Treasury Secretary Discusses Wolfowitz, Chinese Economy
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JIM LEHRER: Mr. Secretary, welcome.
HENRY PAULSON, U.S. Treasury Secretary: Jim, it’s good to be here.
JIM LEHRER: It’s now about 4:45 p.m. Eastern time. What’s the situation right now on the Paul Wolfowitz thing?
HENRY PAULSON: Jim, let me begin by saying that the World Bank is a very important institution. It’s important to the president. It’s important to me. It’s got a vitally important mission — reducing poverty around the world — that, as we speak, the board is in session.
I think you know that we fought very hard to make sure that there’s a fair process for Paul Wolfowitz. He’s a dedicated public servant. He’s worked very hard, had significant accomplishments at the bank. So the process had to be fair for him and for the bank. And, you know, we look forward to putting this behind us all and refocusing on the mission of the bank going forward.
JIM LEHRER: Are you satisfied the process has been fair?
HENRY PAULSON: Let me say this: We’ve done everything we can to make sure the process is fair. And I don’t think I should pre-judge the process. But it didn’t seem right for the bank to rush to judgment. This, as I said, is a very important institution, and this is an institution that’s made its share of mistakes.
There’s work that has to be done at the bank. And I think Paul has admitted that he’s made mistakes, the bank has made some mistakes. But, again, we look forward to putting this all behind us and refocusing on the mission going forward.
JIM LEHRER: So everybody involved is essentially admitting mistakes were made. Paul Wolfowitz has made that concession, and so have others in the bank, as we speak. Is that correct?
HENRY PAULSON: That’s correct.
JIM LEHRER: And because of that, then, there can be a resolution of this?
HENRY PAULSON: Well, listen, I look forward to a resolution. This is a regrettable situation. It’s, in many ways, a sad situation, because this is a very dedicated and committed and able public servant who’s worked very, very hard on behalf of his country and on behalf of the World Bank, and to relieve poverty, and do all the things he’s been doing around the world.
But, again, the board is meeting. I’m looking forward. I’m looking to the time when we can refocus on this mission.
JIM LEHRER: Yes, go ahead.
HENRY PAULSON: As I said, it’s so important to Paul and to all of us.
Wolfowitz and the World Bank
JIM LEHRER: Sure. Now, the reporting we have at this moment is that there is going to be an announcement shortly that will announce the resignation of Mr. Wolfowitz. Can you confirm that?
HENRY PAULSON: I'm not going to confirm anything other than you're just going to have to follow the news. And the board is meeting now. And, again, I'm looking forward.
JIM LEHRER: OK. But for discussion purposes, if there is, in fact, a vacancy at the presidency of the World Bank, will the custom that it be filled by an American continue?
HENRY PAULSON: Well, this has been a custom that has served the world well. As you know, there are a number of multilateral institutions. And, you know, the leadership of these has been divided up. The Europeans lead IMF. We have...
JIM LEHRER: International Monetary Fund.
HENRY PAULSON: ... and so on. So I see no reason why this should change, and I should see every reason why that it's important that the World Bank continue to be run by an American.
JIM LEHRER: And as secretary of the treasury, are you going to do everything you can to make sure that happens?
HENRY PAULSON: Well, let me say, as secretary of the treasury, I'm very committed to the future success of the World Bank.
JIM LEHRER: There's been a lot of reporting that you personally tried very hard to get this resolved in a graceful, quiet way. Is that correct? Did you play a central role in this?
HENRY PAULSON: Well, let me say, all of us have wanted to make sure that this process was fair to Paul. And that's -- my big effort, as well as a number of other people's big efforts, were related to the credibility of this institution and Paul's credibility going forward.
And it was very important, not just to Paul, but to this institution. World-class institutions deal with situations like this in a world-class, deliberate way, which in an attempt to be fair.
JIM LEHRER: But that, in fact, didn't happen, did it? This wasn't really a classy operation, was it, that got us where we are today?
HENRY PAULSON: Well, as we said, there have been mistakes. And there are -- I think this has brought to light a need for reforms and changes in the bank and their processes and the way some of their committee structures work and the way their governance works. But, again, I would like to look forward.
JIM LEHRER: Now, Mr. Wolfowitz himself said that he was the victim of a smear campaign from within the bank itself. Do you agree with him?
