic policies. He publishes widely books, papers, and a number of contributions to the debate and understanding of Russia. Kelly Miemann-Hock, former of 10 years. Kelly has led the Brazilian Southern Core and Trade Practices of McLarty Associates. She previously worked at the Office of the U.S. Trade Representative, my old stomping ground, as director for Brazil and the Southern Cone, where she had primary responsibility for Brazil, Argentina, Chile, Paraguay, and Uruguay. She leads the Trade Facilitation Task Force of the U.S.-Brazil Business Council. So we have an awful lot of talent, and what I'll ask them to do each in turn to give you 5, 10, 15 minutes, whatever they're comfortable with, to sketch out each of the countries that they're going to present. And then we will open the conversation to all of us for questions, expressions of concern and suggestions, if I might. So Kelly, if I can begin with you, we'll want to kick it off. Great, thank you so much, Bill, and I've got a PowerPoint, I'm not sure. Are you, are you Michael? Super. Well, thank you for the opportunity to be here today with such a distinguished panel at CSIS, and to address you all a bit on Brazil's perspective on industrial policy. I thought I'd just go through a PowerPoint presentation quickly. Brazil really comes at industrial policy not as a new innovation. This is something that is really in Brazilian DNA. If you look, it's a little bit small up there, but during the time of the military regime in Brazil, which also ended not that long ago back in 85, and look at the 70s when the Brazilian so-called economic miracle took place, a lot of that was due to industrial planning and industrial policy. Of course, that was back in kind of the battle days, if you will, of import substitution, industrialization, the rel-prebished theory, and not the most sustainable way to industrialize, but layer that on top of, in the pre-military regime days, the fact that there was already this penchant towards developing rather large state-owned industries and state-owned enterprises, many of which during the privatization period we look at today, and those are the multi-Brazilian companies that have become real powerhouses. Many of them have roots back in this period, both pre-military period and ISI period, of very intense, very planned industrial policy. Then obviously the 80s, everything kind of froze for a bit during that lost decade of both debt crisis and hyperinflation. Then in the 90s, things really turned a bit. You had Brazil opening itself up in many cases unilaterally through tariff reductions, privatizing many of those previously state-held SOEs, starting to engage in trade agreements, developing the Mercosur agreement, both for their own interests and also to some extent as a response to NAFTA. That opening really did take an economy which had been extremely, extremely protected with just an abysmally low percentage of GDP relying on trade, and did force in a number of those industries an increased competitiveness. They still were from a free-trader's perspective quite protected, but in comparing it to those 1970s days when industrial policy originated, this really was a new innovation for Brazil. How did they leverage that more outward-looking orientation then? Really, the game changer in Brazil, as many of you I'm sure know, was having a stable currency and nipping in the bud hyperinflation, which had plagued them for decades. The rail plan came into play in July of 94, and that really did allow resilience for the first time because of the elimination or at least controlling, well, elimination of hyperinflation and controlling of inflation to plan their consumption to be more outward-looking, even more so in their orientation. You saw more interlocking supply chains between the United States and Europe, and then you really did, and this is obviously more recent, and a big part of Brazil's boom economically here over the last 10 years has been the emergence of China, Asia, and Middle Eastern markets as a home for Brazilian products, primarily still. A lot of basic goods, inputs, agricultural products, etc. But a real diversification away from what, again, historically used to be an industrial policy driven towards really producing for the Brazilian market and starting to think about, okay, how do we take these policies and look at how we can conquer other markets as well. I might be giving a little bit too much credit to Minister Furlan, who is Lula's first commerce minister, but I really don't think so. I mean, he historically ran what's one of the largest poultry interests in Brazil, Saigia, and really came to the position of commerce minister looking at it as a sales guy. He had spent his entire career going around the world selling chicken to people from countries throughout the globe, and he really attacked his job as commerce minister with that same perspective, but looking cross-sectorally across the Brazilian economy and thinking, okay, what can we do to outreach better to other markets and really sell better and connect better with other markets. Another piece I put down there, Apex, ABDI, and a more aggressive BNDS. Apex and ABDI are two entities that developed under really the leadership, I would say a couple of them originated under the previous administration, but were really deepened under President Lula and under Furlan, and those entities were designed to really help to foment and grow certain sectors of the Brazilian economy, be it cosmetics, aerospace, telecommunications, et cetera. Certain sectors were identified, and those agencies were designed to really help to think how can we make these sectors more competitive and also BNDS, that's the Brazilian Development Bank. We'll talk a little bit more about that later, but they became increasingly aggressive as well. So you had these really pro-growth policies that came with the opening of the Brazilian economy, the diversification of their export markets, and all of that kind of running gangbusters, and that included the factors that I've got here on the first point. You had Brazil really investing in growing their middle class, you've got the conditional cash transfer programs that have been, much has been made to them and with a lot of reason. The Bolsa Familia program that provides as long as you are sending your kids to school, getting them vaccinated, et cetera, provides a certain scholarship, a bunch of money for your family to be able to sustain themselves. You had already had pre-crisis, an increasing reliance on state-owned banks to keep credit flowing. You already had an increasing infrastructure focus by the Brazilian government through the PAC, which is the Program for Accelerated Growth, which again, even pre-crisis had been announced to try to address some of the infrastructure shortcomings because as Brazil has started to grow increasingly quickly over the last decade, it's been increasingly clear how much they really do need to focus on port transportation, et cetera, infrastructure, and the PAC was designed to try to address that. You already had industrial policy, again, as I mentioned before, focusing on certain key sectors through what they call the PDP, which again is a policy that identifies 10 different sectors and says, these are the sectors that we are going to focus on through giving tax benefits to export incentives, et cetera, and trying to make those really some of the core cornerstones of our economy going forward. You all said R&D. I mean, we're talking here about manufacturing, but I think it's important to also highlight that as part of the Brazilian industrial policy, they did not forget about R&D software. There is an incredible amount of money that's being set aside through BNDS and other sources to try to incent, at this time, increased software development within Brazil, and that's a sector that actually has been doing, you know, really, really growing in an impressive way. You've got Google with an R&D center in the state of Minas Charais. You've got over the last year, both GE and IBM announced new R&D centers in Brazil. So this is truly bearing fruit. And then tax incentives. As I mentioned, there's a tax in Brazil called the IPI, which is up there, which is developed and designed to really try to incent local production. That's localizing production is an incredibly large focus of a lot of the Brazilian industrial policy, be it through the development bank in order to get funding from the development bank that I mentioned before, you have to have at least 60% local content, not unlike some of the stipulations that we have here with our own XM, but relevant to note, IPI, if you're not producing locally, if you're importing a product that is produced locally, then you'll have an extra, this extra IPI tax, layered on top of what you're already, the other multitudinous taxes that you're already paying in Brazil, which is one of the challenges in Brazil, is the complex tax code. But they do use that complex tax code in a lot of different situations to try to incent certain industries and promote their industrial policy. So that was really the state of play pre-crisis, and then you've got all those pro-growth policies, they hit the financial crisis. What does that do? That really gives Brazil an opportunity to take advantage of the fact that they had, the time the crisis hit, they had about $200 billion in reserves, in a very positive situation, in that they had that chunk of money, they had really the policy space and the economic space to be able to invest, and this gives you a little bit of an idea here how they invested that stimulus money. About $10 billion of it went just to try to support the state-owned banks, be it BNDS Banco do Brasil, Caixa Economica Federal, and being sure that they were able to keep credit flowing. That IPI that I mentioned before in many industries, be it construction, autos, et cetera, where the government deemed that it was important to the Brazilian economy to kind of keep consumption flowing, keep construction going. They put in place tax exemptions of the IPI and others to try to keep that moving forward. Continued the sectoral targets that I had mentioned before, but with a special focus on these that I have here, the