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98 Speeches by [Alan] Greenspan, [Lawrence] Summers, [Robert] Rubin, POTUS
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�PRELIMINAR Y DRAFT
SHF, September 10, 1998
Stage-setting — :
•
uniquely challenging time in the global economy. Afinancialcrisis that began in Asia
more than a year has taken hold across the region and spread, now, to Russia. One
quarter of the world's people - one third of the global economy - are already in
recession and some are facing economic and financial collapse. The upshot is that what
was once a problem affecting a group of emerging market countries now threatens to
become a global problem of confidence and liquidity, with consequences for our own
markets.
•
in the face of thesefinancialcrises we are hearing some the same voices we have heard in
previous times when the world looked to America a times of global uncertainty. They say
that America should stand back from these crises ~ weather the storm within the comfort
of our own prosperity and hope that the clouds will pass us by.
•
this would not be the safe course and it would not be the right course. Whether we like it
or not, this crisis will affect us and we have an enormous stake in working with other
countries to restore confidence and make these countries healthy again.
•
already, exports to the economies in crisis are down by nearly one third, year-on-year.
Private forecasts are suggesting that the crisis could add one half, even one percentage
point of GDP to the United States current account deficit this year. Consider the
implications of a sustained crisis for California, where about half of last year's exports
went to Asia. Or Colorado, where exports to Thailand alone grew nearly four-fold
between 1993 and 1996.
•
trade has accounted for one third of our growth in this expansion and is the prime engine
of high-wage jobs. More than 30 percent of those exports ~ and 40 percent of our
agricultural exports — go to Asia. More open and competitive commerce has enriched us
as a nation. It has spurred us to innovate and forced us to compete. It has widened the
circle of opportunity within our own country and across the globe - holding out the
prospect for unprecedented expansion in the well-being and opportunities of mankind.
•
we have already felt enormous benefits of globalization. But we will not truly realize
these historic opportunities unles we work together to defeat its dangers. If we stand back
from these crises we risk reversing the tide offreemarkets and broadening global
opportunity we have done so much to propel ~ and from which we have already gained
so much.
•
America made the wrong choice in response to domestic and global financial problems in
the late 1920s and early 1930s. And reaped a lethal harvest of deflation and depression
that laid the ground for devastating conflict. In the wake of that war a far-sighted
generation of leaders laid the foundations for a new era of freedom and prosperity ~
cemented by economic interdependence - whose legacy we enjoy today. (Marshall
�(Harvard speech):: "without the return of normal economic health in the world...there
can be no political stability and no assured peace. Our policy is directed not against any
country or any doctrine but against hunger, poverty, desperation and chaos ".)
•
what is needed today is a global growth strategy - to revive confidence and build a
stronger system for the future.
Concerted global action to secure growth
A generation of Americans has grown up worrying about inflation ~ and rightly. Eats away hardeamed savings, stifles business and distorts markets. We have learned that lesson ~ and we have
applied it. But we must not forget the lesson of the 1930s — that competitive devaluations and
deflation are no less corrosive. Eats away at hope and opportunity within nations and lays the
seeds of conflict between them. In Japan today prices are falling and across the industrial
economies today lower than in a generation. We must not repeat past dangers - but nor can we
afford new ones that may be lurking in the wings.
In United States — we need to continue to pursue policies consistent with strong and sustainable
growth. Now and for the foreseeable future we are the world's indispensable engine of growth.
Every day we continue to expand we offer greater possibilities for other countries to themselves
grow out of trouble and in turn provide expanding markets for America. (Note jobs from exports
and role in 1990s growth).
But we cannot carry the burden alone - the largest industrial economies all have a stake in
ensuring they are pursuing policies that will safeguard global confidence. Critical part of this
effort will be Japan's contribution. As Japanese recognize, they are facing serious risks ~ deep
financial sector crisis, declining economy, collapsing confidence — with huge repercussions for
rest of Asia. Absolutely critical that government takes effective steps to revive the economy and
fix the banking system.
Support for a Rapid Recovery in Asia
Costs of this crises go well beyond company balance sheets. In Indonesia, in Thailand, Korea -years of rapid growth and poverty reduction in danger of being reversed. Ordinary men and
women in Thailand, Korea, Russia and elsewhere are losing their jobs and their livelihoods.
Pensioners' savings are being eroded by inflation. Young children are being pulled out of school
to sort garbage. (Anecdotal material from Post articles?)
Critical to work to restore earliest possible revival of growth. Three core areas for action and
support:
•
effective macroeconomic policy: the international community — with American
leadership -- must work to ensure that the macroeconomic approach being followed in
Asian crisis countries remain consistent with this goal. IMF has worked with countries to
loosen monetary and fiscal policy and make way for growth. Need on an ongoing basis to
�explore whether room to go further.
•
support for stronger social safety nets Financial crises that begin on the trading floor do
their damage on the factory floor. In recent years US have led the pressure on IMF,
World Bank and other international institutions to ensure that the costs of crises and the
difficult adjustment they bring do not fall disproportionately on the poorest. But we need
to do more. [Call on World Bank and ADB to launch an augmented social safety net
program for Asia — increasing their social safety net lending to crisis countries by *
percent over the next three years and strengthening and updating existing programs to
focus on today's priorities: children, the elderly and the unemployed. ]
•
private/public partnerships to address debt problems more quickly and decisively : the
burden of excess corporate debt and insolvent banks is today the number one barrier to a
recovery in Asia. Banks and companies are stuck in a debt trap - banks won't lend to
bankrupt firms and firms can't get restructured and recover because they cannot get loans.
Similar to our own situation in the 1930s. As then, need government to act to break the
cycle and pave the way to growth, by injecting capital into banking system and providing
framework for rapid restructuring and lifting of debt burdens. [To help countries do this,
launching an international initiative — centered around the IMF and World Bank. This
would devise more effective models for carrying out financial and corporate
restructuring in these economies, backed up by targeted technical assistance and new
finance to help them put the model into place.]
Strengthened Support for Major Emerging Markets
Must lead the international community in using every appropriate tool to defend our interest in
stable prosperous global economy - means supporting economies that are now vulnerable to
crisis or very important to the stability of the system as a whole.
Time and again experience has taught hat no country can be helped that is not willing to help
itself. But we have also learnt that, without support, even countries with the right policies can be
hugely hampered, and the costs of crisis can be greatly exacerbated — by the absence of outside
support.
•
need aggressive use of IFIs —past year's crises have taken their toll on IMF's resources
and raised real concems about ability to respond in future which are costing confidence.
The organization is prudent in judging its usable funds - but today is that rainy day.
Many countries are in crisis and many others are straining under the pressure of contagion
and declining market confidence. [Need IMF it to signal preparedness to use its reserves
to support countries in trouble and tackle contagion. Most of all, need Congress to make
good on America's commitment to IMF quota increase and NAB.]
•
also prepared actively to explore ways of mobilizing private capital — harnessing the selfinterest of markets in there being ways to restore confidence quickly and support
continued flow of capital across borders.
