I Don't Want to Hold Your Hand

How Saudi Arabia and the United States have grown apart.

What will be the image that frames the news reporting of June 29's White House meeting between U.S. President Barack Obama and King Abdullah of Saudi Arabia? Surely not another bow toward the desert monarch, as caught on video at the London G-20 meeting in April 2009. Or what hypercritics saw as a further deferential bob in Riyadh last June, when the president leaned forward so the shorter king could confer on him the King Abdul Aziz Order of Merit, a chunky necklace that Obama took off within seconds.

Of course, what the White House staff most wants to avoid is any image as awkward as the shot of President George W. Bush and then Crown Prince Abdullah walking arm in arm at the start of a meeting at Bush's Crawford, Texas, ranch in April 2002. The shot was memorialized by Michael Moore in Fahrenheit 9/11 and, with Moore himself superimposed in place of Abdullah, became the poster for the movie, plastered on thousands of theater walls across the United States.

We will have to wait for W's biography for his explanation of this gaucheness, which came to define his presidency. However, the prevailing assumption is that Abdullah, then the effective ruler of Saudi Arabia because of the ill health of King Fahd, had thrown Bush off balance by threatening to walk out of the summit before it started. Abdullah insisted on being able to take home a diplomatic prize -- anything to make his visit worthwhile. This demand wrong-footed Bush, who had thought the Saudis would still be -- and should have been -- on the defensive because of widespread accusations about their historical tolerance of the Islamic extremism that spawned the 9/11 attacks nearly eight months earlier. Bush grabbed Abdullah's arm as a way of saying: "Stay. Let's talk about it." The rest is history.

Obama and Abdullah already has met just two days before at the G-20 summit in Canada, but Abdullah is coming to Washington to talk one-on-one about Palestine and Iran. On the former issue, Abdullah thinks that Obama "gets it," as he has been tougher on the Israelis than Bush or Bill Clinton. On Iran, however, the Saudi king fears that his country's historically closest ally is naive, and dangerously so, for putting so much faith in diplomacy. The same emotional approach that causes Abdullah to anguish about the Palestinians also explains his distrust and antipathy toward the Iranians, whom he sees as typically untrustworthy Shiite challengers to Sunni, and therefore Saudi, custodianship of the holy places of Islam.

Despite the official blandishments, there are clear indications that under Abdullah, and especially since 2001, Saudi Arabia has put distance into its relationship with the United States. Abdullah is trying to gain more room to maneuver in the Sunni-Shiite rivalry and between extremists and moderates within Sunni Islam. To do so, he has to erode the notion that the House of Saud is a pawn of Uncle Sam.

A clear example of this distancing is the foundation of U.S.-Saudi ties: oil. Saudi Arabia, despite having the world's largest oil reserves, is no longer the largest global producer -- Russia takes that title. And though for many years, in a clear statement of diplomatic priorities, the kingdom was the largest foreign supplier of oil to the United States, it has now slipped behind Canada and Mexico. With the years of ritual denunciations from both Bush and Obama regarding U.S. "dependence on foreign oil," Washington can hardly complain, but the net result is less U.S. influence in Saudi Arabia.

On Iran, there is a widening if not unbridgeable gap between the two countries. The kingdom's own signals of the policy differences between Riyadh and Washington might well include the June 12 London Times story, which reported that the kingdom would allow Israeli jets to fly over its territory to complete a bombing raid on Iran's nuclear facilities. Although officially denied by Saudi officials, the Times stood by its report. Its editor would not run such a story without being confident of the sources.

The kingdom's own pursuit of (peaceful) nuclear energy is a clear sign that Riyadh thinks that the United States cannot or will not stop Iran's program. A June 17 Reuters story quoted an energy advisor to the kingdom as saying that not only was Saudi Arabia looking at nuclear power plants, but it should also be allowed to enrich the necessary uranium fuel itself. That mirrors the Iranian stance, though the ability to make low-enriched uranium for power plants is, but for a few technical tweaks, the same technology needed to make highly enriched uranium for an atomic weapon.

Saudi Arabia's ability to master this technology is doubtful -- but its ambition is not. By his own admission, Pakistan's controversial nuclear expert, Abdul Qadeer Khan, now notionally free after years of house arrest on allegations of rogue nuclear trading, visited the kingdom around 50 times and was on the technology subcommittee of the Jeddah-based Islamic Development Bank. According to Khan's 11-page confession letter, a senior prince at one point even offered Saudi citizenship to Khan and some of his aides. (They declined.)

