Fostering Economic Development in an Era of Constrained Resources

Friday, January 14, 2011
Jose W. Fernandez
Assistant Secretary of State for Economic, Energy, and Business Affairs, U.S. Department of State

SHANNON K. O'NEIL: (In progress) -- to have you all here on a cold January Friday morning. We are here -- let me do a few brief housekeeping, which you all know but we'll run through it quickly, is: any devices that make noises, please turn them off so we don't interrupt the meeting and don't interrupt the microphone system. This meeting will be on the record, so you all know that.

And with that, let me welcome to New York -- back to New York -- early on a Friday, Jose Fernandez, who many of you know, who's a member here at the council. Has done many things here in New York, and currently is the assistant secretary of State for economic, energy and business affairs. So as you can see, he has a very small portfolio and mandate for the U.S. government, traveling around the world focusing on these issues.

So today, we'll start, it's going to be a quite informal discussion. We'll do our usual -- we'll have a little discussion here and open it up to your comments and particularly your questions for Jose. We're going to talk today, at least at the start here, about development issues and where the State Department is on that side. And really, to open it up, could you talk a bit about how the State Department today and your office are defining "development?" What are the goals of the U.S. State Department in terms of -- where are we trying to get to?

JOSE W. FERNANDEZ: Thank you, and it's great to be -- to be home, and it's great to see a lot of friendly faces that -- who will hopefully remain friendly -- (laughter) -- after this breakfast.

Well, at the State Department, development is actually suffused throughout the bureau, the bureau throughout the agency. The bureau that I lead, which is -- you know, that goes from telecoms to sanctions to energy, every piece of what we do has a -- has a development angle. There's something that you may have read about, which is -- in D.C., which is a different universe, has actually made a big splash, and that's called the QDDR, which is the quadrennial review. And one of the things that that QDDR talks about is the need for the State Department to do development, to do whatever it can to help countries that want to help themselves, and to do it through civilian power as opposed to military power.

So you're talking about 271 missions, 100 development offices. And it talks about the need for all of us to put development at the forefront of what it is that we do in addition to a number of other things. And how we define development is basically in the same way that we talked about it, Shannon, when we worked on the Latin American Task Force, which was basically economic growth with social inclusion.

What that means is there's a women's piece, there's a big gender equality piece, and we have -- we have a number of entrepreneurship ideas that we're putting into place to try to help women and girls work in the business world. We're working on infrastructure, which is -- for a long time, people have talked about infrastructure as something the developing world needs in order to move ahead, so, you know, how do we help countries that want to build ports, roads, schools and the like, in order to develop them, and yet do not have the funding, especially at this time

So development is, these days, part of everything that we do, and we talk about it all the time.

O'NEIL: So, given that, and that it is this broad economic growth with social inclusion, which is also not a -- not a small mandate, how do you within the State Department break that into a model or into particular programs? What is it that, given that mandate, how do you go about doing that? What are the things that you're putting forth?

FERNANDEZ: Well, the way that we're talking about it at the State Department and specifically in our bureau is, we say businesspeople and businesses are not angels, so to speak. And we all know that. But yet, there's a part and there's an intersection between business and development. There's a point at which you can help people while making -- while making a buck. We call it "dollars and development."

And what we say is, we're going to take that little intersection between business -- of business and development, and we're really going to push it. So, for example, you can work on agricultural issues, and you can say, U.S. agricultural companies want to go abroad, want to sell their seed, are interested in ag biotech. Well, that's a profit-making enterprise. And yet -- and at the same time, if you look at agriculture, well, ag biotech and hybrid seeds and the like, the kinds of things that U.S. companies lead in, that's a way for us to deal with climate change, social (sic) erosion, drought -- that's an area where U.S. companies can lead, U.S. companies can make a profit, and at the same time we will be able to -- we will be able to help -- you know, help in some of this development area where we want to lead.

We have, for example -- and I'll go back to a couple of things later on, hopefully -- we have an initiative that's a remittances initiative where we're taking -- we're working with the $300 billion a year that are remitted from the U.S. abroad, the $60 billion a year that are remitted from the U.S. to Latin America, and that's -- you know, there are a number of banks that are involved in that, and we're saying to ourselves, how do we -- how do we leverage those funds? How do we leverage them for something other than consumption? How do we use them for development?

So those are the kinds of areas that we're trying to work on. We've got a number of these initiatives, but it all -- it all falls under the rubric of that intersection, that convergence of profit and of development.

O'NEIL: Let me ask you about the remittance program in particular, because you look at remittances, and that's become a hot topic in the last decade or so -- people talk about these flows of billions and billions of dollars -- but when you look down at the on-the-ground level -- say, take a state like Zacatecas, Mexico. For over a century, they've had remittances going back; they have a strong path flows back. But one would not say that Zacatecas is the most developed state within Mexico.

So how do you -- given that there are these flows going back, how do you leverage them? What is it that you can do, or the State Department hopes to help these countries do, to make that -- to translate that into development?