�We have been actively exploring ways of increasing flow of liquidity to these countries. possibly in ways that would not seem sound in more normal circumstances. (Include ~
contingency/swap-line arrangements or global allocation of SDRs.) Bottom line is we will
continue to look for every prudent and effective means, in the face of such crises, to defend our
interest in stable and prosperous markets in our own hemisphere and beyond ~ and use the full
resources of the international institutions to secure that end.
Building a Safer System: A New Paradigm of Prevention
Finally, we need to look at global system to reduce the risk of these crises recurring and ensure
we have effective mechanisms for managing and containing them when they take place. Some
talk of creative destruction. But financial crises of the kind we have seen in recent months are not
creative of anything but pain and distress. If the global economy cannot avoid having them every
few years then it needs fixing.
Largely at our initiative, a variety of international groups are now developing recommendations
on how to reduce the risk of future financial crises, including the G-22 process, the G-7, and the
IMF. These efforts were on a path to produce some initial recommendations by early next
month. The recent turn in the crisis calls for expanding these efforts and placing them squarely at
the top of the global agenda.
Two urgent tasks - make sure we are doing all we can to respond effectively to these crises and,
over the longer term, applying the lessons of these experiences to build a stronger, more
sustainable world system going forward.
To this end, have been conferring closely with Tony Blair ~ head of G7. We are jointly calling
on G7 finance ministers (G8 plus 8 largest emerging market economies?) to prepare report for
the Heads by the end of the year. This would:
•
review the steps they are taking through the IFIs to address the current crisis and the
approaches in place to strengthen the global financial architecture to better prevent these
crises in future.
•
and examine ways the IMF could be adapted and its reform programs better designed to
dealing with the challenges of these new kinds of financial crisis and the social costs they
bring;
Yet we also need to think creatively about some of the broader questions about the structure of
the global system that have been raised by these crises. For example:
•
how do we ensure that capital flows across nations are sustainable in an era of
dramatically changing technology and markets? Money can flow more quickly, to more
places than ever before. That creates jobs and opportunities for advancement here and
around the world. But we have seen that it can create seriousriskswhere countries do not
�have the right policies in place to ensure that money is well-used. The task is not to deny
the benefits of open, truly global capital markets ~ but to work out the best set of policies
(international and domestic) for ensuring these are safe and sustainable.
•
what are the most appropriate kinds of exchange rate regimes and how should countries
seek to maintain them safely in a globally interconnected world?
•
the structure of lender of last resort financing going forward;
Conclude
Recap ~ need for aggressive growth strategy to rebuild confidence and pave the way for a
stronger world system.. Choice to make ~ protect and strengthen the gains of democracy and
free markets by taking these five steps. Or stand back and risk a self-perpetuating chain of panic
and economic distress that would hurt our future and our children's future. Choice is clear.
�I. Introduction: The U.S. Economy Is Strong
•
•
•
Building Blocks/Growth Still Sound
As the President stated in his SOTU ~ no one immune
Greenspan quote on oasis
The need to understand the rules of dynamic international economy and what the U.S.'s
role is.
•
•
•
IL
Issues often seem technical, complex, even academic
Principles, however, are basic and fundamental
Rules have an everyday life resemblance to them:
~ Interdependence (Community)
— Responsibility
-- Merit
- Trust
Interdependence: One Community
In recent weeks and months Americans have seen and felt in a tangible and vivid way the degree
that weakness in economies in one part of the world 1000s of miles away can have an impact on
our families and communities here at home.
A.
Weakness in Competitors' Economic Infrastructure Hurts Not Helps Our
National Weil-Being ^
As I saidnTthe StaTeUf Ihe Union, other countries arc; nnr-competitors, our
customers, and our security partners. In the past, we may have looked at nations
like Russia, Japan, and South Korea as competitors whose strength could hurt
America's industries and job growth, and whose weakness would allow our
companies and our workers to triumph.
Yet, in an interdependent world economy - weakness in our partners hurts not
helps us. Strong competitors competing with each other and buying each other's
products strengthens both countries at the same time. Weakness in one nation,
and competition in another country leads currency to drop - making one country
poorer and unable to buy our products which makes products too cheap and
threatens the stability of our security partners.
B.
'nomic Weakness Can Be Contagious and Weaken the World
The key reason why weakness in competitors affects our interest is the role that
weak demand in one nation play ~ it can weaken demand, exports and confidence
in other nations and cause currencies to fall and this lead investors world-wide to
pull-out all investments punishing countries who have failed and been virtuous
�alike in strengthening their economies.
So the main objective of the U.S., G-7, International community, IMF, and the
World Bank is, as part of a precautionary measure, to not only help other nations
pull their troubled economies together, but to prevent as much as is possible steps
that could eventually lead to a negative cycle.
Today, there is certainly a nervousness and reduced appetite for risk that could
affect any market including our own. I still feel that markets will reward those
with economies with strong fundamentals in the long-run. This is why each
country must put their fiscal house in order and those that do should be supported
by the rest of the international community. This differentiation is important.
III.
Responsibility
In the world economy, the value of responsibility and the rules of global markets are in sync.
The basic value that others can only help someone who helps themselves applies to countries as
well as people. Basic economic relations (realities) of world markets make that value every bit
as applicable in international economic policy as it is in domestic policy.
A.
Em erging Market Nations
When a nation's local citizens, as well as its international investors, lose
confidence that the economic rules of a nation will not be applied fairly and
uniformly; when they become convinced that a nation will handle fiscal
imbalances or a debt repayment problem by printing money instead of fiscal
discipline, or by saddling banks with a combination of short-term debt and longterm bad loans, both its citizens and outside investors will retreat- pulling out
money, investment, and job-employment production.
Providing additional funds to a nation that is failing to build confidence by
reforming itself would be like giving fimds to a drug addict to rebuild his life
before he has committed to kick his habit. All the money in the world will not do
any good until the decision over individual responsibility is made. A core
philosophy of IMF approach is to assist only conditionally: only when a nation
has taken responsibility to determine its own place and its own commitment to
restore confidence. Our inter-dependence and sense of community calls for us to
work through the international community and IMF to help those trying to do the
right thing to help themselves and keep global economic stability Yet, ???? us to
realize that it is careless to offer assistance to a nation unwilling to take
responsibility ~ knowing that is will only fund people seeking to move money
out.
Examples or description that defend the IMF approach.
�B.
IV.
Investors
Investors who take responsibility for bad or unfounded investments. Moral
hazard. Why people really have taken serious hits ~ equity investors and
everyone in Russia. (Or could fit in Market Discipline)
Merit and Market Discipline
The market works to allocate credit in a way that rewards good ideas -- ideas that
are tested by the wants and needs of million of average consumers who vote by
their purchases in market place.
At times countries may create incentives for crucial social purposes. Yet, when
decisions are made simply on personal relationships, political connections, and
private fortunes a cycle of inefficiency is created; money is allocated to people
based on non-market reason who then are freed from market-discipline, but
continue the cycle of poor loans or investments. Eventually, this cycle turns and
the "chickens come to roost."
