>> thank you, senator. appreciate it. >> they have to be resolved. thank you, mr. chairman. >> thank you. ..chairman. >> thank you. as i call upon senator paul, let me say that kentucky played a really tough, defensive, exciting game, and we appreciate them showing the nation what kentucky is all about. >> i know your consolation is sincere, and i wish i could accept it with a better attitude, but still unhappy with the outcome. thank you, secretary kerry, for coming today. one of the first things or actions that i remember as you began your office was that you reinstated the four employees, you know, that were involved and implicated by the review board in ben ghazi. it's always to me been more of a concern about the decisions that were made in the six in i think the talking points have drowned out some really important decisions we've made. we're all human.

i'm not saying they're bad people but some really bad decisions were made in six months leading up. two other big ones were made i think it was a 16 person security team led by colonel wood who said we wanted to stay in country and they were not allowed to stay in country. is also a request for a plane. apparently that evening or a dc-3 that was denied earlier, maybe about six month before the attack. that plane would've been important. there was a struggle that evening to get permission to get a plan. i think the c. 30 they were trying to get on with a libyan plane. there were some bad decisions made, and this doesn't make the people who made the decisions bad people but they were bad decisions that were made. there was request for security that were turned down throughout the six months preceding the attack on benghazi though a lot of money was spent on things that i think most americans would say are frivolous and maybe not part of the immediate mission of the state department. i'll give you a few examples. $100,000 was spent on sending comedians to india.

$100,000 was spent getting electrical charging station in vienna for the ambassador so he could clean up the embassy. 650,000 was spent on facebook ads. these are all state department expenses to $700,000 was spent on landscaping for the embassy in brussels. $5 million was spent on crystal wine glasses and crystal glassware, or where for the state department for embassies. you can argue the legitimacy of these but it's hard to argue that in the face of the -- it's hard to argue this in the face of people say we didn't have enough money. the other criticism i think that ought to be considered with regard to be is that, and this is something i think the review board didn't adequate address is whether or not in the midst of a country coming out of or that really the state department should be in charge of security. whether they can adequately provide security.

i think one of the biggest mistakes, these all happened from her predecessor, not you, but the biggest decision mistake i think in benghazi was thinking that benghazi was more like paris and baghdad. and had we treated benghazi as a fortress in the middle of a military base, i think we might've had a better chance. nobody can predict exactly what could happen with different outcomes, i think we would have a civil war raging we have to consider whether or not one of the errors in this issue is how we chose to protect or not protect the consulate. why is this still important? i think it's still important because i'm concerned another attack could happen like this in other countries that under state department control. i know you are probably well aware of sort of the situation on the ground in libya but i don't know it's perfectly stable. i'm concerned whether or not we could have another attack of this magnitude in tripoli at the embassy. we no longer have any consulate

in benghazi, correct? >> we didn't have one of them. it was not a consulate. >> with some kind of -- >> it was not the consulate. >> my concerns whether not we are adequately protected, whether the state department and adequate protect and whether or not maybe indices in war-torn countries or countries emerging from civil war would be better off treated more as we did the embassy in baghdad with a much greater military presence and a much greater military oversight of protection and whether or not you look at the expenses, and if you haven't you a look into the expenses tha that many of assocd press and are aghast that we spend $1000 in the some comedians to india, $650,000 on facebook ads, 700 us on landscaping, 5 million on crystal ware that really in the face of this benghazi disaster we need to reevaluate how we're spending our money in the state department. >> when did the comedians go to india? >> it's all previous two-year

tenure. i'm not blaming this on you. i don't want to be frivolous about sending some comedians. i mean really, seriously, there are complaints we don't have enough money for security. >> senator, let me answer your question. good questions, legitimate. let me dispel you -- i keep hearing repeated again and again that there was quote no accountability for these people who were involved. two of them were forced to retire. they retired, and the other two were essentially demoted and took on lesser responsibilities. that's pretty heavy stuff for career people. so this needs to end, this notion that there was no accountability. not just the lives were changed, the lives lost and the people who are part of that, but these people, you know, obviously paid a price and a significant one. in addition to that, we've gone

beyond what the arb required in between the requirements. we don't even more with respect to our embassies. every week i am, every meeting that we have every day as a matter of fact, we are starting a morning with an 8:30 a.m. meeting. if i'm here, if i'm not i'm inform. we have a review of our threat levels and we have too many places where the our threats. we done an incredible job under the hardest of circumstances, hardening sites where they can be, taking unbelievable precautions for our people. and we've done a lot of different things. we've created a new light -- a new deputy assistant secretary for high-threat posts who was responsible for making sure i get the focused attention necessary to keep people safe. we've ensured that the staff of diplomatic security go to regular bureau meetings and regional meetings and

communicating on security issues. we've adjusted work requirements. i'm not going to go through all of it. we've got 151 new security personnel, countless marine detachments slowly going up to provide protection where we can. all of this has budget and patients obviously. i will certainly, i'm puzzled by some of these expenses and i look at them and i'll investigate it. but i think that there's an incredible effort underway at the state department to both tightened the belt but also upgrade our capacity to provide security for all of our people. >> do you think it was a mistake to have the ambassador in benghazi without significant military production? >> let me speak to -- there was a request put in for additional security for ambassador stevens, and it was given to him. he had additional numbers of people that went out there with

a big the problem is it wasn't adequate obviously. >> sort of unofficial militia. do you think is a good the student to have unofficial militia who basically ran when the time came? >> he had additional safety personnel, official within the department. i think was one of two people who were assigned, so his number when he went out there met what he had requested in terms of official state department personnel. obviously, it was not adequate, as we all have sadly learned, to the task of rebuilding what took place. but the intelligence community has said they had no information about that kind of attack. there was nothing operative on which to be able to make the decision. >> are we still using malicious or do we have more of her own people during production? >> we have more of our own people. we have significantly hardened up the embassy there. i'm not going to go into the numbers of but we have very significant increase in american personnel on the ground. with much more significant

emergency contingency plans, and we are working very, very hard with other countries to work on the overall security issue. i was just in algeria and morocco for the security dialogue in the last few days last week, and we discussed specifically the training of personnel for rapid response force in libya, and the ability to to provide greater training and capacity going forward. i think everybody is concerned about libya into current status. >> mr. secretary, we're almost at the end. i know senator corker has a few comments to make and then i'll close out and we'll get you back to the challenges that we have all collectively faced. >> mr. chairman, thank you. mr. secretary, thank you for being you. i would like to ask permission that the testimony on september 3 be entered into the record, especially as we highlighted it, tells a different story about why the

administration was asking for the military strike, the limited military strike that the secretary alluded to. very different story than than the story that is now being told by the administration. mr. secretary, i want to say that i know the issues in syria are very difficult, and i look forward to the detailed briefing we will have soon. one of many that's been promised and hasn't occurred. i don't think there are easy solutions. i do think that from a bipartisan standpoint, people are very concerned right now about u.s. credibility. and steery i think was the beginning of that. i think there are concerns about ukraine -- and syria. our actual willingness to go forward and do something after we lost so much credibility around the redline issue and so much credibility on the ground with just people in the neighborhood regarding not

following through on commitments that were made it and i know you know they were made. look, i hope the chapter is not written. i hope we have success. i think everybody on this committee wants our foreign policy to be successful, and i think under chairman menendez's leadership. we've operated in a very bipartisan way, but i will say to you that if things don't change you in effect could be presiding over a period of time where more u.s. credibility is lost than anyone could have imagined, and a time when the world is becoming less safe as a result. so i wish you well. i really do. i'm very genuine in my thoughts that i'm glad you're in a position to try to affect these things, and have said over and over again. but i will tell you, i think there is genuine concern about where we are on both sides of the aisle. i think you sense that today.

i do hope that somehow the people that we are dealing with get a sense that we are really willing to do the things that are necessary to deter. i hope the president will soon -- we had a good conversation a few weeks ago, look at sanctions if the end of having troops on the border there much longer. seems to me that would be a good place to start. but again, a lot of concerns. i thank you for your work. and i hope things turn around because i do believe that right now our foreign policy efforts are not yielding the kind of results that you would like to see, nor we would like to see, and yet we all want them to be successful. >> if i can comment. having spent 29 years on this committee, started way over there in that far in the seat, and worked my way up to work senator menendez is, so i've seen the ups and downs.

i've seen the merry-go-round and the roller coaster of american foreign policy up close and personal. and i will tell you that we are living in a different time. i know the expectations are very high, but at the end of world war ii there was only one country standing, so to speak, and we were magnanimous enough to rebuild germany and japan. and people oppose it, many people, truman had the courage with marshall to make it happen. fact is that we could make mistakes, either in policy choices or any economy, and still win. and we did for a long time. and ultimately in 1990-91, things changed with the soviet union, and that released an

enormous amount of pressure, plays like what was then czechoslovakia, now the czech republic and slovakia. unleashed all kinds of forces everywhere. and so today we are living with a far more almost 19th century, 18th century diplomatic playing field where interests and, you know, some cases just security interests or territorial interests, other kinds of things, are raising their head in ways that they didn't during the cold war because they were suppressed. and now with the rise of radical islam and massive numbers of young people who are filled with aspirations because they're in touch with everybody in the world, through the media, social media, they know what's happening everywhere.

and if you look at what happened in tunisia, it was a fruit vendor who was tired of being slapped around and, by the police come and the corruption in the country, and so the self-immolated and that it mattered a revolution and the dictator of 20 is left in tahrir square. that wasn't muslim brotherhood. it was young people looking for a future. syria, sending. young people are looking for a future and when the parents came out to protest the way they were put down, assad started shooting and that has brought us to where we are today. you know, the united states has power, enormous power, but we can't necessarily always dictate every outcome the way we want, particularly in this world. we have rising economic powers. you know, china, india, mexico, korea, brazil. many other people who are players.