FERNANDEZ: Well, you know, the -- take Mexico. Twenty-five billion dollars a year of remittances. In some years it's been the second source of foreign exchange after oil, it's been actually bigger than tourism revenues. Right now in Mexico and throughout Central America, remittances are used for consumption. People get them and they buy food with it, and they may take care of their housing needs as well. But it's not being used for anything that's going to lead to development. It's not being used to build roads, to build power plants, the kinds of things that, you know, a number of you here who've worked in development have talked about for years, that all developing countries need infrastructure.

So the way that we are trying to do it, and we actually have signed a -- two agreements now, one with El Salvador and the other one with Honduras, is to say, how can we -- how could we encourage banks, how do we encourage the financial sector, the money transmitters, to channel those funds for something other than consumtion? You can securitize these things, for example, and it's been done in the private sector for a long, long time. How do we encourage banks to use these funds for -- to make loans to companies that want to build power plants, and -- or anything else that has to do with infrastructure?

And the way that we're doing it is we're saying, well, you know, there are a number of instruments that we have in the U.S. government, such as: you can guarantee -- you can partially guarantee the bonds. You can actually partially guarantee the projects. And in return for issuing a guarantee for either the investors or for the actual projects themselves, you can -- you can condition your guarantee on the use of those funds for something other than consumption. You can say, if you use these funds in order to build a power plant, we will -- we, either AID or OPIC or somebody else, or even the International -- Inter-American Development Bank -- we will -- we will issue the guarantee.

And that's, again, a combination that -- it's a -- it's been a fabulous -- it's been a good example of the ability of a number of agencies in the U.S. government to work together, and that's been one of the -- one of the great discoveries of my one year in D.C. of how you end up -- you always end up, you know, jostling with a number of the agencies. But in this case, we've worked together, and also with a number of the multilateral development banks. The Inter-American Development Bank has written about use of remittances for infrastructure for a long time, but really didn't have a project in place.

So just to -- just to -- just to summarize, the way that we're doing it is we are, through the use of guarantees, encouraging banks, U.S. banks, the private sector, to use these funds for development in the way that does not jeopardize the remittances themselves.

And there are ways you can do it. It's been done in the private sector for a number of years, but it hasn't been done -- it hasn't been done for development. It's been done to build casinos or do something else, but not development.

O'NEIL: I mean, it sounds like one focus, especially with the remittances, is leveraging or harnessing the earning power of the lower classes, let's say -- those that are sending the remittances back. What's the State Department's or the U.S. government in general, how are you addressing the upper classes and their role in development? Because, to be perhaps uncharitable to developing country elites, economic elites, their goals and the public good and even development have not always directly aligned. And sometimes it seems as if they're happy to have a bigger piece of a smaller pie than the smaller piece of a bigger pie.

So how -- what's your experience in working with some of these economic elites, and where have you seen opportunities or where maybe have you seen challenges in pushing this kind of agenda?

FERNANDEZ: Well, you know, one of the things that Secretary Clinton has been quite vocal about is talking about the need for elites in the developing world to pay their share of development, of costs, and to pay their share of government expenditures. So she's talked about the need for elites to pay taxes. She's done it in Pakistan, she's done it in Ecuador, she's done it in a number of places. And the way that -- and she's going to make it a priority and a focus of her speeches in the next few months.

And one of the ways that we're working on that in our bureau at the State Department is to try and see if we can have what we call a three-legged stool concept, the idea being, why don't the elite pay taxes? Well, rule number one, no one likes to pay taxes. But the other reason they don't pay taxes is that they're afraid that their funds are going to end up in a Swiss bank account; they're not going to be used for anything other than to line somebody's pocket.

They're also not sure of how those funds are going to be used, because in many countries, be it in Africa or in Latin America, there's actually -- you know, presidents get 5 percent of the budget to use, or X percent, to use as they wish. They actually do not have to account for the use of those funds, and that's perfectly legal. They just get a fund.

Well, that goes back to the issue of transparency. It goes back to what we're calling the three-legged stool, which is -- one is, you've got to fix the tax system in order to make it more effective, but in addition, you've got to deal with corruption and you've got to deal with transparency. And you can't deal with any of those three items separately; you've got to deal with them jointly.

And so we are -- when we talk about elites, we're talking about working with governments, working with the OECD that has a number of these programs in place already, to reform tax regimes, but do it in a way that also deals with corruption and deals with transparency. So that's how we're -- you know, you've got places in Central America where the tax to GDP ratio is 8 (percent) or 9 percent. There's not much you can do in terms of creating a social safety net if you've got that kind of revenue.

You look at Brazil -- and Al will probably know this better than they do. So one of the things that they've been able to do is they've been able to increase their tax to GDP ratio in order to do some of the -- to have some of the programs that they've had in place that have brought, you know, 30 (million) to 40 million people out of poverty. You can't do that unless you have the funds. And in order to do that, you've got to be able to convince your elites that those funds are going to be used for development and not for some other purpose.