The international "rules of the road" may allow for infusion of capital temporarily
when investors ignore or fail to recognize non-market decision criteria and delay
market discipline. It is clear that as you go forward, you must have a set of
criteria in place that ensures that the cycle of inefficiency will not be created.
This new reform must be anti-croynism, market-based, and ?. Furthermore,
investors should not be immune or fully protected from funding such ???
Important to prevent moral hazard . Examples of how most have taken big hit,
Russia example. All must bear responsibility for contributing to such cycles.
V.
Trust and Openness
In order for international markets to work, people must be able to trust financial
information. Systems of hiding information, failing to give good information can work
until you get bumed for the first time.
•
Transparency point
•
Budget and Banking
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Board
Remarks by Chairman Alan Greenspan
Is there a new economy?
At the Haas Annual Business Faculty Research Dialogue, University of California,
Berkeley, California
September 4, 1998
Question: Is There a New Economy?
The question posed for this lecture of whether there is a new economy reaches beyond the
obvious: Our economy, of course, is changing everyday, and in that sense it is always
"new." The deeper question is whether there has been a profound and fundamental
alteration in the way our economy works that creates discontinuity from the past and
promises a significantly higher path of growth than we have experienced in recent decades.
The question has arisen because the economic performance of the United States in the past
five years has in certain respects been unprecedented. Contrary to conventional wisdom and
the detailed historic economic modeling on which it is based, it is most unusual for inflation
to be falling this far into a business expansion.
P
Many of the imbalances observed during the few times in the past that a business expansion
has lasted more than seven years are largely absent today. To be sure, labor markets are
unusually tight, and we should remain concerned that pressures in these markets could spill
over to costs and prices. But, to date, they have not.
Moreover, it is just not credible that the United States can remain an oasis of prosperity
unaffected by a world that is experiencing greatly increased stress. Developments overseas
have contributed to holding down prices and aggregate demand in the United States in the
face of strong domestic spending. As dislocations abroad mount, feeding back on our
financial markets, restraint is likely to intensify. In the spring and early summer, the Federal
Open Market Committee was concerned that a rise in inflation was the primary threat to the
continued expansion of the economy. By the time of the Committee's August meeting, the
risks had become balanced, and the Committee will need to consider carefully the potential
ramifications of ongoing developments since that meeting.
Some of those who advocate a "new economy" attribute it generally to technological
innovations and breakthroughs in globalization that raise productivity and proffer new
capacity on demand and that have, accordingly, removed pricing power from the world's
producers on a more lasting basis.
There is, clearly, an element of truth in this proposition. In the United States, for example, a
technologically driven decline is evident in the average lead times on the purchase of new
capital equipment that has kept capacity utilization at moderate levels and virtually
eliminated most of the goods shortages and bottlenecks that were prevalent in earlier
periods of sustained strong economic growth.
But, although there doubtless have been profound changes in the way we organize our
capital facilities, engage in just-in-time inventory regimes, and intertwine our newly
sophisticated risk-sensitive financial system into this process, there is one important caveat
to the notion that we live in a new economy, and that is human psychology.
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The same enthusiasms and fears that gripped our forebears, are, in every way, visible in the
generations now actively participating in the American economy. Human actions are always
rooted in a forecast of the consequences of those actions. When the future becomes
sufficiently clouded, people eschew actions and disengage from previous commitments. To
be sure, the degree of risk aversion differs from person to person, but judging the way
prices behave in today's markets compared with those of a century or more ago, one is hard
pressed to find significant differences. The way we evaluate assets, and the way changes in
those values affect our economy, do not appear to be coming out of a set of rules that is
different from the one that governed the actions of our forebears.
Hence, as the first cut at the question "Is there a new economy?" the answer in a more
profound sense is no. As in the past, our advanced economy is primarily driven by how
human psychology molds the value system that drives a competitive market economy. And
that process is inextricably linked to human nature, which appears essentially immutable
and, thus, anchors the future to the past.
But having said that, important technological changes have been emerging in recent years
that are altering, in ways with few precedents, the manner in which we organize production,
trade across countries, and deliver value to consumers.
To explore the significance of those changes and their relevance to the possibility of a "new
economy," we need to first detail some key features of our system.
f
The American economy, like all advanced capitalist economies, is continually in the
process of what Joseph Schumpeter, a number of decades ago, called "creative destruction."
Capital equipment, production processes,financialand labor market infrastructure, and the
whole panoply of private institutions that make up a market economy are always in a state
of flux—in almost all cases evolving into more efficient regimes.
The capital stock—the plant and equipment that facilitates our production of goods and
services—can be viewed, with only a little exaggeration, as continuously being torn down
and rebuilt.
Our capital stock and the level of skills of our workforce are effectively being upgraded as
competition presses business managements to find increasingly innovative and efficient
ways to meet the ever-rising demands of consumers for quantity, quality, and variety.
Supply and demand have been interacting over the generations in a competitive
environment to propel standards of living higher. Indeed, this is the process that, in fits and
starts, has characterized our and other market economies since the beginning of the
Industrial Revolution. Earlier, standards of living barely changed from one generation to the
next.
This is the tautological sense in which every evolving market economy, our own included,
is always, in some sense, "new," as we struggle to increase standards of living.
In the early part of the 19th century, the United States, as a developing country, borrowed
much technology and savings from Europe to get a toehold on the growth ladder. But over
the past century, America has moved to the cutting edge of technology.
There is no question that events are continually altering the shape and nature of our
economic processes, especially the extent to which technological breakthroughs have
advanced and perhaps, most recently, even accelerated the pace of conceptualization of our
gross domestic product. We have dramatically reduced the size of our radios, for example,
by substituting transistors for vacuum tubes. Thinfiber-opticcable has replaced huge
tonnages of copper wire. New architectural, engineering, and materials technologies have
enabled the construction of buildings enclosing the same space but with far less physical
material than was required, say, 50 or 100 years ago. Most recently, mobile phones have
been markedly downsized as they have been improved. As a consequence, the physical
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weight of our GDP is growing only very gradually. The exploitation of new concepts
accounts for virtually all of the inflation-adjusted growth in output.
The cause of this dramatic shift toward product downsizing during the past half century can
only be surmised. Perhaps the physical limitations of accumulating goods and moving them
in an ever more crowded geographical environment resulted in cost pressures to economize
on size and space. Similarly, perhaps it was the prospect of increasing costs of processing
ever larger quantities of physical resources that shifted producers toward downsized
alternatives. Remember, it was less than three decades ago that the Club of Rome issued its
dire warnings about the prospects of running out of the physical resources that allegedly
were necessary to support our standards of living. Finally, as we moved the technological
frontier forward and pressed for information processing to speed up, for example, the laws
of physics required the relevant microchips to become ever more compact.
But what was always true in the past, and will remain so in the future, is that the output of a
free market economy and the notion of wealth creation will reflect the value preferences of
people. Indeed, the very concept of wealth has no meaning other than as a reflection of
human value preferences. There is no intrinsic value in wheat, a machine, or a software
program. It is only as these products satisfy human needs currently, or are perceived to be
able do so in the future, that they are valued. And it is such value preferences, as they
express themselves in the market's key signals-product and asset prices-that inform
producers of what is considered valuable and, together with the state of technology, what
could be profitably produced.