11 of the 15 people who used to receive aid from imf are now doing their countries. we are living in a changed world, and governance is not doing very well in many places. might i add also here, regrettably, so we need to do, all of us, a job of looking into the future and try to figure out how we're going to stand up for america's interests and promotes a more effectively. and that includes in the budget, for foreign policy and any options that we can put on the table. now, one final word, if you will permit me. on syria where we hear this notion that somehow there was a redline and then it wasn't enforced, and somehow, you know, it's a sign of weakness. i beg to differ. you know, facts are stubborn things. the president of the united states made his decision.

he said i am going to use military force, but he listened to people on the hill who said, if you're going to do that you ought to come to congress. maybe some of them were, you know, there were some crocodile tears in a particularly, because when he came to the congress and get them to affirm his prerogative to do what he decided to do, there was a resounding reluctance, and you thoughfought it. this committee was the sole exception. we know what the senate floor might've done and we know what the hous house would've done. so the president made his decision. use force. but out of my discussions with allow broad, and might i add president obama's discussions with putin, at the summit that they had, they talked about an alternative way of doing it without use of force. force. lavrov. switch into an agreement to remove all of the weapons, not

just to degrade some of his capacity to over one or two days or whatever he was going to be. now, that would've had an impact, yes, on people's thinking, but it would not have changed the fundamental course i believe of what was going to happen. might have had an impact though. but i have to tell you, the president made his decision, and he was ready to use force. and we actually came up with a better solution, which is get all of the weapons out, all of them out, and that still leaves us with other options, folks. so i don't think we should, i think we need to depoliticize this a little bit and try to find a way forward for us to -- >> i don't think when you have bipartisan concern that anybody is politicizing. i take tremendous of fans at you making a comic that i have concerns, have some kind of political applications when both sides of the aisle expressed

concern. let me just a -- >> let me say -- >> let me finish. >> i'm not directing that at you personally. i'm saying this whole notion, you know, i think there's a politics involved in this notion that we are not, you know, pressing enough places and in of things. i just think the united states' interests are better served as trying to find the common ground to move forward on these things rather than falling prey to some of these, you know, i think stereotypes. stereotypes. >> i don't think the president made the kind of effort that most presidents would make in shaping opinion within congress, but we'll let that go and i'll just say in general, i can imagine that you would feel differently that our move to work with russia in the way that we did have certain change the dynamics in many places. and certainly, iran has been the

beneficiary of that. russia has been the beneficiary of that. we have created an era of permissiveness, there's a question. and i don't think, i don't see how you can debate that. that's scholars on both sides of the aisle. understand that to be the fact, and facts are hard to overcome. so look, you've got a tough hand. you've been dealt a tough hand, and i don't know what kind of support you get or not support you get from the white house, but we wish you well. we want to be successful. and in our foreign policy, but right now i will say i think the steps that we took in serious have affected us and iran. they've affected us in the peninsula. they've affected us in ukraine. china is watching us. it's the fact it is there. and i hope that somehow during the remainder of your tenure, you're able to turn around our foreign policy in such a way that the statements that have been made are not true, but that we have some success of because

i think all of us are very concerned. >> senator, look, you've been a terrific help in keeping this committee working with the chairman, in cooperating in summary different ways. and i thank you for that and i know this comes from a genuine concern. i'm not suggesting otherwise. i promise you. but i would say to you that i think -- i think russia with all due respect is not acting out of strength. i do not believe that russia has particularly helped itself. have they accomplished a goal to protect for the time being and to quote secure crimea at least in a military concept, if not legitimately in international law? yeah, but at great cost. at great cost.

and over time if you look at russia's economy, there are real challenges. they are running the risk, clearly, up isolating themselves further and of losing friends around the world. they've already lost them in ukraine where people who were once more supportive now feel threatened and, frankly, abuse by what has happened. and if russia were to come in, ukrainians i believe will fight over the long term. that will not be a pretty picture and i suspect that president putin understands that. show this is not a hand of strength, and i think we need to all of us, stay focused on a strategy, on a long-term strategy, and recognize that russia also has far closer ties to ukraine and far greater interests other than our interest in democracy and freedom which are huge, but in

terms of history, that's where russian religion comes from. that's where russian wars of liberation were fought. they have interests that they are trying to assert i think in the wrong way, but we have to obviously counter that and we are. so my hope is that, you know, we can write a better chapter going forward but i'm not sitting here telling you naïvely that that's automatically going to happen. >> i would agree with you that russia has tremendous weaknesses, and i think our hopes are on this committee that they're moving to crimea instead of being one of the biggest geopolitical mistakes they could possibly have made. i think our concern is, will the administration carry out policies to ensure that that's the case. and i think that's what -- >> i think you heard me particularly today, and i do not doubt this presidents resolve one iota. he is clearly going, he will continue, he has been the last

weeks been conversing with all of the leaders personally on the telephone, building the support for this current level of sanctions and for what has yet to come, and we hope they won't have to come because i think that's a challenge for all, but it's something we are ready to effect if we need to. >> i've listened with interest to the dialogue between you and senator corker accents i gathered the desire to engage in such a dialogue i would let it go on for a while, and i appreciate the. i have one final question and then a closing comment. mr. secretary, i said the very beginning of this hearing that the one part of the budget that most worrisome is the western hemisphere. year after year after year after year we have seen cuts to the hemisphere, even though it is our own front yard. we come in doing so, i think undermine taking advantage of the economic opportunities,

underestimate the security challenges stemming from international criminal organizations, and do not do enough to promote development, educational exchanges and the consolidation of democracy and the rule of law. when i look at central america and the crime wave, i see was happening in venezuela, ecuador, bolivia, i see the challenges in argentina and i say to myself, there is an enormous agenda here to pursue. would you commit to working with me to figure out how we can better position the western hemisphere in our budgetary priorities are? >> i'd be delighted to, senator. some of the change is a reflection of shifting circumstances, like colombia as much or capable today as doing things it wasn't able -- >> i recognized in colombia and mexico that's about. the problem is that we don't reinvest that money back in hemisphere. we send it somewhere else. >> that's a fair comment. that's true. there are choices that have been made in the overall budget allocation process. there are other places where for

instance, in haiti there is are reflections of money in the pipeline. the money in the pipeline gets used, we will be right back asking for the same level or more. so the our challenges and nobody knows it better than you did and what happened to sit down and work with you. >> let me close the hearing by just making an observation. i think as you well know, mr. secretary, from your service here that the members who choose to serve on this committee are passionate about the views that they have, as has been expressed today from a wide range. and vc was i think generally are held in very principled positions. we may not always agree as to them, but they are helping very principled positions, but i would hate for the drink to end without putting that in context. this committee on a bipartisan basis has passed virtually every nomination that the administration has sent us from secretary all the way on down in a timely basis. what happens on the floor is another challenge, but on a

timely basis, overwhelmingly. this committee took one of the most significant steps to any member of the senate could ever take, which is to vote in a bipartisan way for the authorization for the use of force in syria. which i think we all of dollars was critical for the president to get russia to change assad's calculation on the use of chemical weapons. this committee in the aftermath of benghazi has in a bipartisan way, embassy security legislation. this committee passed always reform, up for reauthorization. iran, previous for instance, bettethat been vigorously pursuy the administration, most recently legislation on ukraine. so even though they are very passionate views here, in a very strong, in the midst of partisanship on the floor, i'm happy to say that we've had a wide breadth of bipartisanship in the committee on the critical issues of the day, working with the administration.

and so let me close by saying, and i have one disagreement with my colleague who said that our foreign policy is spinning out of control. we are facing some of the most intractable challenges, and you, mr. secretary, and the administration have sought to go after some of the most intractable challenges that others could simply just walked away from. and instead of walking away from them, you saw to try to change the course of events for the better. and so from the chairman, i want you to know that i have every confidence in your intellect, in your tenacity, in your capacity to try to meet these challenges. that does not mean we will be successful every time, nor does it mean that we will message you agreed every time on how to get there, although generally we always agree on what we want to get too. so with the gratitude of the committee for your service, and for the time you spent with us here today, i'm going to leave

the record open until the close of business on thursday, and hearing is adjourned. >> can i just say, you know what extent i am of this committee and i appreciate enormously the bipartisan efforts. i really do. thank you. [inaudible conversations] ..