O'NEIL: Let me ask you a bit about -- coming back to our side of the pond, so to speak -- what's the political climate for these types of initiatives from the State Department, or, as you were saying, across the U.S. government and with multilateral organizations? I mean, how do you see it over the last year that you've been there in terms of support or not for this kind of issues? And then looking forward, we have a new Congress that just came in. What -- how are you -- what's their response to the kind of things that State Department's trying to do?

FERNANDEZ: I think we are in a -- at least my bureau is in an enviable position. I say to people, you know, business and dollars are party-neutral. No one's going to argue with the need to have more efficient use of funds. We realize that we will never be able to -- we will never have the resources that we need in order to fund development through all. So we're always going to be short. We're going to have to coordinate. We're going to have to work strategically. We're going to have to get more bang for the buck. And that's why, you know, one of our major thrusts is to work with the private sector in order to leverage those funds.

So that kind of philosophy, the whole philosophy of efficiency, I think, resonates well with both parties. And so, frankly, at least in the conversations that I've had with people on the Hill, you know, they might -- they might not be happy with a project or two that we have. But I think in general they believe that what we're doing makes sense. And that's really the only way to go.

O'NEIL: Let me ask sort of a bigger question before I open it up to the audience. And this is the 50th anniversary, the golden anniversary of the Alliance for Progress. And so from that you can see that the State Department and other organizations have been involved in development for a long time now. And maybe, as you think about what you're doing today, could you -- could you reflect a bit about, you know, what we've learned for over half-a-century worth of development work in the State Department? What have we learned as a U.S. government in terms of what we can do or what we can't do? And how is that shaping what you are putting forward --


O'NEIL: -- today?

FERNANDEZ: -- you know, the Alliance for Progress -- 50 years ago, you know, 1961, and we've learned a number of things. And I think one thing we've learned is that aid in and of itself is not development. If you look at the world in 1961 and the kinds of things that the Kennedy administration was pushing, a lot of it had to do with aid. Times have changed. The funds just simply aren't there. So part of what we need to do and part of the reason why we have to leverage or work with the private sector is we need to find other ways of working with countries.

I think if you were to look at the -- at the change in philosophy perhaps, some of the things that were needed in 1961 are still there. This is perhaps -- in Latin America, democracy has taken hold, so perhaps that's a change from 1961. But some of the needs like development used to -- you know, some of those, rates of poverty, poverty rates, social inclusion, those items are still there.

Where I think -- where I think you may very well see a shift in -- from -- in our relations in terms of 50 years later is I think we have to work with countries in some ways that want to help themselves as opposed to just doling out the funds. If you look at, again, the initiative on remittances, the initiative on helping countries reform their tax systems so that they can actually fund some of the programs, that's -- that's not an aid program. That's much more of a partnership. You're talking to countries, but doing something that they already want to do, and helping them do it better. So that's -- that I would see as a shift.

But, you know, in some ways, the Alliance for Progress gets a bad rap. But if you look at Latin America in the last 50 years, you can't argue with success. And a number of the things that were done in the name of the Alliance for Progress, I think -- I think, have been successful. And then to this day, you know, you created a whole group of Latin leaders who look to the U.S. for guidance and leadership. That's something that the Alliance for Progress did. And so I -- you know, but it's going to -- it's going to change. The resources simply aren't there.

O'NEIL: Well, let me open it up to questions from you all or comments from you all. Please just signal to me, and I'll take a list. Who wants to speak from the start?

QUESTIONER: Me. Good morning.


QUESTIONER: I'm Andy Spindler from the Financial Services Volunteer Corps. And I'd like to raise one of the more problematic sides of development, and specifically the rough-hewn nature of the financial sectors in a lot of the countries that we're talking about.

In our own work at FSVC, in the Middle East, in Sub-Saharan Africa, we see financial sectors that have in some cases developed very positively. But there are sides of these financial sectors that are very vulnerable and subject to misuse. They can readily be used as conduits for financing of illicit activities, criminal activities, even terrorist activities.

How does -- how do these problems -- how is the agenda in your bureau dealing with these types of problems, which are really serious ones, all over the developing and emerging-market world?

FERNANDEZ: Andy, one way that we're dealing with it -- and there's a dark side to what I do, which is the whole sanctions piece, and Somalian piracy and Kimberley diamonds, and Iran sanctions and things like that. And one of the ways that we're -- that we're trying to work with it is to -- is to -- is to work with countries that need some help in the financial sector, and then to actually track some of these -- some of these payments. You're right. Oftentimes, countries have a desire to work with us in terms of enforcing sanctions and the like, but simply don't have the means.

In another -- in another situation, for example, we're working on Somalian piracy, how do we -- how do we deal with that. And, you know, we're not -- we are not in the -- in the business of what the Defense Department does, which is, you know, getting on ships and trying to free people. But what we're trying to do is, how do we track the funds. These people are getting funded from somewhere. And oftentimes they're being funded from the U.S., from diaspora communities here. And if you talk to some of the agencies, they'll say, "We just don't know where the money is coming from, and we don't know where it's going." It's hawalas. You know, it's cash. And the intelligence is not great. You just don't know where that money's going. So one of the ways that we're trying to work with it is to work with countries' financial systems to create those kinds of controls. So that's one way we're dealing with it.