Abdullah's determination to go nuclear, at least for generating electricity, is being encouraged by France, where he will travel after leaving the United States. French President Nicolas Sarkozy, who is noted for his tough approach on the Iran nuclear issue, has already pitched the idea during three visits to Saudi Arabia. If the kingdom pursues this, it will impact the centerpiece of U.S. nonproliferation efforts on the Arabia Peninsula: the so-called nuclear 123 Agreement with the United Arab Emirates (UAE), which won U.S. approval for nuclear power plants by renouncing enrichment technology. If Washington accepts Saudi enrichment, the UAE -- which in its bad old days, also offered Khan a passport -- would insist on renegotiating its deal.

The octogenarian King Abdullah often cuts a lonely figure in the clannish House of Saud. One almost sympathizes for him when he returns home and has to explain to his brother princes where the United States stands on key policy issues. Crown Prince Sultan, his designated successor and official stand-in during his absence, is reportedly enfeebled and unable to comprehend government affairs. Therefore, the ultra-cautious, conservative, and anti-Iranian views of Sultan's brother, Interior Minister Prince Nayef, who is emerging more clearly as the next in line, could be crucial. Both men were said to be involved in paying off Osama bin Laden in the years before 9/11. So, even if the enduring image from this most recent summit is a bow or an embrace, it appears likely that the kingdom will diverge even further from its decades-old bond with Washington.

SAUL LOEB/AFP/Getty Images


The Canadian Century

What the United States could learn from its northern neighbor.

At the beginning of the 20th century, Canada was one of the richest countries in the world, enjoying boundless natural resources, a privileged place in the commercial empire established by still-dominant Britain, and access to the energetic American market. Against this backdrop, it didn't seem unreasonably boastful in 1904 when Prime Minister Wilfrid Laurier proclaimed that "the 20th century shall be filled by Canada."

Ninety years later, his words seemed more ironic than prophetic. The Canada of 1994 in many ways resembled the United States or Europe of today. Deteriorating public finances at every level were causing grave anxiety among both the public and experts. The federal government was plagued by persistent deficits. The national debt was growing at an alarming rate. The media and the international community were all predicting a day of fiscal reckoning with far-reaching implications. The Wall Street Journal went as far as to call Canada "an honorary member of the Third World."

Fast-forward again to today, and Canada seems to be back on track. The country's economy grew at an average rate of 3.3 percent between 1997 and 2007, the highest average growth among the G-7 countries, including the United States. Canada's job-creation record was nothing short of stellar. From 1997 to 2007, Canada's average employment growth was 2.1 percent, doubling that of the United States and exceeding employment growth in all other G-7 countries. Perhaps most importantly for future economic prosperity, during the same period Canada outperformed the G-7 average almost every year on business investment. Canada outperformed the United States on this measure in every year but three over the same period.

So perhaps Laurier was not wrong, just 100 years early. If the country continues on the path it is following today, it's not unreasonable to think that this will be the Canadian century, the era in which the country comes into its own as a world economic power and finally steps out of America's shadow.

The story of how a classic economic basket case transformed into a top global performer has implications beyond Canada. Every one of the tools Canada used to extricate itself from its parlous position is available to the United States. As the world's top economic powers gather in Canada for this year's G-20 summit, U.S. President Barack Obama and his team would be wise to study the Canadian model, or risk being left behind.

First, it's important to understand how Canada got off track. Prior to the early 1970s, Canada had a strict political culture, like many countries, which demanded balanced budgets and frugal government spending. Ottawa began to abandon this traditional discipline in the 1960s and 1970s, as federal spending increased from just under 15 percent of GDP in 1965 to 23 percent by 1993, but was not matched by equivalent increases in taxes. It was a phenomenon observed in many, if not most, industrialized countries during this period.

Between 1965 and 1996, Ottawa booked a grand total of four operating surpluses, and the real value of the national debt tripled. By the late 1980s, roughly a third of Ottawa's revenues were being used to pay interest.

Then there were the entitlement programs. The national public pension plan, the Canada Pension Plan, for instance, was increasingly unsustainable because its underlying assumptions, namely a growing population and continuous income growth, proved faulty. Huge premium increases or benefit cuts seemed the only way to carry the program through the looming retirement of Canada's enormous baby-boom generation.

The problem wasn't only in Ottawa. Canada's provinces, whose governments have much greater spending, taxing, and regulatory authority than U.S. states, were also hard at work creating a fiscal mess. As a share of the economy, provincial spending more than doubled between 1965 and 1993 while provincial debt tripled. The associated interest costs, as a share of revenues, also tripled.

By 1993, Prime Minister Brian Mulroney's Conservative government was beset by mounting internal pressure from the deficits, coupled with external pressures such as the Mexican peso crisis, which heightened capital-market worries about deficit-laden countries (three-month treasury bill rates more than doubled in 1995), and embarrassing international recognition of Canada's fiscal crisis, exemplified by the Wall Street Journal's mocking. The public was hungry for change, and in October 1993 the left-of-center Liberal Party of Canada led by Jean Chrétien came to power.