auto industry, housing, construction, and agriculture. And then again, and particularly because over this timeframe that we're discussing, you had the awarding of both the World Cup for 2014 and the Olympics for 2016 to Brazil. So you had an even more intense pressure to focus on the infrastructure question. So you look at all of the ways that they channeled the money, they're through state-packed programs, which is that program for accelerated growth, the infrastructure program federal, financing through BNDS, Petrobras is kind of an animal in and of itself, especially post-presalt fines where they are investing incredibly in various industrial projects to get that oil out of the ground. So you've got a lot of money flowing and a lot of kind of renewed focus as far as having a state-led role in being sure that a lot of these industrial projects and policies were being well-funded. So you look at this, what are the questions going forward? I mean addressing the question of the panel here, useful model or sustainable success. I think that there are a lot of things here that do show that there are elements of what Brazil has done that do provide useful points to model off of. I've highlighted here though some of the questions that I think we need to address going forward to really, I don't think you can call the Brazil case writ large a useful model until you address some of these questions that I've got here. And the number one structural roadblock, at least for me, is education. It's the fact that you can put all the tax incentives that you want on growing R&D and software industries, et cetera. You've got to have those engineers to staff those places. And so this is something that has been kind of the reform of always the reform that's always been needed to be done in Brazil. Hopefully it'll be something that incoming president Housseff can address. Federal spending. A lot of those programs that I've highlighted thus far in the presentation, it's a lot of government spending on the part of Brazil. And it does create an inflationary threat, which in the Brazilian psyche is a big deal given the history of hyperinflation. I've got 10% versus 5%. If you look at what they're projecting for growth of government spending, growth of the federal budget next year, it's a 10% growth rate. Compare that to 5% inflation rate, thank you. That's pledged for next year. And you can see that this is going to continue to be an issue and the overly strong howl and their ability to therefore continue to grow exports to some of these diversified markets that they've opened up is going to be challenged by the overly strong howl. And as much as you heard around the G20 meetings, Minister Montega and others, the finance minister of Brazil and others talking about this challenge of, you know, the currency war, at the end of the day, Brazil is going to have to address this issue of the level of public sector spending in order to, just within their own house, address the issue of the overvalued howl and the impact that has on their industrial sectors and their export possibilities. Another question that a lot of analysts are asking right now is, is there an overreliance on the state-owned banks? Is this somehow going to have a lasting impact on the ability to finance long-term projects? You see, you know, the extent to which BNDS, the Development Bank, has been capitalized just over the last 10 years, used to be $9 billion back in 2000, now it's about $25 billion. The FDI and Export Diversification Factor, this is a positive, will that continue? You know, China now, this year's $20 billion is what they're looking to invest in Brazil and that's, you know, a really groundbreaking number for them. They've never been that high of levels before. Infrastructure projects, we talked about that before. Where will that money go? Will it be spent, you know, whenever you've got that much money flowing, that many projects going, are you spending intelligently? And that's a question that a lot of people are watching right now. And then the final point that I'll make and see is just an overall risk in industrial policy, not just in Brazil, but I would say also here in the United States is this trending towards binational policies. Obviously we had our BiAmerica and in a sense that did kind of open the door to other countries pursuing similar policies. The Brazilians have a binational policy, it was done by Presidential decree and just passed by their Congress last week or approved by their Congress last week that does impose a number of government procurement benefits on locally produced products and services. I guess the question for me is, where does that trend continue? I mean, you know, right now we've got some of the larger markets in U.S. Brazil that have put in these binational policies, but when you've got your largest export market for Brazil being Argentina, what if Argentina, you know, in January decides to do a buy Argentina bill, where does this end and what impact does that have on Brazilian industries? So I think I'll leave it there and leave anything else to the Q&A. Thank you. Thank you. I'm not nearly as organized as Kelly, so I don't have a PowerPoint. So I'm just going to tell a story. I think that the questions that are raised at the outset here, even in the title, looking at Brazil, China, Germany, and Russia's industrial policy, useful models, sustainable success, I think that's a really, it's a very interesting question applied to China because I'm not sure we know what the China model is and I'm not sure that we know whether the current success was sustainable in China if China decides that its model is something that perhaps it's not. And clearly, right now, particularly in the wake of the global financial crisis, China is feeling extremely good about itself. It had a very targeted, fairly well-designed, stimulus package that actually was stimulus and not merely transfer payments internally, actually was directed at infrastructure and other areas that really will generate economic activity for some time. So fairly successful model of a stimulus package in the middle of a crisis, but what happened as a result of the crisis in China's sense of its relative rise respective to the United States was a perception that the Washington consensus, which even if China never really embraced that consensus, China always held out the Washington consensus as sort of an ideal model of what you'd really do if you wanted to have an economy that was clicking on all cylinders if you had the political elbow room to do it. In the wake of the crisis, the Washington consensus in China was completely discredited and people actually started talking about something that might be a Beijing consensus or at least a China model or maybe more correctly, a China approach to things. And if you talk to Chinese scholars or officials about the China approach or the China model, you get a variety of different answers about what that is. Not a lot of people can identify it with any specificity, but what people will tell you generally is that a cornerstone of the China model is state directed capitalism, i.e. the model that was used in the stimulus package during the recent crisis, i.e. the state directing capitalism to achieve industrial policy ends. And that's an interesting question whether that truly is the China model. Really, for 30-plus years, China has generated double-digit growth, and I'm not sure that that was a result as a result of state directed capitalism. Indeed, if you look at state directed activities, particularly through the state-owned enterprises, state-owned enterprises for the past 20 years or so have consumed 70% of the resources and only produced about 30% of the output, which is the precise reverse for the private sector or the non-state sector in China. The question is whether state directed capitalism, as it goes through the state sector, is really what is driving new growth in China. Certainly, there are a lot of people in China who believe it is. Certainly, really, going back to the end of 2001 when China first joined the WTO, there are a lot of people in China who have been active in producing industrial policies designed to stimulate the economy in a wide range of sectors, and anybody who spends any time with a Chamber of Commerce or the U.S.-China Business Council or anyone who spends any time in boardrooms that have anything to do with China is quite familiar with the gnashing of teeth and ringing of hands as a result of some of these industrial policies, and they run the gamut, again, from direct stimulus of Chinese industry in ways that discriminate against foreign business interests in China. Anti-competition policies, which are designed to reduce monopolistic powers in quotes of foreign actors in the marketplace. The use of technical standards that are designed to stimulate either Chinese enterprises that produce these standards uniquely or force foreign companies to produce in China according to these standards, direct subsidies of research and development, again, in the name of producing Chinese innovation that grows domestic Chinese companies that can compete on the global stage in technology circles and the like, and procurement policies that are designed, again, to largely stimulate higher technology, higher value-added Chinese production. One can certainly point to the, if one chooses, to the exchange rate policy as an industrial policy. It certainly has a primary effect, if not intent, and I think the intent is there as well, to benefit Chinese exporters and continue to preserve some margin for those exporters in international trade that allows them to be competitive, not necessarily with all deference to people like Fred Berkston with U.S. producers, but certainly other exporters from Asia and possibly from Latin America and increasingly from Africa, at least at some point down the road. And finally, one can also, if one chooses, and I think there's something there, call lax enforcement of intellectual property rights in China a policy designed to at least stimulate Chinese production through the use of property that is not theirs, one can say that perhaps this is not a coherent policy from the top that it is in a policy by effect rather