And I -- obviously, in the sanctions department, in Iran sanctions, it's a major -- it's a major initiative, and that's something we're spending a lot of time on.

QUESTIONER: Thank you.

QUESTIONER: Jim Silkenat, Sullivan & Worcester. Jose, good morning. I wanted to follow up on your comment about interagency cooperation. And I wondered if you could talk a little bit about how the different departments interested in international business and economic affairs shape policy, whether it's Treasury, Commerce, the trade representative, your office at State, other parts of the State Department, the Human Rights Bureau and so on, how do they work together or not to develop policy?

FERNANDEZ: Well, you know, it's -- that's been an education for me.


FERNANDEZ: I got there, and I figured, you know, that we wanted to work on debt issues. And I thought I could just -- you know, I had this big title; I could just go ahead and do it. But it -- you know, and then you figure out that it's -- that Treasury's involved, and that Commerce is involved. It works well. It works well, but it -- what it means is that you've got to check a lot of boxes. I think in general all of the agencies are trying to get to the same place. They may be trying to get there through different ways.

But, for example, one of the things you learn is that currency issues are -- you stay away from, you know, Treasury. That's -- and you don't even touch it. At the same time, if you're dealing with issues of the Paris Club debt, well, that's something that our bureau gets very much involved in. So you've got to coordinate. And what it means is -- you know, you -- there's this adage that government, that it moves slowly. And part of the reason why it moves slowly is you've got to check a lot of the boxes.

And so I have been -- you know, it's not something that came natural to me -- naturally to me. But I think it's something that once you get used to the fact that you've got to get a number of people to come along, it works well. And so far, at least in my experience -- and, again, I've only been there a year -- you know, at least with Commerce and with Treasury, it's full of people who commute back and forth to New York. So it's people that all of us know. It's worked well. But it means -- it takes a lot of calling and getting people on the same page, a page that they're already on. But it -- you've got to -- as I've said, you've got to make sure you check a lot of boxes.

QUESTIONER: I wanted just to talk about China for a second. I'm not sure China has a development agenda. They clearly have an investment agenda. I wonder if you could talk a little bit about, from your perception, what their objectives are and how well they're doing in carrying them out, both in -- I mean, I see them in -- you know, in Latin America, in Brazil and other places, and clearly throughout Africa?

FERNANDEZ: China in -- is -- it's amazing how active they have been in the -- in the developing world. You go, you know, from Costa Rica where they literally have built a football -- a soccer stadium for the government, to North Africa, where it was recently where they are doing, you know, a lot of the infrastructure work.

You know, one of the things that we're trying to do is to try and coordinate more with the Chinese on development. They're very active in Africa. They are active in major infrastructure projects. And they've got a development agenda. What we -- what we'd like to do more of is to work together with them in a number of areas.

You know, Africa is -- comes to mind because they're very active. It's from Zambia to Libya, they're there, and we're not. And it's from a -- from a business point of view as well as from a development point of view, I think it's going to be tough for us to catch up in some of these areas. And I think we can actually work with the Chinese and bring some of our expertise on development.

In the food area, you know, we have a major initiative on food security in Feed the Future. Well, that -- you know, that brings a number of issues to the fore, issues of land grabbing, issues of -- well, biotech. In all -- in all -- in all of these areas, the Chinese are involved. But it hasn't been coordinated.

QUESTIONER: You -- what are your -- what are your -- what are your perception of objections? That was my question. And how well are they doing against -- what is your perception of their objectives? And how well are they doing against that? That was my question.

FERNANDEZ: I don't know what you mean by "objectives." I mean, I think they -- the criticism, okay, of the Chinese that you'll hear is that they don't pay as much attention to some of the issues that we pay attention to, human rights and the like.

You know, I -- some of that, frankly, is sour grapes, I think, in my case. And the fact of the matter is that oftentimes they're doing projects that we're not getting involved in, that nobody else is doing. So I think, yeah, they've got a -- they've got a geopolitical agenda. They want to make friends just like we do. And I'm not sure that's a bad thing.

I think -- but I think rather than simply criticizing them, I think we've got to put our money where our mouth is. If they are the only game in town, as they are in several countries in Southern Africa, you know, they're going to be successful. So we either play in that arena or we just -- or we just step away. And in my eyes, I think we have -- we have to play in that arena. We've got go find ways to work with U.S. business. U.S. business is very interested in -- from a -- from a business point of view, not a -- not a -- not an altruistic point of view in getting involved in a number of these areas. And then we've got to find ways to -- in some ways work with the Chinese, but in others complement or do something different

QUESTIONER: Hi, I'm Carol Sakoian from Scholastic, the children's publisher. My question is about remittances. In the countries where I work, I'm often shocked by the level of -- I guess you'd call it -- "transfer fees" for these people, Mexicans working in this country who are paying Western Union 25 percent of what they transfer. And those people have no advocates. And I'm wondering if that isn't an appropriate role for the -- for the government is that if this money is to go -- no matter where it's going -- that somehow the fees would be lower. The bank transfer fees, which I experience transferring money, are just horrendous. And mine are --

FERNANDEZ: Is that still the case, Carol? Because my understanding is that those numbers have gone down big-time.

