Bijan Kian on the Global Economy, Arab Spring, and EU's Debt Crisis

Bijan Kian on the Global Economy, Arab Spring, and EU’s Debt Crisis

B.-Kian

Originally Published in Foreign Policy Association Blogs

Bijan Kian is a Senior Fellow at Global Public Policy at the Naval Postgraduate School. He has served under President George W. Bush and President Barack Obama from 2006 to 2011 as a member of the Board of Directors of the Export-Import Bank of the United States. In 2011, he served as a member of the White House Business Council. Twice confirmed by the Senate of the United States, he is the first Iranian American to have served directly under two presidents from both major political parties and the highest ranking Iranian American in U.S. government. The opinions expressed here are his personal views and not those of  the Naval Postgraduate School or the United States Navy.

Mr. Kian Sat down with Reza Akhlaghi to discuss the following topics:

The debt crisis in Eurozone;

American economy and the challenge of job creation;

The Arab Spring; and

U.S.-Iranian relations

“For too long in America, we have lived off of the hard work of our parents and grandparents. It is time to roll up our sleeves and go to work to find new customers around the globe. Once we understand
the global competition for jobs, we will learn what it takes to compete”.


The European debt crisis seems to be on one path and only one path, and that is managing its debt crisis with even more debt. Pumping more money into the continent’s largely dysfunctional economies does not seem to have yielded any tangibly positive result. What are your thoughts on the integrity of the Eurozone? How is this crisis playing itself out in the U.S. economy and its job market?

We live in a connected world. We are used to periods of economic boom and bust. What makes this crisis unique is that it is global and simultaneous. We are very good at labeling events. Junk bonds became the products of turbulence in the ‘80s and toxic assets became the buzzword for the subprime mortgage collapse. In reality, the systemic problems that caused the so called subprime mortgage debacle went much deeper than a bunch of eager lenders making loans to home buyers to buy homes they could not afford.

While in the U.S. we were identified as the perpetrator, the crisis was not a solely American crisis. Europe was affected too. The double whammy effect in Europe took place with their undue concentration on government bonds. Government bonds were considered zero risk and high yield. Right there, there was a problem. How can a bond have little or no risk but pay such high yields?  Now, Europe’s response to its financial crisis is causing a series of cascading complexities and I see no real cure in sight if Europe continues on its current path.

Let me explain. The European Central Bank (ECB) is not permitted to bail out governments. However, ECB is circumventing this legal barrier. It is offering unlimited liquidity to European banks to enable them to buy government bonds. Banks borrow from ECB at an annual rate of 1% to buy government bonds with coupon rates of 6% or 7%. Then, they bring the bonds back to ECB, place them as collateral and borrow more to repeat the lucrative transaction which yields a net 5% or 6% positive spread to the banks. With such fixed, healthy spreads, banks have little or no incentive to lend to corporations.  As a result, private capital loses the appetite to leverage equity participation in corporate growth.  Unable to obtain credit at reasonable rate of interest, businesses starve for additional capital to fuel growth. Without growth, there can’t be new revenues. Without new revenues, there will be no new jobs. With no new jobs and no added income, there won’t be increased revenue in taxes for governments. Without increased tax revenue, the governments go deeper into deficit spending.

The problem does not end here. It gets more complex. The government bonds purchased with ECB low price money are in fact worthless. They are worthless assets financed by ECB sitting on balance sheets of the banks. When governments face difficulty in redeeming the bonds, banks face the pressure to raise capital to fill the negative gap created by devaluation of their assets. With such weak and poor valuations, the value of their stocks drops. Their depositors shy away from them as well and with that effect, their traditional sources of money dry up.

This is no way to cure the problem. The European Union lacks a currency discipline. Eurozone lacks a unified fiscal discipline and governance.  These infrastructural deficiencies must be addressed and reconciled.  A unified discipline will have to establish barriers against a repeat of irresponsible fiscal behavior of some members of EuroZone. As long as these infrastructural measures and mechanisms are in place, the fears of cascading failures are valid and justified.