9
To get back to basics, the value of any physical production facility depends on the
perceived value of the goods and services that the facility is projected to produce. More
formally, the current value of the facility can be viewed as the sum of the discounted value
of all future outputs, net of costs.
An identical physical facility with the same capacity to produce can have different values in
the marketplace at different times, depending on the degree to which the investing public
feels confident about the ability of the firm to perceive and respond to the future
environments in which the plant will be turning out goods and services. The value of a steel
mill, which has an unchanging ability to turn out sheet steel, for example, can vary widely
in the marketplace depending on the level of interest rates, the overall rate of inflation, and
a number of other factors that have nothing to do with the engineering aspects of the
production of steel. What matters is how investors view the markets into which the steel
from the mill is expected to be sold over the years ahead. When that degree of confidence in
judging the future is high, discounted future values also are high—and so are the prices of
equities, which, of course, are the claims on our productive assets.
The forces that shape the degree of confidence are largely endogenous to an economic
process that is generally self-correcting as consumers and investors interact with a
continually changing market reality. I do not claim that all market behavior is a rational
response to changes in the real world. But most of it must be. For, were it otherwise, the
relatively stable economic environments that have been evident among the major industrial
countries over the generations would not be possible.
Certainly, the degree of confidence that future outcomes are perceivable and projectable,
and hence valued, depends in large part on the underlying political stability of any country
with a market-oriented economy. Unless market participants are assured that their future
commitments and contracts are protected by a rule of law, such commitments will not be
made; productive efforts will be focused to address only the immediate short-term
imperatives of survival; and efforts to build an infrastructure to provide for future needs
will be stunted.
A society that protects claims to long-lived productive assets thereby surely encourages
their development. That spurs levels of production to go beyond the needs of the moment,
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the needs of immediate consumption, because claims on future production values will be
discounted far less than in an environment of political instability and, for example, a weak
law of contracts. At that point, the makings of a sophisticated economy based on
longer-term commitments are in place. It will be an economy that saves and invests-that is,
commits to the future—and, hence, one that will grow.
But every competitive market economy, even one solidly based on a rule of law, is always
in a state of flux, and its perceived productiveness is always subject to degrees of
uncertainty that are inevitably associated with endeavors to anticipate future outcomes.
Thus, while the general state of confidence and consumers' and investors' willingness to
commit to long-term investment is buttressed by the perceptions of the stability of the
society and economy, history demonstrates that that degree of confidence is subject to wide
variations. Most of those variations are the result of the sheer difficulty in making
judgments and, therefore, commitments about, and to, the future. On occasion, this very
difficulty leads to less-disciplined evaluations, which foster price volatility and, in some
cases, what we term market bubbles-that is, asset values inflated more on the expectation
that others will pay higher prices than on a knowledgeable judgment of true value.
The behavior of market economies across the globe in recent years, especially in Asia and
the United States, has underscored how large a role expectations have come to play in real
economic development. Economists use the term "time preference" to identify the broader
tradeoff that individuals are willing to make, even without concern for risk, between current
consumption and claims to future consumption. Measurable discount factors are intended to
capture in addition the various types of uncertainties that inevitably cloud the future.
P
Dramatic changes in the latter underscore how human evaluation, interacting with the more
palpable changes in real output, can have profound effects on an economy, as the
experiences in Asia have so amply demonstrated during the past year.
Vicious cycles have arisen across Southeast Asia with virtually no notice. At one point, an
economy would appear to be struggling, but no more than had been the case many times in
the past. The next moment, market prices and the economy appeared in free fall.
Our experiences with these vicious cycles in Asia emphasize the key role in a market
economy of a critical human attribute: confidence or trust in the functioning of a market
system. Implicitly, we engage in a division of labor because we trust that others will
produce and be willing to trade the goods and services we do not produce ourselves.
1
We take for granted that contracts will be fulfilled in the normal course of business, relying
on the rule of law, especially the law of contracts. But if trust evaporated and every contract
had to be adjudicated, the division of labor would collapse. A key characteristic, perhaps v/
the fundamental cause of a vicious cycle, is the loss of trust.
1
1
We did not foresee such a breakdown in Asia. I suspect that the very nature of the process
may make it virtually impossible to anticipate. It is like water pressing against a dam.
Everything appears normal until a crack brings a deluge.
The immediate cause of the breakdown was an evident pulling back from future
commitments, arguably, the result of the emergence among international lenders of
widening doubt that the dramatic growth evident among the Asian "tigers" could be
sustained. The emergence of excess worldwide capacity in semiconductors, a valued export
for the tigers, may have been among the precipitating events. In any case, the initial rise in
market uncertainty led to a sharp rise in discounts on future claims to income and,
accordingly, falling prices of real estate and equities. The process became self-feeding as
disengagement from future commitments led to still greater disruption and uncertainty,
rising risk premiums and discount factors, and a sharp fall in production.
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While the reverse phenomenon, a virtuous cycle, is not fully symmetrical, some part is.
Indeed, much of the current American economic expansion is best understood in the context
of favorable expectations, interacting with production and finance to expand rather than
implode economic processes.
The American economic stability of the past five years has helped engender increasing
confidence of future stability. This, in turn, has dramatically upgraded the stock market's
valuation of our economy's existing productive infrastructure, adding about $6 trillion of
capital gains to household net worth from early 1995 through the second quarter of this
year.
While the vast majority of these gains augmented retirement and other savings programs,
enough spilled over into consumer spending to significantly lower the proportion of
household income that consumers, especially upper income consumers, believed it
necessary to save.
In addition, the longer the elevated level of stock prices was sustained, the more consumers
likely viewed their capital gains as permanent increments to their net worth, and, hence, as
spendable. The recent windfallfinancednot only higher personal consumption expenditures
but home purchases as well. It is difficult to explain the recent record level of home sales
without reference to earlier stock market gains.
P
The rise in stock prices also meant a fall in the equity cost of capital that doubtless raised
the pace of new capital investment. Investment in new facilities had already been given a
major boost by the acceleration in technological developments, which evidently increased
the potential for profit in recent years. The sharp surge in capital outlays during the past five
years apparently reflected the availability of higher rates of return on a broad spectrum of
potential investments owing to an acceleration in technological advances, especially in
computer and telecommunications applications.
This is the apparent root of the recent evident quickened pace of productivity advance.
While the recent technological advances have patently added new and increasingly flexible
capacity, the ability of these technologies to improve the efficiency of productive processes
(an issue I will elaborate on shortly) has significantly reduced labor requirements per unit of
output. This, no doubt, was one factor contributing to a dramatic increase in corporate
downsizing and reported widespread layoffs in the early 1990s. The unemployment rate
also began to fall as the pace of new hires to man the new facilities exceeded the pace of
layoffs from the Old.