QUESTIONER: Well, I -- this was -- actually, my most recent experience was in Morocco, and I was horrified.

FERNANDEZ: It was recently?

QUESTIONER: Yes. I could not believe what people were paying. And they were coming -- of course, they were coming from France and from Europe.


QUESTIONER: But, you know, it really -- it was usury.

FERNANDEZ: Yeah. Well, again, part -- if we do this right, we will create some competition. We also have an initiative that we're working on called financial inclusion, which is basically to create mobile banking -- you know, to have it done by phone and have it, you know, just -- in a way avoid the bank -- going through those systems. And that's going to create more competition.

What we're trying to do in remittances is create ways for banks who have an incentive to get involved in this business, to compete with -- in this business. And I think if we do that, I think there'll be -- it will be in their interest to lower some of their fees, which I think have gone down, at least in the parts of the world that I've been looking at. In West Africa, they've been lowered, and also in Latin America.

QUESTIONER: I hope so.

FERNANDEZ: Yeah. But it's not 25 (percent), I don't think it's 25 percent anymore. It used to be. I mean, you're right.

O'NEIL: Okay.

QUESTIONER: Bob Pelletreau, former assistant secretary for the Near East.


QUESTIONER: I'd like to ask you a question about Tunisia, that's been in the news quite a lot recently in a negative way. Here's a -- and you were there recently, I think -- here's a country that over the years has done quite a lot right. It has emphasized education. It has emphasized gender equality. It has emphasized development of a middle class.


QUESTIONER: And it graduated from American assistance programs decades ago, but all under very tight political control in the country. And I'd like to ask your perceptions of the Tunisian situation, both for Tunisia itself and as an example of a number of countries that are living under authoritarian regimes, but in which there is a considerable amount of positive economic ferment.

FERNANDEZ: Yeah. I was -- I came back from North Africa a couple of weeks ago. I went to four out of the five countries in the Maghreb; didn't go to Mauritania. And I was there to promote entrepreneurship and to find ways and to put together a program with the Tunisians -- they were involved as well -- to bring U.S. entrepreneurs to North Africa to create a private sector link with our private sector to find new avenues for us to work with governments that weren't necessarily state-to-state issues, but actually were business issues.

And you're right. Tunisia is a -- in some ways, has been an example of some of the things that we're asking a number of Arab countries to consider, such as gender equality. I mean, it's been -- you know, better than I do -- it's been a model in the North African and Middle East region on women's issues. It's got a very vibrant private sector. You know, I think none of these places is perfect. I think you could argue that in Algeria, you've got a -- you've got some of those same issues, and you could argue that in Morocco and in other places.

From where I sit, what I'm trying to do is to find ways for our private sector to connect with their private sector, and this -- and to promote entrepreneurship, to bring more -- to bring a -- to create a private sector that will embrace technology, that will see the opportunities to do business with our sector, and that will create other avenues for us to work together in those countries.

In order to do that -- and if we do that, we will be able to achieve some things that are better achieved, I think, by showing and talking about what the objective is as opposed to what they need to do, such as changing investment laws, creating a bankruptcy code, doing things that you need to do in order to create or to have a free market economy, an economy that will do two things that they're very interested in. And this is -- we're opening -- we're pushing an open door here -- and an open door. One is a -- a lot of these places are powder kegs in terms of huge unemployment, and I think it was Algeria where the unemployment rate for people under 30 is 70 percent. It's -- I mean, that's a nightmare waiting to happen, right?

So one is to deal with the unemployment, and secondly, to diversify -- diversify their economies away from natural resources. That's -- you know, that's what we're trying to do in North Africa.

In Tunisia, yeah -- I mean, you've got the -- Secretary Clinton just, I think, yesterday spoke about some of the things that need to be done in a number of countries. We've made our views known to the Tunisians, but at the same time, what I'm trying to do is -- rather than simply hammer people over the head with what it is that they need to do to show them what -- you know, that if you do certain things, if you liberalize certain areas, I think you can -- you will achieve results.

So to go back your question on Tunisia, it's a challenging place. It's got a very vibrant private sector, which you don't have in a number of other countries in North Africa. But we've got some challenges there that you're seeing now occur -- you know, some of which are creating problems.

QUESTIONER: I think encouraging modern bankruptcy laws is very important.

FERNANDEZ: Well, it's --

QUESTIONER: And you're right on it.