[inaudible conversations] >> edison was really a plant scientist as well as interest in the other sciences and, the story is that he knew that it didn't freeze in fort myers. so a lot of the interests that he had here in this area were based on his love of plants. by the 1920s, the united states was relying on foreign rubber and we were headed into war. but at that point they decided

the plant material and the process should be done in this country. edison, ford and firestone were traveling all over the world collecting plants and in fact had hundreds of thousands of people all over this country collecting plants and sending them back here to fort myers to his laboratory to find a source of plant material that could produce rubber efficiently, effectively, commercially. so the laboratory was put here because of that reason. because they could grow the plants here on site and actually do the preliminary research on site. so it is a really exciting project. the laboratory was interesting for many reasons. one of them was at that point in american history there was no patent process for plant, chemical, patenting, so part of the reason why this lab was so important was that it caused the u.s. government to come forward with what was called the patent, the u.s. patent law, which then

said if you invented something with plants, and it was a process that was worthy of patenting, it was issued a patent. >> this weekend, booktv and american history tv take a look at the history and literary life of fort myers, florida, including a stop at thomas edison's botanical research laboratory, saturday at noon eastern on c-span2 and sunday at 2:00 on c-span3. >> there is old saying that victory has 100 fathers and defeat is an orphan and i wouldn't be surprised if information is poured into you in regard to all the recent activities. >> we're just talking about the fact that the intear gays last week of the stennis committee, senator goldwater asked about a use of carrier aircraft, the use of aircraft carrier essex with

their markings painted out. we figure somebody over there told them about the thing on wednesday morning and dirksen will spring it or goldwater will try to spring it in such a way that looks like there was us air cover and you were wrong and i was wrong saying there wasn't. historic audio from the attempt to overthrow fidel castro. on c-span radio at 90.1 fm and nationwide on xm satellite raised yo channel 120. this morning we're live at the center of strategic and international studies here in washington for a discussion on china's economic growth and what it means for the global economy. china has the world's second largest economy but growth has sewed recently due to drops in real estate values because of overbuildings. analysts include president obama's former asia advisor

including several of china's experts. later this morning a conversation with former treasury secretary henry paulson. this is live from the from the center of strategic international studies. it should get underway in just a moment. [inaudible conversations] >> again waiting for this discussion on china's economic growth and what it means for the global economy, hosted by the center for strategic and international studies. should get underway shortly, while we wait for it to start,

congressman mike lee was one one of the featured speakers at the conservative summit in new hampshire over the weekend. senator mike lee was one of the speakers. here is what he had to say. [applause] >> thank you very much. i just left washington yesterday and i have to say it is good to be back in america. [laughter] a pleasure to honor my friend senator ayotte. she and i were elected to the senate at the same time, when we got there, bono, the lead singer for u2 were in town. she and i were only two senators in the room when bono came by who listened to u2 starting in junior high so it was a good moment. when i came to the senate, i was youngest senator. i was 39 ways elected and took office. as i like to say i was reading at the level of 40-year-old which i was told was very

impressive. 42 now but i read at the level of a 43-year-old, always trying to stay ahead of the curve. my waive sharon is hire somewhere. she is younger than i am but always reading ahead in levels herself. it was interesting, because apparently to some people in washington i didn't look like a senator. to some of them i looked like a staff member by comparison and from time to time when i got to the door of the senate in order to vote, there were very heavily armed gentlemen there who would stop me and i was trying to just get into vote to do my job. that was it. as a non-drinking kid from utah i was not used to getting carded they didn't want to see my driver's license. this is what they wanted to see. i got carded at door of senate floor i had to produce this. this is my senate i.d. this has

my picture on it. says united states senator, representing utah and has my name. expiration, january 34rd, 2017. i don't know whether i personally expire or maybe my term of office. that has got sharon worried a little bit. this is would happen every single time and i have to produce the i.d. to check it. make sure the security resistant strip was in tack. that had not bought it at a fake i.d. outlet somewhere in washington. they would look at each other, shrug their shoulders and say i guess we have to let them in. after i while i discover ad shortcut to this exercise. i discovered there was this lapel pin they gave me after i was sworn in. i promptly put it in the desk drawer. closed the drawer. didn't think i would need it. not into accessories, somebody told me, if you wear that pin they will recognize you as a senator. that pin is designed to enable the capitol hill police to recognize a senator as such. so i put it on and it worked like a charm.

[laughter] i came to my senator pin, when i got carded to door in the senate chamber and cops would say, oh, sorry, senator, you can come on in. most of the time it works like, you know, just like without a flaw. every once in a while it didn't work. after i had been there a year. i was on the senate floor and standstanding in between the two roll call votes look how it would turn out and one arm leaning on the desk in front of me. one. non-informed security personnel and came up to me in a harsh tone of voice that i did not expect, excuse me, sir, would you please not lean on the senator's desk. i respond well to authority. i immediately stood up, i'm terribly sorry i didn't realize i was putting weight on the desk t won't happen again. some of these desks are very old and they're very protective the

desks. some of the desks are almost 200 years old and almost as old as some of my colleagues. [laughter] and then the man said something to me are i didn't entirely understand. are you with the minority? i said well, what do you mean? i'm a republican senator. i don't know whether you mean on this vote or the next? i don't always vote with my party but most of the time i do. >> my name is matthew goofed mann. i hold the simon chair in political economy here at csis. glad to have all of you hear. let me give a shoutout to our online viewers. we have quite a strong following online and follow us on twitter at csis. so this morning's event marks the halfway point in a two-year project that we're doing here at the simon chair on economic decision-making in china. this audience doesn't need to hear from me about the, about

the interests and the frankly concerns about the chinese economy that everyone in the global markets and global policy making community are very focused on right now. after 30 years of break neck growth china has clearly entered a period of slower growth and the risks and challenges for policymakers have substantially increased. and so we're, i'm not going to spoil our multimedia presentation in a minute but what we're trying to do in this study is really ask the question whether this group of policymakers, the leadership and the broader policy making world in china have, or still have the right stuff to manage this transition to a new model of economic growth and development. so that is what this is all about. we call this project the navigators. that is our nickname for it because we imagine the crew of a riverboat that has been in relatively calm waters for 30 years and is moving now into the more turbulent rapids and the

question are they going to be able to get get out the other se with long-term, sustainable growth at the other end? so our focus, by the way is very much on institutions and processes of decision-making, not on policy substance although inevitably we obviously have looked on that and touch on that and i'm sure you will hear more on that later. if you were hoping to learn today whether chinese growth in 2014 is going to be 7.5% or 7.4%, or exactly when financial reform is going to unfold in what order, then you may be disappointed but we hope you'll get something out of this institutional focus can. so before we start the presentations, let me acknowledge with gratitude some people that helped get us to this point. first, many thanks to our sponsors the smith richardson foundation, ge pounddation and alcoa foundation. second, thanks to the many, many officials, scholars, business people, journalists and other

experts in beijing, shanghai, hong kong, washington, and san diego and other places who gave us so much valuable insight and wise counsel through this first year. that includes all the panelists on the next session. so i appreciate it to all of you. and finally let me thank my many colleagues at csis who offer tremendous support along the way including our china chair, chris johnson, the csis ideas lab team, who put together the presentation you're about to see and i hope you'll agree about 12 minutes from now that this is a very engaging way of presenting what could be considered somewhat dry information but it's, i hope, going to be something that will stick with you. and of course my own team including research associate david parker and program coordinator, grace hardy and a really terrific group of interns, so thank you all. a couple of quick housekeeping before we begin. please turn off or set to stun

your phones and noisemakers. and we will be taking a short break at 10:45 but there's coffee out on the sam nunn terrace back there which is covered. don't worry, it is not out in the rain out behind you there. the restrooms are out around behind me. go out to the right and around the corner. so with that, let's dim the lights and we will start the show. china's economy has grown rapidly for 30 years due to combination of smart politics and favorable economics. four key factors enabled this economic miracle. a nearly unlimited supply of inexpensive labor, a high savings rate and massive investment, large and growing export markets, and the presence of one overarching goal, that united china's people and its policymakers, the single-minded pursuit of rapid economic growth. now these advantages are gone

and china faces the middle income trap. shorthand for a world bank finding that of 101 middle income economies in 1960, only 13 have graduated to high income status. yes, including equatorial guinea apparently. the country already has begun to slow down even as it encounters new difficulties. including challenge urban process, this shows a typical protest in urban area, severe environmental degradation, industrial overcapacity and widening death and wide array of new vested interests competing for influence. back in 2007 former premier win jaobao warned that china's economic growth was unstable, unbalanced, uncoordinated and unsustainable. these problems only deepened over the past five years. she zhengping and current

leaders feel urgency for reform. they release ad major statement for reform promising to create a mixed public/private economy, give markets a decisive role and build an ecological civilization n a more complex political economy and facing a swirling array of challenges the question today than china's leaders and policymakers continue to deliver sustainable economic growth? china has a large, technically capable central government overseen by the state council of china's cabinet which handles day-to-day economic management. it is lead by premier to has ha phd in economics. its 35 members include many internationally respected economic policymakers. but central government is a small part of china's national policy making apparatus. there are only 60,000 civil servants in beijing. there are more than 40 million scattered across the country and at five levels of government.