Parenthetically, the perception of increased churning of our workforce in the 1990s has
understandably increased the sense of accelerated job-skill obsolescence among a
significant segment of our workforce, especially among those most closely wedded to older
technologies. The pressures are reflected in a major increase in on-the-job training and a
dramatic expansion of college enrollment, especially at community colleges. As a result, the
average age of full-time college students has risen dramatically in recent years as large
numbers of experienced workers return to school for skill upgrading. But the sense of
increasing skill obsolescence has also led to an apparent willingness on the part of
employees to forgo wage and benefit increases for increased job security. Thus, despite the
incredible tightness of labor markets, increases in compensation per hour have continued to
be relatively modest.
Coupled with the quickened pace of productivity growth, wage and benefit moderation has
kept growth in unit labor costs subdued in the current expansion. This has both damped
inflation and allowed profit margins to reach high levels.
That, in turn, apparently was the driving force beginning in early 1995 in security analysts'
significant upward revision of their company-by-company long-term earnings projections.
These upward revisions, coupled with falling interest rates, point to two key underlying
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forces that impelled investors to produce one of history's most notable bull stock markets.
But they are not the only forces. In addition, the sequence of greater capital investment,
productivity growth, and falling inflation fostered an ever more benevolent sense of
long-term stable growth. People were more confident about the future. The consequence
was a dramatic shrinkage in the so-called equity premium over the past two years to near
historic lows earlier this summer. The equity premium is the charge for the additional risks
that markets require to hold stocks rather than riskless debt instruments. When perceived
risks of the future are low, equity premiums are low and stock prices are even more
elevated than would be indicated solely from higher expected long-term earnings growth
and low riskless rates of interest.
Thus, one key to the question of whether there is a new economy is whether current
expectations of future stability, which are distinctly more positive than say a decade ago,
are justified by actual changes in the economy. For if expectations of greater stability are
borne out, risk and equity premiums will remain low. In that case, the cost of capital will
also remain low, leading, at least for a time, to higher investment and faster economic
growth.
Two considerations are therefore critical to higher asset values and higher economic
growth. The first is whether the apparent upward shift in technological advance will persist.
The second is the extent of confidence in the stability of the future that consumers and
investors will be able to sustain.
P
With regard to the first: How fast can technology advance, augmenting the pool of
investment opportunities that have elevated rates of return, which engender still further
increases in expected long-term earnings? Technological breakthroughs, as history so
amply demonstrates, are frustratingly difficult to discern much in advance. The particular
synergies between new and older technologies are generally too complex to anticipate.
An innovation's full potential may be realized only after extensive improvements or after
complementary innovations in other fields of science. According to Charles Townes, a
Nobel Prize winner for his work on the laser, the attorneys for Bell Labs initially, in the late
1960s, refused to patent the laser because they believed it had no applications in thefieldof
telecommunications. Only in the 1980s, after extensive improvements in fiber-optics
technology, did the laser's importance for telecommunications become apparent.
The future of technology advance may be difficult to predict, but for the period ahead there
is the possibility that already proven technologies may not as yet have been fully exploited.
Company after company reports that, when confronted with cost increases in a competitive
environment that precludes price increases, they are able to offset those costs, seemingly at
will, by installing the newer technologies.
Such stories seem odd. If cost improvements were available at will earlier, why weren't the
investments made earlier? This implies suboptimal business behavior, contrary to what
universities teach in Economics 101. But in the real world, companies rarely fully maximize
profits. They concentrate on only those segments of their businesses that appear to offer the
largest rewards and are rarely able to operate at the most efficient frontier on all fronts
simultaneously. When costs rise, the attention of management presumably becomes focused
more sharply on investments to limit the effects of rising costs.
But if cost-cutting at will is, in fact, currently available, it suggests that a backlog of
unexploited capital projects has been built up in recent years, which, if true, implies the
potentialforcontinued gains in productivity close to the elevated rates of the last couple of
years. Even if this is indeed the case, and only anecdotal evidence supports it, security
analysts' recent projected per share earnings growth of more than 13 percent annually over
the next three to five years is unlikely to materialize. It would imply an ever-increasing
share of profit in the national income from a level that is already high by historic standards.
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Such conditions have led in the past to labor market pressures that thwarted further profit
growth.
The second consideration with respect to how high asset values can rise is: How far can risk
and equity premiums fall? A key factor is that price inflation has receded to quite low
levels. The rising level of confidence in recent years concerning future outcomes has
doubtless been related to the fall in the rate of inflation that has, of course, also been a
critical factor in the fall in interest rates and, importantly, the fall in equity premiums as
well. Presumably, the onset of deflation, shouM it occur, would increase uncertainty as
much as a reemergence of inflation concerns. Thus, arguably, at near price stability,
perceived risk from business-cycle developments would be at its lowest, and one must
presume that would be the case for equity premiums as well. In any event, there is a limit
on how far investors can rationally favorably discount the future and therefore how low
equity premiums can go. Current claims on a source of income available 20 or 30 years in
the future still have current value. But should claims on the hereafter?
An implication of high equity market values, relative to income and production, is an
increased potential for instability. As I argued earlier, part of capital gains increases
consumption and incomes. Since equity values are demonstrably more variable than
incomes, when equity market values become large relative to incomes and GDP, their
fluctuations can be expected to effect GDP more than when equity market values are low.
Clearly, the history of large swings in investor confidence and equity premiums for rational
and other reasons counsels caution in the current context. We have relearned in recent
weeks that just as a bull stock market feels unending and secure as an economy and stock
market move forward, so it can feel when markets contract that recovery is inconceivable.
Both, of course, are wrong. But because of the difficulty imagining a turnabout when such
emotions take hold, periods of euphoria or distress tend to feed on themselves. Indeed, if
this were not the case, the types of psychologically driven ebbs and flows of economic
activity we have observed would be unlikely to exist.
Perhaps, as some argue, history will be less of a guide than it has been in the past. Some of
the future is always without historical precedent. New records are always being made.
Having said all that, however, my experience of observing the American economy day by
day over the past half century suggests that most, perhaps substantially most, of the future
can be expected to rest on a continuum from the past. Human nature, as I indicated earlier,
appears immutable over the generations and inextricably ties our future to our past.
Nonetheless, as I indicated earlier, I would not deny that there doubtless has been in recent
years an underlying improvement in the functioning of America's markets and in the pace
of development of cutting edge technologies beyond previous expectations.
Most impressive is the marked increase in the effectiveness in the 1990s of our capital
stock, that is, our productive facilities, the issue to which I alluded earlier. While gross
investment has been high, it has been, in recent years, composed to a significant extent of
short-lived assets that depreciate rapidly. Thus, the growth of the net capital stock, despite
its recent acceleration, remains well below the peak rates posted during the past half
century.
Despite the broadening in recent decades of international capital flows, empirical evidence
suggests that domestic investment still depends to a critical extent on domestic saving,
especially at the margin. Many have argued persuasively, myself included, that we save too
little. The relatively low propensity to save on the part of the American public has put a
large premium on the effective use of scarce capital, and on the winnowing out of the
potentially least productive and, hence, the least profitable of investment opportunities.