FERNANDEZ: You know, it's -- something we don't realize in this part of the world sometimes. I was in Japan promoting another entrepreneurship initiative, and everywhere I go, I speak to -- I go and speak to students. And one of the students in the Japanese MBA class said to me, well, you know, you have these entrepreneurs who ask people for money and then they go bankrupt. How can you go back to that same person and ask him for more money for a second venture when you've gone bankrupt? And what I said to him is, you know, in Silicon Valley, that's a badge of honor -- (scattered laughter) -- you've gone bankrupt and you can come back. And that kind of mindset, you can't teach it; you've got to bring it from below and you've got to show the opportunities. And that's what I'm -- really, the most attractive parts of this business.

I'm not -- of this position that I'm in. I'm not lecturing people. I'm just -- I'm working with them and working together in order to get to a certain place.

O'NEIL: (Off mic.)

QUESTIONER: The question I want to raise is not one for which you have personal responsibility, but I think it's illustrative of what you indicated earlier, which is the difficulty in a world in which all of these economic issues spread across a whole variety of institutions within the U.S. government. And as a consequence, what happens is that people do not really see and understand that the U.S. as a whole is viewed as impotent within the world economy because of Doha.

Our inability to come up with an end to this continuing process involving trade is extraordinarily costly. And no matter what you do or say about entrepreneurship or about doing this, that or the other is going to make any difference whatsoever in terms of policy, in terms of attitude or in terms of the relative importance of China, which is growing as important component of international trade.

FERNANDEZ: You know, I would -- and this is dangerous, but I would disagree with you. (Scattered laughter.) I don't think we're impotent. I think, A, this is still the world's biggest market to this day, I think. I think in Doha we have -- in trade we have some real differences. We're basically saying some of the -- you know, some of the countries that we used to call developing countries have sort of moved along, and you can't -- you know, if you're India and China, you're no longer in the place where you were 10, 20 years ago, so it's -- the same kinds of concessions and treatment that you wanted 10, 20 years ago, you know, perhaps you now ought to be -- you ought to be more like us than a purely developing country.

You know, but -- but, you know, we're seeing some other initiatives that I would argue are not making us impotent. You've got the Trans-Pacific Partnership discussions, the TPP, which is a 21st century, you know, free trade agreement that includes -- goes from Australia to Malaysia to Indonesia and the like, where there are a number of countries that have asked to be included. That's going to -- that's -- you know, if we can do that, I think it'll be a huge leap forward in terms of our ability on trade -- of our work on trade.

There are still some -- you know, on Korea. You know, trade is difficult. Trade is very contentious these days, and not just in D.C., but throughout the country. But I think we're making some progress. And I wouldn't say that we're impotent, I just think, I think we've got some real differences and almost philosophical differences in terms of what the -- what kind of relations will we have with countries that 20 years ago were in a different position than they are today. And that's -- you know, that's -- we need to work that out.

But if you look at the Korea free trade agreement, that's, hopefully, going to go forward. If you look at TPP discussions, if you look at what the administration has done lately -- you know, by announcing a program on Mexican trucks, if you look at what we hope to do in the -- with the FTAs in Colombia and Panama, you know, it's difficult, but I wouldn't say we're impotent. I just think these are very, very difficult -- now, decisions that we need to make and difficult negotiations where even within our administration, there are differences of opinion.

O'NEIL: (Off mic.)

QUESTIONER: Thank you. I just wanted to return to the issue of remittances. I see the rationale for a loan guarantee for projects that you want to encourage. I don't see the rationale for tying that guarantee to remittances. If it's a good thing to do if you got offered the guarantee because when you're securitizing the remittances, you're really securitizing the flow of revenue from the remittances, not the remittances themselves.

If you're, indeed, leaving them out of the process, you're not taxing remittances directly, you're securitizing the flows of revenue from foreign exchange and transaction commissions that come to the institution, which provides a counter to -- with the competitive pressure that drives these down. Once you've securitize them, you have to hold the fees up because then you're obligated to pay off that bond.

So I think it's probably a good idea to the extent we can offer guarantees for projects we want to encourage, but I don't see -- unless there's some sort of tension-gathering mechanism, I don't see the rationale for tying those guarantees to remittances.

FERNANDEZ: Well, look, it's just a way of creating some liquidity. The -- Guy, as you know, one of the issues in many -- in the developing world, certainly in Central America where we're testing this, is the lack of medium and long-term financing. And so that's what we're trying to do by -- you have these remittance flows that you know are going to remain more or less stable, even during the recession they were -- they really didn't go down that much. And what we're trying to do is rather than -- you know, some of these projects require 10, 15, 20-year financing. That's what you can do with a steady remittance flow. And you're creating liquidity. You're basically telling the banks, you're getting these funds. We are going to find ways of encouraging you to use them for development as opposed to something -- you know, consumer loans.

So I do think there's a use for remittances. You can also -- you're also encouraging the second-tier banks -- the first-tier banks are already working on some of these things, but the second-tier banks in many of these countries to lower their fees in order to get more remittances and more liquidity.

