Interview with Larry Kudlow of Kudlow & Company on CNBC

MR. KUDLOW: Right after the break, Deputy Secretary of State Robert Zoellick on what trade can do for Iraq and the Middle East. Mr. Zoellick, I get one question and you have to give me about a six word answer. Easy one. Is capitalism finally sweeping through the Middle East?

DEPUTY SECRETARY ZOELLICK: I hope so and I believe so.

MR. KUDLOW: All right. There's a great beginning. Anyway, Bob Zoellick coming up. He's nice enough to come on in a very delicate moment with the Iraqi elections. Kudlow and Company, coming straight back with Mr. Zoellick.

(Break.)

MR. KUDLOW: Last evening, the Senate ratified the Bahrain Free Trade Agreement. One more step towards President Bush's vision for a Middle East free trade zone. Joining me now, we're very happy, Under Secretary, Deputy, I've got to get this right, Deputy Secretary of State Robert Zoellick. He's a former U.S. Trade representative and a long time senior official in the United States Government. Mr. Zoellick, welcome.

Let me just give you a chance to elaborate and elongate on your notion that capitalism may be spreading through the Middle East. And actually, we have a chart of the Jordan stock market, which I believe has been hot as a pistol and although we couldn't find a picture of it, sir, the Gulf stock market, which look at the Jordan stock market. Wow, is that thing up, one-year change-up 107%. So something good is going on in that region. And Bahrain and all the others -- Saudi Arabia, Kuwaiti investment bank, are running up the Gulf stock market as well. Mr. Zoellick, what's your take on this? What's driving this change towards ownership and capitalism?

DEPUTY SECRETARY ZOELLICK: Well, Larry, you know, you're one of the people who have always made the point about the connection of economic and political change. And I think that's exactly what you're seeing in this region. Now, some of your viewers may think it's driven by oil prices, but Jordan doesn't have much oil and as you've said, they've had explosive growth in part because of their free trade agreement with the United States.

Morocco has a free trade agreement with the United States. Bahrain just negotiated one. Last year about this time, I was in Egypt where we inaugurated something that was the first agreement between Israel and Egypt in some 20 years since the peace talks, about trying to create qualified industrial zones, where you have Israeli investment, creating jobs in Egypt exported to the United States. And I think, Larry, it's one of the phenomena that you see taking place around the world. People in this region recognize that their old, closed view of economics won't fit in this era of globalization.

Just this week, Saudi Arabia joined the World Trade Organization, the global trading body, and many people may have thought they belonged long before. And as part of those changes, Saudi Arabia has to open up a lot of markets that have nothing to do with oil.

So it's part of the process of change the President has talked about where economic openness and freedom support political openness. You know it's going to be a long difficult struggle, but I've actually been very impressed how quickly it's starting to move.

MR. KUDLOW: So to borrow Tom Friedman's idea, with the exception of Iran, I guess, and Syria, a lot of the Middle East is "coming on-line" to the global capitalism move, the global move towards free trade, the global move towards investment and wealth creation. Is that fair? I mean, it's come further than most people and certainly the mainstream media have reported.

DEPUTY SECRETARY ZOELLICK: That's true. There's still a big, big challenge ahead. You have your large numbers of young people coming on, need to have jobs, need to have some sense of economic hope and opportunity, but that's where the economics gets connected with the politics. If you're going to try to create societies where you have an open democratic political system, which we think is important for the security and stability, you also have to create economic hope and opportunity. And the good news is, as you know, people have to know this themselves and that's what you're starting to see change in the region and they're looking to the United States as one of the agents of that change.

MR. KUDLOW: Now, there is a Baghdad Stock Exchange. It actually has been replaced formally as the Iraqi Stock Exchange. We could not for the life of us get a picture, but we're still working on that. The IMF says growth this year is going to be close to 4% and perhaps as much as 16 or 17% next year.

But, Mr. Zoellick, let me ask you this tough question, the oil sales, oil development story has not panned out. The United States coalition forces, I think, it hoped several years ago, that would be an important source of revenue. What's gone wrong in the Iraqi oil field production and sales story?

DEPUTY SECRETARY ZOELLICK: Well, as you would know, the security and the infrastructure, obviously, are critically related to one another. So part of the challenge has been the security threat to some of the pipelines. Another lesson that we've learned is, frankly, how badly the system had degraded. This is true of the electricity system under Saddam Hussein as well. But that's where the elections that are going to be taking place tomorrow will be important because if you have an Iraqi Government responsible for its own future, and that oil is very important for the government revenues as well, they're going to have a very strong interest in trying to develop that market for export and there's a lot of potential in that market at a time that the world needs more oil.

But it's clearly related to the point the President made about the political change, the security and economics coming together. One other point about Iraq, though, I've been there a number of times this year, that's a country with a lot of potential beyond oil. There's a lot of educated people. I mean, this was the original cradle of civilization in terms of the water and agriculture and the Tigris and the Euphrates. If we can get the security situation right, I think, unlike some other developing countries, this one could grow pretty quickly.

MR. KUDLOW: May I ask two additional questions in our remaining time? If you could go short, I would appreciate it. I'm in my Archie Manning short-term mode.

Number one, if tomorrow's Iraqi elections produce a high Sunni turnout, which is to be desired according to almost all the analysts in Washington, how might that shake up Iraqi politics? Is it a good thing at the end of the day or a bad thing?

DEPUTY SECRETARY ZOELLICK: Well, it's a good thing because if you're going to create a country that can stand and hold together, you'd have to have all groups of the country participating. And the Sunnis did not participate in the January election. You saw them in the October referendum. And then what you've got is you've got the Kurds, the Shia and the Sunni, together, having to form a coalition government to deal with these issues.

MR. KUDLOW: But, could it tilt against the United States? Is that a possibility?

DEPUTY SECRETARY ZOELLICK: Well, I honestly think we can find with the Sunnis is some balance with some of the Shia who have associations with Iran. So, look, in a democracy, we can't dictate what the future will be. I think they recognize their own interest in development and also the security relationship is one that needs to have a good relationship with the United States. But, look, these people want to do it on their own and we should want them to do it on their own.

MR. KUDLOW: And the very last one, we only got about 15 seconds. Allawi and Jaafari, the Prime Ministers, were not very popular. Reconstruction didn't take off, security still has got its issues, and this was a lot of corruption. So this is an example of the Iraqi voters holding their leaders accountable, is it not?

DEPUTY SECRETARY ZOELLICK: Yeah, Allawi may have a comeback and it's too soon to say what's happened to the current Prime Minister, that's what democracy is about. It's for them to decide. But you're right, people are concerned about security. What’s actually interesting, and a new Time poll showed this, people's sense of the future is now on the upbeat. I hope they'll follow through.

MR. KUDLOW: That was a splendid poll. Anyway, Deputy Secretary of State, Robert Zoellick, we appreciate it.

The linkage between free trade -- capitalism and prosperity is one of the key themes of this show.

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