HENRY PAULSON: Jim, what I agree with is that it's very important to look forward. Let's leave history to the historians. Let's learn from ways in which the processes and some of the structures in the bank can be changed, but let's not forget, this is a great institution. And it does good for people all around the world. And we need to refocus on the good that this bank does, and learn from some of the mistakes, and just make sure that it does its job going forward.
The state of the World Bank
JIM LEHRER: Has it been seriously damaged by this, Mr. Secretary?
HENRY PAULSON: Let me say this. It is a great institution. And this isn't -- the important thing as I see it is the progress that's been made under Paul's leadership and some very, very important initiatives that he has begun. And I think the way to look at these things is over a period of time.
And I believe, when we look back a number of years from now, we're going to see that very important seeds that Paul Wolfowitz has planted will grow and flourish into significant successes.
JIM LEHRER: Some people have suggested in the middle of all of this that maybe there isn't a need for a World Bank as such anymore, that there are other institutions that can handle some of these things, more in the private sector. Do you still believe there's a need for a World Bank?
HENRY PAULSON: Oh, absolutely.
JIM LEHRER: Why?
HENRY PAULSON: This plays a vital role. But I think what people are getting at, it is important that every institution evolves over time to meet the needs of a changing world and a changing marketplace.
And change is difficult for every institution. And so managing change is important, and this is an institution that's going to need to change and evolve as the world evolves, like every institution.
JIM LEHRER: And were you keen on managing the change at the top, as well, amidst all of this turmoil yourself?
HENRY PAULSON: As I said, my focus has been to make sure that the process at the World Bank was a fair one, the best credit to the World Bank as it works its way through this situation.
JIM LEHRER: Do you believe that Paul Wolfowitz if, in fact, he does leave the bank can emerge unscathed?
HENRY PAULSON: All I'm going to say is that Paul Wolfowitz is a dedicated public servant, a very competent professional, who's done many good things, and I think his record is going to speak for itself.
China's economic growth
JIM LEHRER: New subject. I'm sure you're grateful for that.
HENRY PAULSON: Thank you. Thank you, yes.
JIM LEHRER: You're going to have some meetings next week with the Chinese, a continuation of discussions you've been having over the last several months. What is it you want the Chinese to do, particularly in the currency area?
HENRY PAULSON: Well, Jim, what we're going to have is a meeting here, which will be the second meeting we've had in the strategic economic dialogue. And this dialogue is a way to help us manage more effectively a very important economic relationship between our two countries.
And the relationship with China is a multifaceted relationship. It's an important relationship. The economic relationship is an important part of that. And what we are focusing on with this dialogue is the pace of reform in the Chinese economy beyond the WTO. The WTO obligations...
JIM LEHRER: World Trade Organization.
HENRY PAULSON: You know, world trade obligations are base level, are minimal. So we're talking about opening up the Chinese economy to more competition, opening it up for U.S. goods and services.
So, much of this is about the pace of reform, the path of reform of the Chinese economy. The currency is one important aspect of that. The Chinese do not have a market-determined currency. Many nations in the world don't have market-determined currencies. But China is by far the biggest and most important country economically that doesn't have one.
They're integrated into the world economy in terms of their trades in goods and services. Their financial markets, their currencies aren't fully integrated. And so we're trying to speed up that pace of reform.
They agreed they need to appreciate their currency. They're doing so. They're not doing it quickly enough. And so we're attempting to persuade them that it is very much in their best interest and in ours for them to speed up that process.
JIM LEHRER: Why is it so important to the United States, Mr. Secretary?
HENRY PAULSON: Because reform -- let me step back and say that this economic relationship is mutually beneficial. This is a fast-growing market for U.S. exports that, if China does well, the U.S. is going to do well.
But for the U.S. to do as well as we should do, China is going to have to continue to develop. And their economy needs to make some structural changes. They are too dependent on exports and manufacturing exports, and they need to develop more and move more to domestic consumption.
They save at rates that are above 50 percent. These are precautionary savings rates because they don't have the safety nets and they don't have capital markets that have adequately provided savings vehicles for their people.
JIM LEHRER: But isn't the bottom line that the trade deficit between the United States and China is been over $200 billion. It's supposed to go up 20 percent this next year, and it's because of the currency, right? It's because their goods are so much cheaper than ours, et cetera, et cetera.