In response to your question as to how the U.S. economy is affected, banking is a contagious business. One bank’s default on its obligation becomes a loss for another institution. At the end of the day, the likely effect of turbulence in Greece, Italy and Spain is not too difficult to discern. France, Germany and the IMF have to come to rescue. The United States is the biggest contributor to the IMF. The answer is simple. The U.S. tax payer will be asked to take more pain to ease the European pain. The trouble is, the U.S tax payer is already burdened with massive debt. ECB’s back door strategy can only last so long. The easy financing of banks purchase of worthless governments bonds cannot be continued perpetually. Europe could decide to suffer “later” as opposed to suffer “now”, but the trouble is that “later” is already here.

The pace of job creation in the U.S. economy can be described anemic at best. What, in your opinion, are the fundamental obstacles in job creation in the U.S. economy? How long can the private sector hold on to its massive cash that numbers in trillions of dollars? Is the private sector in the U.S. too pessimistic about prospects for growth; How much of deciding factors are political uncertainty and lack of investment in job creation?

Like water, following the laws of physics and finding the lowest point to travel to, capital follows its own laws of physics. It seeks to find the highest return at the optimum level of risk. Capital seeks to reconcile return with risk of both return on capital and return of capital. Why is capital sitting on the sidelines? What is standing in the way of capital to be unleashed to produce growth? What is scaring the investors into inaction? These are the questions that need to be answered if we are truly interested in reality. Job creation has become a political slogan in the U.S.

Anyone interested in capturing the hearts and minds of 23 million unemployed people in the United States uses this slogan. The real question is how? Thankfully, my friend Jim Clifton has summed it all up in his new book, “The Coming Jobs War”. Anyone interested in real answers on why the six million or so CEO’s in our country don’t get up every day with the goal of creating a new job ought to read Jim’s book. Jim is chairman of Gallup and this is what they did at Gallup. Gallup went out and asked CEO’s of companies in the United States why they are not creating new jobs? And the answer came in loud and clear: “I don’t get up every day to go to work with the aim of creating a new job. I go there to find a new customer”.

Backed by Gallup data, Jim says: “Jobs occur where new customers appear. For that reason the science of customers, often referred to as customer insight or customer centricity, is more important today than ever before”. I agree that to grow a business, you can’t just stop selling to your own market at home. You must sell abroad.  In order to sell abroad, you must understand those customers. How do you expect to sell anything to people you do not understand? Exports is the name of the game for growth and jobs. Half of companies in the United States involved in export actually send their products and services only to two countries. You guessed it right: Canada and Mexico.

Growth without exports is simply not enough to create new jobs. The other reality is that job creation does not happen in Washington. Professor Michael Porter of Harvard defined the value of local economic development strategies in early 1990s. It all happens in the cities. That is where the greatest potential for job creation exists. National job creation strategies don’t work unless they are actively coupled and energized by cities.

We can have all the research and development on new and innovative technologies but innovation alone does not create jobs or lead to economic growth. People who take risk and put an idea into a practical application and then go out and sell a product have the ability to create jobs. Why are they not doing it? Well, data shows that CEO’s are scared of regulation. When you look closer, you see what the enormous force of regulations can do to businesses. First, it is the city’s licensing and regulatory requirement, and then there are compliance demands by the county and State; and finally the mountain of regulations by a whole host of Federal agencies.

Regulations aside, there are also various interpretations by those in charge of enforcing regulations. These various interpretations add to the gigantic weight of regulations, choke growth and scare away capital. Small businesses are the engine of job creation. We have to find ways of coupling the efforts of cities, academic centers and community leaders who are the movers and shakers in each community to give job creation a local, concentrated focus. We should look to finding ways to cut excess regulations whose costs far exceed their benefits in every possible way. We can do this. We have done it before. What it takes is a return to work ethics and values that built America.

For too long in America, we have lived off of the hard work of our parents and grandparents. It is time to roll up our sleeves and go to work to find new customers around the globe. Once we understand the global competition for jobs, we will learn what it takes to compete. It is only then that we can have a chance to win the jobs war. I am not worried about capital sitting around for too long. Once we show the appetite and commitment to finding new customers and the ensuing ability to create new jobs, capital will come running to secure high returns.

Do you believe the role of the United States is undergoing change in the Middle East? What are the key dynamics of a potential evolution of the U.S. role in the region?

