for one's self or one's family, that probably, you know, more or less is a good thing, we would think, in most circumstances. so when one looks at the united states, and the united states is spending well above our peer countries in terms of use of health resources on -- use of resources on health care, it's often observed that we're wasting a lot of money and i'll get to that in a second. but that's not obvious on its face, that it turns out that the richer the country, the more that is spent on health care. that's observable across all the advanced economies. there is a correlation there. so one would expect the richest country to spend a little more on health care. so that's not necessarily a bad thing. let me just start with that. the second aspect, of course, is that we wouldn't really question this if we knew and felt and understood that the

use of resources was taking place inside of a functioning marketplace, to the extent the people in a free market that is working well are using additional resources on health, we would say good. that means that they found that use of resources is better than an alternative use, and we wouldn't question it much. for a lot of different reasons, and we've already tiptoed up through here today, there's plenty of reason to believe that the united states doesn't have a functioning marketplace for health services. the united states government subsidizes health insurance enrollment through medicare and medicaid, but as doug mentioned, through the tax preference through employer paid premiums. so you start off with the fact that the vast majority of the country is -- affordable care is done for people outside the employer setting as well. therefore, the vast majority of

people in the united states are enrolled in health insurance in large part because of the large subsidy associated with that enrollment. so the price of the insurance has been reduced substantially through governmental policy. the second thing that's going on, of course, is that the government has gotten very involved in regulating the terms of the use of services and also the prices that are paid in many different circumstances. the federal government through the medicare program and the state government through the medicaid program. so a large portion of the use of services by patients is governed by a regulatory structure that has put in place in some cases very arbitrary limits on what the prices that are paid for services. so we don't have free floating prices in a normal way in a health system by a long shot. so the result is that, for a lot of different reasons, one can

look at the system of health service purchasing in the united states and say it's not a, of course, a functioning marketplace in the normal sense, as robert samuelson indicated, it's not a government or private market. it's sort of some mixture of the two, but in some ways, a dysfunctional mix of the two. which is why many observers of the health system come to the conclusion after looking at all of this to say, yes, we wouldn't normally object to someone spending some additional resources on health if we thought it was a good use of money. but when we look at what's going on, it seems like there's a lot of waste just by objective observation, that if someone was spending their own money for some of these things and they were told you, you know what, if you spend that $500 on that additional utilization of health services, it's more likely to make you worse off than better off. most people would say why would

i spend $500 on something that's going to make me worse off than better off? but believe it or not, a lot of studies say resources are being spent on things that tend to push people on average toward worse health rather than better health. so it's a complicated situation because of the entanglement of government policy with the normal aspect of deciding whether something is being spent in a good way or not. now, what are the effects of this on people? well, obviously when health spending is distorted and elevated and low value services are purchased by consumers or indirectly through the insurance plans paying for them, premiums are artificially higher than they should be. therefore, people are spending their own resources indirectly on the premium for insurance. but they are spending them nonetheless. that means that they have those less resources to spend on things they would have valued

more than low-value health care. the second thing is that we have a major distortion in our fiscal situation, that if there is this much waste going on in the health system, then our fiscal situation is a lot worse off for not very good reasons. because the united states government through four avenues, again, the tax exclusion, medicare, medicare, is basically subsidizing most people now into the united states in health insurance. there's a lot of waste in that spending, it's putting our fiscal policy in a much worse position than it needs to be. taxes are therefore higher than they need to be. deficit spending is higher than it needs to be. people are internalizing the future fiscal disaster doug alluded to, to some degree, in their current purchasing assumptions, which distorts how

the rest of the economy is working as well. so there's lots of reasons to worry about the distortions that are associated with poor allocation of resources in the health system. often the united states debates on health care almost always boil down to -- no matter where it starts, you can figure out what's going on in contentious debates, you can kind of figure out what's going on by trying to understand, is the policy that's being proposed to correct and move things in a certain direct, does it pull more toward the government deciding how to fix this allocation of resources problem, or does it pull more toward trying to have the market function a little bit with consumers making some better decision making about the use of the resources. washington and policymakers and the health care community are divided on that question. so a lot of people believe it's a hopeless cause, going back to a lot of research,

a lot of theoretical thinking about this. it's a hopeless cause to have a functioning mpgs in health care, by definition the government is going to have to get involved with allocation of resources and do the best they can to weed out low value care, which is why you have in the affordable care act, many other measures enacted by parties over 40 years, lots of interventions where the government is trying to decide is this going to be a good use of resources, should the price be higher or lower. so the government is knee deep into this. because a lot of decision making has been made to say yeah, it is hopeless to get a functioning marketplace. let's have the government regulate it and decide. on the other hand, there would be people like myself who say it's true that it's going to be difficult to have a functioning marketplace in the health sector, but we better try, because the alternative is lots

of misallocation by government appropriation rather than by the marketplace it's self. -- itself. so if you look at what the government is doing in the health sector, there's not a lot of good evidence -- in fact, there's lots of evidence to the contrary, that it gets the answer right. that it gets the prices right in medicare regulatory policy and the decision making about how to steer physicians and hospitals to organize themselves, as they are trying to do through delivery system reforms and other mechanisms. there's not a lot of evidence that the government knows the right answer, either. it's a complicated thing to deliver a health service to a patient. so this is the conundrum we face. i will conclude just by saying that the -- there's a famous paper on economics on the many reasons why the health system does have problems functioning in a totally free marketplace. i agree with much of what's in that kind of assessment.

on the other hand, there's also lots of empirical studies that show that people behave in the health system kind of like you think they would when presented with choices. that they tend to like lower cost, high value health care. as opposed to high cost low value health care when they can figure it out. and that when they're spending their own money, they're much more judicious with it than when they're spending someone else's money. and so some of the normal rules of a market economy do apply in the health system. i think we would be better off trying, as much as possible, to move more in that direction opposed to relying entirely on the government. thank you. >> thank you. >> dr. fiedler. >> thank you for having me. so i want to spend the second half of my remarks circling back on the main thread that i think has run through jason and doug and jim's remarks without how do we solve this fundamental

question of how we're getting value for our health care dollars. but i want to touch on one item. i think one other sort of important way in which health care costs impact family's economic lives is the large, catastrophic expenses and corresponding effects on financial security. so i think it came up in the opening remarks, and most people in this room probably know that health care spending is highly concentrated. so in any given year, 5% of the population will account for about half of the health care costs, which, again, in any given year, a small number of families are potentially facing extremely large health care burdens. so in thinking about economic consequences, that is something that families don't have effective protection through insurance coverage, it's going to have very large consequences for them. they're going to need to forego various types of consumption, medicare it's self or valued

goods and services. and another thing that recent research has emphasized that in some cases they are going to get that medical care, but they're not going to be able to pay those bills. those things are going to be passed through to collection agencies and it's going to impair family's access to credit in the future to buy a home or a car. so this is one area where policy -- where we know policy has a direct role in ensuring that families are well protected against catastrophic costs. discussions often are focused on expanding insurance coverage and there's good reason for that. we have good evidence that insurance coverage is a good way of protecting people against catastrophic expenses. whether it's from the creation of medicare, health insurance experiment, massachusetts health reform or starting to get early evidence that, yes, it's working the same way under the affordable care act. i think one thing we should be thinking about is how to make sure families that already have coverage also have protection

against catastrophic costs. just take one example. only have to go back as far as 2010, that one in six workers in employer coverage this no limit on their annual out of pocket spending. it's very hard to believe given that fundamental purpose of insurance is to protect people from tail risks, that that was a market outcome. there are good reasons to think this is an area where market outcomes might not be efficient. you know, an out of pocket maximum is a contract feature that is very likely to appeal to sicker individuals relative to healthier ones. so this sort of adverse selection pressure is on that type of out of pocket maximum are likely to lead to it being underprovided in a private market. we also know that thinking about low probability events is a -- from behavioral economics is a place where consumers often struggle. and, again, we're talking about these catastrophic events that

are going to affect a small fraction of the population each year, it is plausible this is the type of contract feature that might be underprovided relative at least to make an economist might think is optimal. so this is another example where sort of policy has a role, the affordable care act requires that all private insurance policies, regulatory intervention of the type that is talked about, a targeted regulatory intervention, a place where market failure, aca required all individual -- all private insurance policies to include an out of pocket maximum, something that had previously only been required for hsa, health saving account compliant policies. and the spread of out of pocket maximums and employer coverage since 2010 mean there is's an additional 20 million people now enrolled in policies that have out of pocket maxes. so i say that just mainly to emphasize obviously can't