HENRY PAULSON: No. Let me say this: The currency is very important. And the currency needs to appreciate.
JIM LEHRER: In other words, grow in value with the market as best it can.
HENRY PAULSON: That's right. And the currency does that for a lot of reasons. That's a symbol of their reform. It's quite important.
But I have not talked with any experts that disagree with the point I'm going to make to you, and that is, if the currency had appreciated to whatever level was the level that reflected economic value, we would still have a big trade deficit with China, because the trade deficit with China is driven by structural considerations.
The United States has a very low savings rate. China is saving at a 50 percent level. Their economy needs to shift more so there's a bigger reliance on domestic consumption. Let me just give you one...
JIM LEHRER: Meaning Chinese -- let me make sure I understand it. The Chinese need to sell their own products to the Chinese, and we need to do what?
HENRY PAULSON: Well, let me step back and say, what that means is the Chinese -- the benefits of their economic growth need to be spread more broadly throughout their society.
JIM LEHRER: Not just in the exports?
HENRY PAULSON: Yes. And what we're seeing -- I'm going to give you one example, which is interesting. Chinese have savings rates that are above 50 percent. We call these precautionary savings. The reason they need to save at that level is they don't have Social Security, they don't have Medicare, health care programs, and they get very low return on their savings.
They have $2 trillion of individual savings in Chinese banks earning 2.5 percent a year. Now, that is a negative return after taxes and inflation, but yet this is an economy that is growing at well above...
JIM LEHRER: Why does that matter to us? Why do we care?
HENRY PAULSON: Well, because if the Chinese were able to make a higher return on their savings, they would have more money to spend.
JIM LEHRER: I got you.
HENRY PAULSON: And there would be more U.S. products and services that could be sold into China.
Meetings with Chinese officials
JIM LEHRER: I read something today where a Chinese official said yesterday -- this was in relationship to these meetings that you all are going to have next week -- that "external interference will only backfire. We are firmly against any attempt to make threatening rhetoric."
He was referring not to you, but to what some senators, United States senators and others have said, "Well, if China doesn't do it on their own, we're going to take some sanctions against China. We're going to get this thing done on our own then." What do you think of that?
HENRY PAULSON: Here's what I think about it. What I think is there is -- this is an economic relationship that benefits both of our countries. Most of the American people -- maybe all of the American people -- don't believe the benefits of this trading relationship are spread evenly. Congress is reflecting that sentiment.
And then, in China, we have strong nationalistic sentiment. And so there's protectionist sentiment in the U.S. There's protectionist sentiment in China. We have elections in both countries. China, the 17th Party Congress, is meeting this fall. They're going to be filling important politburo seats.
In an environment like this, it's hard to make change and progress, but we're going to get progress. A strategic economic dialogue lets us talk to the senior levels, and we're going to get progress in looking at energy. We're going to get progress in environmental issues. We're going to get some progress on opening up to services and financial services. And we're going to keep pushing and getting them to move the currency, doing everything we can to have them move the currency quicker.
JIM LEHRER: And to say this is hugely important is an understatement, correct?
HENRY PAULSON: Yes.
JIM LEHRER: To get it right...
HENRY PAULSON: And to say it's hugely difficult is an understatement and to manage expectations on both sides, because there's only so much progress that is doable.
JIM LEHRER: One final question, and a third subject. How worried are you about the slump, so-called slump in the housing market in the United States right now? And what kind of damage, if any, is it doing to the economy?
HENRY PAULSON: Well, let me say this. As you've pointed out, we've had a major housing correction in the U.S. The U.S. economy had been growing at a rate that was unsustainable and, in housing, it had clearly been growing at a rate for a number of years.
That correction was inevitable; that correction has now been significant. We think it is near the bottom. It will take a while to work its way through the system. Fortunately for us, we have a very diverse, healthy economy. There are other things that are positive that are offsetting that.
We've had business investments start to pick up. They've got a very strong labor market, unemployment at quite a low level. We have good growth outside of the country. We've been talking about exports to China, but exports everywhere are picking up. The consumer remains healthy.
So my very strong view is that we are near the bottom and that this will be contained as -- the housing will be contained, and we're fortunate that we have a diverse, healthy economy.
JIM LEHRER: All right. Mr. Secretary, thank you very much.
HENRY PAULSON: Thank you.