the center, 31 provinces, roughly 300 prefectures, nearly 3,000 counties and over 40,000 townships. this is the only the state. china also has a communist party that overlaps with the state and plays the predominant role in policy formulation. the party is led from the top down, starting with the seven member politburo standing committee chaired by general secretary zhengping. these sit on the poll lilt bureau which has 25 members. the members are part of the communist party central committee. this 205-member body represents the top leadership of an organization whose power and 82 million members extend throughout chinese society. party bodies control key levers of power, noticeably personnel appointments. party committees exist in every ministry at all bought levels and in public and private companies throughout china,

including foreign enterprises. to support polly making the party has often drawn on so-called, central leading small groups, secretive bodies that conduct research and offer policy recommendations to on leaders. for example, much of the drafting of last november's reform plan was performed by officials secunded by economics leading group. the drafting committee was chaired by xi zhengping and including policy standing committee members and key experts. the committee's day-to-day work was overseen by an economist. confidante of xi, once referred to as china's larry summers. the third plenum plan also announced the creation after new leading small group for the comprehensive deeping of reform designed to coordinate china's reforms through 2020. xi zhengping well again head the body and three other politburo

standing committee members are in the group, giving it unrivaled authority as it seekses to implement reform. this cctv video shows the new leading group heading its first meeting in january. incidentally this kind of tv footage for a meeting like this is highly unusual. the groups creation suggestions that xi has the clout to drive structural solutions at the highest level of the systems to get around the foot-dragging typical of china's gridlock state machinery. the group will be replicated at all lower levels of government in china which is unprecedented. a major reason for establishing this new group was to manage growing pluralism in chinese policy making. a variety of actors now compete to influence policy. powerful vested interests such as giant state-owned enterprises are fighting to insulate themselves from reform. scholars, think tanks and government research institutes channel competing ideas to top leaders. provincial leaders lobby for

projects that will support regional goals and media, ngos and civil society organizations constantly seek opportunities to advance their agendas. all of this has contributed to making china's policy-making space increasingly messy, complicated and in a word, pluralistic. but china's economic policy making also demonstrates certainly enduring characteristics. first despite a strong preference for top-down oversight and heavy state intervention, coordination remain as major challenge for beijing. this is the gate to the compound where the chinese leaders work. this is improved with time. in 1982 there were 100 government ministries. today there are fewer than 50. but problems of juicer ducksal overlap because influence, gridlock and stovepiping are perennial problems. second, there is a large gap between the center and

localities. there is a chinese saying that the mountains are high and the emperor far away. these centralized governance has benefited china's development tremendously. local leaders have competed intensely and creatively to meet central targets. these targets, especially gdp growth, determine officials promotion prospects and create powerful incentives to comply with beijing. decentralization also fueled unproductive overinvestment and a massive buildup of local debt as seen in this "60 minutes" program hosted by lesley stahl last august. this has become a major risk to the economy. moreover, this dynamic has created space for corruption have local leaders pursued rents that come with rapid growth. third, leaders repeatedly fallen back on a familiar set of tools to create incentives for reform, including experimentation and external pressure. experiments such as xiaoping's decision in 1980 into the

special economic zone limit the political and economic risk of new policies and incentivize competition among local leaders. interestingly, xi zhengping's father was the top party official in guangdong at that time. external pressure provides useful political cover and helps clear away domestic obstacles to refor. famously the former premier used china's negotiation join the wto as tool to push reforms that dramatically weakened the state-owned sector and laid a foundation for a decade of rapid growth. today the trans-pacific partnership and a u.s.-china bilateral investment treaty appear to be playing a similar role encouraging chinese leaders to advance new pilots as the shanghai free trade zone opened last september. but it is uncertain whether these tactics are suited to addressing the challenges china faces today. experimentation was a useful strategy for boosting

manufacturing but new experiments like the shanghai ftc are centered on promotion of service which are porous and more difficult to contain. moreover the size and complexity of china's economy and its interdependence with the global economy make managing external dynamic for more complicate than in dong era. this provides backdrop for the challenges facing chinese economic policymakers. top communist leaders have governed for 30 years with two overarching goals. first to preserve communist party legitimacy. the second to enhance the country's wealth and pow are which xi zhengping branded the china dream. reform is essential means to both of these ends fueling china's economic rise which in turn sustains the party's legitimacy. but implementation of reform remains with challenges. leaders must balance multiple objectives in addition to gdp growth.

clean air, clean government, greater equality and other goals demanded by the chinese people. moreover as mentioned earlier, leaders will have to break through vested interests to deliver on reform and achieve sustainable growth. even the right reforms are risky. china must carefully introduce market discipline in key areas such as capital markets while avoiding systemic shocks liberalizing too quickly or in the wrong order. moreover economic policy making in china faces one central tension. xi zhengping is act aggressively centralizing political control and the third leading plenum document made clear that beijing will continue to rely on state intervention both to sustain china's rise and to maintain the party's power. but giving the market a decisive role will require letting go of direct control and reducing the direct role of the state to create space for private actors to innovate and flourish. whether x-i and his successors can continue to reconcile this

fundamental tension and maintain party control while sustaining economic growth remains to be seen. but it would be a mistake to count china's leaders out. they have proven themselves highly adaptable and pragmatic. they control all the major levers of power and they have access to enormous financial resources. but china's economic navigators are entering a narrower, more turbulent part of the river. the number of policy objectives and policy actors in china has proliferated. with them the complexity and risks economic decision-making. these will test the skills of china's leaders as they steer the country towards a new, more sustainable model of economic development. okay. so that is that. and hope you enjoyed that. thank you. [applause] so, that was an overview obviously. we now have a chance to delve into some of those issues in

more detail with a terrific panel. if i could invite the panelists to come up and join me here on stage. i think we'll remove the podium, right? you're in charge now. sorry, kevin, i'm blocking you. thank you. chris? >> yeah. >> a few others haven't

conserved. >> well, good morning all. my name is kevin nealer. i'm delighted to be here to introduce this terrific panel. you have met the founder of get together, matt good man, the william e simon chair in political economy. many know that matt was white house coordinator for asia-pacific economic cooperation and coordinator on the east asia summit. on my far left, how do you feel about that far left? >> that's where i belong. >> david dollar is currently senior director at the brookings institution but was formerly at the treasury department as their representative in beijing. were you the first? >> no, no. dave was. >> that's right. but the best so far. and was also, world bank representative. dave's made that magic washington transition from being a policy-maker to being a

resource to everybody for which we're all most grateful. on my far right and i know how you feel about that, chris johnson is senior advisor here and one of the coauthors of the study and freeman chair of china studies at csis. chris spent nearly two decades in the intelligence and foreign policy community on behalf of the u.s. government. on my immediate left, olin wethington, former assistant secretary of the treasury for international affairs, special envoy to china and leader of our financial financial negotiations with them and founder and head of the wethington international right now. where you work on m&a work and outbound investment of all kinds. yeah, maybe it is the cold rain but on the way over i was reminded and kind of chastened by the idea that it has been exactly 40 years ago that i was, probably making in the same weather about same time of year the transit of the university of

michigan diag to go to mike oxenburg's class on chinese political thought. mike didn't waste all his time with ungrateful undergraduates, as many of you know he went on to be carter's senior director for asian study and spearhead the china normalization effort. mike, among the many things that he taught us, he emphasized the need in looking at china for intellectual rigor and honesty and also for a necessary modesty appreciating what we don't and can't know in trying to understand china's instincts and motives. i think he would look at the study as a durable contribution to the literature in this area and it would meet mike's high standards. for that i commend you all. i think this is an important contribution to the literature. matt, let me start with you. in listening to your overview,

most all of us appreciate china is not a place where the internal incentive structure permits people to walk around and have free and unfettered views of who is in charge here any way and how does this really work? those are dangerous conversations in washington and certainly not without risk in the chinese political environment. can you say more about you how you guys went about this analysis and some of the, both the problems and the surprises that occurred in the course of what, over a year's worth of discussion? >> sure. thanks. let me say mike was also an inspiration to us. he and ken lieberthal did a lot of original work we read to get a foundation for this. a terrific guy and tragically died way too young. one of the surprises in this project was it was pretty easy to talk to people.