require out of pocket maximums again, but an important dimension how they think about health care policies is how we protect people against tail outcomes and doing that is more than just expanding coverage. switching gears, i want to agree with what's been said, that the most important way which the health care sector affects the broader economy is by consuming resources that could be used for other purposes. as jim said i think very well, that's not necessarily a bad thing. we're getting value for incremental dollars, that's how we can do that. as alluded to in opening remarks, does seem like there's been hopeful indicators we've made progress on that front. we've also seen sort of encouraging signs of

improvements in quality in terms of things like reductions in readmission rates, reduction in hospital required admission rates and other things, but there's clearly a lot more to do. i think the interesting thing is in some ways, the list of the two items at the top of my list has more overlap, which is i think the sort of top of the list is continuing the progress on payment reform in medicare. i think it's the sort of failings of traditional fee for payment systems, encouraging by orienting payment around hospital admissions, diagnostic tests. not surprisingly you get a lot of hospitals and diagnostic tests some will value. i think the administration has made a decent amount of progress in deploying payment models. a more holistic view of payments, if you bundle around care like hip replacement,

bypass surgery or accountable care organizations which really try to take a look at all the care patients are receiving over the course of a year, say to providers if you can sort of provide that overall bundle of care more efficiently, you can share in the savings and we're going to hold you accountable for the quality outcomes you're achieving. earlier this year, about 30% of traditional medicare payments were flowing through models. mostly accountable care organizations. that's up from virtually none about six years ago, but we still got to find ways to tackle that additional 70%. i do want to say that i think that's a strategy -- i agree that i think medicare is a good place to start here in some respects in that i think it's a strategy that has implications for the system as a whole. there are a few reasons for that. i think one, we now have lots of evidence that when a patient comes in, the first thing a physician

asks is not is this a medicare patient, is this a private insurance patient, but they have a sort of practice style that they treat all patients. if the medicare system gets better and higher value care, if you're a private patient seeing that same doctor or that same hospital, you're going to see improvements in the type of care you're receiving, as well. i think the other thing we're also getting increasing evidence of is when medicare changes its payment system, either the level or structure, that tends to be adopted by private payers as well. so payment reform in medicare is a way to drive changes system wide if the way care is incentivized. as an economist, presumably the way care is delivered. and then i think the final piece is this, is that we know the broad sweep of history, a big part of what drives changes in health care spending is changes in medical technology. to the extent that medicare is paying in a way that in places at least encourages use of low value care, that's going to create incentives for the

development of medical rnd to skew towards lower end technology. to the extent medicare changing that part of the system and indirectly through the rest of the system, that's can have a big effect on our long-term trajecto trajectory. the other sort of policy piece that i think is really important is retaining the affordable care act, or what's commonly known as the cadillac tax. the fact the exclusion is kicking in $0.30 to $0.40 for each additional dollar of health care spending, even for highest priced most generous health care policies has a wide range of perverse effects throughout the health care system from discouraging private engagement in payment reform efforts, talking about to increasing providers leverage in negotiations between doctors and

hospitals to discouraging sort of sensible plan designs to discourage low value utilization. so certainly administration feels excise tax remains a sensible way of addressing distortions created by exclusion focusing on the least efficient plans while retaining strong incentives for employers to continue to offer coverage. there's certainly ways the excise tax can be improved and president's budget put forward ideas how to do that but i think important that policymakers find some ways for the excise tax to take affect in some form. >> terrific. thank you very much. what we'd like to do now is open up the forum for questions. we have a couple around the room with microphones. it's important if you have a question you wait for the microphone to reach you.

i may need you to wave at me wildly. i ask you do ask a question rather than making a long statement, which i know you would be conscientious about doing that. i do want to invoke the moderator's privilege and ask at least one, maybe a couple of questions of my own. it was striking to me listening to comments, we had a number of commentators talking about how we subs dies through tax exclusions or other means. we've will had speakers talk about a very high proportion of health care expenses are felt by a small percentage of individuals and families. given those two facts, should we be focusing less as a nation on

expanding the raw numbers of those with comprehensive coverage, and should we be focusing more on simply limiting the catastrophic exposure of people now currently with or without insurance? and i guess that's the first part of the question, which is a yes or no question. the second part is, if yes, how would we go about doing that? anyone want to take a crack? >> yeah, i think you're on to something there. i do think that the public interest really is making sure that everybody in the united states, as much as possible, is enrolled in an insurance plan that protects them against a major medical event, where i agree some of the literature would indicate some inability of the consumer to understand the ramifications of such a huge event on their finances. predicting actually it turns out that it's true that, you know, 5% use 60% of the resources, but it's a little harder to predict who that 5% is going to be.

there's a fair amount of churn there. it's not the same 5% every year, a lot of people are at risk. and a lot of people get cancer, that's a major medical event. that's one of the biggest ones in that category. so i think the policy should be directed as much as possible in that direction. also, you can do that in a way where people then have a more -- on the margin, an incentive to buy a catastrophic plan the most cost effective way of delivering care in the event that they do have catastrophic event, instead of unmanaged, open ended care, they enroll in a policy that says if you have a major event, we're going to have an organized way of providing care to you in an integrated system of some sort. that would be the best sort of public policy on goal. and then, you know, below that, i think there's been an overemphasis, frankly, on trying

to design every possible permutation of preventive care, primary care, other things where the evidence is weaker that we can know in advance that an intervention is going to definitively push people towards better health over time. so i think a little more consumerism, market driven approach there would do some good, as well. >> i might disagree with the view that is sort of the primary focus should be on catastrophic protection. obvious from my remarks, i think catastrophic protection is really important. i do think if we think that catastrophic policy is one that has an out of pocket maximum of $7,000 or whatever, which is the sort of single policy maximum in the aca, for many families that's just too much out of pocket exposure. both from the perspective but financial security. economic models, you

write them down and people develop these savings, that would be the shock that they're able to bear. in practice we know that many consumers don't have that sort of good wealth. and that's likely to mean that's sort of catastrophic policy is not a good fit for them, even in terms of the purely financial. i think we also know moderate cost sharing can be a good tool for discouraging overutilization, we also have evidence that as cost sharing becomes more excessive, this sort of care isn't necessarily the low value care, a lot is the high value care. so i think there is a sensible role for cost sharing and for making sure that we're not sort of putting an emphasis on employing excessively good coverage but ensuring catastrophic coverage for everyone is going too far. >> i would underscore that. you're referencing ken arrows article from the 1960s, which was extremely influential and

important in this point that suggests health care is really a different beast when it comes to consumers being able to rationally shop for the best bargain. and i suspect many people here, myself included, have been in a situation where you have a system that's beginning to nudge you towards more skin in the game and consumer shopping and you've often felt incapable of doing so. many folks in this room are pretty educated consumers. so i think arrow's insight was health care is different in this regard. it doesn't mean there's no room for skin in the game, but it does mean it can be pushed too far. one of my concerns is that the increase in high deductible plan is moving in that direction. it may be one reason why costs have been growing more slowly. according to the kaiser family foundation, something like 65% of the employer sponsored plans for firms with over 200 workers

are now high deductible plans. and as matt just suggested, that can have a downside. it doesn't just disincentive people finding -- didn't just disincentive people from finding wasteful but useful health care. so you have to be mindful where the edge is on that approach. >> i guess i'm more sympathetic to where jim came down. i think the thing i would emphasize when you think about this is, it's easy to say health care and somehow make the mistake of say thing's just one thing out there called health care. there's an enormous array of health services that range from very acute and emergency style care to highly elective procedures and shouldn't be thought of in the same way. one of the things i think allowing for some catastrophic backstop -- i don't think jim said everyone should have a

catastrophic plan. you want to make sure there is a catastrophic backstop and some flexibility in the plan design and innovation that gives you better choices that people can make to cover the kinds of things they face at that point in their life cycle. that, i think, is what the privatization does better than the government. the government inherently bakes into the cake, these are the choices you're going to have and the innovation is quite poor. so i think we really do have to worry about the catastrophic backstops but take advantage of flexibility and innovation over time. >> before we open it up further, i would just like to pin you down on one more specific item. we've had a couple of criticisms uttered of the tax exclusion for employer sponsored insurance and references to the cadillac plan tax. is that our best available antidote to the esi tax distortion or should we be looking at a different approach going forward? >> who gets to answer that? >> whoever wants to volunteer.