than intent, but it certainly, the lax enforcement of intellectual property rights in China, has a direct impact on the competitive abilities of Western firms in China and arguably throughout the world and almost certainly is a primary, should be a primary concern for those of us that still believe that United States technology and innovation is a primary United States competitive advantage. All of this said, if you look at all of these industrial policies to date, it's very hard to find a lot of success. Even though there's a lot of gnashing of teeth and ringing of hands by foreign firms in the marketplace that say it's very difficult to compete with some of these firms that are getting benefits from the Chinese government in the form of subsidies or other policies that stimulate their advantage, it's hard to find a whole lot of successes in there. You can certainly point to some, but even those where there is clear production successes or export successes like in solar panels and the like, it's hard to find a whole lot of profit there. So again, if your goal is to produce companies which can undersell others globally, China is having some success at that. It's hard to find though a sustainable business model when you are losing money on the order that some of these companies are. I want to give an example of an industrial policy specifically in China. It's impact on the marketplace and some of the challenges that it presents, not only for foreign competitors in that market, but also for Chinese competitors. The Chinese government for reasons good and just and also in order to stimulate domestic Chinese production of green technology declared that they wanted a certain percentage of wind energy as part of the overall energy mix in China. Overnight you had, whereas the day before you had this announcement, you had I think three or four Chinese wind turbine producers, some of which were okay. All of a sudden anybody that ever produced a gearbox or something that looked like that could rotate or anything that could be put on a pole was a wind turbine producer in China. So today you have something like 80 wind turbine producers in China. This is not a sustainable model. This is not a market or even the global market can't sustain 80 wind turbine producers. Yet as a result of this process, 80 were created. Now a company that goes into that marketplace and there are many western companies that go in because of concerns about intellectual property, they go into that marketplace and they say, okay we don't want to sell tomorrow's technology, we don't want to sell today's technology and today in China. We would prefer to sell yesterday's technology because at least we have a better sense that our current technology will be preserved. So they go into the marketplace and they say, okay we want to sell an 850 megawatt turbine in this market. Well the Chinese customer knows that in Europe or the United States, the same company is selling a 1.5 gigawatt turbine and so they want that one. They want the best, they want the finest and they have the ability to pay for it. Well no one from the foreign companies will sell that to them so the Chinese companies say we can build a bigger turbine and they produce it. And so they sell a 1.5 gigawatt turbine in the marketplace. It's not good. Chances of failure are significant but it's a big turbine and that's what our companies in many cases are competing with. So the impact because of the initial industrial policy is you get a lot of producers who can't produce on any profit margin at all and who are certainly going to sell global competition because the competitive environment is so shrill. You've got substandard quality being produced in the marketplace by groups that really don't have the technology or the management to produce according to global scale. Is this a sustainable model? I'm not sure. Out of these 80 producers in China are three or four or five or six going to be successful and emerge? One would think at a certain point that the Chinese government would consolidate the overcapacity and bring it down to six or five or six companies but the problem is because of local protectionism in China because provinces and municipalities all have their favorite companies it's very difficult for Beijing to effectively quash the goals of these local governments to preserve their own not just national champion but provincial champion in wind turbine production and so it's very difficult to consolidate that production. Now what will happen long term? Well the local governments may continue to subsidize and support these companies but they're all going to drift along and I'm not certain that that is a sustainable business model. Ultimately I think the lesson that the Chinese have learned from the financial crisis that state directed capitalism is the Chinese model of success is completely the reverse. The Chinese model and the one that has been so successful for so long has been an intense focus on reforming to allow the market to play the primary role in Chinese policy. Getting out of the way of the average Chinese citizens and particularly in the private sector to produce products that make his or her life better and his or her child's life better has been the primary generator of success in China for the past 30 years. Now there are challenges with unchecked unregulated market reform certainly and you can point to any number of disparities and dislocations in the Chinese marketplace whether it's environmental challenges, whether it's income disparity, whether it's regional and rural urban income disparities or development disparities but it's very hard to argue that the reverse is the better option. Frankly industrial policies are what drove China from a relatively preferential place in the global economy in the early 1950s down to less than one percentage point of global GDP by 1978 when they had to give up and essentially allow the market to take hold. So I'm considerably worried frankly and I fire in Beijing and I was a Chinese leader. Thank heavens I'm not because their problems are certainly greater than any of ours. I would be very nervous about the Korean approach to industrial policymaking in China and the sense of hubris maybe too strong but certainly pride in the notion of state directed capitalism as the primary model for Chinese growth going into the future. Thank you. Thank you Bill. I guess I should begin by saying when I was initially invited to appear on this panel I thought that somebody had gotten something very wrong because what we have here are three of the four BRIC countries and then you have Germany and the Germans of course would be the last to consider themselves an emerging market and they certainly don't fit that category they're probably best thought of as a mature market but given the experience the German experience economic experience in the last 12 months while they may not be an emerging market I think you can consider them a renaissance market and I want to just demonstrate that by initially throwing out a few numbers well three percentages and one fraction five percent which is their estimated growth in GDP this year 15 percent which is their estimated growth of exports this year six percent which is their unemployment rate and the fraction is one third which is the share the German share of the overall GDP of the European Union as a whole the one thing the economic crisis I think has underscored very dramatically and you can tell that simply by reading the headlines from day to day focused on the Euro crisis is that they have emerged as the economic powerhouse of Europe now it probably given the nature of their economy and their maturity it probably doesn't make much sense to compare and contrast the German model if you want to call it a model with Russia, China, Brazil or India so to the extent I'm going to be making comparisons in contrast it's going to be with the United States this afternoon because I think there are some interesting ones but to begin with I think it's important to understand that the German economy and its approach to industry is really focused by I think two critical historical experiences of the 20th century the first of course is the great inflation of the Weimar period in the 1920s that has burned deep into the consciousness of every German not only because of its ruinous impact on the German economy and the destruction of the then German middle class but I think the widely held view in Germany that it paved the way for the Third Reich and Adolf Hitler to come to power in the early 1930s the second important shared historical memory is the immediate post-war period when the Germans not only faced the daunting task of reconstruction but what we often forget is the very real peril of communism and by this I don't mean the Soviet military threat but the widely perceived threat that far left politics was going to dominate the German political scene and that produced in the course of the 1950s the middle of the 50s to the late 50s the notion or the concept of what the Germans call their social market economy the notion that Germany's economy needed to be driven by market forces it needed to be driven by the private sector but there had to be an ethos of social cohesion to defend that system from the excesses from the left and I think both of those if you want to understand the success of the German economy today you need to understand those two shared experiences a deep fear of inflation of deficit spending of stimulus on the one hand and on the other a very important shared ethos of social cohesion of social equity I mean one example of that is the disparity if you measure the disparity between the average salary of a German and the average salary of a German CEO and compare that in the United States the average American salary to the average salary of an American CEO the German figure is about one tenth that of an American CEO the Germans will not socially tolerate the tremendous divergence of salaries wages and wealth that has come to characterize the United States that just doesn't work it's not socially acceptable in Germany now as far as industrial strategy is concerned there really is no industrial policy per se but that isn't to say