For the first year, the new government's promises of reform went largely unfulfilled. The turning point came in the 1995 budget when Finance Minister Paul Martin articulated a new direction for the federal government. "We are acting on a new vision of the role of government," he said. "Smaller government ... smarter government.

The Liberals' 1995 budget relied chiefly on spending cuts rather than tax increases to slay the deficit and began the long process of debt reduction. Spending was to fall 8.8 percent over two years. Large cuts in transportation, industry, regional development, and scientific support were made. The size of the federal government was to decline from 16.2 percent of GDP in 1994 to 13.1 percent in 1996. Public-sector employment was to fall 14 percent.

The new discipline paid off quickly. Federal government spending as a share of the economy fell even more rapidly than planned. Provincial government spending also decreased significantly from 25 percent of GDP to 20 percent. Federal budget surpluses were consistently reported beginning in 1997. The national debt fell by almost half (to a little over 40 percent of GDP) by 2007.

The quick return to fiscal surpluses coupled with stronger economic performance than expected meant Ottawa could cut taxes, including personal and corporate income taxes, capital gains taxes, and the corporate capital tax, which reinforced economic performance.

Canadian reforms didn't stop with balanced budgets. Chrétien's government went on to tackle and solve two previously untouchable entitlement programs: the Canada Pension Plan (CPP) and welfare.

The CPP, Canada's main public pension plan, is similar to Social Security in the United States. Previously deemed a political third rail, the CPP's unsustainable finances suddenly became fixable in Canada's new reform-minded political climate. The federal government and a number of its provincial counterparts seized the opportunity of the public's willingness to confront long-festering problems and bear the cost of reform. Nine provinces along with the federal government agreed to a set of reforms to the program that went into effect in 1998. These included increasing the payroll tax, modestly trimming benefits, and investing budget surpluses in equities.

One can quibble with the specific nature and cost-effectiveness of the reforms; no one, however, can disagree with the results: The program's financing was placed on a solid footing that will enable it to weather the costs of the retiring baby boomers.

Like the United States, Canada achieved historic reform of the country's welfare programs in 1996. Canada's approach, however, was more decentralized than Washington's. Ottawa offered a historic deal to the provincial governments: unprecedented freedom to make their own welfare policies. This unleashed a wave of fruitful experimentation and innovation in the provinces, while spending was cut at the national level. The results were stunning. Large numbers of Canadians, previously trapped in poorly designed benefit programs, returned to the workforce: By 2000, the number of welfare beneficiaries in Canada had declined by more than a million people, from 10.7 percent of the population to 6.8 percent.

In short, the Canadian economy took flight as reform took hold. Moreover, Canada weathered the recent recession better than its G-7 partners, so the reforms of the 1990s are the gift that keeps on giving. Consider that the recession in Canada lasted only three quarters, from the fourth quarter of 2008 to the second quarter of 2009. Beginning in mid-2009, the Canadian economy turned a corner and is experiencing real GDP and employment growth. Unemployment peaked at 8.7 percent in August 2009 and stood at 8.1 percent this May. None of Canada's major financial institutions had to be bailed out.

Some in Washington might dismiss the relevance of the Canadian example to the United States' fiscal problems because of the differences between the two countries' political systems. This is a misunderstanding of the Canadian experience. Many reforms that were put in place required extensive political bargaining with powerful interests, and provincial consent was often necessary. Moreover, as part of the reform package, the Liberals in Ottawa directly challenged several of their traditional interest groups, among them the civil service and social-welfare advocates -- perhaps a precedent for Obama to consider.

In fact, circumstances in Ottawa and Washington in the early years of Canada's reforms showed parallel patterns. The Liberals faced a fiscally conservative Reform Party opposition in Parliament, while Democratic President Bill Clinton was under similar pressure from Republican Newt Gingrich's congressional majority after 1994. This political alignment proved fruitful in moving both countries in a more fiscally responsible direction, but Canada was able to sustain reform whereas in the United States it quickly faltered. For example, the Clinton-era Republican Congress began reducing the federal deficit in 1994 until surpluses were finally achieved in 1998. Unfortunately, the status quo mix of overspending financed with deficits returned in 2002.

What made reform possible was the depth of the crisis Canada faced, the extent to which the Canadian electorate demanded an end to irresponsible public finances, and the degree to which the entire political class responded. Governments at all levels then moved on a broad front, making it clear that no established interests would be exempted from contributing to the cost of slaying the deficit, lowering both taxes and the debt, and making the Canadian economy an outperformer.

Every one of these lessons is entirely applicable to the United States today. America's budget mess can and will be fixed when the public demands action and the political class decides to set aside rancorous and extreme partisanship in pursuit of a robust economy, job growth, lower taxes, and focused government. Call it the Canadian way.