You know, I should say that yesterday, in fact, we had a delegation from El Salvador and another from Honduras that came to talk to us already about the specifics of the remittances project. And they -- you know, they see it as a game-changer. They really see it as a way to -- El Salvador is talking about a billion dollars' worth of infrastructure development in terms of ports, in terms of power plants, roads. And they do not believe that the current conditions allow them to get long-term financing in the private sector. And so they need to find ways of lowering the costs of funding and to lend them the maturity -- the maturities on their loans, which they haven't been able to do.

So that's where they see remittances making a difference.

O'NEIL: Donald.

QUESTIONER: Jose, I see your job as trying to create an intellectual powerhouse in the State Department to do development more intelligently. And it seems to me that that requires intellectual leadership with the commerce attaches in the various embassies. And I give you a short example. I was in Libya earlier this year at the time of the first American Commerce Department visit to Libya, and I suppose it's a wonderful thing after 10 years to finally realize that it's possible to have commerce with Libya, but it was not very well planned and it was certainly badly executed.

And certainly, they never thought that improving the knowledge and the opportunity of entrepreneurs in that country was an important part of their function.

So I would assume that you have to deal with the Commerce Department which sponsored this mission, as well as your own attaches. But something has to be done to make sure that there is a study of what can be done, what should be done and what kind of follow up is necessary. How do you work on making the visa process more manageable? There are so many things. But instead of doing it in a hop-hop-hop manner, to do it consistently, intelligently and with follow-up.

FERNANDEZ: That's a good point, Don. And one of them -- one of the problems that I've seen is a lack of -- in some countries, lack of resources and lack of manpower, people power from the Commerce Department. There are countries where there is no foreign commercial officer. And so the State Department has to take that role.

The way that I'm trying to deal with it is realizing that at any time, assuming we're not going to get any more money to do what we want to do, is to try and focus on specific areas. For example, I've gotten it into my head that we've got to be a player in the infrastructure field.

Libya, I just -- that is not the sort of stuff I wake up knowing about, but I just came back, so I know the numbers, $60 billion this year alone, this year alone in infrastructure projects, 30 million (dollars) to the Chinese, 18 billion (dollars) to the Turks, 6 (billion dollars) to the Koreans, zero to U.S. companies.

QUESTIONER: Except for AECOM, which overseas a lot of those projects.

QUESTIONER: Six billion dollar housing project -- AECOM.


QUESTIONER: In Libya. They're rebuilding the city. Remember all those towers you saw when you came in from the airport?

QUESTIONER: This year?

FERNANDEZ: This year?

QUESTIONER: Yeah. It's been -- it's a three-year --

FERNANDEZ: Well, that's not what I was told. I mean, they said what -- this is the minister of trade telling me zero this year from U.S. companies. What I'm trying to do is rather than just deal with business as a whole, we're going to focus on three or four things that we do. Agriculture, big success story. We can do more there. Infrastructure is the other one.

And so that's what we have to do. We've got to get smart. We've got to focus. We're not going to be able -- I'm not going to be able to do to help every business everywhere. That's our challenge, though. That's really the challenge.

O'NEIL: Okay. Right down there.

QUESTIONER: I'm David Slade with international law firm Allen & Overy. Jose, you mentioned the darker side of sanctions and of course, there's always increasing political pressure to expand those sanctions due to Iran and other reasons, yet we have many clients down at the likes of U.S. Ex-Im bank and OPIC, whose mission is to promote development in emerging markets -- at least, that's part of Ex-Im's mission -- and they're always complaining to us about how the sanctions interfere with that very important mission, which is also an important part of your mention -- your mission.

So, you know, obviously, getting the balance of those two objectives is a difficult one and I just wish you'd -- I was just wondering if you could comment on that.

FERNANDEZ: The head of OPIC is yet another New Yorker who commutes, Fred Highberg (sp). You know, what we're trying to is to coordinate. We've had a number of meetings where we try and work out a policy. Where you get into trouble, I suppose, is the gray areas. What if you -- what if you're OPIC and making a loan to a company that's selling to another company that's a got a subsidiary that's working in Iran? How do you treat that company?


FERNANDEZ: And those are the kinds of issues where we meet regularly to talk about the policy, and we've had in a couple of cases, recently, had to actually come up with a policy on the run because we didn't have a policy to begin with because the law is changing, too, as you know.

So I'd say on that one is because of the intense congressional attention on Iran. We're treading very carefully and we're making sure that all of our ducks are in a row.

So I think from a business point of view, it's -- if I'm -- I'm not surprised that businesses are complaining. I mean, it makes it much harder to secure OPIC financing or Ex-Im financing. It makes it, in some cases, very complicated because you've got to do the kind of due diligence that you really didn't think you had to do in the first place.

So it's not making business any easier, frankly, but it's what we're being asked to do. And you know what, if anything, it's going to get harder.

O'NEIL: We have a good list here for our last five or ten minutes. I want to take a couple of questions and let you answer them. So go ahead, David.