there isn't what I guess would be better framed in Germany as an industrial consensus the first point about that consensus is a focus on exports and the best way to portray that and Charles has just talked about China Germany with a population of 80 million people and remember 20 of those 80 million people only recently joined the team from the backward East Germany, GDR an economy of 80 million people competes year in and year out with China to be the world's largest exporter Germany is an export machine secondly unlike the United States and some other European countries most notably Britain Germany continues to focus on its manufacturing prowess it is still both in terms of large companies and middle-sized companies the so-called Mittelstand it produces stuff and sells it and it's interesting how they've survived and been competitive in an era when new manufacturers have come from the fore to the fore from emerging markets is they focused on a very important niche which I would call the high value added manufacturing niche so if you want to buy a machine tool and you want it to be the best machine tool the most reliable machine tool and yes it's probably the most expensive machine tool you typically are going to buy a German product and that's what the Germans have carved out and that they've had tremendous success selling their manufacturing product whether it's machine tools whether it's ships whether it's cars to a growing market not just the United States it's European partners Japan but increasingly the emerging markets they have had tremendous success selling those high value added manufactured products into an increasingly globalized economy that is the key to the success of the German model they have done that by maintaining excellent infrastructure you can have, you can their logistic systems their transport systems their railroad systems their airports are at the cutting edge and they have an interesting mix between as I was saying before large names like in electronics and IT semen in financial services Allianz and Deutsche Bank and with the Mittelstatt the medium sized companies who play a very important role in terms of a backbone for the German economy what's the downside? the downside is there are no German Bill Gates Germany is not a startup kind of place in fact there are regulations in Germany that even forbid you from starting a business in your own garage and as the Germans like to say if Bill Gates had been born a German he'd be a middle level employee with Siemens but hey their ability to carve out their role within the global economy has been enormously successful now the role of government one of the most interesting things that the Germans inherited from the Anglo-American occupation of Germany in the late 40s and early 50s was a decentralized federal state the allies worried about the concentration of power in Berlin and the centralization gave Germany a federal system which has been a great boom to the creation of a diversified economy with centers of excellence so if you're in Bavaria in Munich tends to be more of the high tech center if you're in Hamburg that tends to be a media center the center for chemicals some of the traditional industries is Dusseldorf Frankfurt is a financial center so the decentralization of Germany has served them well and so too has the creation of a very good secondary school system the Germans complain all the time about their universities which they believe are not up to par with US universities and I think by and large they're correct there is no German ID League but at the same time their secondary schools in my judgment and I think of most observers are vastly superior to ours so they are able to educate a large proportion of their population that can perform in the workplace and unlike the United States they still have preserved a kind of apprenticeship programs which mean that their workers are in fact truly skilled workers they're able to produce these highly value added manufacturing equipment that the Germans need to succeed in the marketplace and part of that approach to education is attract educational system you have the students at a certain age those who are bound to go on to university are going to go to a gymnasium they're going to go to a school where they'll be prepared for college those students that are going to be more and move into the blue collar world are going to be given an education that prepares them for that as well just a word about government business relations there is not the kind of lobbying that occurs companies engage in here where people go see members of the Bundestag or members of the government from different companies Germany is very well organized for the most part into different industrial trade organizations associations that have more formal ties into government they provide information they are of course given a campaign funding in Germany nobody can make political contributions to candidates so you don't have the kind of ability to kind of corrupt the system to the degree that you have in this country at the same time some of the large companies and large financial institutions do enjoy very good access to the top and it's not uncommon for the Chancellor of Germany to have dinner with the CEO of the speaker as he's called of the Deutsche Bank or the CEO of Siemens or Allianz but this is part of I think an informal system of making sure that the government and business stay on the same wavelength finally a word about this point I made earlier about social cohesion it is very very important politically you don't and haven't had the kind of political polarization and paralysis that you can see in Washington today in part that's because the Germans because of their own special history don't trust a single party to come to power and so nearly every government post-war government German government has been a coalition and typically the minor partner in that coalition has been the liberal party the FDP their kind of centrist pro free enterprise party and they tended to swing back and forth between the Christian Democrats and the social Democrats more recently now of course you have new parties the Greens the Linka but it is the kind of coalition element of German politics that keeps radicalism and polarization out of German politics so that and again this sort of emphasis on income distribution and not letting incomes get widely out of whack so looking forward what are the potential problems with this system that seems to be working remarkably well right now well one like most European countries you have the problem of the demographics and an aging population and one of the solutions obviously to that problem is immigration and Germany is not an immigration country it is not a country that has a tradition of welcoming immigrants of course millions of Turkish guest workers came to Germany in the 1960s and 70s and they make up today still an important fraction of the German population but the Germans have not done a particularly good job of integrating that group in fact Berlin is said to be the third largest Turkish city in the world but the Germans will have to attract more immigrants and that could very well lead to frictions and other problems the bottom line about Germany is it is not a dynamic society it is not a society that is built for high economic growth and high risk it is a steady stable performer and in time of economic crisis and uncertainty it is perfectly positioned for success thank you Andrew thanks Bill well what a contrast Russia is to Germany Russia is not a steady performer although like Germany Russia does not have Bill Gates they have Vladimir Putin who may well be more wealthy than Bill Gates or anybody else in the world for that matter but I choose not to research that issue in much depth you know it is great talking about Russia because one of my favorite comments was by Will Rogers back in the 1930s he said Russia is the only country that no matter what you say about it it is true and that's certainly the case when it comes to talking about the Russian economy one can come to wildly divergent conclusions but let me give it a go now like Rick I kind of thought this was a brick conference so I didn't read the invitation closely enough to realize it was a meeting whatever the acronym is but Jim O'Neill of Goldman Sachs is a popular guy in Russia because the original brick report that came out seven, eight years ago really was one of the most positive maybe the only positive assessment of Russia done at the time and Russia was very happy to be included in this category of rapidly growing emerging economies particularly in the wake of the financial crisis and some of the difficulties that Russia has endured a number of people have suggested that maybe we should take the R out of bricks and make it BIC now because I'm the last speaker and you've been sitting there for a long time I'd like to do something interactive to start out with so I'm going to ask you a question and the question is which of the brick economies do you think has seen the greatest GDP growth in dollar terms over the last decade I'll name the country and then you can raise your hand I've never done this before but I'm kind of curious to see how you come out on this how many people think that China saw the greatest GDP growth in the last decade raise your hand please okay, three, five, nine, twelve okay, that's about 20 plus or so India, one okay, Brazil, none Russia, okay, about ten well, let's go to the answer please okay, the answer is Russia a long shot this should be a color graph this is from my friend and colleague Cliff Gaddy at the Brookings Institution who I regularly steal his graphic materials he knows it though he says I could actually explain his graphs better than he can Russia's there is the first one and you look at that dramatic growth it took a big hit in the financial crisis 2008 to 2009 but nevertheless its performance has been dramatically greater, better than in dollar terms than the other three bricks what's been driving it initially part of it was the devaluation of the ruble post-98 financial crisis the results of restructuring that took place in response to reforms in the 1990s early 2000s played a big role and