i found very little resistance to talking about this stuff. of course we were in this first year trying to map the whole elephant as it were. i think one thing, one explanation there are a lot of blind people who know the tale or trunk or tusk in china but they kind of had an interest themselves in sort of understanding how the big picture works and so i think that was part of the explanation. partly these are not as controversial issues as some other things that one could ask b we certainly weren't asking, sort of deep, difficult questions that others might. so i think actually, and i think that the chinese authorities want us, all of us in this room to really understand how china works better because they want, you know they want a better dialogue, better exchange. no more difficult than i think it would be in washington to get access and information and insight. >> indeed, indeed. the end product speaks for itself and i think it is useful to us and probably to them as

well. david, look, you've been involved with many of the people that matt described as being key to this process but both in your treasury job and at the world bank but i thought many times, when we were sitting together in beijing, that you know, your bank colleagues, even those with successes like equatorial guinea, look at china and say, this isn't the development model that any of us understand. and indeed perhaps a decade ago we would have said, things should go in a very different way to produce this heroic result, this, this kind of growth. what factor do you think best explains why china doesn't fit the conventional development model that we all have thought of when we look at success and transitions? >> so i think paradoxically, while we think of china as an authoritarian country with a powerful central government the

thing that always struck me working there was the power of local government. you know i had a chance to work with a lot of different local governments around china. that is really the core world bank work is with local governments and my strategy was to find local governments that were interested in reform. usually they conceived, they were interested in a particular problem you know. some governments are worried about air pollution. some were worried about wastewater treatment. so our strategy was to find governments that had a problem and were interested in thinking about, you know, innovative ways of solving it and our model and our mind always was this is a country where if something is piloted at the local level and is successful it tend to spread pretty quickly. so i was both impressed by the independence and competition among local governments. but then having said that, also, they had a very single-minded focus on economic growth. they were able sometimes to interest them in environmental issues but it was always because particular environmental problem

had risen to a level where it was threatening economic growth. so it was easier to deal with wastewater, for example, than with air pollution. so the incentives for local government were very, very strong to pursue economic growth. that is covered in matt's presentation. this is coming down from the center, how you evaluate local officials but then i think we have to appreciate the growth model in china created a lot of corruption opportunities for local officials. so their private incentives were aligned with official ones and i worry as we move ahead i worry about two things. one, how do you change incentive for local governments so they're interested in a broader range of things? cleaning up air pollution, food safety. i think that is tough nut to crack. secondly this model relied a lot on experimentation has served china very well during this growth phase but now they're moving into a set of issues, for example, opening up the service sectors or financialee form. it is very hard to do that as a geographic pilot.

the shanghai free trade zone i think is inherently contradictory because the kind of things they want to reform you can't just do it in one little location. i think some of the strength that has worked very well for them is going to be a problem going forward. >> you see us testing the limits in this next phase of development of local initiative and that kind ever growth? >> i appreciate your comment about unit so i'm going to sob -- humility so i will observe this over the next period. i'm skeptical they will be able to change the incentive for local government officials but i have an open mind. >> can i jump in there real quick? because i think this is important, what david talked about is so important to xi zhengping's philosophy how to pursue the reform program philosophy. if you look at recent speeches there is help emphasis some chinese media are referring to the fifth modernization as opposed to fourth modernization.

this idea of improving and restructuring china's government structure and its capacity. this is designed to create a lot of the infrastructure that to manage these problems that david was just highlighting. it was interesting that xi talked about when xiaoping launched in 1992 launched the reboot of the reform program he remembered him saying it would take 30 years to achieve this he didn't call it the fifth modernization 30 years to achieve this process. xi refers this is one that has to grab the bull by the horns and do it. >> chris, say more about what you think, as you're sitting in pictured up there, what is the biggest difference, most immediately the biggest difference between the previous regime, government of the last 10 years and, and xi zhengping's agenda now? we've seen the third plenum documents. we've seen the march party

documents. olin and i beforehand were talking about how little compared to the last three decades, how little specificity is there. what is your compare and contrast with benji because and the others? >> would i say it is activism. these guys are much more active than their predecessors, pursue ing more bold process of reform. >> by choice or necessity? >> i think that is for both on one hand it is encouraging that zhengping shows boldness to do things that need to be done even though there are serious obstacles and vested interests problems to overcome. on the other hand i think is shows on many of these reform proposals he leaned very far forward. so far i think he is out in front of the general consensus of key constituencies in the regime if you look at it that way he is coming to the fork in the road and has two choices.

he will slow down the pace of what he is trying to do to allow a new center to reform or grab the resistors by the scruff of the neck to drag them along with him. so far what we're seeing i think it is latter case. he is using tools, anticorruption, even idealogical entrenchment to signal to the resistors to get on board or it is not going to be pleasant for you. >> olin, it is sort of beyond our writ today but i can't resist having you here spent so much time in negotiations with chinese colleagues and continuing to do so in the private sector. as you look at what these guys described, what, what particular challenge or opportunity to do you see for u.s. policy against this backdrop of dynamism, even of, and this is not new to you, changes in government structure, heaven forbid we should have significant changes in the way our, our government is

organized. we all do this we toss every couple of years with the different models and mover the boxes around but listening to what chris just said, i'm trying to think of what consequences you feel this has for the u.s. and for policy going forward? >> i think it does have some significant process consequences as well as substantive. just let me say i'm surprised you didn't put me center right but i'm happy to be here on your left. >> you're always there for me. >> i'd like to associate with the ox sendburg former student fan club as we, having been one of his students who he waved a lot of time on. >> i don't think he would regard it as a waste. >> i think from a u.s. perspective as we view china's leaders current articulation of policy they have said that the current economic model is now sustainable. there have even been some,

including the deputy to the leading group on finance and economics, who have gone so far as to say, it's a dead end. maybe not today but at some point. and as that new model of economic vesselment, the leadership is saying, will necessitate slower growth, more balanced and sustainable growth trajectory. well, from a u.s. perspective when we see china having generated over the last number of years about 30% of global growth, maybe we should also ask the question, to what extent is an engineered, at least for short, medium term purposes, slowdown in growth in our interests? well, we may not have much control over that. but i would say that from a u.s. perspective a model of growth that does have a slower, more

sustainable trajectory is in u.s. interests and i say that for several reasons. one is i do agree with the, with the fundamental assessment that the current strategy has played itself out. that has implications for social and political stability and stability in that domestic context is certainly in our interests. i think also they are projecting the vision includes a more integrated china with the world economy. and i think certainly that is in america's long-term interests. so i think bottom line is, we, we have a national interest in affirming, because it is in our

interests, the leadership'ses is assessment that they need to change that ever economic model. now, chris had reverended some new considerations with respect to xi zhengping and the current leadership. i think one very significant change, structurally in the decision-making process is been the reemerge ends, not that it was ever dormant, but the party under xi, as he projects it will play a much larger role than it has in the past and in a more consolidated and disciplined form. and as he envisions at this at this.i must envision it in political terms take the party left. so he is to some extent

resorting to tactics previous era, leftist kind of approaches, idealogical orthodoxy -- >> information management information management. i think he views it as a bypassing a state apparatus that has been gridlocked now in terms of policy making for well over a decade. so one look to a stronger, i think at least in the near term role for party apparatus. i think to go back to your question that does have some implications for how we interact with china. we have current interactions that we need for ongoing reince. there are new set of players. they are difficult to access

government officials in the past because of xi's institutional dominance. the power base what might actually be. we have to elevate in our own government the point of contact, the senior point of interaction. because it has elevated on the chinese side for institutional purposes. >> i couldn't agree more with that, kevin. i think it is quite important to grasp the full implications of that. for example, one of the things, on one hand it is good xi is doing what he think is necessary of increasing power to justify what they hope to they need to achieve. there is the risk if they're then successful, message only totalitarian, highly centralized form of government will work in the country. so that is very important. let me say separately the presentation highlighted issue of ttp and first stop of

bilateral investment treaty. would i argue this is, you mentioned humility earlier. it is important for us to understand we're not going to fundamentally affect the trajectory of this internal reform program but would argue the bilateral investment treaty may give us our best shot to at least angle the direction of that program because my sense is that there's a view inside the system of what the end point of this process looks like which may be very different what ourselves or other westerners or regional countries would like to see and this process combined with tpp may give us the opportunity to arc with the trajectory. >> we may want to talk on your last sentence more about this later. their definition of reform -- >> very different. >> is very different from ours. despite the, the single-most probably significant statement in the third plenum document that the market shall play a decisive role in resource allocation, that does not

capture the real essence of either their current, certainly, or their envisioned economic model. >> you guys are recalling some of the conversations we had in the lead-up to the study. someone, i wish i could remember who so i could probably credit as we were talking about the relative growth levels, you know what would be historic, if they didn't announce a growth level. if they believe growth happened when good macro policies are in effect. let me tease out this point and also go back to something david said. i know you're working at brookings on china outbound investment but i can't resist asking all of you about the role of foreign investment in this model. it has been so key to china's development. but it's clear to me just in our own client dealings that the old formula where you go in an a foreign investor and trademark get access -- trademarkket

access for capital that deal is dead as julius caesar. i'm not sure what replaced it. as i look at plenum document i don't know where to take, david, in particular as you have these discussions with chinese officials do you get a sense for how they value foreign participation in in this turning point? >> i think the whole attitude toward foreign participation turned last few years and become negative or cold toward foreign investment. foreign investment played a important role building up china's export machine. at one point more than half the exports were coming from foreign invested firm. exports will play a less important role going forward. what you're seeing in the recent data. not just a cyclical phenomenon, china's share of global trade will be peeking peaking. exports will not play the same role. they need set of reforms they reference in their various