QUESTIONER: My name is David Willkie. I work for the Senate Foreign Relations Committee under Senator Lugar. And Jose, I want to thank you for inviting me today and reaching across the aisle, which you don't see very much in Washington these days.

I want to ask you a little bit about the remittance program. And specifically, your thoughts on how you can demonstrate the benefit of the remittance program for those people that are making the remittances, and also thinking about the criticism that comes up, especially in the middle of the country, about development programs in general, how you can show a benefit possibly from supporting the president's goal under the president's export initiative of doubling exports in five years.

Is there a thought process that you have there in rolling this out?:

O'NEIL: Let me just take your question down there as well.

QUESTIONER: Yes. Brad Fusco from Booz & Company. I just wonder to what degree the promotion of political freedom is seen as being instrumental in some of the initiatives that you described to promote entrepreneurship and to provide some faith in the private sector that it's worth trying to get ahead, and really have no voice in their societies.

O'NEIL: You want to take -- I'll give you -- tell you what, Ivan (sp), do you want to add yours to that?

QUESTIONER: Ivan Rebolledo with TerraNova Strategic Partners. I wanted to ask you a little bit about microfinance, an initiative that I know is close to you, Undersecretary Otero and Secretary Clinton.

How is the State Department and your bureau in particular use it as a tool in development? And I ask this question in light of strong criticism that microfinance has been subjected to over the last few years.

O'NEIL: (Off mic.)

FERNANDEZ: Yeah, let me -- first of all, to David, if there's anyone, frankly, that I personally admire in terms of foreign policy it's Senator Lugar. So it's not a question of bipartisanship; it's a question of having great respect for the senator. He's been great, for my purposes. If you want to learn about food security, read the report that Senator Lugar put together on food security. It's really wonderful.

Diaspora. I'm convinced -- and everyone that we talk to in the diaspora, and we've reached out to community groups -- that they will find ways. The taxi driver who sends money to his family so that his son can go to school in El Salvador also wants to make sure that that school has lights that it can turn on. So it's more -- it's not simply consumption, it's making sure that they develop. And I think -- the way that we're pitching it is we're saying there's something that made you leave your country and that's poverty. There's opportunity because you didn't have opportunities in your own country. We're trying to find ways to create opportunities in the developing world.

So I think the response that we've received from the diaspora communities, once we show them that the remittances are being affected, that we're simply just channeling the remittances to a different objective, I think it's been excellent. I'm very heartened by that.

In terms of showing results, that's important and there are two pieces of the results. One is when El Salvador comes to you and says I've got $1 billion worth of development, I want to create a port so that I can do more trade, I'd like to create an airport so that I can have more tourism, but I can't do it because I can't get the funding, one of the ways you show results is you get into your financial adviser mode and you find ways for them to get lower cost funding that makes it feasible.

So one way that I would show results is there are projects today that cannot be done that we will be able to do if we lower the cost of funding and if we extend the -- (inaudible). And that's what we're trying to do.

From an NEI point of view, National Export Initiative, those of you who haven't been following it, the president has mandated us to work to double U.S. exports in the next five years and create 2 million new American jobs. That's a tough order. The first 10 months of 2010, our exports went up 17 percent, but that's from the base of 2009.

So we've got -- that's going to be something that we work on all the time. But that's the opportunity. If we can get more trade, if we can build the port in someplace in Central America, more grain from Indiana will be exported. The airports -- we lead in the construction of airports around the world. Well, if they're able to build a new airport, if they're able to refurbish their existing airports, that will be an opportunity for U.S. companies.

So that's what we're trying to do in that sense.

Political freedom. The entrepreneurship initiative begins with the president's Cairo speech and where he talks about the need for us to reach out to Muslim-majority countries and to have better relations. One way that the president has told us to do that is to create links between our entrepreneurs and create links in ways that -- one of the most admired sectors of American society as I've discovered as I travel around the world is our entrepreneurship culture. People want to meet U.S. entrepreneurs. They want to meet U.S. technology companies.

Entrepreneurship means private sector contacts. It means changing legislation that I was talking about. It means furthering technology in a way that will create more freedom, more political freedom, more opportunities for people to communicate. It will create opportunities for women. We're doing something now in Peru. We're giving women -- working with U.S. companies, for example, to agree that they will buy X number of billion dollars a year from women-owned businesses in Peru. That's going to create, if we're successful, 2,000 new women-owned businesses in the next two years in Peru. That will create -- you know, if you empower people to have their own businesses, that will create -- that will create some political space.

What we are not going to do, what I'm not going to do, at least from my bureau, is to go out and tell the world, you've got to do this or else. I want to create -- I want to create the conditions to encourage them to do that. There will be times where we will be successful. There will be times where we will not be successful. But entrepreneurship, if we're successful, will lead to more political freedom, will lead to more economic opportunity.

O'NEIL: You know what? We've reached the end of our hour, and unfortunately, we have a few more questions on the dock, but maybe if you could stay a bit, maybe people could come and ask you. But please join me in thanking Jose. (Applause.)












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