certainly the rise of the oil price played a big role let's go to the next oh there we go this is my favorite graphic it's also Cliff's now if I had one graphic to show about Russia this would be the one okay, so this is what this line shows is the amount of revenue from oil and gas sales estimated coming into the Russian economy going back to 1970 as you can see things were good in the beginning of the Brezhnev period the first oil crisis, the second oil crisis they kind of peaked around 1980, 1979, 80, 81 things weren't so good during the Gorby-Yeltsin times and Vladimir the lucky you can see what happened while he was while he was president and I think the best estimate of to what extent the this increase in revenues contributes to growth growth in Russia is estimated somewhere between a third and a third and one half of the growth but this this high low oil price high low revenue intake also it corresponds very closely with high oil price less incentive for structural economic reform as was the case in the Brezhnev period and it has been in the case in the particularly the second Putin administration less political openness pluralism and a more aggressive Russian Soviet foreign policy I mean just coincidentally the two peaks of those periods around 1980 and 2008 almost closely correspond with the two times that Russian military forces have been used abroad in the last 30 plus years in Afghanistan and Georgia but this gives you this graph also tracks very closely economic growth and fall etc now still oil and gas is going to be the the biggest determinant of Russian economic performance and what is that likely to look at by according to the most authoritative estimates of oil price whoops what happened there Travis I need some help there we go thank you I'll just say next please ok thank you alright the this is the the similar graphic that I showed you before but then at a $50 oil price $130 oil price $200 oil price through the the different scenarios of from the IEA for oil price out to 2030 you can see the impact of the revenue that would be coming into into Russia as a result even at the relatively low $50 oil price Russia is not going to do all that badly and if you get at the higher oil price scenarios then you're going to see actually considerably more robust economic performance a lot more to the story than that but but that's a big piece so let's skip these won't skip skip ok now the problem for the Russians of course is Russia is unique in many ways Russia is the largest economy in the world which is so dependent upon this one factor and which contributes to the great volatility of Russian economic performance and not only let's not forget that Russian Russians Russia went bankrupt twice in the 1990s 1991 and 1998 and even then they experienced this extraordinary period of economic growth where in real-dollar terms the economy was growing at about 25, 26, 27% a year in real-dollar terms so it takes into account economic growth plus currency appreciation that's how you get those big numbers and they were feeling on top of the world in July of 2008 when oil price hits all-time high at about $145, $147 a barrel and they were talking about they were looking at a lot of shade and Freud at the United States and the subprime mortgage crisis was starting to have a larger impact on the American economy all those poor Americans, ha ha ha but we Russians we think we are an island of stability we are a safe haven they were talking about this well they got a rude awakening with the impact of the global economic crisis and it was pretty much starting with the bankruptcy of a layman brothers in mid-September and if we look at this graph shows the performance of the G20 economies and Russia was the worst relatively the worst performer of all the G20 economies and that they experienced the greatest change from growth to increase to decrease in their economy about a 15% change in one year and that's what puts them in that bottom right-hand corner and again it re-emphasized for them something they already realized the dangers of over-reliance on natural commodity and especially energy exports and they had even before the economic crisis hit they had under while Putin was still president they put together their economic goals to the year 2020 and they drew up three scenarios and one scenario was the the least optimistic scenario and it was about a about 3% growth per year and there was a mid-level scenario at about 5% and the so-called innovation scenario which called for about 7% growth per year which is in what the Russian economy was experiencing for the previous decade if you take out the currency appreciation and it was what they called the innovation scenario and it was premised on greater diversification of the Russian economy to insulate itself from the vicissitudes of the energy price sounds like a pretty reasonable reasonable way to go and when Mr. Medvedev became president this was then described as modernization and that has been the theme of the Medvedev presidency the modernization of Russia and the Russian economy that's kind of interesting I don't think there is any actual formal definition of the term modernization and I've spent a fair amount of time in Russia the last year and heard a lot of different definitions of how they understand modernization and a lot of people will equate modernization with diversification well, I think that's kind of problematic the Soviet economy actually was a lot more diverse less dependent relatively speaking on natural resource exports although it was still very dependent upon them but they did produce a lot of consumer goods they were crappy it was a command economy and the command economy was more diverse and there was a tremendous misallocation of resources because they weren't being done according to market signals even in the... and the Russians recognized this and even in the innovation scenario under their own terms the optimal level of change in what high technology in so-called innovative sectors would constitute a driver of economic growth in the future is fairly modest certainly less than 10% so I emphasize that because there's so much discussion at a fairly superficial level that really kind of tends to equate at least in the Russian context modernization with diversification and the one thing I wanted to take away with from this is that the amount of diversification that would make sense from the standpoint of using your comparative advantage and responding to market signals in the near to medium term I'd say up to 2020 and 2030 is modest let's not overestimate that now the Russians, President Medvedev probably doesn't do himself a favor actually by overestimate, by overselling this because you'll often speak about the primitiveness of reliance upon natural resource exports and that that's a bad thing well there could be worse things I suppose in Russia's case if you didn't have the natural resources now the counter argument of course is the resource curse being well if they didn't have the natural resources then the Russians would have developed other means to drive economic growth that's true to an extent now let me talk a bit more specifically let's skip if we could to the slides on the high technology sectors and look a little more closely at what the Russians have are focusing on in this modernization so-called innovation economy framework and this is based upon a chapter in an excellent book which I coincidentally co-wrote or edited with Anders Osland and Sergei Gudiyev Anders Osland of the Peterson Institute and Sergei Gudiyev the rector of the new economic school in Russia called Russia After the Global Economic Crisis and I will immodestly say it's a great book but more modestly it's a great book because I wrote very little of it but it's a very good collection of various pieces that capture I think the political, economic, social dynamics of what's going on in Russia with a lot of empirical data to back it up and what this is based upon is the analysis done by a couple of economists at the RAND Corporation Keith Crane and Arthur Usanov so the five high tech areas the Russians have identified are software, nanotech, civilian nuclear industry, aerospace and armaments, defense most of the Soviet Union's major achievements and civilian technologies were tied to its military program well in essence the Soviet Union almost it was a military industrial complex, full stop the 1990s the domestic procurement for those military goods fell tremendously by about 80% totally in the period of high growth 1998 to 2008 the high tech industry played a relatively small growth in driving the increase in Russian GDP now things that did drive the increase in addition to the increase in the revenue coming in from the oil price include retail wholesale trade, construction, transportation, telecommunications and Russia's recovery in the first decade the transition but the industrial base is still very very it's very old, it's very obsolete a lot of it goes back to the first industrialization that was stolen back in the 1930s let's look a little bit more closely about these five sectors next please software and information technologies there's been considerable success in this sector so in 1999 McKinsey estimated that this highest labor productivity in the Russian economy was in this sector about 38% 38% of the US level which is about twice the average Russian level but the gross revenues even just two years ago are quite modest about 5.5 billion the IT sector has been one of the most open industries in Russia it has higher wages in IT than China or India so it's not going to be I think a leader in offshore IT business but it is expanding its presence in the offshore development market and in packaging software development of their sector is going to depend on making the country's business environment friendlier now this business friendly environment many many many measurements of this of course the Russians do very poorly things like transparency international the world economy the Davos competitiveness et cetera that's the story we know well about the very weak legal system and the problems of corruption and this is a sector that really suffers from that quite a bit but it has some strengths