>> we have a cadillac tax because when campaigning to be president, barack obama attacked john mccain for proposing to get rid of the exclusion. that's the only reason we have it. the back doorway to get rid of the exclusion. just get rid of it. it's a crazy design. why should someone in a 15% tax bracket pay 40% on one part of their compensation. it doesn't add up from a tax policy point of view. so scrap the cadillac tax, tap the exclusion in some way, index that cap, and get the incentives lined up better. >> so i would say two things in response to that. i think first cadillac tax is on the books. it is in law. i think one wants to be very careful about saying we should repeal it with sort of no replacement in hand. the second thing i would say is i think the cadillac tax is much closer to a cap on exclusion

than it's often given credit for. first of all if you look over payroll tricks when you look at payroll and tacks together, this tax rate on labor income doesn't vary much, which means cadillac tax is similar to a cap on the exclusion. i think the other thing to keep in mind, when you're thinking about that 40% rate, that's a 40% stated as sales tax rate so you want to think about that 40% rate is more like 28 fix rate stated in income tax returns. what's stated not that different than a cap on the exclusion so i think we should be cautious about saying this alternative would be so much better when a bird in the hand is worth two in the bush. >> i do think in the current environment -- not just current but the environment we've lived in in the past six years, that tax on the book is strong. all of us agree disorgs and esi

need to be dealt wchl the idea there's a tax on the book that get part of the way that seems important. one of the big objections to the cadillac not enough geographical, i would argue seshl explain better than i, i would argue the administration's way builds in in a way that's very helpful. >> i'm not going to belabor this but i'm looking at the hand and the bird is not in there. it got pushed back in drafting, delayed in implementation. i will say now you'll never see the cadillac tax implemented. so that argument -- >> higher probability of esi cap than cadillac tax? >> yeah. >> we disagree. >> all right. >> i cannot pass on this. would probably go on for half an hour on this particular one. there's a couple of things. one is that, you know, doug's initial point is the right one.

it was designed for political reasons. it's ironic, of course, that the coalition of past law is now the -- elements of that are the main ones that now want to get rid of it. if they do get arrived it, they will blow gigantic hole in the production measure along with other things that will be wobbly pretty soon. very notable the tax was supposed to go into effect after president obama left office. he signed a law to delay an official two years so won't start until the last year of the next president, the likely winner of whom is also opposed to it. so it's on weak ground. now, having said all that, you're not going to believe this. i do agree with matt that it's better than -- i mean, i completely crazy for the congress -- especially republicans in congress, to get rid of it before they impose an alternative. i think they were -- i think it would be completely insane to

get rid of it. it is close enough to a tax gap to keep it until you can actually enact a tax gap. unfortunately because weak defense of it frankly, there's a lot of people that voted for the law saying we never liked this thing in the first place. so you know, there's enough blame to go around here. >> all right. let's open things up. >> got one right here. >> here first. >> sorry. hi, sar ark, bloomberg news. we heard mr. furman say affordable care act brought insurance to over 20 million people. however, premiums have been going up for individuals, 25% on average in the last year. so what do you think the administration -- the next administration should do in order to lower these health care costs for consumers? >> so i will jump in here for a moment. first of all, i think in talking

about premiums, i suspect that the 25% you're referring to is marketplace premiums. i think one thing that's important to keep in mind is, you know, the vast majority of people who have private insurance have private insurance through an employer. we just got data a month ago now on premium growth and employer coverage. it was 3.4% -- between 3 and 4%, the last five years in the kaiser employer premium survey, five of the six slowest growth years we've seen in that survey. i think it's important to be careful about where those premiums are increasing and where they are not. i think in terms of, you know, how to think about the marketplace this year, i think there are some just one-time factors affecting premium growth this year. the temporary reinsurance program is phasing out. it does look like insurers just set their premiums too low in

the early years and they are justing to that on a one-time basis and some one-time factors as well. all that said, i think the president wrote a piece probably seen in the journal of american medical association this year saying there are clearly things that can be better in terms of how the marketplaces are working, higher financial assistance for people in order to sort of make premiums more affordable is one important step the president has talked about introducing option to put down pressure on premiums and prices. so there are certainly things that can be done. i also think it's sort of important not to -- >> i want to make a quick amplification. i think the most important contribution the next president could make would be public option, very much the sense matt just suggested. i want to bring in one dimension of the conversation that goes

back to comment bob samuelson made. i very much appreciated your comments. one thing you didn't speak to and we've all left out is international dimension. here you see, i think, evidence that contradicts if you move towards universality, you have to spend more. in fact, there are universal programs in pretty much every advanced economy that spends much less than we do as a share of our gdp. one reason is they almost all have some version of a public option. that would be my strongly held answer to your question. >> so i would say three things quickly and lovingly. forget the public option. we've00 that experiment. it was called co-ops, not onfor profits, taxpayer backing. the only option, infinite backing. i'm not done. number two, it's hard to praise

aca, because employer sponsored insurance has low premium growth. the promise of the aca is we won't touch esi. they are now claiming credit for not having screwed something up, which is weird. i think the exchange markets are just in the early stages of a death spiral. there's going to be little saving them. they have turned into glorified high-risk pools. they are really expensive. you can do one of two things, force people in with a tougher mandate or throw money at it but neither is going to happen in the next congress. >> can i actually jump in on the death spiral point. i think it is extremely difficult to believe one will have a death spiral in this market, the way the taxed credits are structured, if premiums rise in an area tax credits rise to match, which means the fundamental economic mechanism that would lead to death spiral in insurance market is that premiums go up, the healthy people leave. that mechanism simply cannot

function in this market. >> but there's supply side problem. you're down to one choice for 20% of the population, two for 60% of the population, you're getting it on the supply insurance side. they are leaving. >> in other areas where the government has become concerned there might be market inefficiency or anomaly like executive comp, for example, they have imposed standard disclosure requirements in order to give visibility to market participants and enable everyone to see who is getting what from whom. why has there not been more of that in the health care area to create greater transparency and true cost especially for planned sponsors who are payors for most of this? >> anyone want to take a crack? >> the beginning of it in a lot of small ways, i think our health system is so vast and so

complex sort of deciding on one rule that's going to apply across a lot -- to a lot of it is almost impossible to do. but having said that, there are individual initiatives going on that point in the direction you're talking about. i think one that's probably the most promising is the evidence towards reference-based pricing. basically it says big groups of employers get together and they have a lot of plan participants. they basically say to them, we've canvassed all the providers in all of our various networks, and we've figured out that a hip replacement, you know, a high-value, low cost hip replacement costs x dollars. therefore all of our insurance plans are only going to pay x dollars for a hip replacement. you can get it within a 30 mile radius of all of us at this particular site or these five sites, and we've organized and

made sure it's available to you. however, you can get it from any of the others that are also some in network and some out of network participants, but they are all required to post their price in advance. so you know if you decide to get yours done at an alternative location you pay the additional price. okay. so this experiment has run in california for several years. it's driven the price down immensely. and you know, in a pretty simple way. i think that kind of thing is very, very useful, and they should probably apply it across the board. frankly if you could do that in medicare, it would be a revolution. but it's complicated in medicare because the politics are much worse, okay? you have political actors as opposed to just employers doing it. but i think that's the kind of thing that can actually have a big effect. >> anybody have a question over

there? >> good morning, thank you for all of your remarks. fascinating. i'm with regional health care improvement. any comments on the consolidation of the health care market and potential impacts it has on economic well-being? >> i think this is a really important point. i have felt for a while that the next round of genuine health care reform is probably best done at the state level where states have the most direct impact on the nature of competition in these local health -- and deliver these local health care services, the scope of practice laws, certificate of need for facilities, things like that. and as we see the consolidation, if that's accompanied with market power, pure price increases for same utilization we're going to have big problems there. i'm worried about it. >> anyone else? >> a question over here. >> thank you. hi.