Our relationship with the Middle East and by extension, North Africa is changing. In a

nutshell, we have less control, more challenges and wonder about the volume of opportunities compared to threats we face from that part of the world. To understand the dynamics of our relationship with the Middle East, we must first understand the transformation of the world as a whole. We used to live in a world that operated according to the characteristics of a closed system. In the old world, we defined our sphere of interest. We then put the means of control in place to cause results matching our interests. We pulled levers and pushed buttons to shape our relationships with others. We used the tools of control and containment to shape the world to our liking. We behaved in this way simply because we could.

But the new world does not operate that way. The advancement in technology and a shift from the age of industry to the age of information changed the old configuration. We are not exactly in charge of our own sphere of interest. We pull the levers and push the buttons but we don’t get the old results. When it comes to our adversaries, containment is not sustainable. We cannot afford continuing the commitment of our scarce resources to policies that are not sustainable.

For so many decades, the United States placed its foreign policy priorities on stability. Stability, as we viewed it, was achieved and maintained by strong leaders who maintained the status quo. Their popularity among their own people was not a decisive factor for us. Our interests were not too complex when it came to the Middle East. Free flow of cheap oil, maritime security in the warm waters of the Indian Ocean and Persian Gulf defined our key objectives.

When countries like Iran and Iraq threatened the balance of power, we doubled up on the controls and instituted our “Dual Containment” strategy. The world has changed. We now operate in a world that follows the configuration of an open system. External influences on our sphere of interests are just too great and too complex for us to be in full control. The Middle East has been changing and continues to evolve into increasingly complex societies. Some of the strong men of the Middle East are gone.
We have lost the ability to just pick up the phone and call “our friend” in charge. We are now faced with a multitude of forces competing with each other and trying to forge the winning social contract with their constituencies. The transformation of these societies is not complete. We have a tendency to want to make quick observations and draw fast conclusions. We quickly label an event, condense a complicated situation and fit it into an easy to understand analysis. We then compose a narrative in our own political lexicon and move on. In other words, we have a tendency to see the world from our own American prism. Unfortunately, the New Middle East does no longer allow us to look at it with the old eye.

So, where do we go from here? Do we have any leverage in the Arab-Israeli conflict? Does the new Egypt trust us? Do we have a chance in winning the nuclear stand-off with Iran? It seems like they are playing chess. Are we responding to chess moves with football maneuvers?   We cannot expect people of other cultures and countries to trust and respect us if we do not close our Say-Do gap.

I believe we should stay firm on our American principles and not sacrifice them in the way of our interests. We must not be shy in advocating freedom. Freedom is a universal concept. To be respected, we must believe in the same freedoms that we enjoy for people all over the world regardless of their culture. This is not forcing our ideals on others. It is being honest about what we believe in. In this open world, I see a great potential for active and engaged public diplomacy with the Middle East.

Thankfully, Facebook, Linked-In, Twitter have already proven their important place in the equation of bringing people together. As for conflicts, we cannot abandon diplomacy. As a seasoned diplomat recently reminded me, diplomacy is like riding a bicycle. If you are riding a bicycle, you must move forward or you will fall down. This of course, is when you are not on a stationary bicycle. In that case, it really matters not if you pedal hard or not pedal at all. You won’t fall but you won’t get anywhere either. The world now operates on an open system. There is a new Middle East and we simply cannot remain the old United States. As long as we recognize the change and are willing to learn from our past mistakes, there is hope.

Both Iran and Saudi Arabia are two states based on fundamentalist interpretations of Islam; with both states known for their dismal human rights record. Critics of U.S. foreign policy almost always point to the paradoxical nature of the relationship that the U.S. has with Saudi Arabia vis-à-vis the Islamic Republic of Iran. How do you explain the U.S.-Saudi alliance vs. the Washington-Tehran animosity and rivalry? 

I divide the critics you are referring to into two groups. They are either genuinely clueless about the differences between Saudi Arabia and Iran, or just pretending to be clueless about such differences. As a friend once remarked; Saudi Arabia has the source code on Islam. Iran does not even come close to that position. Only a small segment of Saudi population is Shiites.

