The United States must address long-festering fiscal and social issues if it's to maintain its preeminent political and economic standing in the world, according to Condoleezza Rice.
The former secretary of state to President George W. Bush issued this warning during a wide-ranging talk on world affairs at a general session of the Association for Advanced Life Underwriting, which concluded its four-day annual meeting in Washington, D.C., on Wednesday. Among other domestic challenges, Rice pointed to the U.S.' fiscal crisis, entitlement reform, education and impediments to growth of the private sector as issues that urgently require the nation's attention.
Rice additionally called for immigration reform, which she said is key to strengthening the U.S. in an increasingly knowledge-based global economy that depends less on physical resources than on human capital.
"The U.S. has been the greatest mobilizer of human potential in human history," said Rice, who currently serves as the Denning Professor in Global Business and the Economy at the Stanford University Graduate School of Business. "And immigration has been at the core of our ability to mobilize human potential from all over the world. Comprehensive immigration reform is therefore critical to continuing to be a nation of immigrants that mobilizes that human potential.
"[Reform] can't be just for those who come here, but also for those who are here," she added. "We also have been greater mobilizers of human potential because we've been able to mobilize across classes."
Hence the need, Rice continued, to avail all Americans of a high-quality education. But the nation's K-12 system is failing many among the nation's youth, notably those in lower income classes, leaving them potentially unemployable and on the dole.
Turning to the U.S. fiscal situation, Rice said the growing national debt and budget deficits are "mortgaging our future" and negatively impacting the nation's political and economic influence. The immediate danger is growth in nondiscretionary entitlement programs – Medicaid, Medicare and Social Security – which, if left unchecked, will force dangerous cuts to other federal appropriations, including defense spending.
"There is much at stake," she said. "With the 2012 elections over, my hope is that we'll be able to find a balance of deficit reduction and growth, which we also desperately need. We talk much about cutting; we don't talk much about how to get the economy growing."
To that end, Rice urged Congress and the president to coalesce around reduced marginal income tax rates as it proceeds toward reform of the complex federal tax code. Reduced rates, she said, would free additional money for consumer spending and business investment – both key components of gross domestic product – as well as philanthropy.
Lower corporate income tax rates also are needed to encourage companies to move their profits to the U.S. from offshore tax-havens. She added the U.S. should also not be "picking winners and losers" by offering subsidies or tax credits to particular industries.
Challenges now facing the U.S. are also having a global impact. Rice said that over the past 12 years, the "international system" has been impacted by a shock to physical security resulting from the terrorist attacks of Sept. 11, 2001, and the shock to the world's economic security following the financial crisis of 2008, one result of which is upheaval in the established global political order.
"When economic shock waves hit, it's not long before political shock waves follow," Rice said. "As the economic crisis is shaking up the balance of economic power in the international system, it has begun to have an effect on political power."
One manifestation of this shake-up, she said, is the Eurozone sovereign debt crisis, which is "fundamentally a political crisis." Though bound by a single currency, the European Union lacks the political structures to coordinate fiscal and social policy. One result: While Germany's exports have benefited significantly from a depreciating Euro, other countries with significant debt obligations – notably Greece, Spain, Italy and (most recently) Cyprus – have seen their economic situations deteriorate dramatically.
Expressing confidence that the EU will not break up, Rice said that Europe can potentially resolve its current debt crisis through greater political integration. But this step would require member countries to give up decision-making authority over key fiscal and social questions, such as the ability to issue government debt and define labor standards and regulations.
Rice voiced mixed views on economic prospects of the so-called "BRIC" nations: Brazil, Russia, India and China. Brazil and India (to which she added South Africa) are currently enjoying significant growth rates, tied in part to booming export sectors like IT sourcing. She cautioned that these countries continue to suffer huge income disparities and state interference in the economy – challenges that could inhibit further growth – but also lauded their political systems.
"Brazil, India and South Africa have something going for them that is not to be undervalued: They are functioning, multi-ethnic democracies," she said. "And as messy as democracy is, it has a safety valve: When people are fed up with their government, they can throw the bums out, and can do so peacefully."
She insisted, however, Russia doesn't deserve to be grouped with the other three "BIC" countries. The reason: Russia's economy is essentially run as an oil-and-gas syndicate, of which President Putin is the head. Though the country boasts world-class engineers and programmers (many of whom, Rice noted in recounting a conversation with Prime Minister Dimitri Medvedev, leave Russia after graduating to live in high-tech-friendly communities like Palo Alto and Tel Aviv), the country's educational talent remains underutilized because Russia lacks a well-diversified economy: Roughly 80 percent of Russia's exports are in oil, gas and minerals.
"The decline of Russia's political power is masked by an overwhelming number of nuclear weapons and the fact that Russia has a Security Council veto," she said. "Depending on the price of oil and gas on any given day, the Russian economy is maybe the 16th largest in the world. One can't build political power on that basis."
Turning to the fourth BRIC country, Rice voiced admiration for China's rapid social and economic transformation, one that has catapulted hundreds of millions of the nation's 1.3 billion people from poverty to the middle class; and that is forecasted to make the country the world's premier economic power later this century.
However, this transformation has come at huge social costs in terms of environmental degradation, food and product safety, political corruption, and civil unrest. Just in the last two years, Rice noted, China experienced 186,000 riots, many of them resulting forced displacement of people living in rural areas as local party officials have confiscated land destined for economic development.
China's political institutions, she added, are ill-suited to dealing with these issues, nor with its citizens' growing political aspirations.
"These challenges are putting a strain on a political system that is still centralized, hierarchical and that has bet its legitimacy on prosperity," Rice said. "The problem with legitimacy based on prosperity is that it's hard to keep up with people's expectations."
She added that China's lack of democratic institutions ultimately could act as a brake on economic development, particularly its efforts to promote industries tied to information technology.
"The Internet is the worst nightmare of the Chinese leadership because it is the great democratizer of information," she said. "The Chinese economy may well become the biggest economy in the world. But a country that is so terrified of the Internet that it hacks into people's servers just to find a human rights advocate is not likely to lead a knowledge-based revolution."