documents. i think one of the important ones is opening up the service sectors in china. some of the manufacturing sectors are pretty open to foreign investment, not all, but some but the service sectors are extremely closed. they stand out among g20 countries as having the most closed regime in general. very specifically closed in years like financial services logistics telecom and services media. this will be controversial. my technical assessment it would help them a lot to open up the sectors, get competition, get new technology but it will be hugely controversial and i think what was implicit in your question, china is also moving into a stage where most of as you guy they're overinvesting and they need to bring investment down. their consumption is rising but may not rise proportionally but they could become a larger net supplier of capital to the rest of the world. so their firms want to go out. you mentioned the bilateral

investment treaty. there is good potential to negotiate a deal because chinese firms are interested in coming into the u.s. this would require them to really open up those service sectors in china. this is going to be very controversial there. and as we get into the negotiations, i think many chinese stakeholders will realize the u.s. in fact is extremely open. the u.s. is now the number one destination for chinese outward investment so the u.s. doesn't actually have much to give up in the negotiation because we're already open. i think it will be very interesting to see how this plays out. will china be willing to open up the sectors, some ways lock in a better investment relationship with the u.s. as i said the u.s. is already pretty open. so it will be hard to point to a lot of specific benefits they get. >> matt highlighted at the outset that some of the tensions in these reforms but listening to what you just said it occurs in the need for job creation where does most of the job creation in this economy occur? i see mike west sell sitting

there. david, not mike. that a lost job creation is happening in the service sector. you've been listen about this. so too, you have got six out of 10 american jobs being created in small and mid-cap companies. those are the parts of the china niece economy that have less access to capital which is, seems to me they have avoided that moment of tough choice for about as long as they can. >> china does not need u.s. capital. as it seeks to move up the valued added chain in manufacturing, its greatest need in my view is for collaborative research development. collaborative r&d. they are at the point now, they understand the sig dance of

manufacturing -- significance of manufacturing industries, technologies that are innovative. they can no longer simply copy. they have to create. and from that perspective, as a long-term driver they know they have got to enter into collaborative research and development relationships with outside industry. and i think they are intent on doing that and i think in part because today they bring to the table in those collaborative research and development areas not only capital but genuine human capital, and scientific contribution. this is no longer a one-way street. it is collaborative in nature. >> i agree. i think that is absolutely right. but one consideration i think is how those collaborative enterprises are shaped. so i think, kind of along the lines of what david has said, we

are seeing an emergence what you might call indigenous innovation 2.0 coming out of the chinese as one chinese told me they're pursuing a nike strategy. don't talk about it, just do it. the tools that we see them employing, antimonopoly, anti-pricing, these sort of things all turn back on this wheel of the issue of the development of first domestic and ultimately global champions and the role foreign investment and role foreign participation plays in that process is fundamentally different. >> can i just pick up on that because definitely in the course of this although we were not specifically looking at issues of foreign investment and foreign investors positions and views we heard constantly about the challenges, the increasing challenges that foreign investors are facing whether it is this antimonopoly act where they're pulling companies in sort of a way threatening them or using these, sorry, for the general audience, indigenous innovation, idea of developing

through whatever means, begging, borrowing or stealing, technological capabilities to develop china's own innovative capabilities. and it is just becoming a lot more difficult, between that and the overall too big structural factors that growth has slowed and labor has become a lot more expensive in china i think it's much less friendly place for foreign investors. so that has been something that, that i think is just reality of what is going on there. but i wanted to pick up on that and something said earlier about the bid by chris. we spent a fair amount of time in shanghai because of free trade zone was unfolding and it was very interesting, i mean shanghai is not obviously, inso facto, it is its own sort of place. not exactly a reflection of the center local but we learned a lot about central local dynamics down there and you get a different perspective on local issues in shanghai where they

have their own ideas what works and doesn't work, more or leslieen to beijing when they have to. the difference there, many people in the shanghai, chris can speak much more to this, xi jinping used to be in shanghai and stepping stone to promotion to beijing. there is a little bit of constraint on the independence of action or thought but you picked up there is very different approach in a place like shanghai. the other two things we learned down there that sort of stood out for me are that, they definitely are on whatever level and whatever lasting significance, i'm not sure but they definitely are picking up on these external forces because if you look, for example, at the just glossy brochure about the shanghai free trade zone it uses terms like preestablishment, national treatment and negative list approach to regulation which is straight out of the american playbook. in the by the negotiations,

bilateral investment treaty, they're for whatever reason using those terms and adopt ad negative list, whatever it is, negative list meaning that you can do anything you want except the things that are listed on a list open approach. by the negotiations. because it implies a whole different approach to regulation, instead of going through a huge, difficult, preapproval process you essentially set up shop with very low barrier to entry. the problem is, we heard this a lot, first of all it is not clear they will really lower the barrier that much in practice. it still may be hard to get in. but if they do the question is post-establishment once there is a company up and running there are huge number of risks and things that will require structures of supervision and monitoring and disclosure and things that don't really exist

in fully robust forms yet. you guys correct me if i'm wrong, if that stuff is missing there is real risk they will get something wrong and there will be mistakes and abuses, potentially ultimately a backlash against reform. that is one thing we picked up. the other big thing was the gap between the political ambition which is clearly there. there is no question that they're politically committed to this stuff and the, and the technical capability which is quite strong. i think the bureaucrats and the officials working on these issues know what needs to be done to get from here to there. and so, as barry naughton inspiring, i alluded to san diego, barry has been very much someone who we based a lot of our research on, explains the third plenum document as a vision statement and a to-do list and not as a road map or a blueprint. to me that was very good way of

characterizing what i just said, there is clearly the political vision and the ambition and i think there is a good, long, list of things that need to be done and that are good, appropriate things but the missing middle is there, which is, how do you kind of put together a coordinated, sequenced program and have somebody driving that and making sure that all those things are moving in the right order? and in theory i guess this new reform leading group is going to do that but like 10 people who will try to manage this across the country. >> i think that is one of the key structural difficulties frankly we'll see going forward is they do appear to having difficulty doing such processes transitioning from a very small kitchen cabinet around xi jinping that participated in drafting the plenum document, the decision document to the

clunkier document of leading group. >> leading group is not that big and i think -- >> largest one they have. >> think about the implementation challenges in all these areas. >> right. >> i think it will come back to the line ministries. >> i absolutely agree. >> i was in beijing last week. what i heard from some of the people you pictured up there the line ministries will play critical roles in implementation. one way to look what is happening, some of these agencies like the central bank has a very clear vision how it want to proceed with financial reform so you actually see some progress. not sure i would call it all that rapid, but you sigh some progress. what they did last week opening this channel between hong kong and the main land to invest in each other's stock markets that is actually quite significant and what they did to widen the exchange rate band i'm not sure call that significant but obviously they're still managing it. but other areas the line ministries seem extremely lukewarm about reform. you leave the negotiation of bilateral investment treaty to line ministries that normally

negotiate trade relations and i could see that dragging out for years. i think we'll see more rapid movement in some areas than others. it won't be central design. but it will reflect deepen trenched interests in these line ministries. >> as this process moves down if it is to be successful as it has in the past, implemented by people at the grassroots level, say more about the tension thaw observed, all of you, in the incentive structure for these people at, when they're dealing with, in particular state enterprises. the kind of choices that you're talk about, david, are extremely wrenching for and dislocatetive, that is word right? , forethe folks at the township provincial level, when they're sitting across the table from the locally-owned state-run enterprises, how is that going to work? >> a general issue all these state enterprises whether they're central or local, they

used to be more or less owned by some line agency. at the center they collect them under sasic i think there are very strong ties between the line ministries and these enterprises. the relevant line agency for the big commercial banks is the banking regulatory commission. they seem extremely reluctant to open up to competition from foreign first. they're very protective of their big firms. of course you see senior officials move back and forth from being head of a commercial bank to being one of the banking regulators. so, just one little quick anecdote. when we were trying to negotiate with them around electronic payments where the united states actually took china to the wto, we were told to talk to a particular vice governor of the central bank who was in charge of the policy but as we were pursuing this we read in the newspaper that he had become the president of the monopoly credit card company which is, that was a problem. so, i still think the line agencies in general are very

protective and then when you go down to the local level it is even worse. the local level owns a lot of state enterprises in a variety of sectors and they own those and they feel ownership of those. >> can i say one thing? tragically unable to find a good shot of in the creative commons was the red phones that soe chairman have on their desks that connects them to the officials and party members in beijing and these literally exist, right? bat phones that connect people. so it shows we really want ad picture of that to bring home there is this very tight connection. . . .

>> they have doubts about their own human capital, their own bandwidth to be able to manage very technical reforms. >> i want to drag you back into this. there's this mythic view in the u.s. whether it's, you know, capability and training on engineering or, you know, in the government. 1.35 billion people, the top 0.01% are extremely talented folks, let's allow, but having taught in the chinese system, this is a wildly uneven educational structure. is there, look at what the u.s./china business council tells us about the number one need of u.s. companies in china. it's not intellectual property

or any of this other stuff, it's being able to get and retain qualified local people. surely the chinese government faces that same talent constraint. do you -- is there that bandwidth? i mean, is there the human capital to manage this kind of intricate change that we're talking about? down to the grassroots level? >> my instinct is to say, yes. as i already said, i've just been very impressed by my experience with local government officials compared to, you know, the rest of the developing world. it's just, you know, the really striking thing about china. at the central level, you know, as you say, the top 1% is extraordinarily good, and, you know, there's advantages in being a big country. you don't need that many outstanding central bankers. you really just need one. [laughter] china and the u.s. are lucky each to have one. so i think they have enough, i do think they have enough talent, you know, at the very top to design these reforms.