The remaining vast majority are Sunni’s. Mecca and Medina are the two holiest cities in Islam. More than 1.6 billion Muslims face Mecca five times a day to perform their most basic duty in their religion; their daily prayers. Sharia is the law of the land in Saudi Arabia. I don’t recall ever seeing thousands of Saudis in the streets of Jeddah and Riyadh shouting “death to the king”.
I would ask the critics: Is Saudi Arabia threatening its neighbors? Does Saudi Arabia take pride in announcing their support for global terrorism? Is Saudi Arabia bragging about having created Hezbollah? Do these critics not see that the leaders of the Islamic Republic are afraid of their own shadows? Do they not hear that the clerics in Iran are the most disliked segments of the population? Have they not heard the rumor  that even cab drivers in Tehran don’t stop to give clerics a ride? Thirty three years have passed and the Islamic Republic has not been able to pass its revolutionary stage. It continues to remain an unstable system. Its leaders are constantly afraid that the west and especially the United States covertly supporting a velvet revolution in Iran. Frankly, I don’t believe that those who compare Saudi Arabia with Iran are simply ignorant. They choose to ignore the differences in their attempt to help the continuity of a wobbly, unpopular, bankrupt religious dictatorship called the Islamic Republic of Iran. Finding faults with other countries does not add to the stability of a fragile Islamic Republic.

Since 1979, consecutive U.S. administrations have insisted on changing the Iranian behavior. What type of behavior does the U.S. expect from Iran? To what extent have U.S.-Iranian expectations changed over consecutive American and Iranian administrations in the past three decades?

Trying to change the behavior of the Islamic Republic is an exercise in futility. The Islamic Republic cannot afford the optics of a compromise in favor of the wishes of the United States. After the brutal suppression of the uprising in the summer of 2009, the only real force in Iran is the Revolutionary Guards. The Guards will be the loser in any compromise between the United States and the Islamic Republic. Apart from this serious barrier, there are other practical reasons for Iran to continue its behavior. Let’s take a close look at the list of grievances of the United States against the Islamic Republic.

The U.S. wants the Islamic Republic to stop its nuclear development on the suspicion that it is developing nuclear weapons, stop its support for Hamas and Hezbollah, and in particular, cease its support for terrorism around the globe, stop meddling in  Afghanistan, stop its aggression toward its neighbors in the Persian Gulf, and stop its opposition to the Arab-Israeli peace process.

When I look back at the past three decades, every single one of these demands has been turned into a negotiating chip for the Islamic Republic. It is like “what would you do for me if I stopped doing that?” On the nuclear issue, Iran claims that developing weapons of mass destruction is against its religion and that it is only interested in nuclear power for energy consumption. This is the big negotiating card. Iran cannot be flexible on this one. This is the last point of compromise for them. Why give in? It has been working for over three decades. To me, Iran is playing a very clever game. They have compiled a long list of “bad boy” actions. Each item creates a strong potential to receive something of major value in return. There are of course, some complexities associated with their strategy. Iran’s support for Hamas and Hezbollah is strategic. Hamas and Hezbollah are the insurance policies for Iran against the unhappy Iranian youth. Resumption of relations between the United States and Iran can only take place if the United States gives up on all its demands, apologizes for its past behavior, pay the Islamic Republic past due, accrued interest on its frozen assets in the United States and provide a guarantee that it will never support any opposition group inside or outside of Iran against the Islamic Republic. It is only under such conditions that the Islamic Republic will announce that it has forgiven the “Great Satan” on the account of her repentance and the promise to behave. I don’t see such a scenario playing in the cards. This simply won’t happen.

What is your analysis of Iran’s current power structure and the process of power transformation in Iran?

