In Box

Epiphanies from Hank Paulson

The former U.S. Treasury secretary on China's economy, bitcoin, and the problem with new ideas.

What is happening to the Chinese economy? After averaging roughly 10 percent annually for three decades, the pace of GDP growth began to slow in 2012 -- and may drop into the low single digits in a few years. Pessimists say the country could face a hard landing or even long-term stagnation. But Hank Paulson, who as U.S. treasury secretary stewarded the American economy through the darkest days of the financial crisis and now runs the Paulson Institute, a think tank that promotes cooperation between the United States and China, remains cautiously optimistic about China's long-term prospects -- so long as it implements important reforms. After all, ebbs and flows are all part of the game. "As long as you have financial markets and banks, there will be financial crises," Paulson says. Interviewed in his Chicago office in February, Paulson talked about what Beijing needs to do to avoid its own Great Recession -- and more.

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Like so much of the rest of the world, the Chinese watched in horror as the financial crisis began because they had been working hard at best practices and they thought that the United States had the right model. I've worked extensively with the Chinese leadership and with Wang Qishan [China's top anti-corruption official], and we have a good working relationship. When I was pressing them very hard on their financial-market reform, Wang very nicely said to me, "You used to be our teacher, but right now, our teacher doesn't look quite as wise."

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The Chinese economy is too big and too complex to be run by this jerry-rigged structure of a combination of state-planning and markets. I have no doubt the Chinese leadership knows what the big economic issues are. They know they need a different economic model -- one that's less dependent on investment and exports -- and to move to normalize the labor market, reform the capital markets and the municipal finance system. The 100 percent issue on my mind is, are they going to be able to solve these problems? Because reforms haven't been done for so long. The scale of their challenges is truly awesome.

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When you step back and look at this in a bigger context, one of the huge problems China faces is that they need to modernize their government. They don't have the institutions they need to govern. China is a country ruled by men more than laws.

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The reform debate in China is mostly a conflict between those who want to reform domestically and those who want to open up to foreign competition. In my judgment, the true reformers are those who want to open up to competition, because that's the only way China is going to realize its economic potential -- and it's also only fair to the rest of the world.

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China invests in our Treasurys because it is in their interest to do so. As important as that is, I would much rather see investable dollars going into something that's more permanent: investment in greenfield plants that create jobs or acquiring failed or failing companies.

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I think people have to be very careful with new ideas. If something is a bad idea, you never really need to worry about it too much. It will come and go and maybe do a little bit of damage -- some people will lose some money -- but it's not a big thing. What you need to worry about is when you have something that's a really good idea, but you get too much of it too fast, like over-the-counter derivatives. Complexity and innovation are not always good things. I haven't studied Bitcoin in detail, but even if I had, I'd be very careful with anything that volatile.

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For those who say, "Well, Washington is just more poisonous than it's ever been," they just don't know their history. I went to work in the Nixon White House six weeks before the Watergate break-in, so I saw a little bit of poison. It's not unusual for there to be periods like this, and I'm more optimistic than some that we will get our political act together.

Illustration by Robert Ball

In Box

'The State Doesn't Exist for You'

Israel says it wants to lift its Bedouin citizens out of poverty. But it keeps demolishing their villages.

Sderot, Israel — Awad Abu Freih says that the Israeli government has demolished his village, al-Araqib, some 60 times over the last five years. It needs more land for Jewish people, and so wants the village gone, explains Abu Freih, a middle-aged man with a small, graying beard. "I think this is the reason why, al-Araqib, they destroy it."

Abu Freih is a Bedouin from Israel's Negev Desert. Of the roughly 200,000 Arab Bedouins in the Negev, about 70,000 live in dozens of villages that the Israeli government considers "unrecognized" -- or built illegally. Al-Araqib is one of them: a collection of trailers, tents, and homes made of blue tarp and aluminum. About 300 people live there.

According to Abu Freih and other villagers, the demolitions of al-Araqib follow a pattern: Residents receive an eviction notice setting a date by which they must leave -- usually, they are given a week. Then riot police arrive early in the morning on or around the stated day to remove people from their homes. Often, al-Araqib's residents are herded to the village's small cemetery while bulldozers raze structures. The whole process takes about an hour.

Because the villagers often begin rebuilding within a day, they say police have sometimes confiscated construction materials. But al-Araqib rises again anyway -- residents find ways to re-establish their homes on land that the Jewish National Fund, a development organization that owns about 10 percent of Israel's terrain, wants in order to plant a forest.

"They try to destroy everything," Abu Freih says during an interview in his office. One of 12 children from a poor family in al-Araqib, Abu Freih is now an activist and teacher; he divides his time between his village and the nearby city of Sderot, where he is a chemistry professor. It is "like a cleaning," he continues. "A cleansing of man, a cleansing of trees."