That is one of the reasons that our financial system, whose job it is to ensure the productive
use of physical capital, has been such a crucial part of our overall economy, especially over
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the past two decades. It is the signals reflected in financial asset prices, interest rates, and
risk spreads that have altered the structure of our output in recent decades towards a
different view of what consumers judge as value. This has imparted a significant derived
value to a financial system that can do that effectively and, despite recent retrenchments, to
the stock market value of those individual institutions that make up that system.
Clearly, our highfinancialreturns on investment are a symptom that our physical capital is
being allocated to produce products and services that consumers particularly value. A
machining facility that turns out an inferior product or a toll road that leads to nowhere will
not find favor with the public, will earn subnormal or negative profits, and in most
instances will exhibit an inability over the life of the asset to recover the cash plus cost of
capital invested in it.
Thus, while adequate national saving is a necessary condition for capital investment and
rising productivity and standards of living, it is by no means a sufficient condition.
The former Soviet Union, for example, had too much investment, and without the discipline
of market prices, they grossly misplaced it. The preferences of central planners wasted
valuable resources by mandating investment in sectors of the economy where the output
wasn't wanted by consumers—particularly in heavy manufacturing industries. It is thus no
surprise that the Soviet Union's capital/output ratios were higher than those of
contemporaneous free market economies of the West.
9
This phenomenon of overinvestment is observable even among more sophisticated free
market economies. In Japan, the saving rate and gross investment have been far higher than
ours, but their per capita growth potential appears to be falling relative to ours. It is
arguable that their hobbled financial system is, at least in part, a contributor to their
economy's subnormal performance.
We should not become complacent, however. To be sure, the sharp increases in the stock
market have boosted household net worth. But while capital gains increase the value of
existing assets, they do not directly create the resources needed for investment in new
physical facilities. Only saving out of income can do that.
In summary, whether over the past five to seven years, what has been, without question, one
of the best economic performances in our history is a harbinger of a new economy or just a
hyped-up version of the old, will be answered only with the inexorable passage of time.
And I suspect our grandchildren, and theirs, will be periodically debating whether they are
in a new economy.
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Federal Reserve Board
Remarks by Chairman Alan Greenspan
Understanding today's international financial system
Before the 34th Annual Conference on Bank Structure and Competition of the
Federal Reserve Bank of Chicago
May 7, 1998
Events in Asia over the past year reinforce once more the fact that, while our burgeoning
global system is efficient and makes a substantial contribution to standards of living
worldwide, that same efficiency exposes and punishes underlying economic imprudence
swiftly and decisively. These global financial markets, engendered by the rapid
proliferation of cross-border financial flows and products, have developed a capability of
transmitting mistakes at a far faster pace throughout the financial system in ways that were
unknown a generation ago. Today's international financial system is sufficiently different,
in so many respects, from its predecessors that it can reasonably be characterized as new, as
distinct from being merely a continuing evolution from the past.
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As a consequence, it is urgent that we accelerate our efforts to develop a sophisticated
understanding of how this high-tech financial system works. Specifically, we need such an
understanding if we are to minimize the chances that we will experience a systemic
disruption beyond our degree of comprehension or our ability to respond effectively. We
need it if we are to continue to make progress in reducing settlement risk in foreign
exchange markets and to ensure a sound infrastructure for payments and settlement systems
generally. And we need it if we are to have confidence in our processes of supervision and
regulation.
In this regard, I intend to focus my remarks this morning on three related topics: I will start
by examining the crises in Asia, which, along with the one in Mexico just a few years ago,
provide the first evidence of how crises arise in the new system, especially the central role
that banks play. I will note that, while the support provided to banks by public safety nets
appears to be an element of stability in the new system, it has also been part of the process
that engendered recent crises. Next, I will consider why, if the existence of safety nets can
encourage crises, we continue to provide them. Finally, I will consider possible policy
responses to some of the system's evident problems and tensions. Put differently, can we
learn to stabilize our burgeoning, sometimes frenetic, new international financial system so
that we can realize its full potential?
***
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Let me start with Asia. In hindsight, it is evident that those leveraged economies could not
provide adequate profitable opportunities at reasonable risk in the 1990s to absorb the surge
in capital inflows. That surge reflected in part the diversification of the western equity
markets' huge capital gains to a sector of the world which was perceived as offering above
average returns. Together with distortions caused by a long-entrenched government
planning ethos, the flood of investment resulted-some would say inevitably-in massive
deadweight losses. As activity slowed, burdened byfixed-costobligations that were
undertaken on the presumption of continuing growth, business losses and nonperforming
bank loans surged. The capital of banks in Asian economies—especially when properly *
accounted for—eroded rapidly. As a consequence, funding sources dried up as fears of
defaults rose dramatically.
In an environment of weakfinancialsystems, lax supervisory regimes, and vague
assurances about depositor or creditor protections, the state of confidence so necessary to
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the functioning of any banking system was torn asunder. Bank runs occurred in several
countries and reached crisis proportions in Indonesia. Uncertainty and retrenchment
escalated.
I
In short, the slowing in activity in Asia exposed the high fixed costs of a leveraged
economy, especially one with fixed obligations in foreign currencies. Failures to make
payments induced vicious cycles of contagious, ever rising, and reinforcing fears.
It is quite difficult to anticipate such crises. Every borrower, whether a bank or a nonbank
company, presumably structures its balance sheet to provide a sufficient buffer against the
emergence of illiquidity or insolvency. The scramble by borrowers to protect their balance
sheets when this buffer is unexpectedly breached can lead to a surge in the demand for
liquidity that in turn produces a run on thefinancialsystem. At one moment, an economy
appears stable, the next it is subject to an implosion of fear-induced contraction.
In this context a preventive effort to lessen the probabilities of such crises arising-for
example, by bolstering the financial system's buffer through more capital or improved bank
supervision—may not in itself further insulate a country from crisis if financial institutions,
now faced with a lower cost of capital or lower spread on their debt, leverage away the
increased buffer. Indeed, one form of moral hazard is that an initially sound financial
system that attracts low risk premia could merely induce a ratcheting up of the risks that a
nation's borrowers choose to take on. This is not to disparage endeavors to bolster financial
systems. But we should keep in mind that some of the advantages of such initiatives could
be drained away by moral hazard.
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What is becoming increasingly clear, and what is particularly relevant to this conference, is
that, in virtually all cases, what turns otherwise seemingly minor imbalances into a crisis is
an actual or anticipated disruption to the liquidity or solvency of the banking system, or at
least of its major participants. That fact is of critical importance for understanding both the
Asian and the previous Latin American crises. Depending on circumstances, the original
impulse for the crisis may begin in the banking system or it may begin elsewhere and cause
a problem in the banking system that converts a troubling event into an implosive crisis.
The aspects of the banking system that produce such outcomes are not particularly opaque.
First, exceptionally high leverage has often been a symptom of excessive risk-taking that
leftfinancialsystems and economies vulnerable to loss of confidence. It is not easy to
imagine the cumulative cascading of debt instruments seeking safety in a crisis when assets
are heavily funded with equity. Moreover,financial(as well as nonfinancial) businesses
have employed high leverage to mask inadequate underlying profitability and did not have
adequate capital cushions to match their volatile environments.