penny starr with cns news. for those shopping in the marketplace for insurance. before the affordable care act, you could go and shop for what you wanted. if you wanted certain coverage, that would determine the cost of your policy and deductible, et cetera. now because the affordable care act says that policies have to cover these -- everything that can possibly happen. for example, my son said why do i have pediatric dentistry, why do i have maternity benefits. how does that play a role in driving up the cost and could that play a role in decreasing the cost? thank you. >> i think that goes to him. >> so i think one of the key things to keep in mind is that one of the goals of the affordable care act was to ensure that the sort of burden of health care costs were shared equitably. and if you're going to have

people only pay for the -- key part of that is making sure people could buy coverage without -- even if they had pre-existing conditions. if you're basically going to allow people to buy insurance policies based on the services they are going to use through the back door, you're going to end up back in a world where people with pre-existing conditions are paying for a policy that covers the care they need and the people without the pre-existing condition are not buying that care. so i think that structure is a key part of enabling the -- enabling the insurance market where people can get coverage and get care even if they have pre-existing conditions. >> i think it's really important began the answers very important point. it's an equity discussion. the question is whether there's a shared understanding of what's equitable. basically there's a socialization going on here of a lot of premium costs across parts of the population. i think some of the difficulty with the aca really is with

people -- the electorate having a different understanding of what they think would be equitable as opposed to the law that passed. they are not quite sure that it's equitable, people maybe of lower means, actually, subsidizing care for people with higher means, which actually can happen, because you have people who are not going to use a certain service paying for a premium for people that will definitely use the service and perhaps have comparable incomes. okay. so i think there's -- it's a question of what's equitable. that's a subjective question. it's not -- it's something different people can have different points of view on. >> i agree with the way jim just teed that up. i think it's important. however, i would add that really what you're describing is called insurance. there's just no insurance scheme that works where in the hotliney

don't subsidize the sick and the people that don't burn their house down subsidize the people that do. it needs to be explained betterment i will say what you're describing should ultimately lead to an increase in cost against the historical trend. the fact jason and matt and others have described. this is i don't think a controversial point. in fact, costs are growing a lot more slowly. so it could be that some of the efficiencies described today are offsetting costs of the type you mentioned. but you know, at the end of the day, the trends are telling us that, in fact, we're doing better in terms of holding down costs. >> can we have one last question? >> not sure -- is that it? well, good. i think we are done. thank you, everybody. thanks for our wonderful panel.

it was a great discussion. we're going to take a 15-minute break and be back at 11:00. thank you. while congress is on break until after the november elections, we're featuring american history tv programs that are normally seen weekends here on c-span3. tonight congressional history 8:00 eastern former senators bob dole and nancy castlebaum talk about congress. at 5:00 history of african-americans in congress. shortly after 10:00 eastern 50th anniversary of the national

historic preservation act. at 10:45 tonight the dedication of thomas edison statue in the nation's capital. >> c-span brings you more debates this week from key u.s. senate races. this evening at 7:00, live on c-span, the pennsylvania senate debate between republican senator pat toomey and democratic katie mcginty. wednesday night at 10:00 on c-span debate for florida senate between republican senator marco rubio and democratic congressman patrick murphy. thursday night at 8:00 eastern, republican senator kelly ayotte and democratic governor maggie has om for senate seat. now until election day key debates from house, senate and governor's races on spn networks, c-span.org. c-span, where history unfolds daily.

>> if you missed any of the presidential debate, go to c-span.org using desktop, phone or tablet. on our special debate page you can watch the entire debate choosing between the split screen and switch camera options. you can even go to specific questions an answers from the debate, finding the content you want quickly and easily. use our video clipping tool to create clips of your favorite debate moments to share on social media. c-span.org on your desktop, phone or tablet for the presidential debate. a panel of global finance experts now on the impact of china's currency on emerging markets, specifically in the latin american region. the atlantic council hosted this event. it's about 90 minutes. >> good morning, everybody. i'm jon huntsman, chair of the atlanta council. we are indeed delighted and

grateful to have you all with us. thank you for being here today to discuss a topic that as the former u.s. ambassador to china is very near and dear to my heart. that is china in its evolving global role. we're delighted to be able to unveil the adririen arsht cente. peter schecter is here. we're grateful for his leadership among many others on his team. thanks enormously to generous partners at hsbc represented today by their chairman of global banking for americas and atlantic council board member gerri meadow. he's become a great friend over the years and i'm delighted our interests lined up for this kind of partnership. but it's a partnership that goes

far beyond today's discussion and a similar event next more. with hsb's generous support we'll look at a number of issues critical to u.s. china relationship from investment to trade to energy issues, with report launches and events in washington, new york, in china, and various latin american countries. so stay tuned for more programming on this hugely important set of issues. now, i'd also like to say a very warm welcome to the executive vice chair of atlantic council board adrienne arsht in the audience with us today. adrienne, thank you. adrienne is in large part responsible for a rang of issues so successful in recent years. she really is a remarkable

driving force. we thank you for so many good deeds you do for this organization. today's discussion is a topic that requires attention beyond the financial world to be joine panel of experts to discuss the profound impact of running these international organizations and the impact on emerging markets, particularly in latin america. our event comes a the a critical moment as just on saturday the chinese became the fifth global currency to be accepted as an official reserve asset by the international monetary fund. this is a giant step forward for china. a telling moment in the country's emergence as a global economic power house. now for countries in latin america such as brazil and argentina, that already have substantial trade and investment partnerships with china, this development could further immove bilateral cooperation. however, it's vital we consider

the broader ramifications for the international organization will have on other economies. as well as the implications for our own domestic economy. today's discussion will devil into the meat of these issues, providing further context to the reports findings and to china' highly complex relationship with latin america. after i invite jerry to say a few words, we'll have two separate panel decisions. the first one moderated by sam phlegming of the financial times, and then by jason marzac, director of the adrian arts center for latin america economic growth initiative. please remember, today's skfrgs on the record and it's being live streamed online. i encourage all of you to tweet about the event using the hashtag rmb in latam, thank you all for joining us today. and it's with great honor that i

now turn the stage over to jerry mato. thank you all so very much. >> good morning everyone, and welcome. thank you for your kind remarks. it's such a pleasure to be working with you and the atlantic council on this important endeavor. your remarks really incapsulate why now was such an important moment to host this event. just a couple centered into international research. this is also a spacious timing for us to publicly launch our two-year partnership with the atlantic council. an institution known for it's vision, an institution with whom we share many core values. without being redundant during these two year partnership, we will dive deeper into issues of

trade, investment, energy, and security in the china latin american relationship. with events around the world. we had a very successful ts prior round table in new york on this topic which also features an impressive group of people. i would like to thank those participants as well for helping inform today's report. finally, thank you, as well as the team from the atlantic council for producing another high quality publication. so, why focus on the latin america relationship and why now? after nearly 2500% increase in two-week trades since 2000, the terms of the china-latin american relationship are on the cusp the change. the organization will make trade and investment between the two regions a more seamless transaction. at the same times, a globalizes

will be transaction cost savings for hundreds of companies in latin america and other emerging markets. but there are some risk involved as our own market region has shown. and the infrastructure for more the nominated transaction is still being built. what is the next phase of the china latin america relationship and what implication for the western hemisphere? will it reshame the region? today, habc and the atlantic council looking forward that will highlight a new instance in this issue. this is discussion is not about winners and losers, but the opportunity to be overcome. and we have an excellent line-up of experts ready to explain where china, latin america, and the u.s. will find those. with that i will turn it over to our first panel. thank you very much.

>> good morning, everyone. my name is sam fleming, editor of the "financial times." great pleasure to be here with a superb panel. as governor huntsman said, it was a giant leap forward for china, its inclusion in the sdr on saturday. it's a historic moment in terms of currency and economic development and china in the world. the ramifications are huge and that's what we're hear to discuss this morning. let me introduce an excellent panel to talk at these issues. on my immediate left, douglas arner, hong kong university, co-author of this morning's

report, on his left is mr. tang, assistant professor at johns hopkins and visiting fellow at the dallas fed. on the far left is clyde ward. foreign exchange strategist douglas, can i start with you? let me talk a bit about the report. obviously huge ramifications from this international realization. one of the arguments you make, ramifications go beyond world and central banking. perhaps you could spend a couple minutes outlining why this is such an important theme for the u.s. economy and china's economy. >> thanks for that and thanks to the council for being here and to my co-author andre in the front row there.

i think one of the key points of both the report, as well as the answer to your question, china has reemerged as one of the world's major economies. with that has come a major position in trade, finance, and investment. one aspect of that traditionally has been increasing use of the currency. and so as we look at china's increasing economic role in the world, it's also important to think about the increasing role of the currency. and in particular, as the relationship between the major currencies like the dollar, the euro, and as the rmb emerges, the sort of challenges for global markets of the relationships between those currencies. >> let me ask about the -- the amount of use that the rmb is now getting in international transactions. it's fairly small still.