Prior to the uprising in the summer of 2009. Mr. Khamenei, the supreme leader, was the sole political power generator and power distributor in Iran. This was true as long as Mr. Khamenei stayed above the fray. The architecture of political power generation and power distribution was formulated on the basis of Mr. Khamenei exchanging collective legitimacy that he provided to the security apparatus and the Revolutionary Guards in exchange for continuity of the institution of the Islamic Republic. In the summer of 2009, Mr. Khamenei lost his power to produce legitimacy. He took sides and was no longer above the fray. For the first time, he became the target of chants of “death to Khamanei”. After this loss of legitimacy, he had nothing to exchange with the guards. The power got consolidated within the security apparatus, the paramilitary Basij and the Guards. The Guards now control a massive portion of the economy and speak the last word on strategic matters in Iran. Mr. Khamanei is now controlled by the Revolutionary Guards.  Internal divisions and in-fighting are eroding the formerly planned and centrally controlled distribution of power and the placement of power nodes in the Islamic Republic. Fissures are getting wider in the fault lines of the Islamic Republic.

The current social upheaval in the Arab World is known as ‘the Arab Spring’. The use of ‘Spring’ evoked a sense of optimism and socio-political progress in a democratic sense. However, the Arab Spring has had quite uneven implications in each of the affected countries. Would you redefine this social transformation in the Arab world?

I would redefine it by calling it ‘revolutions in progress’; an unfinished change too early to judge and label. What is happening in Tunisia is very different from what is taking place in Egypt. The outcome of Libya after Ghaddafi has little in common with what is taking place in Yemen after the departure of Ali Abdullah Saleh. I believe we need to develop a more clear understanding of the role of Islam in these countries. Ennahada is the major political party in Tunisia but its interpretation of Islam is very different from Ekhvan al-Muslemin (The Muslim Brotherhood) in Egypt. Epistemologically, we base our understanding of freedom on our own interpretation. Each culture wants to have its own take on freedom. Just because a dictator has been removed, it does not mean that democracy has walked in.

Islam is the only religion that comes in a package with its own form of embedded government. The separation of Mosque and State is not permitted or possible in Islam. In order for the transformation to be complete, there is a need for a revolution to take place in the minds of the people. We will have to see how they differentiate between Hijab and Niqab for women. Hijab is a concept that leaves a lot to choice for women who comply with it. Niqab leaves no room for choice. It is very much predefined. When the dust settles, we will see if we have gone from dictatorships to Taliban rule or a moderate version of Islamic law.

Has the Arab Spring changed the U.S. national security calculus in the Middle East?
Do you think it should?

It is too early to reconfigure our national security calculus based on changes in Tunisia, Egypt, Libya and Yemen. Islamic ideology powered the radical movements of the Muslim youth by promoting martyrdom against the unjust rule of tyrants. It fueled the fight for a just society under the rule of Islam. After the fall of the dictators, it seems that violent Islam has lost its grip on its most dedicated audience. It is not the only product available to the youth in the countries affected by the change.

The most important demand of an average youth in the Middle East today is not based on ideology. It is based on economics. They are demanding jobs from their new governments. They are no longer pacified with the promise of spiritual rewards. They need a job to have a life and a future. The kinds of threats to our national security will be very different by the half of the 21st century. Of the approximately 2 billion additional people in the world by 2050, only 100 million will be in the Western world. China and India will hold half the world’s 9 billion population by then. Nearly a billion people will be added to the population of Africa. Per Capita income in the west will be around $90,000. In China and India, it will stand at about $40,000 and in Africa, a meager $3000. Food and water security will be new international security threats. We’d better start planning for a world with nearly two billion hungry people. I am optimistic about change in the lives of the people of the Middle East. In formulating our national security, we cannot afford to ignore international security concerns. We don’t live in a bubble.

As an Iranian-American and a public figure in American business and politics, how would you assess the success of the Iranian-American community in American political life?

Looking back over the last thirty years, I must say the Iranian American community has come a long way in finding its own place in the American political life. Thirty years ago, there were no Iranian American political organizations. Today, many Iranian American entities are engaged in politics. Iranian Americans have succeeded to set new records in academia, science and technology and, of course, in business. Today, it is difficult to list the top businesses in the United States without finding an Iranian American at the top or near the top of the organizations on the list. Despite this amazing success, the Iranian American community has not been able to help elect an Iranian American to the Congress. A number of Iranian Americans have run in congressional, senatorial and even gubernatorial races with no success. We lack a cohesive and unified organization that would provide the support system for this to take place. I would like to see Iranian American candidates run for office and win not only counting on the support of the Iranian American community, but also the community at large. I am hopeful that I will witness this very soon.

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