nanotechnology quickly the Russians identified nanotechnology a few years ago as a high priority and they created this state-owned corporation Ross Nano and they actually put it at the head of it one of the most competent administrators and managers in Russia and it was fairly well capitalized with about 5 billion dollars it was subsequently drawn back a little bit with the impact on the Russian budget of the economic crisis but still their investments in nanotech have exceeded a billion dollars falling behind only the United States and Japan but their innovation activity has been relatively modest probably too early to tell but just if you look at one measurement Russia ranks 16th in the number of patents related to nanotechnology the expectations in the near term that Krain and Osanov have for nanotech are fairly modest and a lot of it's going to be in the area of scientific machinery things like microscopes and such next please a more significant industry for Russia certainly is the civilian nuclear industry several years ago the Russians occupy about 16-17 percent of the global civilian nuclear market they aspire in the next 10 years or so to get about 25 percent of the global the global market and the nuclear industry does constitute domestically about also about 16-17 percent of power generation within Russia and they have the same goal that the nuclear industry will occupy about 25 percent of Russian power generation domestically free up more domestically produced gas for export sales their big advantage here is that they have the largest capacity for uranium enrichment they have the lowest cost of enrichment in the world making it one of the most competitive industries in the world market they also have some considerable assets in pieces of advanced reactor technologies aerospace rockets, satellites, civilian aircrafts still a leader in launchers proton rocket will be the remain the only well tested rocket capable of varying people and heavy payloads into space for the foreseeable future since the 1990s the space program has depended upon commercial launch contracts and collaborative activities with other countries and foreign companies for survival the Russian government has tried to consolidate the civilian aircraft industry they've created this big holding company United Aircraft Corporation with major transport aircraft design bureaus and production facilities all being merged into the company the story here on civilian the future of Russian civilian aircraft as opposed to military aircraft is that they're really going to need to partner with western companies and this is the story with the MS-21 it's the story of the other major commercial aircraft projects that the Russians have under way and it's a reflective of I think the role that the extent that Russian production manufacturers are going to play a significant role in high tech innovation industries a lot of it's going to have to be in partnership with other players and the Russians thinking of themselves especially IT for example also here as where are they going to fit in global value chains armaments of course this was a huge relative strength of the Soviet economy still the Russians are a large exporter of arms the second largest in the world to the United States but there's been tremendous erosion to the R&D capacity of the Russian military sector aging of the work the work sector the sector has been able to survive essentially especially in the 1990s to what extent that it has because of exports because domestic procurement almost fell off the fell off down to nothing or close to nothing here it's kind of ironic because we think of Soviet legacy of these huge companies huge industrial enterprises a problem actually for the Russian defense sectors that relatively their companies are small and they have fairly low valuations so again I think looking at future development it's going to be increasingly in concert with other foreign producers the next place and that's I think the larger story the Russian leaders perceive growth in high technology industries as key to defining Russia's future place in the world economy but the Russian policy to encourage growth in high tech to this point has not been that effective and a reason for that is that Russian policy makers have attempted to foster high tech industries in many cases by consolidating existing manufacturers into large state controlled agglomerates especially in armaments nuclear industry and aerospace even if still in the armaments they're relatively small by international standards looking at European defense companies and American defense companies and this has been what Mr. Putin started doing in 2006 2007 and this has been a fairly noticeable piece of so-called industrial planning and can only say that I would agree with Charles how he was characterizing industrial planning in the Chinese case that it the rationale for the Russians to do this is that well we need to have national champions so they can compete internationally with other large international companies there's not much evidence to support that that is a policy that will be effective and the more I think that Russian government will help its entrepreneurs think about where they actually fit in global value value chains is going to be the way to go but still the bottom line is that if you look at 2008 industrial output high tech sector of industrial output was about 9.8% industrial output all told of Russian GDP so therefore the high tech sector currently is contributing about 3-4% of Russian GDP fairly marginal not insignificant but fairly marginal this is not going to be the big driver of growth for the Russian economy in the future and just one last word because I found this kind of an interesting study because most of the studies that look at Russian competitiveness business environment etc put Russian very very very unsavory territory with Zambia and 180 countries Russian rates 145 or something like that well I came across this recent Deloitte global manufacturing competitiveness index and I do not vouch for the methodology behind here but I just found the results interesting and this is a the survey was done by global CEOs as to which countries have the most manufacturing competitiveness and will in the future and these are the criteria ranked for most significant to least significant the 10 most important criteria they see when they rank global competitiveness and you see it's a not surprisingly it's a much wider set of criteria than simply looking at the legal environment and the issue of corruption where obviously Russian doesn't do very well you know number three energy cost and policies well Russian does better there the relatively low domestic energy costs number one talent driven innovation you know Russians do relatively well there you know number two cost of labor materials not so much that's a big comparative advantage of China etc let's go to the last one and then I'll shut up because this is where it came out currently Russia came in 20th place ahead of Italy, South Africa, France, Belgium, Argentina and Saudi Arabia but of more interest was their expectations for the future and that Russia in five years would move would be the biggest mover of all of these countries we go to the next slide place and Russia would move from 20th to 14th place so here we go a significant report like the BRIC report seven years ago with a rather optimistic sense of Russia's future so on that optimistic note let me conclude thank you thank you okay let's go to our talented pool of participants out here questions please go ahead here's the mic coming thank you this is about China and the question is addressed to Mr. Freeman I was struck in your talk if I understand it correctly about this model of China model whatever that model may be is not as successful as people may think I think that's what you're saying you gave the example of the state run companies for example not being very profitable on the other hand I think it's my view that China has achieved China's rise is much broader than just that obviously it's been able to turn around a communist nation into a market oriented type of nation in a very short period of time manages borders strategic relationships with its neighbors and the world its presence is Africa that's a huge typically a domain of Europe and the US is achieved a kind of growth 10% a year for 31 years at a scale and a speed that has never been seen for a nation ever in the history of mankind if I'm correct so I would see that as some kind of success if nothing and perhaps in looking at a of course it's the largest country in the world 5000 year history of Europe so to look at a model for China perhaps if there is such a thing would have to be a much broader you know view of it from that kind of historic perspective I was wondering if you want to comment on that I don't disagree with that Chinese economy is extraordinarily successful but I think the panel is really about the industrial policies and whether those are successful and I think in Chinese industrial policymaking Chinese economic policy for years and years and years has been predominated by focus on market reform again you know the kind of getting out of the way and deregulation and removing barriers to trade and commerce removing the barriers not just to international commerce but to intra-provincial intra-provincial commerce that are enormously successful building roads and rails and processes to move goods and services throughout the Chinese economy that's been tremendous success what I'm suggesting is that any industrial policies that are engaging believe that the next wave of growth or that Chinese China's future economic growth depends on the kind of narrow state-driven capitalism the kind of growth that's reliant on further empowering further shoring up these national champion state-owned enterprises which is fundamentally what seems to have been the conclusion drawn by the majority of Chinese policymakers today I would be very happy to answer any questions about China's future success if they really go down that road my own feeling because I do believe that if there is a country and a group of people which is more pragmatic than the Chinese I don't