>> you know, it's, in terms of implementation and projecting requirements down to the local level, the big design and putting it in place, it's certainly the case that behavior is affected by incentives. and so it's not simply a question of the technical capabilities of officials, it's a question of what they perceive the rewards to be for change. and i think in that regard in the context of reform and looking at how you design a set of incentives, two things at least note referencing. one is that the softer stuff is harder to quantify. >> yeah. >> growth, numbers of jobs is

relatively easy. and so more nuanced, more balanced set of incentives doesn't lend itself to the kind of certainty that may be required to motivate and to transmit instructions clearly. the second thing is that even in the context of reform the old system, if you will, as they transition will persist for some period of time. it's not only it will persist from their perspective, from the per perspective of leadership -- >> they need that continuity -- >> -- it must interest. and there are very clear reasons for that. one is urbanization is a high priority. it's perhaps the one area where they have laid out the most detailed set of measures for reform. urbanization necessitates

capital investment, fixed asset investment. it necessitates infrastructure. all the elements of the system that, you know, they are saying they want to modify. so there's tension in this transition process that complicates the process of or articulating -- or articulating and enforcing clear incentives that could change behavior down the line. >> i think if you layer onto that structure as well the anti-graft environment that these officials are facing and how that affects their incentive structure or their willingness to lean forward, as olin just said, in areas where it's unclear what the winning strategy is. and secondarily, the broad feel of reform program and top level design. she is using a political mobilization strategy,?

the leading groups that will run down the hierarchy are all led by the local senior party official, and that's great in terms of mobilizing the party apparatus, but when the crunch really comes in implementation of some of these reforms, do you want that top political guy to, the guy who's seeking promotion, or would you rather have a committee of tech technocrats wo understand the situation well? >> we should not assume that the tactics of the left are appreciated. down the line. because they are associated with the past. >> right. >> that was problematic. and so there is, i think there has been a generated some cynicism especially as to the nature of the political direction. >> when you go down and meet with these guys, too, you'll notice that they're 30 and 40

years old which i find extremely frightening, because they're so much younger, so much sharper that they don't really care what our generation of chinese officials and a lot -- they see a real disconnect with the life experience of some of the people who are offering up these lessons. >> they do. and i think there's also a sense that this too shall pass. >> indeed. >> we will ride the -- this out, that the requirements, the mandates of the old system will reemerge, that the interests in special privilege, in the crony nature of business transactions, that that must survive in order to facilitate business, in order to facilitate growth. >> to which i would reply what do you think this is, wall street? [laughter] >> that cultural challenge is, it's not just a cultural

challenge, where interest really lies. >> hang on one second. we have mirrored the small leading group phenomenon in that we're now in complete and violent agreement among ourselves. [laughter] i want to provoke you because on the wild notion that you might have different ideas and questions to inform our panel and invite those questions. we've got folks coming around with microphones, and you can pick up one. some of the threads here, take us in a new direction as you will. >> and please identify yourself. >> yes, i'm sorry. do identify yourself at the outset if you have a question. >> maybe while people are thinking, chris, you want to make that point? >> i just, my sense is that this is so critical in terms of the risk that we're seeing in the development of the anti-corruption campaign because so many people feel that it won't last. shi finds himself having to go higher and higher and broader and broader to demonstrate that it's real, and that risks the potential of provoking an immune response, you know? >> i had a chinese colleague

tell me he was presenting the customary or red envelopes and $300 bottles of liquor at chinese new year, and the would-be recipients said, no, no, no, no, you know, in this isn't the right time. hang on to that. [laughter] scott right here. >> thank you. and thank you for a terrific panel. alan roberts, simpson center. something you really sort of talked around a little bit when you talk about incentives and so on, it's sort of been an article of faith, i think, a lot of people who think about economic reform in this town that it won't succeed in china without fundamental political reform. and i wonder if you could comment on that, what that political reform might be and what the chances -- >> well -- >> if that article of faith is, in fact, justified? >> i put david on the spot? as i mentioned, all of these gentlemen were helpful in giving

us insight. and one of the things, david, you said to me was when, as olin was saying, these new metrics for success at the local level, not gdp growth or in addition to gdp growth, you know, environmental protection or improving fairness and equality and so forth, outcomes are much harder to measure, and the only way to measure those things is through some sort of democratic process of subjective evaluation of whether an official is actually doing their job or not. is that a fair characterization? >> yes. i think people may not want to accept this, but when you start out at a very low level of development, economic growth is not a bad summary of what's the national welfare. so when you start out poor and have a system that generates economic growth with lots of bad things around the side, you know, my perception still is chinese people have been pretty happy with this performance, and local government officials, you know, as i mentioned, you've within able to a-- been able to align their private incentives

with a growth agenda. thousand as the economy gets into a middle income, people have a broader set of wants. the leadership has obviously picked up on that, and i am skeptical that you can achieve this in an authoritarian system. because it's easy to say you're going to be evaluated based on economic growth and, by the way, you can pull open your pocket, and i think it's much harder to have an authoritarian system where you say we're going to evaluate you on 15 things and, you know, here's the measurement, and here are the weights of those 15 things. i'm just, i'm skeptical that they will actually reward officials on a broad scorecard. i think they're going to continue to reward officials primarily on economic growth and, you know, plus social stability. >> but we're seeing increasingly, i think, the fact that you can't divorce the two because, you know, what in the rest not on our model, but just as a practical matter the political economy requires this different polity. i was in a meeting a while ago

where we had a rich conversation like this with some chinese friends, and it got on to the political subject, and one said, yeah, forget the politics. this lack of transparency and this lack of dialogue also doesn't allow us to see price signaling. you know, which i hadn't thought about, alan, in those kind of terms. but the same inhibitions in the political context do inhibit what's possible in the political economy. >> i think a big point not to miss there, though, because it's so important on political restructuring is the point that olin referred to earlier which is this idea that for the last 20 years, 30 -- and a lot of it has to do with the long shadow cast by tiananmen, you know? in the hu jintao administration, it really was the manifesto from the 13th party congress in 1987 political structural reform. and that is, you know, kind of continuing along. i think xi jinping is basically

saying that longstanding debate over functions is over, and the party will be paramount. >> indeed. >> go ahead. >> i just wanted to say quickly, i think on this question of political reform there is at the top very, there are very significant differences too. i was in beijing a couple weeks ago at a session with the executive vice premier, john galilee. he gave finish i mean, it was a closed session, but he gave a very strong presentation on rule of law, on the independence of the judiciary, and in large public participation. and i know there are other parts of the government that do not share that kind of, that a kind of outlook. >> there was a policy directive late last year not to use the term "rule of law," i understand. so he literally didn't get the memo. >> he didn't get the message.

i mean, he very clearly used that terminology repeatedly. >> yeah. this is one where these comments that economy jinping himself has made about putting power in the kipling of regulation, right -- in the cage of regulation, right? but watch the upcoming fourth men numb this fall. if they are interested in making a move in this space, that's the place to watch for it. >> very good. >> yeah, please. >> david brown from sais. i entirely agree, this is a fascinating panel, and i'd like to probe a little bit more into this incentive structure that we've been talking about. you've said, you've described the difficulty of defining a different set of criteria, but i wonder if someone could give us a thumbnail sketch of whatever it is we know about the criteria that the organization department is sending down to local officials now and to what extent that has changed from, say, five

years ago when there was also a debate about the need to change those internal incentives. and then link to that a second -- linked to that, a second question is i think you talk about the many new players that affect decision making, and one of those at the local level in any place where there is air pollution to the extent that there is now must be the role of local environmental groups, and they provide a set of incentives on some of these non-economic factors which, hopefully, will reinforce what the organization, department's trying to do. i wonder if you could talk a little bit about how those things play together. thank you. >> most helpful. i mean, five years ago your evaluation as a communist party member was weighted about 60%. how did you promote stability. >> still is. [laughter] >> but, allowed, but what did you folks see as you undertook the study? >> clearly, environmental protection has risen on the

list, particularly in the eastern, you know, provinces ce9dustrial pollution around beijing in particular. one province has been subjected to very specific guidelines on how much particulate matter they can release. , you know -- this has required shutting down of factories and so forth, and that causes economic pain. so these provinces are wanting some payback for that or payoff to, you know, to compensate for the loss of economic activity and jobs. so that's certainly one. >> i would just add i do think i it's important to underscore what the organization department is changing and what it is not. obviously, social stability's still going to be huge. one thing that's interesting in the previous criteria you had strict enforcement of the one-child policy as a critical, you know, sort of criteria. how does that change with the recent changes in that policy.