The destruction of al-Araqib is part of a larger, long-term effort by Israel to move the Bedouin from unrecognized villages in order to make way for Jewish settlements and other projects. Israel says it has the right to dismantle structures because the Bedouin are squatting on state-owned land -- though Ami Tesler of the government's Headquarters for Economic and Community Development of the Negev Bedouin insists that, contrary to what Abu Freih and others say, in al-Araqib "there is no building with people that live in it that has been demolished." The Bedouin, however, claim ties to the land stretching back centuries and say that Israel is treating them as second-class citizens.

Yet the situation is even more complex than it appears at first glance. Recent efforts to relocate the Bedouin are part of an unprecedented push to develop the Negev -- and, in theory, to improve the lives of its inhabitants -- after some 60 years of neglect. David Ben-Gurion, Israel's first prime minister, wanted to expel the Bedouin from the country entirely. Today, by contrast, some policymakers say they want to help the Bedouin, compensate them for their land, and integrate them into Israeli society.

But Israel's initial efforts to do this have been clumsy, and its more heavy-handed and coercive tactics have inspired accusations of ethnic cleansing. In November 2013, thousands of Bedouins and their supporters poured into the streets to protest the government. The New York Times described "scenes reminiscent of the Palestinian uprisings in the West Bank" in which "protesters hurled stones at police forces, burned tires and blocked a main road for hours near the Bedouin town of Hura in the Negev. The police used water cannons, tear gas and sound grenades to disperse the demonstrators." Since then, the Bedouin have continued protesting -- outside the prime minister's residence, in villages, and elsewhere in the Negev. In a report released in February, the U.S. State Department called the treatment of the Bedouin one of Israel's "most significant human rights problems": "[T]he Bedouin segment of the Arab population continued to be the most disadvantaged."

Heightened tensions between the Bedouin and the government come at a particularly sensitive time: The Israeli-Palestinian peace talks are on life support, and some observers are concerned that if Israel further alienates other members of its Arab population, there could be an increased threat of civil unrest. Yet the destruction of villages continues, and the Bedouin are only growing more and more distrustful of the government. "The state doesn't exist for you," says Amir Abo Kweder, a Bedouin activist from an unrecognized village. "The only time that you see the state is when it comes to demolish houses."


The Bedouin comprise tribes of Arabs that have lived throughout the Middle East for hundreds of years. Historically, they were shepherds and desert guides. But despite their popular reputation as nomads, the Bedouin began living in more or less stationary villages scattered throughout the Negev in the 19th century. When the state of Israel was founded in 1948, the Bedouin numbered about 100,000. During the 1948 Arab-Israeli war, in which many Bedouins sided with Israel's Arab neighbors, most fled or were expelled. By the end of the war, only 11,000 remained in the country.

Over the following decades, Israel concentrated the remaining Bedouins in the Siyag, an area in the Negev's northeastern corner. The government justified the resettlement by citing the demands of an expanding population, the Israeli army's need for new bases, and security concerns created by undocumented population centers. Israel constructed seven townships for the Bedouin between 1969 and 1989; however, these townships were designed more to contain the Bedouin than to address their needs, and many lacked basic industry and infrastructure.

The Bedouins who wanted to avoid the townships began expanding indigenous villages and creating new ones. The government, however, refused to recognize these villages, and it continues to do so today. "This is not their land," Tesler says. "This is exactly like if you built a shed in Dupont Circle."

The Bedouin disagree: They operate according to a traditional system of land ownership dating back centuries, with individuals and tribes claiming tracts throughout the Negev. They can describe the boundaries of these claims from memory; in some cases, their descriptions are corroborated by deeds from 19th-century Ottoman land reforms and later British surveys. So strong is their respect for these claims that many Bedouins living in unrecognized villages resist moving onto land owned by other Bedouins, including some territory in the townships. This has made governmental development of the Negev challenging, as parts of townships stand empty.

Years of disagreement with the government and the attendant social disenfranchisement have left the Bedouin among Israel's poorest citizens. In 2000, six of the Siyag townships were ranked among the 10 least developed towns in Israel. Birthrates are high, while employment -- though difficult to track precisely -- is very low in some locations. Municipal services like water and sewage management are available only sporadically and often in insufficient quantity.

Conditions are often worse in the unrecognized villages. "You don't have any infrastructure in those villages. You don't have any paved roads. You don't get services in most of the villages like education or electricity," says Kweder, who works for the Negev Coexistence Forum for Civil Equality. (Full disclosure: I was a volunteer English teacher with the forum from 2009 to 2010, but did not know Kweder.) Many villages have to buy water from private vendors, and connections to public transportation are poor; some villages sit close to the highways, but others can only be reached by driving off road into the desert.