Second, banks, when confronted with a generally rising yield curve, which is more often the
case than not, have had a tendency to incur interest rate or liquidity risk by lending long and
funding short. This has exposed banks, especially those that had inadequate capital to begin
with, to a collapse of confidence when interest rates spiked and capital was eroded. In
addition, whenfinancialintermediaries, in an environment of fixed exchange rates, but still
high inflation premiums and domestic currency interest rates, sought low-cost, unhedged,
foreign currency funding, the dangers of depositor runs, following a fall in the domestic
currency, escalated.
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Third, banks play a crucial role in thefinancialmarket infrastructure. A sound institution
can fend off unexpected shocks. But when they are undercapitalized, have lax lending
standards, and are subjected to weak supervision and regulation, they have become a source
of systemic risk to both domestic and international financial systems.
Fourth, recent adverse banking experiences have emphasized the problems that can arise if
banks, especially vulnerable banks, are almost the sole source of intermediation. Their
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breakdown induces a marked weakening in economic growth. A wider range of nonbank
institutions, including viable debt and equity markets, can provide important safeguards of
economic activity when the banking system fails.
Fifth, despite its importance for distributing savings to their most valued investment use,
excessive short-term interbank funding, especially cross border, may turn out to be the
Achilles' heel of an international financial system that is subject to wide variations in
financial confidence. This phenomenon, which is all too common in our domestic
experience, may be particularly dangerous in an international setting. I shall return to this
issue later.
Finally, an important contributor to past crises has been moral hazard, that is, a distortion of
incentives that occurs when the party that determines the level of risk receives the gains
from, but does not bear the full costs of, the risks taken. Interest rate and currency
risk-taking, excess leverage, weak financial systems, and interbank funding have all been
encouraged by the existence of a safety net. The expectation that national monetary
authorities or international financial institutions will come to the rescue of failing financial
systems and unsound investments clearly has engendered a significant element of excessive
risk-taking. The dividing line between public and private liabilities, too often, has become
blurred.
Given that the existence of safety nets generates moral hazard, and moral hazard distorts
incentives, why do we continue to provide safety nets to support our financial systems?
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It is important to remember that, notwithstanding the possibility of excessive leverage,
many of the benefits banks provide modern societies derive from their willingness to take
risks and from their use of a relatively high degree of financial leverage. Through leverage,
in the form principally of taking deposits, banks perform a critical role in the financial
intermediation process; they provide savers with additional investment choices and
borrowers with a greater range of sources of credit, thereby facilitating a more sophisticated
allocation of resources that appears to contribute importantly to greater economic growth.
Indeed, it has been the evident value of intermediation and leverage that has shaped the
development of our financial systems from the earliest times—certainly since Renaissance
goldsmiths discovered that lending out deposited gold was both feasible and profitable.
In addition, central bank provision of a mechanism for converting highly illiquid portfolios
into liquid ones, in extraordinary circumstances, has led to a greater degree of leverage in
banking than market forces alone would support. Traditionally this has been accomplished
by making discount or Lombard facilities available, so that individual depositories could
turn illiquid assets into liquid resources and not exacerbate unsettled market conditions by
the forced selling of such assets or the calling of loans. More broadly, open market
operations, in situations like that which followed the crash of stock markets around the
world in 1987, satisfy marked increased needs for liquidity for the system as a whole that
otherwise could feed cumulative, self-reinforcing, contractions across many financial
markets.
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To be sure, we should recognize that if we choose to have the advantages of a leveraged
system of financial intermediaries, the burden of managing risk in thefinancialsystem will
not lie with the private sector alone. As I noted, with leveraging there will always exist a
possibility, however remote, of a chain reaction, a cascading sequence of defaults that will
culminate in financial implosion if it proceeds unchecked. Only a central bank, with its
unlimited power to create money, can with a high probability thwart such a process before
it becomes destructive. Hence, central banks will of necessity be drawn into becoming
lenders of last resort. But implicit in the existence of such a role is that there will be some
form of allocation between the public and private sectors of the burden of risk, with central
banks responsible for managing the most extreme, that is the most systemically sensitive,
outcomes. Thus, central banks have been led to provide what essentially amounts to
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catastrophic financial insurance coverage. Such a public subsidy should be reserved for
only the rarest of disasters. If the owners or managers of private financial institutions were
to anticipate being propped up frequently by government support, it would only encourage
reckless and irresponsible practices.
In theory, the allocation of responsibility for risk-bearing between the private sector and the
central bank depends upon the private cost of capital. In order to attract, or at least retain,
capital, a private financial institution must earn at minimum the overall economy's marginal
cost of riskless capital, adjusted for firm-specific risk. In competitive financial markets, the
greater the leverage, the higher the rate of return, before adjustment for risk. If private
financial institutions have to absorb all financial risk, then the degree to which they can
leverage will be restrained, the financial sector smaller, and its contribution to the economy
more limited. On the other hand, if central banks effectively insulate private institutions
from potential losses, however incurred, increased laxity could threaten a major drain on
taxpayers or produce inflationary instability as a consequence of excess money creation.
Once a private financial institution infers the amount of capital it must devote to ensure
against, first, illiquidity and, finally, insolvency, the size of its balance sheet for maximum
rate of return on equity, adjusted for risk, is determined. That inference depends on the
institution's judgment of how much of the tail of its risk distribution requires a capital
)rovision. The central bank is presumed to respond to the remainder of the risk tail by
ending freely and reducing the danger of illiquidity. Protecting private financial
institutions' solvency through guarantees of liabilities risks significant moral hazard.
In practice, the policy choice of how much, if any, of the extreme market risk that
government authorities should absorb is fraught with many complexities. Yet we central
bankers make this decision every day, either explicitly or by default. Moreover, we can
never know for sure whether the decisions we made were appropriate. The question is not
whether our actions are seen to have been necessary in retrospect; the absence of a fire does
not mean that we should not have paid for fire insurance. Rather, the question is whether, ex
ante, the probability of a systemic collapse was sufficient to warrant intervention. Often, we
cannot wait to see whether, in hindsight, the problem will be judged to have been an
isolated event and largely benign.
Thus, governments, including central banks, have been given certain responsibilities related
to their banking and financial systems that must be balanced. We have the responsibility to
prevent major financial market disruptions through development and enforcement of
prudent regulatory standards and, if necessary in rare circumstances, through direct
intervention in market events. But we also have the responsibility to ensure that private
sector institutions have the capacity to take prudent and appropriate risks, even though such
risks will sometimes result in unanticipated bank losses or even bank failures.
Our goal as supervisors, therefore, should not be to prevent all bank failures, as I have
suggested to this conference many times, but to maintain sufficient prudential standards so
that banking problems that do occur do not become widespread. We try to achieve the
proper balance through official regulations, as well as through formal and informal
supervisory policies and procedures.
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To some extent, we do this over time by signalling to the market, through our actions, the
kinds of circumstances in which we might be willing to intervene to quell financial turmoil,
and conversely, what levels of difficulties we expect private institutions to resolve by
themselves. The market, then, responds by adjusting the risk premium addition to the
riskless cost of capital available to banks.