i do think it's clear, i mean, it's been publicly announced that the organization department is sending down new requirements, and a lot of them have to do with balanced growth, so it's going to be interesting to see how they try to implement that and the process. >> indeed. see if we have time for a couple more. yeah, in the back? >> thank you very much, bob -- [inaudible] georgetown center for business and public policy. the chinese have announced that they will join the tisa negotiations, the trade and services agreement negotiations, but not all of of the 22 member countries in that negotiation are willing to accept them. the united states has made it clear that in order for china to join that negotiation, china has to indicate its good intentions by offering confidence-building measures by, for example, implementing some of its wto cases -- judgments, rather. and other measures. there are many. how serious, what is driving

china's interest in joining a negotiation like the international trade and services agreement, and will they be sincere enough to ante ahead of joining, that is ante in terms of offering changes in their current commercial policy? >> david, can you -- >> yes. so i think that, i think that there's multiple reasons why china's interested in the service agreement and also bilateral investment treaty with the u.s. premier li was talking about being open to tpp, you know, china not opposed to tpp and thinking about maybe joining in the future. so i think among some of these technocrats we're talking about there's a good awareness that these a external agreements can be a way of locking in reforms that china really needs, you know? and china has gotten a lot of mileage out of world trade, out of wto, so i think there's a general sense that this can be a good strategy. you know, looking for some kind of down payment seems like a realistic, a reasonable approach. there hasn't been a lot of

movement in china's trade and investment policy over the last decade or so. so it seems to me very reasonable to ask for some kind of down payment, and it would be a smart move on the part of the leadership. it would be consistent with their approach of experimentation to pick one sector and really seriously liberalize it. but i think, you know, they've got opposition in all of those key sectors, so -- >> but you said before, too, services are a lot more porous by their nature than manufacturing. so the implications for the economy -- you can't secularize it even though they're trying to in the shanghai free trade zone. >> right. you can't put it in one geographic area. >> indeed, yeah. >> you know, if they're serious about this next wave of reform, getting more dynamism in the service sectors is quite critical. you mentioned employment. it's already the case that most job creation in china's in the service sectors, but they're not creating enough jobs for college graduates, and that's where liberalization of those service

sectors could really help them. >> urbanization, movement from agriculture to the cities, that population will probably -- if it happens -- go into services, not manufacturing. that's the assumption, planning assumption of the government. steven roach up at yale has followed this area. i saw a presentation he did recently. he is now, based on his analysis, he says that the service sector nationwide employs more people now in china than manufacturing. he is bullish on the speed of this transition. but that may in part account for their interest. >> hopefully, they can avoid the wage compression that we've seen as -- >> services are more labor intensive than manufacturing. >> yeah, indeed. indeed. yes, please. >> yes. i'm steven -- [inaudible] i used to work for olin at the

u.s. council for international business. i see we have three treasury people up here. >> i was going to say, lack of diversity. >> i want to take you out of the weeds for a moment and talk about the young people and their access and power of the internet. and if you look at the recent history of the last 50 years, the ability of the young people in china to push change more rapidly and in directions that the chinese officials have yet to contemplate. >> i think it's a very useful question. i want to link it to my earlier snarky comment about how those expectations in that younger age cohorts are so very different from the people of the cultural revolution generation. you've looked at this in terms of stability. >> yeah. i mean, i think, look, this is the biggest challenge they face is the tension between the need to move in this direction, to break out of -- [inaudible] and their pervasive desire for control. and, you know, right sizing that

is really the chief challenge. all of these economic issues and so on aside, perhaps the chief threat to their continued stay in power is the proliferation of cheap smartphone technology across china, you know? so now you have the capability of some person far out west snapping a photograph of something bad happening and putting it up on one of these sites and ten people in shanghai -- and then people in shanghai can see what's happening. this is what scares the leadership. they only worry about two types of mobilization, students and workers and things that cross provincial boundaries, and this technology makes it problematic for both of those areas. >> indeed. yes. >> thank you. john powell from -- [inaudible] i have a question about the human capital in the government, chinese government administration. few people know that even in the -- [inaudible] government ministries the medium or even higher level official,

their salary is parallel. maybe just $900 per month or just $1,000 per month. and is over the past -- and over the past few years and there is no, for example, if you want to buy a house, actually, the government officials cannot get more per village. my question is here in the united states there is kind of revolving door between an administration, public sector and the party sectors. -- [inaudible] if you jump out of the government, you can never come back. there's just a one way. >> right. >> i ask the panel could you, please, share with us what's your comment about this kind of human capital policy in china? because this is very important from central government to local government. the human capital actually is quite lack, and people request not -- cannot work, you know, without a decent salary. and actually over the past few months there are very, very heated debate on internet.

and the public sector servants say we need to raise the salary, and the people, the grassroots say, no. so could you comment? [inaudible conversations] >> we could never have that conversation here, of course. [laughter] no, we've seen successful management of this issue, and thank you for that question. an important one. in places like singapore where, you know, civil servant salaries are equivalent to, sometimes better than the private sector. do you have any instinct about where in the context of the reforms you're looking at in the study, i mean, is there any element about -- [inaudible] of the civil service, and let me add to that or the military that gives you confidence and would let you think they can avoid this problem? >> well, it's going to be a challenge, and this is where i think the realignment of incentive structure that o to lin talked about earlier so important because if you take things like the crack down on --

more importantly, the crackdown on so-called extravagance, so many officials rely on the, you know, the red envelope at that chinese new year and so on as a supplement to their salary. and so if this environment remains pervasive -- and i don't see any sign that xi jinping is key on bet letting up on it anytime soon, do you have a brain drain problem? i think counter to that is this idea of seeking to, you know, they only look at singapore as a model, but they'd with be the first to tell the chinese we're a tiny little island. and if you look at what's happening in singapore, that pay packet is coming under tremendous pressure there as well. so i think the chinese realize that's not viable for them. they just have too many officials. so retooling that incentive structure, how do you incentivize somebody who has, who gets paid nothing but has signature authority over anything, you know, at, what, ten million, whatever the limit is? that's a very difficult situation. so how do you change that dynamic? i think it's very hard.

>> but it's corrosive, isn't it? because we know that officials above middle management have to purchase their position. i mean, you've got to come up with a lump sum in many cases to buy the job. i mean, that kind of embedded corruption that's tied right back to the party's personnel system, i mean, is it remediable through right-sizing pay packages with the private sector? i mean, is it -- does the conversation even permit that, do you think? >> i would point out you had the same problems in the united states before the progressiver era and, you know, concern progressive era, and what it took was a lot of free media, it took a certain amount of federal intervention in some of the most corrupt local government withs, concern on part of people. but basically, democratic institutions largely rid how we brought corruption under control. i don't think there are too many other historical examples except in tiny little places like

singapore. everybody else that's brought it under control has basically brought democratic institutions. >> i don't see a quick remedy. i mean, the private sector is favored over government now among young people in china. there's been a big reversal. i think one way in which that the human capital, the talent piece is dealt with is there is heavy reliance on outside think tanks, universities. the dividing line between being in government to influence government and being outside is not, is not sharp. and those that have policy interests can still have impact from the private sector x they can sup limit -- they can supplement, they can earn incomes far in excess of what government officials do. and in many cases, that outside advice is the driver for policy

formulation. it's not the, it's not the bureaucrats. there's another component of this, too, and that is on the back end, the retirement side. where senior officials consistent with what you're saying are hemmed in when they leave the government and are constrained in the kind of private sector activity they can engage in. you don't find senior officials going from senior posts in government to senior positions in finance or industry. generally speaking. they go into honorary positions. associations, those kind of -- >> or think tanks associated with government institutions. >> right. [inaudible conversations] [laughter] >> five of us up here -- >> there's more pressure. >> high income part. that doesn't apply, but the rest of what you said -- [laughter] >> got a question over here.

>> my question will tie in with -- >> let me ask you to identify yourself. >> certainly, jeff -- [inaudible] formerly with the usda in beijing, currently unemployed, seeking employment. [laughter] human capital. my question is a little bit of, it contains a little bit of metacommentary. i see a panel that's very informed about china, good contacts within china. why is it that the decision was made not to include someone who was part of the chinese system or a scholar from china studying the chinese system in a more rooted perspective nestically rather than -- domestically rather than an international policy perspective? >> fair enough. we talked about that, in fact. >> sure. >> i mean, that's a fair comment, just a little empathy i hope you'll have. it's very difficult to put these panels together, these events, and we try to find the best people, and we did certainly

explore the possibility of bringing some chinese experts of the kind you describe and were unable to get the right person for this particular panel. but i think we would like to do more of this. this is, as i said, only a halfway point in our study, and we certainly expect to have more. and we, by the way, along the way we've had events including chris has done a couple of events with some officials involved in some of these decisions. so we certainly encourage that and want to have, want to have more of that. >> well, and being involved right now with putting together a panel overseas, i've been trying to do this, and what's frustrating, too, is that yet and still the polity in china hasn't reached a stage where -- and you know this from your time in china been where those officials and retired officials even felt the confidence of being able to do the kind of irresponsible thing we're doing