In 2007, as part of a broader effort to develop the Negev -- in order to create more housing and to secure the region -- the government finally began to show more interest in the Bedouin's situation. Although driven in part by goodwill, the government also recognized the potential benefits of better engaging with a swath of its Arab citizens. (Hamas had swept the Palestinian elections the year before.)

The government established a commission, headed by former Supreme Court Judge Eliezer Goldberg, to chart a future for the Negev that would take the Bedouin's welfare into account. The report the commission produced in 2008 recommended recognizing as many villages as possible and developing them where they stood, compensating the Bedouins with land claims for what they would give up, and offering those who needed to move land in newly built or developed villages. The report did not recognize the Bedouin's ownership of land, but it acknowledged their historical connection to the Negev.

This was a significant divergence from the past, and the report was relatively well received in the Bedouin community. The Association for Civil Rights in Israel, an NGO that works with the Bedouin, called it a "turning point."

But when, under the direction of Ehud Prawer, head of policy planning in the prime minister's office, the government proposed policies based on the report's recommendations, things soured. The 2011 "Prawer Plan" called for relocating up to 35 villages (some 40,000 to 70,000 people), far more than the Bedouin had expected or the Goldberg report seemed to imply. While many of the villages would be re-established locally (some would be moved less than a kilometer), Bedouin activists complained that they had not been consulted in the plan's design. The plan also did not name the exact villages it proposed to move, leaving the matter up to the prime minister's office.

Rafi Barzilay, a consultant to Prawer, defends the plan by describing the difficulty of bringing the Goldberg report "down to earth." "If you say, 'We have to recognize each village as much as we can' … what is the meaning?" he asks. "To recognize each small house on every hill?"

Benny Begin, then a government minister, was tasked with listening to the Bedouin and assuaging their concerns -- but his efforts were seen as lackluster at best, and they were not helped by continued village demolitions. Simultaneously, the Prawer Plan attracted international criticism: In July 2013, Navi Pillay, the U.N. high commissioner for human rights, said it risked "decimating" the Bedouin's "traditional cultural and social life in the name of development."

November's mass protests targeted the Prawer Plan. Begin resigned the following month, and, bowing to pressure, Israel withdrew the plan before the Knesset could vote on it. Yair Shamir, the agriculture minister, is now in charge of reworking the program, and he has pledged to work with the Bedouin. "[They have been] living in poverty, in Third World conditions," Shamir told the Jerusalem Post in January, "and we have to change it."


Yet many Bedouins now fear that a harsher scheme might replace the Prawer Plan, especially if right-wing opponents, who always felt the plan offered the Bedouin too much (estimates suggested compensation could reach $2.4 billion), become more deeply involved in the issue. Ari Briggs of Regavim, a Zionist organization that lobbies to "ensure responsible, legal & accountable use of Israel's national lands" and that the government has consulted on the Negev, says, "I promise them that the next plan that the government comes out with will not be as generous."

Many Bedouins are also closing ranks, worried that the government will try to cut deals with some individuals while evicting others, creating an arbitrary settlement structure even as it continues to demolish villages. (In early April, the Agriculture Ministry reached an agreement with a single tribe, in which several hundred families would move onto plots of land given to them by the government or face enforcement measures.) This fear has reinforced the sense that protecting land is a collective cause, and Bedouins willing to compromise on their own could risk alienation from their community. "I can't give you land for money, because after that I will be shamed," Abu Freih says. "Nobody will respect me if I sell my land."

Tesler says his office is willing to work with the Bedouin to find a "fair solution," but routinely encounters resistance. "This is the tragedy of the Bedouins. Simple as that," he says.

For the current stalemate to end once and for all, the government and the Bedouin will likely have to reach a comprehensive, inclusive accord about villages to be recognized and those to be moved, as well as the exact terms of compensation for land claims. It is a tall order, but until it happens, the cycle of village demolitions will likely continue: Places like al-Araqib will be rebuilt as many times as they are torn down. (Two months after an initial interview, Abu Freih says there has been "more demolition" of his village.)

Some observers are also concerned about the recurrence or worsening of violence, like that which occurred during November's protests. A few have gone so far as to say that the Bedouin and their supporters could instigate a "third intifada." Palestinian flags often fly at Bedouin protests, and Arab political leaders, along with many Bedouins, now speak of land and demolitions in the framework of Israel's long-standing conflict with its Arab population.

Abu Freih, however, worries mostly that the current impasse will become a de facto permanent arrangement -- one that, through the destruction of villages, risks detaching the Bedouin from their history. He says his people have asked the government why it tears down al-Araqib.

"And they said, 'This is the law, we have a strategic plan to settle Jews here, and maybe you will die. But your sons will forget the place; they'll forget everything.'"

Photo by Uriel Sinai/Getty Images