in fact, very small. what are the key barriers to an increase in the use of the rmb? >> i think there are two sides to that. the first is that very much we're seeing -- initially we saw very rapid growth. if we look at asian currency uses, in the context of asian transactions, has become really very substantial. internationally, it seems to float in terms of trade payments somewhere between just below or sometimes just above the level of the yen to just below the level of the canadian dollar. so still smaller, particularly when you compare that use to the size of china's trade flows. i think over the past year and a half, there's been a lot of attention on the internationalization process, but we've also had a lot of volatility in chinese domestic markets, in particular in the stock market and just over a year ago in the context of the currency markets. i think the context of some of those domestic volatilities has

slowed progress down in the context of international usage. >> can i ask you about the moment that we are in history in a sense, why is china pursuing this internationalization process now? why is it a pro pitious moment for china to be attempting to internationalize? >> i think this is not the first time that china wanted to sort of play a more major role in the global economy. so china joined the wto in 2001. that was sort of the water shade for china to be more engaged in trade and also international financial flows. in the previous regime, in 2006, they had a big meeting inviting a lot of foreign leaders, particularly those from emerging markets, to launch this thing called the go global policies.

as a result, you see substantial increase investment in africa and other emerging markets. so, you know, this is a very different kind of globalization this time. so in terms of trade, in terms of investment abroad, china has been sort of pushing very hard. part of the reason is because, you know, the opportunities for investment in the domestic economy have been largely gone. so how many high speed railways you can build, how many freeways you can build connecting second tier cities. but more importantly, something that i've been doing research on regarding china's economic growth, is that a lot of times, the chinese government wanted to use some external pressure to facilitate and speed up internal reforms. so wto is a good example. in fact, the prime minister at that time said wto is not so much about trade globalization, it's more about privatization. it is so difficult to privatize enterprises, so therefore, you know, wto provides some sort of

external pressure and regions for them to basically privatize a lot of these firms. so this time i see similarities. on the one hand, china wanted to be more powerful in terms of, you know, inducing other countries to use their currency. but on the other hand, they also need some external pressure to basically reform the financial and banking sectors. >> interesting. we obviously saw particularly earlier this year an awful lot of volatility in financial markets in china and also really confusion, i think, in a lot of other global capitals about what china's foreign exchange strategy was. how did the chinese government reduce that confusion and uncertainty and how successful do you think they've been? >> i think -- so i got my training in the u.s. you know, i am a big believer in sort of decentralized economy, free market.

once in a while, there could be room for the government to intervene and sort of, you know, reduce volatility in the stock market. but the way the chinese government has been doing has been by and large disappointing. sort of scared investors from abroad and also scared domestic investors. as a result, the kind of housing bubble we've seen in second tier cities in china these days is a sort of consequence of heavy regulation of the financial market, in particular the stock market. so that has been in my opinion, a backward development in terms of having additional reforms on the financial sector. so hopefully with renminbi being included as currency of imf, that would provide some legitimacy and also external pressure. so that on the one hand, their hands are tied, they could not

just intervene any time they want. on the other hand, they would provide more confidence and credibility about the financial system. >> clyde, let me turn to you. first of all, could you pick up on that last point, how successful do you think the calming measures have been in terms of -- especially foreign exchange markets more recently after all the jitters that we saw earlier this year? >> well, i think obviously a year to 18 months ago, we were in a rather difficult situation. we had a lot of stresses in the global markets from anticipation of the fed tightening that was strengthening the dollar. and so a number of emerging market currencies were weakening at that time. at the same time, you had some concerns about the trajectory of growth in china, some were calling for a hard landing. and this led to -- and preceding that, of course, china had begun to liberalize some elements of the capital account to allow for investment from china to move overseas.

of course with the offshore renminbi, cnh or other centers as well as hong kong, there's an ability for foreign investors to speculate on renminbi. it trades as a freely convertible currency offshore. these factors were contributing to downward pressure on the currency. what we've seen before, especially in the global financial crisis when obviously we'd had less liberalization at that time, but we saw from the authorities in china that they -- they tend to have a batten down the hatches approach to situations such as this. and i think what's important is to just focus on the long-term trajectory here of the reform and internationalization process. we believe that that will definitely continue.

we think that what we saw 18 months ago was -- was more a blip in terms of, okay, let's calm things down, try to remove the dislocation we saw between the onshore currency and the offshore currency. i think after sdr inclusion we're actually going to see an acceleration of reforms that make those two markets trade much more in line with each other. >> let me ask about the implications for corporates, specifically, in this internationalization process. douglas's report refers to the idea that transaction costs could be reduced. what kind of benefits are you currently seeing for your clients in terms of this process? >> we've seen over the last few years, the ability for corporates obviously to transact in remnmbi. but there are significant constraints with that process. you don't have control of the currency conversion.

you're essentially leaving it to the supplier or the payer to manage those foreign exchange risks. and of course often prices can be inflated to take into account of those foreign exchange risks. corporates now are really finding out if they're, for instance, sourcing manufacturing goods from china, they're asking for invoicing in rmb. they're setting up rmb accounts in the offshore market which are very easily funded, and then making payments which have no documentation or regulatory requirements attached to them. they're finding up to 4% savings on what they were paying previously. it's an important process that corporates need to look at. they need to understand, if you're going to do business with chinese companies, then you really need to look hard at using the remnbi as a trade

currency. >> douglas, what did your research throw up in terms of the potential benefits but also the barriers at the moment? >> i think i highlighted a couple of them. i think from the benefit standpoint, one is that as we see ever increasing trade and investment flows using the domestic currency provides an alternative in accessing the domestic chinese market. one of the themes we picked up on the report is that much of the trade and investment into latin america so far from china has largely focused on commodities and resources. this is something in the context of thinking about the region going forward, we think there's a need for rebalancing that direction and that use of the rmb to target the very large and rapidly growing chinese market is one of the important options. >> okay. could you talk a little bit about the same point, targeting the chinese market?

what are the main barriers at the moment for that targeting process? >> i think the main barriers for more investors and banks around the world to use the renminbi, substantial control of outflows between chinese and investors. even though the transaction costs could be substantially reduced as a result of it being included in sdr and the affiliated reforms, you know, the amount of money that can be channeled out and in are still highly regulated. five years ago, i think the chinese government was probably worried about capital inflows, driving up the stock market and housing market. but these days they're more worried about capital outflows. the kind of investors that can still invest in china, the so-called qualified institutional investors, there are 300 of them.

at the same time, the domestic investors who can invest abroad are the so-called quality domestic investors. so without substantial removal of the capital control, i don't think at this moment we can say much about how much the renminbi could be a major currency yet. although, china's government was very committed. in fact, two years ago, the premier said by 2020, the chinese government is going to have full -- for the remnbi. now almost the end of 2016, so there are four more years to go. of course, we're talking about china. the magic will happen, hardly imagine in four years we'll see renminbi fully convertible mostly because of the capital control and partly because the financial market still need a lot of reforms for that to

happen. >> i'll go back to you in a second. clyde, what are your observations on it? >> no, i think over the last few years, one thing that we've noticed, and if i may pat ourselves on the back a little bit, is we've tended to in our research talked about the pace of reforms will be faster in some respects. certainly in the period of 2010 to 2013. and that was definitely true. so i think there is scope for an acceleration of reforms going forward. i think we've been through a rocky patch, vis-a-vis, the potential for the chinese economy and what's happening in global markets. there are still risks out there. we've seen with the brexit vote. we've got the u.s. election coming up. you know, there are uncertainties. and i think that the authorities in china are going to remain very cognizant of that. but assuming that -- particularly on the domestic front, china's economy remains steady and stable, we don't see any capital outflow pressures, i

think what you could see is an acceleration of the reform process. whether it will have full convertibility of the capital account by 2020 remains to be seen. but i couldn't -- i wouldn't doubt it too hard. i think already we're beginning to see major central banks around the world, including in latin america, buying renminbi for their reserve assets. the numbers relative to their total reserves are small, but that's definitely the trend we're seeing. i think we'll see that continue. >> douglas? >> just a couple follow-ups on both of those. it's sort of an ongoing joke that for the past 20 years we've been five years away from capital account convertibility in china. over the past couple years, we thought maybe that five years might actually happen this time, but it still seems like it's five years away and could continue to be five years away for some years to come. one question on your point of

use of central bank reserves. since the opening of the interbank bond market, are you seeing more basically direct access? >> yeah, we're seeing significant inflows over the last six months, more than -- i mean, prior to march of this year that the inflows were actually pretty -- pretty negligible. we were obviously seeing outflows in six to twelve months prior to march. the last six months we've seen significant pickup in inflows from both institutional investors and also from central banks as well. >> this takes us back to the trade point. one of the reasons why central banks are going to be increasing the reserves is that given the trade flows and if we see as we are seeing an increasing denomination of those trade flows in rmb, there's a necessity for central banks to manage those.