know which ones they are that they will recognize the foolishness of the kind of industrial policy making path on which they're now trotting and will chuck it and chuck the people that are responsible if you have to say what will happen as a result of these policies if they're generally short up I think that there will be a stumble and there will be some people whose heads will roll as a result but I certainly wouldn't argue for a moment that China's economic success has been extraordinary I think it is, it is certainly of our age the story and if one wants to talk about a Chinese model which is in large part deregulation focus on market reform to drive growth with some sort of wise spending to try to increase the competitiveness of the Chinese economy that I think I'd have to argue is a tremendous model but drawing other inferences and other lessons from the results of the crises which suggest that the market is not the way to go I think it would be dangerous and is dangerous There was a question right here please Thank you, I'm Keiichiro Nakazawa from Japan International Cooperation Agency, OJICA I'm working in the field of international development and I'm very interested in some lessons drawn from experiences in some successful countries like Brazil China and Russia maybe but in many developing countries try to apply industrial policies but in many cases they failed and they failed not because they using the industrial policies in a mistaken way but rather they failed because they chose or selected industries which would be losing not picking the winners but picking the losers and sometimes it's too ambitious or too advanced compared with the level of development or the endowment structure of those countries and I wonder in the case of Brazil or maybe in China or Russia what kind of criteria those governments used to select industries to be protected or supported to be developed and I'd like to know the lessons which we can utilize to other developing countries thank you Kelly? In the case of Brazil if you look at the sectors that have been identified in most cases there's sectors where there really is a national need for for lack of a better term supply so you're looking at infrastructure you're looking at energy you're looking at healthcare and you know truly in those three sectors at least I would say that the way that Brazil interprets their national interest is very much that you must have in the same way that some countries may look at having homegrown food supplies or homegrown defense industry viewing that as being in your national interest I would say that in those three sectors Brazil views those equally equally as such I think that where the challenge may end up coming the bottom line is Brazil's prospects going forward just given the growth dynamics globally in China and elsewhere in Asia and globally etc is positive enough that I would say that most companies be them foreign companies or Brazilian companies are looking at really investing more and growing their operations in Brazil no matter what the industrial policy is so I guess a concern or fear that I would have going forward is that if you as a government overthink that a little bit too much overly encouraged by forcing localization policies by imposing by national policies etc in an era where all companies no matter where they're based by definition unless you're talking some of these overly programmatic situations in China etc have global supply chains I think that inherently you're limiting the either the extent to which companies can continue to grow and or the level to which you're going to reach technologically with those investments because if you can't tap into those global supply chains at a certain point it is going to limit your ability to go forward but in Brazil I would say that the definition of sectors getting to your question very much came out of necessity for the market domestic market not exports to start I remember one of the the statistics you had Kelly was that Brazil trade is 30% of the GDP in Brazil where it's 65% in China and what I think I hear you saying is that Brazil's so-called industrial policy is focused on domestic rather than export growth I think so far yes it's interesting you'll find that in Brazil first of all just informally surveying companies that are doing business in Brazil right now for example on this new bi-national policy there was a very low level of concern about that policy writ large primarily because what you'll hear just anecdotally from most companies is look we're going to continue to invest in our operations and our manufacturing capacity just to keep up with Brazilian needs and Brazilian growth so at least I mean looking at it from a short term perspective that's how the companies are looking at it it certainly is how the government is looking at it and that 30% is actually a huge increase from when I originally started working on Brazil that number was like 10 when I first moved there at the time that Polano Hale first came in so even that is a huge advance but you'll find that even these Brazilian multi-nationals the multi-Brazis even in Brazil have come under criticism to some extent when they have made major investments overseas major operations in China or Russia or Africa there's been something of a domestic you know backlash or reaction to that saying well hey you're a Brazilian company you need to be creating jobs in Brazil does that sound familiar to us Americans yes it does but you know so you'll see a large American company or large excuse me Brazilian companies taking out full page ads in the Brazilian newspapers saying you know we employ Brazilians it's something that's you know I guess a bit unusual and does build to your point kind of reinforce the idea that the domestic market is still not the only focus but but a big focus. Rick the last question we we had on this agenda was how is the policy making environment responding to successes and failures I'd like to ask more how's it responding to the perceived risk. Germany in this particular conversation is unusually dependent upon exports to China and Germany also faces the challenge of dealing with the problems in Europe I'm not sure that I get a sense of their the degree of flexibility they have in responding to the threat of a Chinese bubble burst example or similar action in particular Spain well that's a very good question and in fact early on in the financial crisis they did face a very substantial drop off in exports what is interesting was how quickly they adapted and diversified their whole approach to exports I mean China correctly is a very important growth market for them but they don't rely simply on China I mean as Andy knows they have become the Russian Federation's number one economic partner and they are the largest exporter in Russia they are now they discovered India and their business leaders are all over India as well as Latin America one thing I should have said is while in my view and I'll speak very candidly here while German politicians are not a very impressive lot sort of similar to ours I think they probably have the highest quality managerial class in the world it's hard to meet a German CEO who doesn't have a Ph.D who doesn't have a great grasp of history who can't discuss classical music and art they are very well educated strategic thinkers and they are internationalists and and they understand like well in a way similar to say a Dutch business manager because they need to export as well or a fin they rely on being able to penetrate foreign markets and thus I think are very successful at it now the Euro crisis is some very serious challenges and I think but their approach to that crisis in the short term is to recognize that with lower growth likely in the rest of Euroland they are going to have to export beyond Euroland so I don't think they can make the same assumptions they are going to be able to sell for example as many BMWs or Mercedes in Spain or Portugal as they did before but of course the big markets are not in Spain and Portugal so unless there is a fundamental collapse in world trade I think the Germans will do just fine the really more interesting question is I think is what are they going to do about the Euro because for the first time in recent memory their requirement to stand up and engage in these bailouts Greece Ireland Portugal potentially Portugal and others has really led to a domestic backlash at home and you can imagine it if you saw that in American terms what if we were suddenly bailing out because of the Mexicans or the Canadians or the NAPTA I mean and this is might be closer to home but but these are massively unpopular and if in fact the price is going to be continuing bailouts coupled with the potential for stimulus policies and the unwillingness of their European partners to accept fiscal restraint you could very well have I think a decision taken by the German establishment say in the next 18 months to 2 years to return to the Deutsche Marker that is the core a sound currency is the core not only of German economic policy but their sort of political identity that's perfect we're drawing to the conclusions one quick last question with the highest hand back there thank you so much good afternoon my name is Allison Johnson and I thought the panel was very fascinating I'm building a smart power initiative at Northrop Grumman Corporation sort of looking at how US foreign policy is affecting some of these amazing changes around the world and I'm really interested as the discussions are going on in Cancun by the United Nations how these countries are including Germany have really attacked their industrial policy as it relates to our climate to our environment having worked in all of these countries I have been very struck by how the Germans were very aware that their industrial policy could not ruin the environment that they lived in and you find that when they work around the world whereas the rest of the BRICS cannot say as strongly an acknowledgement that environmental degradation are some of the consequences of their industrial policy so if the panelists could comment on that and also how the developing world can either use these models or not because they have to consider