as a result, central banks around the world have a need to access assets particularly in the domestic bond markets to manage their own reserves to manage flows as a result of trade and investment. >> does that -- do you agree with that -- that assumption? >> yes. i think in the long run, there will be increasing amount of sort of reserve related investment going into china. there have got to be prerequisites in the sense convertibility, we don't expect full convertibility but level would give foreign investors some confidence that they can convert rein men -- renminbi back to their own currencies. i remain very optimistic that more of that is going to be

involved in renminbi. i do some research on china/africa relations. i realize one trick -- i shouldn't have used the word trick. one strategy that the chinese government has been using, basically investing a lot in natural resources in africa, renminbi. in turn those nations will have to buy chinese goods in renminbi. so that's an effective way to put renminbi into global currency. so on the trade side, i'm very optimistic. on the financial side, the reason why i'm a little bit more reserve is because i think there still quite a bit of, you know, legal reforms and financial market reforms that need to be done before that can happen. you know, morgan stanley i think

had a very optimistic estimates that in the long run, i think they have ten year in mind. that there will be $1 trillion u.s. dollars worth of renminbi flowing into china as a result of currency reserve purposes. >> let me take a step back now and look at the bigger picture, in particular, the announcement -- the landmark reached over the weekend with the sdr. douglas, what are the practical implications for this, this inclusion in the sdr? how important? is it mainly a symbolic thing or do you think it's a major thing for the development of the chinese currency? >> i actually go back to clyde's earlier points, when we look at the sdr inclusion, there are really two principal reasons why it's important. the first has to do with the process of domestic financial restructuring. in other words, much of the strategy of the chinese leadership saw sdr inclusion much in the same way as wto joining. in other words, this was a way to lock in the reform process.

i think internationally as well. once that became understood, that sdr inclusion was one way to lock in this continued process of domestic financial reform, that has tremendous importance. the other aspect is largely political. that -- it's something that is symbolic and important from the standpoint of as trade flows increase, the redenomination of central bank assets, the sdr inclusion makes it simpler. from the standpoint of will this cause a dramatic increase in transactions, i think the answer is no. it's a much, sort of longer term restructuring and political recognition process. >> i'm taking -- keeping the view from 30,000 feet, can we talk a little bit about the implications for the u.s., then, as the prime -- holder of the prime currency in the world. over what period could you start

to see that being challenged, clyde, by china? are we talking many, many decades? is this a threat or an opportunity for the u.s.? >> i certainly don't think it's a threat. just in terms of currency flows, the bis does a tri-annual every three years, a survey of the exchange market. the u.s. dollar is still by far the dominant currency that over 90% of foreign exchange transactions are with the -- the dollar is one side of those currency transactions. so that's not going to change. the remnbi is a very small portion of that. what's interesting in that survey, and we've seen as long as i've been in the market and watching this survey, you've seen volumes go up every year. this is the first year that

total fx volumes actually fell versus 2013. what's interesting, though, the renminbi volumes are up to the eighth largest of all currencies. still a relatively small number compared to the total dollar transactions. but interestingly, in a three-year span when total values have fallen, renminbi volumes have actually risen. commodities are priced in dollars. i don't think that's going to change any time soon. so i think latin american commodity exporters may struggle to try to -- to shift -- or the chinese certainly will struggle to try to shift that pricing into renminbi, so i don't think that's going to change, but i do think it's significant for latin american exporters to look very seriously at being paid in rmb as opposed to dollars for those exports to china. in particular because chinese companies now are actually

running into some roadblocks and hurdles themselves domestically to pay for their imports in u.s. dollars. it's becoming increasingly easier for them to do that in rmb and so i think they -- they will be quite open to latin american exporters to china approaching them and being paid in rmb. it will be more convenient for both parties, and potentially see cost savings for the latin american companies exporting to china. >> what are your thoughts on the same topic? what are the implications for the dollar and the u.s. more generally? >> i think the way i would analyze this is to separate the denomination and currencies into those for trade flows and those for financial flows. in terms of denomination and renminbi in trade, as i said, i think there will be an increasing use of rmb, particularly within asia.

trade is such a complicated subject these days. increasing globalization. so there could be sort of network and multiplying effect which will push the rmb to be more useful in international trade. in terms of the denomination for financial transactions, i think renminbi is still sort of far away from u.s. dollar as being major safety investment asset. as i said, because of in effect convertibility and associated inefficient financial system, but let's see. ed give china 10, 20 years, the gap will be reduced. for now, i wouldn't be worried about the u.s. dollar being displayed by any major currencies in the world.

>> douglas, i'm going to ask you to turn to that question and then we'll open it up to questions. if you have any questions, do raise your hand up. >> just, i think i would nuance that a little bit. what we're very likely to see in the new future, the rmb will emerge around the third slot. that in the context of chinese economic size and relationship, you can expect that it will probably eclipse the yen in the near future. >> near future meaning -- >> next year. it almost did it this year. so this is something that is near term. >> yep. >> i think what we're looking at is three major currencies going forward. i don't see any likelihood in the medium term of the rmb eclipsing the dollar, but

something in parallel to the euro makes a great deal of sense. finally from the standpoint of the financial side as opposed to the trade side, we have now seen china emerge as a net foreign creditor, as one of the world's major foreign investors, and there's an increasing push for that investment and credit to be provided in rmb in international markets. as a result, if we look at historical processes of other creditor nations emerging throughout history, we will see an increase in the use of the currency for financial transactions as a corollary of that. >> right. questions from the audience? please raise your hand and do say where you're from when you ask your question. gentleman here, please. and please wait for the microphone. >> i have been in china. i will ask you a simple

question, actually, because there is a trade imbalance between all of the countries, between china and the rest of the world. eventually chinese people will demand better life, better standard of living, et cetera, et cetera. so my -- from other countries, they will say no more chinese product will be entering into our countries. the current inventory will go down with the same situation. there's no way they can sustain. if all the country close the market and imbalance is so great what would be the future of chinese currency if this happened? >> so if i understand you correctly, so you concerned

about the fact that foreign consumers may not want as much chinese goods to be exported to those countries, therefore, the demand for renminbi would be reduced. is that the conjecture? so i'm a trade economist, so i believe in competitive advantage. i still think that china still has a lot to provide in international trade. labor costs have been increasing quite a lot, but compared to those in the mexico and the u.s., they are still much lower. what i worry more about is basically the increasing protectionism that we see in the u.s. and around the world. so that may push chinese growth, you know, back by 1 or 2 percentage points, if i have to put a number on. you are absolutely right that the renminbi has been weakening since november last year. i don't think that sort of sudden, you know, increase in trade protection will lead to a

collapse of the renminbi just because there's still, you know, a lot of investment and a lot of demand for chinese goods in the absence of protection. >> why don't you invest inside of china -- better standard of living -- [ inaudible question ] it's going to happen. the people will demand better standard of living. what's going to happen in china when they say, hey, we cannot live on that? >> let me give this one to douglas. then we'll move onto another question. >> i was going to say that actually we're already seeing this as an important trend. wage levels are increasing. consumerism in china is increasing dramatically. in fact, that's probably the chinese government's biggest objective right now is restructuring the economy to push it up the value scale, up the innovation scale.

and very much renminbi internationalization is in fact part of that process to drive the development of the chinese economy. in fact, what you're saying is already happening very dramatically. i see it where i live in southern china that wage levels have increased dramatically. and the sorts of low cost manufacturing that used to dominate in southern china have been pushed out to vietnam, bangladesh. increasingly what you see is higher value added electronics and, in fact, quite innovative developments. taking over where used to be textile factories. >> okay. another question, please. lady here first. please wait for the microphone. towards the front. a little bit further. i'm sorry. thanks very much. >> hi. from university of hong kong. my question is partly related previous question on the domestic chinese reforms and as i weigh in, doug also mentioned

boult this renminbi internationalization is more -- would have deeper implications with the domestic -- locking in of the domestic chinese reforms. i wonder how much of these domestic market reforms are going to cost chinese in terms of, for example, unemployment, or we are talking about rising wages or increased cost of living and other things. so would these reforms, market reforms would be worth the cost in terms of unemployment, social unrest, all other -- >> okay. do you want to take that one? >> yeah. >> what is the cost? >> i think the quick answer is that the sort of view in china at the moment is that the risk of not doing anything, of staying with the old export oriented, low-wage manufacturing

driven model is at the extent of its possibilities. and as the labor force is already shrinking, that in fact that previous model is no longer sustainable. so the only option to avoid much more severe problems is, in fact, a process of restructuring the economy to avoid the middle income trap. and financial reforms are very important process of making that happen. so it's very much a balancing act between the costs and challenges of the restructuring versus the costs and challenges of the fact that the old economic model is no longer sustainable. so trying to balance the two. >> clyde, how bumpy is this proving to be?

>> i think remarkably smooth so far. i think the government's switch to focusing on domestic consumption a few years ago and part of that reform process was trying to disencourage savings from the domestic -- chinese population. typically, the chinese are very good savers. they save primarily for retirement and their children's education and health benefits. what the government has been doing, they've been building new public schools and hospitals to try to encourage you know dissavings and more consumption. in general, that has become a relatively successful policy to date. so i think this trend will continue. i think the economy is evolving and it's certainly moving away from the export-led economy. and, you know, i think as long

as you don't see significant pressures in certain parts of the economy, especially the property sector, then i think that we can be relatively sanguine about the outlook. >> one more question, towards the back, please. right there. thanks. >> hi, thanks. just a quick question. sean minor from the peterson institute. clyde, you mentioned that you think the sdr inclusion will spark reforms that close the gap between onshore and offshore rmbs. is that because you think it will move more towards convertibility or another reason? >> the difference between the onshore market and offshore market, i'll just say a couple of points to those unfamiliar. if you imagine the onshore market as domestically in china. we talk about the offshore market as all of those other

centers where you can trade the renminbi on a free basis. it's literally like trading the euro. they set up clearinghouses in 16 cities around the world now. the first one was in hong kong, and that's still where the most liquidity exists. you have to imagine a bigger pool of liquidity in the renminbi in the onshore market and offshore market. what we've had at certain periods of stress is the -- is the liquidity in the offshore market become smaller and that leads to pressures on the currency and the money market. and we see money market rates going up, we see the currency weakening relative to the onshore market. and certainly this has been a concern. since 2010, when we saw the advent of the offshore market, there have been a couple of periods of dislocation between the rates between the on shore and offshore market. in some cases onshore renminbi

was trading more strongly where there was extreme demand for renminbi assets. more recently over the last 12, 18 months you've seen it go the other way with stresses the other way. i think the reforms are really going to focus on moving liquidity between those two centers and the ability for banks that have presences in both markets to pool that liquidity. i think that will encourage the process of unifying the two rates on a longer term basis. obviously if we get to a period where there's full capital account convertibility, then there will be no issue and any differences between those markets will disappear. >> as i said at the start, it's a huge, historic moment, historic week in terms of currency policies around the world. a lot of this is going to be debated over the next few days because the imf and world bank are having their annual meetings and this is germane to those decisions. this panel, extremely complex process and has a very, very

long way to go. for the time being, please join me in thanking the panel. [ applause ] >> got the next panel coming up and -- >> great, well, thank you very much. good morning, i'm the director of the latin america economic growth initiative at the latin america discussion. thank you for having the great discussion. doug, heiwai. the only problem with the first panel, you really set the bar for our second panel. before we start, i'd like to congratulate douglas and andre in the first row on an excellent report on a topic that i think may be overlooked by some as just a technical development in the world, but really has the potential to reshape how

business is done across emerging markets, including latin america. that's really no small statement, but frankly it's true. the renminbi becoming an international reserve asset is not something to be overlooked. as our first panel said, huge changes not just in chinese markets, but global implications. we looked at the ins and outs of china's currency policy. the next panel is going to look at what this means for latin america. we have a dream team of speakers, my dream team of speakers at least, to look at that. i'm going to sit down here. the first speaker -- you have their full bios in the handout. to my left here is barbara, kotschwar, senior investment policy officer in the trade and global competitve global practice at the world bank. in addition, she spent eight

years at the peterson institute. you published on a number of topics. so this is a topic that's very familiar to barbara. next to barbara is a person who is no stranger to washington. somebody who commands respect around this town and globally. that's ambassador luis miguel castilla. ambassador castilla was previously peru's ambassador to washington up until a few months ago. and among his many other responsibilities in his life, served as peru's minister of economy and finance under the administration of the president. miguel, now that you're out of government, we can ask you those difficult questions. right? to miguel's left, claudia, trevisan, washington correspondent of a newspaper

that's familiar to many. for those who it isn't, it's one of brazil's leading and most influential newspapers. among claudia's many foreign assignment she spent six years living in beijing. but that's not her only claim to fame when it comes to china. you've written now two books on china, among, and i don't know how you find the free time being the correspondent submitting daily stories, but living in china and writing about china. i've asked the speakers -- i've actually encouraged the speakers to disagree with each other. because that's what makes a panel fun. let's see if y'all follow through on that. what we're going to do in the next half hour, we're going to look at the general picture, and then we'll look at risks, investment potential, and of of course, although this is about china/latin america, we're here in washington, so we'll look at the u.s. implications of renminbi internationalization as it pertains to latin america.

let's get started with you barbara. you've done a lot of excellent work on chinese fdi and latin america. do you see it reshaping the investment picture across the region in the short to medium term? this is a tough question. are there implications really still so much unknown that it won't be clear for years to come of what the real impact is? >> thanks for such a narrow and specific question. >> it's a great way to start off a panel. >> it is. actually you've given it to say we really don't know. >> i'm not going to let you get away with that. >> i probably should stipulate that although on my bio you see that i work at the world bank, my views do not represent those of the world bank, any member countries, any of my dear colleagues, their brothers and sisters. i'm probably here more with my georgetown professor hat. >> one of your many claims to fame. >> one of my many claims to fame. i think it's an interesting question.

as you know, obviously, and the report mentions this. congratulations on an excellent report. you know, china's interactions in latin america have really been sort of leading up to this. in terms of renminbi internationalization, you already have three countries that have swap arrangements with china. and so there has been some activity in local currencies for -- >> can you explain what a swap agreement is quickly? >> a swap agreement, and i think the audience probably knows, means that commercial transactions can be paid in the local currency. so if brazil exports goods to china, those goods can be paid for in renminbi and vice versa. that brings up an interesting point douglas made on a previous panel, the hope this would lead to rebalancing of the economic relationship between china and latin america, as has been mentioned many times, there's a massive trade imbalance between

china and just about all of china's trading partners. in latin america, that's certainly a big deal. latin america imports lots of chinese goods, but hasn't been able to break into the chinese markets in terms of export and investment. we'll talk about investment in a little bit. if the internationalization of the currency, of the ability to use the renminbi can expand that, that would be great. and if latin american companies can gain greater access to the chinese market, then this would help latin america break into a dynamic market. regime, but there are still tremendous regulatory administrative and legal barriers in addition to reserve sectors. so i do hope this is a signal that china is under taking

further economic reforms and that those can be of benefit to latin american companies. >> barbara talks about the first panel. this has been something the latin american companies are struggling with. how do you break into the potential of the chinese market. ambassador castillo, or miguel as you prefer to be called, rmb use provides a lot of opportunities, new opportunities for latin american countries, investment in china to attracting new investment from chinese companies. all of this coming against the backdrop of a boom of chinese investment in the region. so i want to take you back to your days as finance minister. i don't want to bring up any bad

memories. i'm going to take you back to these days. what steps should the finance ministers take to seize on the opportunities to bring. and there is also some risk as we discussed in the first panel. from a financial perspective, how do you mitigate some of those risks? >> well, thank you, jason. and let me also congratulate the authors for a very insightful report. actually when we talk about latin america here, i want to be clear. here we have to do the distinction. one thing is the reality of cash starved country. they need it to build reserves. i won't mentioned country. but you know it went into a swath agreement. and the other thing is a sophisticated country that would like to give options to investors. so there are different motivations for countries. i think opportunities trade wise, i think commodities will still remain a driving factor for many south american countries in spite of what's being told. and actually i think for the commodity which would perhaps

fit better in terms of rmb denomination, i think there's still a lot of, as the same line that barbara mentioned, a lot of restrictions to enter the chinese market. one talks about paris. one looks at the subsidies or the v.a.t., the chinese charge for imports for different agricultural products. they are huge. over 50%. so it is very difficult to access the chinese market for nonstandard commodity products coming from anywhere in the world, particularly in latin america. i would be less bullish in terms of this huge opportunity there is. i see it more of an opportunity in terms of locking in reforms, in terms of trying to liberalize its capital account, he deepen its financial market. i see that as the main, you

know, objective of this process of sdr in -- rmb inclusion on the sdrs. i wouldn't be too overoptimistic in terms of the new way for trade to be nominated indeed rmb or finance. in terms of finance, there also needs to be an adjustment. and i'll tell you the case of peru, for instance. in my own country, the chinese were very aggressive in terms of opening up one branch of their -- of the chinese. our legislation has constraints towards linked companies. and given that for tax purposes and for banking purposes if you're linked to a home office, a home firm, then there are restrictions.