this as they grow as well and how it affects our planet thank you that's such a simple question can I ask you all to give it at least a minute let me just say a word about Germany because this is fundamentally different than either the BRIC countries or the United States I mean there has been a an organized environmentalist mentality and movement in Germany for 30 years I mean they have probably the most successful green party in the world in fact the green party today is now according to the latest poll in Spiegel is larger than the social democrats so it's the second largest party in Germany it just gives you some sense of their popularity the Germans have shut down all their nuclear reactors so they have no nuclear reactors and great distinction to their neighbors in France they have become in part so closely tied to the Russian economy because they are such large importers of Russian natural gas because of their environmental movement and there is just a political consensus from left to right that conservation environmentalism is next to godliness if not increasingly German secular culture ahead of godliness the amazing thing is it's clear that they have paid a major economic price to do this and when you think about the costs which they subsidize things like biodiesel and wind energy and solar energy I mean it rains most of the time in Germany when you add that to the cost of integrating the German Democratic Republic the East Germany and the fact that they have been able to absorb those two big price tags and still come out as one of the best performing economies in the world you sort of understand how Germany almost won World War II fighting Britain, the United States and the Soviet Union collectively they are a highly talented motivated and disciplined people just a quick point on Brazil I think Brazil's case is a little bit unique because their energy grid is just naturally so green if you go back nine years ago when you had the energy crisis in Brazil due to the droughts the reason was because about 80% of their energy was coming off of hydro they moved to more diversification after that point it was such a vulnerability and their challenge has been particularly since they've made these massive pre-salt finds which getting them out of the ground is going to be a lot harder than finding them but a major debate that they're having within the country now is how can they continue to diversify their energy grid so that it remains quite dependent on hydro but does take in some of these other wind energy etc the first wind bid last year since they developed their Proimfa, their wind program about five years ago they finally were getting off the diamond moving forward on these things so I think that you'll see a continuing focus on ensuring and obviously in Brazil in the 70s during the oil crisis they developed their now famous ethanol program so they are very heavily dependent upon bioethanol and biodiesel from sugarcane that being a very important part of Brazilian development going forward is maintaining a green energy grid and further diversifying it where Brazil historically has been looked at with more of a critical eye has been in agriculture and that's something where I think both because of a strong recognition in the Brazilian public, the government NGOs have become more involved in Brazil as well and Brazilian government's frustration at times I think but that is an issue that is being looked at as far as deforestation of the Amazon biome a lot more carefully and a lot more strategically Thank you Thanks, great question there's been some interesting movement on that in the last couple of years in Russia during the Putin presidency the Russians were not particularly enthusiastic about the Kyoto Protocol his chief economic advisor Andrei Ilyanov was an avid opponent of the Kyoto Protocol going through copious calculations that this would be a hindrance on economic growth in the longer term for Russia the Russians did see the protocol but it was a transactional agreement for the European Union to support their WTO session if the Russians did that now what's happened in the last couple of years is interesting and this is I think part of the wake up call of the global economic crisis has had for the Russian leadership Russia is one of the most energy inefficient countries in the world and the potential savings that they can have for their economy in becoming more energy efficient and the numbers are quite staggering that's had an impact on them and also driven by as a major energy producer you lose use less domestically than you can export more and it was a major world bank study that came out in December of 2008 and I think this has been pushing the Medvedev government to be a little more proactive on this Charles it's a great question I mean it gives me the opportunity to say that CSIS has recently published a piece called Green Dragons which actually looked at Asian approaches to climate change from a domestic politics an industrial policy approach so look for that at csis.org but the China is obviously an autocracy and so has less perhaps a direct concern for there is no green party in China and there is unlikely to be for some time but you won't go broke looking at Chinese policy through a prism that assumes a fundamental concern by the Chinese Communist Party for their political future and for their role as the quote legitimate governing entity in China those Chinese policies are taking with a view to how do they how do they preserve their own primacy and climate change policy is certainly part and parcel of that exercise fundamentally the Chinese government has done a back of the envelope calculation that they need 8% annual growth in order to provide 50,000 GDP growth in order to provide 50,000 new jobs a day and that 50,000 new jobs a day the chances of political instability that will result in their having to deal with local unrest so any challenge to 8% annual GDP growth is going to be a source of political concern certainly worrying about putting in place hard caps or commitments on climate change is something the Chinese government is going to be seriously opposed to and is going to make every exercise every effort in global discussions to reduce that said there is a certain amount of sincerity actually a fair amount of sincerity about reducing environmental degradation in China because it's a political problem because there are increasing protests and about health related concerns related to environment so there is an effort to try to reduce the environmental degradation and it's sincere it's just that they don't want anybody from the outside reducing their flexibility in growth the last piece of this puzzle is like a lot of countries China is trying to promote a domestic green technology industry in part because there is a widespread belief in China that Kyoto and the sort of green technology movement around the world is a plot by the west to try to keep China down for the next way of industrial growth so there is a strong industrial policy political attempt to promote green technology in China to the deterrence of other countries abilities to produce that by producing by using the scale of the Chinese economy to promote these kinds of products does that mean we have a green technology war in the future? It's certainly possible I think at a minimum you've got a little bit of a green technology bubble going on in China and arguably elsewhere is that a terrible thing? No because it just promotes more and more green technologies that will eventually will be valuable but it means a lot of people will go broke in the process of trying to capitalize on the green technology wave I'm going to wrap it up excuse me thank you very much with the one or two thoughts first of all I love the last question I just got back last month from Shanghai where I spoke to an expo conference on green cities and my sense is that there's a substantial increase in interest in China in part because it's an economic growth opportunity maybe in terms of exports their clean coal technology is arguably better than ours and they're making enormous progress in a number of other areas I just finished yesterday looking at a Mackenzie study on the urbanization of China and I brought just two numbers here and the next 15 years they're going to have 350 million more people in their cities they're going to have 221 cities with more than a million people Europe has 35 today the building that they got to do 50,000 new high rise building is 50,000 which is 10 times that of New York City so they have got to deal with some serious problems and that probably is the way to conclude the thing that I have been listening to with some interest is the conundrum that politicians in all of these countries whether they are they are all politicians in one way or another except North Korea the Chinese government has to respond because it faces that problem of people flooding into the cities the need to create 50,000 new jobs a month if you look at what every country is trying to do they're trying to solve their domestic problems with exports I think I could make the Adams cement argument that if everybody exported the things that they did best we probably would have global growth at an astonishing pace the problem is when you talk about industrial policy where political judgment is imposed then you may be competing as to who has the best right to develop this particular industrial area and that's when we get into trouble the worry that I have is that we've got some serious problems facing these countries political systems are slow to respond and we face the question of whether or not we can respond quickly enough with industrial policies or whether there are other ways we can gather our best judgments together and achieve a more global response that deals with the problems we've got bubbles coming we have the potential of not just dot coms in the states or sub-prime you've got a Chinese bubble with potential all of these things drive us to look at the question do we have the capacity to adjust quickly enough to keep from falling off another cliff that's a matter for another conversation but I want to thank the panel for some really remarkably thoughtful comments