and given that most things in china are owned by the government, that implies we have to change our banking system, our tax code to be able to accommodation. there are also restrictions in that regard. in terms of risks, i think the document does a good job in terms of the main objective of picking a way the current risks. but still we are a region i think primarily seeking towards reducing its mismatches in currency. you see because of chinese restrictions the potential to move into that market. peru just do an operation in the market to be able to increase the local currency denomination of its debt. i think firms on the corporate side are trying to minimize and try to hedge any, you know,

potential currency mismatches they may have. >> so you're saying even though there is a reduction in transaction costs, because of the renminbi, like doug, there is more bullish, because you see of chinese restrictions, that potential for latin-american companies to move into the market. >> i see this as a long process. it is very country specific. i wouldn't actually pull all latin american countries in the same bed. >> claudia, miguel mentioned he didn't want to mention any names of countries, but he mentioned about china being -- becoming a lender of last resort in the last decade for certain countries in the region. i'll name the countries. one of them is venezuela, and the other one is argentina. clarify this, not under the current argentine government, and it helped to prolong conditions in those countries. so why is it in latin america and china's interest to ensure

its loans and investments are being used, and again, for sound technical and economical -- i say latin america, but miguel mentioned, talking about specific countries. >> i think the main reason is to try to guarantee that these resources are used in the most efficient way possible. and they are used in projects that make sense from an economic point of view. and does not perpetuate a development model that isn't sustainable. i think that's clear in the case of venezuela. falls on five china gave 60 billion u.s. dollars to venezuela, and no indication that the oil production in venezuela is more efficient. there is production and it is unprecedent. from the chinese side, there is

the evidence of not being repaid from the loan, and i think one could also agree that there is a political backlash, being the situation where you have a change in the government after being associated so strongly with the previous government. but i think if we look at the example of argentina, i think the expectation might be wrong. assumed office last year, and initially there was suspicious in the new government that china was increasing a lot its influence in argentina, but the suspicion quickly vanished. had two meetings with the

president this year, and china has announced in the first semester of this year, investments of $25 billion in argentina. so i think there is a gravitational pull on the chinese capacity to export capital, political backlash. >> of course, from china's perspective, they want to -- the chinese want to invest in sound policies in which the investment will be able to pay back their investment too. >> yeah. >> which is a concern. >> yeah and i think from what i hear and talk with people, i think the experience of venezuela, kind of had learning effect from the chinese side to be more cautious in their decisions, their land money and

to be more concerned with the economic and returns of these investments in the long run. >> that's great. thanks, claudia. miguel, i want to turn back to you. there are cautionary winds arched internationalization of the renminbi, and in this report, which is i think should be on everyone's chair and i highly encourage you to read it, it is a fantastic report, ntast although i am a little biased. in this report, we know the dynamic that decreased investment can be a win for countries but also a cautionary notes. how an increase in renminbi could lead to greater fears of over dependence on chinese, chinese trade, chinese investment, chinese finance. so miguel, from your perspective, what steps should be taken to ensure the increase or potential increase of renminbi, the renminbi brings in investment to necessary sectors in latin america doesn't result in overdependence on china, or too farfetched?

>> i think that's too farfetched. still, you know, our dominant investors, our countries that, you know, the european, the u.s. are dominant in the countries. i would say that could play more towards africa, chinese relationship than latin america, you know, relationship of china. just to give you an example and beyond commodities, we were discussing with claudia before coming here, the first official visit of peru's new president was to china. to actually signal his intention to deepen, you know, the link, and to attract investment, not to, you know, ask for loans, which is a different, you know, important point made. but we were talking about this

bill, withdrawing brazil, and a huge train that was announced when the prime minister of china came to the region a year ago. and this was actually -- came by and that huge project of $60 billion was reduced to a commuter train outside of lima as a priority. so this overdependence theory, it doesn't really apply. we do still have huge necessities of investment, of fdi, which is receding in many country, and obviously we're open to receive a lot of investment. i don't see any particular fear. also, i see a change in the nature of investment, even

extract sectors. back to the case of peru. 20 years ago, we privatized the public s.o.e. firm of iron. and it was actually really bad experience, lack of compliance with environmental labor standards, that was 25 years ago. nowadays, we have, you know, huge chinese companies coming in that meet high standards. they actually stock hong kong and london market, so very sophisticated run, you know, under high standards. and there has been a change, i think in also the composition and type of investors we're seeing from china coming into the region. >> barbara, on that point, do you see as miguel mentions, more sophisticated investors, more sophisticated projects, but you know, with the -- talking about the renminbi internationalization that can open up the latin market to chinese companies that don't necessarily have access to

international credit in dollars to invest, it's -- previously companies were constrained by that. you had to be able to invest and that access to dollar credit. how can latin american companies best evaluate the investment offers that could come from this new crop of chinese companies that don't likely have had as much global experience as something we've tackled a little bit in the report, but i would love your perspective on this. >> two things. one, the composition is changing to a certain extent. there has been a chinese learning curve. i think peru is sort of the poster child for that. both sides have really gone through an evolution in terms of country like peru, setting out standards for all investors, including the chinese investors, and china, through changes in its policy and also just learning the peru environment. for chinese companies dealing with civil society was a new experience. and when we did our reports, some of our interviews really pointed to the difficulties in learning the culture of the

country. china has been invested in peru for decades, gone through difficult and positive periods, and i think that has contributed somewhat to the increased sophistication and increased also sophistication of investments in peru in some of that change. you see that happening in other countries in peru as well. that said, china still invests predominantly in natural resources, and infrastructure.

it's going to have to meet labor standards and environmental standards. here, i think there is a burden on latin american policymakers to think about what risks might be associated with investment from companies that which they may not be as familiar. really make some, you know, resource allotments, so that those standards can be enforced, particularly at the local level, where you sometimes don't have great budget for evaluation of this. in terms of the currency issue or the capital issue, i would just say that companies that aren't prepared and aren't well

capitalized and don't have proper business plans are probably not going to do well in the market. >> well, looking at chinese investment into the region, one deal on the table is possible chinese financing of petro, brazil's state oil company, with a potential $10 billion loan from chinese banks. let's look at this and the brazilian company, brazil is important because of the huge increase in trade and china and the last few years. but how significant would this deal with for the overall state of chinese investment in brazil and along the lines of our topic today, does renminbi make more deals going forward? >> well, petro is the largest company, and largest corporate debt in the world.

it has a debt of $125 billion, last year, it lost its investment grade, which made it more difficult, more expensive, chuck says the capital market. and the chinese have been one of the main sources of finance for petro grants. and these deal, it has been negotiated since the beginning of this year. there was an expectation that it would be announced that during the visit of president michelle pimenta to china earlier this month. but the negotiations have not been concluded. but there is an expectation that it will happen sometime soon. so i think it shows the importance of china as a source of finance to brazil and to brazilian companies and to show the deepening of the finance links between the countries. and i think one of the

possibilities that rmb international might open provided that the reforms that are needed to get internationalization are by the chinese government is probably the possibility of issues ponds in the chinese market and have one more access to a source of cocktail inside the china, chinese market. >> president temor was recently in brazil, his first trip after he was confirmed as -- sorry, with -- >> yes. >> his first foreign trip after he was confirmed as president. he used that as an opportunity to try to attract more chinese investment into infrastructure projects in brazil. how successful was that. >> a bit by chance that his first international visit was to china. it was because of the timing of

the impeachment process, and the impeachment of former president rousseff was completed in the afternoon of august 31st. he was sworn as president in a couple of hours. he was on a plane to meeting in china. there was so big uncertainty of who would represent brazil in the meeting, that the dignitaries have the names of all the representatives of all countries, and in the case of brazil, it was the leader of brazil. because nobody knew if it would be temor or vilma. and president temor had a meeting with president xi jinping and besides that, which

i think is more important to our discussion here, he took part in a seminar to present the opportunities of investments in a huge infrastructure program that launched earlier this year. it's projects that total around $100 billion. and there were 250 representatives of chinese companies. and i think there was a great deal of interest. especially in projects related to transport and logistics that could make it more efficient to the export products from the region to china. and i think there is -- the recent increase, especially last year in invest, chinese investments in brazil, i think it is a factor of convergence of factors. the need of chinese companies to