***
To return to the question I raised at the beginning: Can we learn to stabilize our burgeoning,
sometimes frenetic, new international financial system so that we can realize its full
potential? What types of regulatory initiatives appear fruitful in achieving the benefits and
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minimizing the costs of the new system?
I
In addressing those questions, I will confine myself again to issues related more narrowly to
banks: in particular, to bank supervision and to possible ways in which the behavior of
individual banks could be improved. I will not discuss the important issues concerning the
need for efficient bankruptcy procedures or for alternative means for coordinating debtors
and creditors, both in the domestic context in many countries and in the cross-border
context, that may be required in our new system.
While failures will inevitably occur in a dynamic market, the safety net—not to mention
concerns over systemic risk—requires, to repeat, that regulators not be indifferent to how
banks manage their risks. To avoid having to resort to numbing micromanagement,
regulators have increasingly insisted that banks put in place systems that allow management
to have both the information and procedures to be aware of their own true risk exposures on
a global basis and to be able to manage such exposures. The better these risk information
and control systems, the more risk a bank can prudently assume. In that context, an
enhanced regime of market incentives, involving greater sensitivity to market signals and
more information to make those signals more robust, is essential.
In this rapidly expanding international financial system, the primary protection from
adverse financial disturbances is effective counterparty surveillance and, hence, government
regulation and supervision should seek to produce an environment in which counterparties
can most effectively oversee the credit risks of potential transactions.
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Here a major improvement in transparency is essential. To be sure, counterparties often
exchange otherwise confidential information as a condition of a transaction. But broader
dissemination of detailed disclosures of governments, financial institutions, and firms is
required if the risks inherent in our global financial structure are to be contained. A market
system can approach an appropriate equilibrium only if the signals to which individual
market participants respond are accurate and adequate to the needs of the adjustment
process. Among the important signals are product and asset prices, interest rates, debt by
maturity, and detailed accounts of central banks and private enterprises. I find it difficult to
believe, for example, that the crises that arose in Thailand and Korea would have been
nearly so virulent had their central banks published data prior to the crises on net reserves
instead of the not very informative gross reserve positions only. Some inappropriate capital
inflows would almost surely have been withheld and policymakers would have been forced
to make difficult choices more promptly if earlier evidences of difficulty had emerged.
Increased transparency can expose the prevalence of pending problems, but it cannot be
expected to discourage all aberrant behavior. It has not prevented reliance on real estate for
collateral from becoming problematic from time to time. East Asia has been no exception.
When real estate values fall sharply, as they do from time to time, such collateral tends to
become highly illiquid. Removal of legal impediments to more widespread forms of
collateral and to prompt access to collateral would be helpful in dealing with these
problems.
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It is increasingly evident that nonperforming loans should be dealt with expeditiously and
not allowed to fester. The expected values of the losses on these loans are, of course, a
subtraction from capital. But since these estimates are uncertain, they embody an additional
risk premium that further reduces the market's best estimate of the size of effective equity
capital. Funding becomes more difficult. Partly reflecting uncertainties with respect to their
nonperforming loans, Japanese banks in London, for example, are currently required to pay
about a 15 basis point add-on over what markets require for major western banks for
short-term deposits denominated myen. It is, hence, far better to remove these dubious
assets and their associated risk premium from bank balance sheets, and dispose of them
separately, preferably promptly.
A predicate to addressing nonperforming loans expeditiously is better and more forceful
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supervision, which requires more knowledgeable bank examiners than, unfortunately, many
economies enjoy. In all countries, we need independent bank examiners who understand
banking and business risk, who could in effect, make sound loans themselves because they
understand the process. Similarly, we need loan officers at banks that understand their
customers' business-loan officers that could, in effect, step into the shoes of their
customers. Lack of a cadre of loan officers who have experience in judging lending risk can
produce debilitating losses even when lending is not directed by government inducement or
the need to support members of an associated group of companies. Experienced bank
supervision cannot fully substitute for poor lending procedures, but presumably it could
encourage better practice. Apparently even that has been lacking in many economies. And
training personnel and developing adequate supervisory systems will take time.
I pointed earlier to cross-border interbank funding as potentially the Achilles' heel of the
international financial system. Creditor banks expect claims on banks, especially banks in
emerging economies, to be protected by a safety net and, consequently, consider them to be
essentially sovereign claims. Unless those expectations are substantially altered-as when
banks actually incur significant losses-governments can be faced with the choice either of
validating those expectations or of risking serious disruption to payments systems and to
financial markets in general.
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Arguably expectations of safety net support have increased the level of cross border
interbank lending from that which would be supported by unsubsidized markets themselves.
This would suggest resource misallocation. Accordingly, it might be useful to consider
ways in which some added discipline could be imposed on the interbank market. Such
discipline, in principle, could be imposed on either debtor or creditor banks. For example,
capital requirements could be raised on borrowing banks by making the required level of
capital dependent not just on the nature of the banks' assets but also on the nature of their
funding. An increase in required capital can be thought of as providing a larger cushion for
the sovereign guarantor in the event of a bank's failure. That is, it would shift more of the
burden of the failure onto the private sector. Alternatively, the issue of moral hazard in
interbank markets could be addressed by charging banks for the existence of the sovereign
guarantee, particularly in more vulnerable countries where that guarantee is more likely to
be called upon and whose cost might deter some aberrant borrowing. For example,
sovereigns could charge an explicit premium, or could impose reserve requirements,
earning low or even zero interest rates, on interbank liabilities.
Increasing the capital charge on lending banks, instead of on borrowing banks, might also
be effective. Under the Basle capital accord, short-term claims on banks from any country
carry only a twenty percent risk weight. The higher cost to the lending banks associated
with a higher risk weight would presumably be passed on to the borrowing banks.
Borrowing banks, at the margin, might reduce their total borrowing or shift their borrowing
to nonbank sources of funds, perhaps with the shift facilitated by the lending banks, who
might advert to securitization of short-term interbank lending if regulatory capital charges
exceeded internal requirements. In either case, there would tend to be a reduction in
interbank exposures, a significant source of systemic risk. To be evaluated in any such
initiative is whether such regulation would disrupt liquidity in the interbank market to a
point where such costs exceed the benefits of reduced interbank exposure.
***
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We are interacting every day with an emerging new international financial structure, one
with great potential for facilitating the creation of wealth and rising standards of living. Our
understanding of the new system continues to improve, as does our ability to gauge and
manage risks. Still, the new system will doubtless at times appear threatening and unstable.
But that is the price of progress. In my judgment, at the end of the day, it will be a price
well worth paying.
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TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
Text as Prepared for Delivery
January 21, 1998
RR-2168
Treasury Secretary Robert E. Rubin
Address on the Asian Financial Situation to Georgetown University
Washington, D.C.
Today I would like to discuss the financial crisis in Asia; why the United States must protect its vital
economic and national security interests by working to help restore financial stability and economic
growth to that troubled region; and why acting promptly and effectively to do so protects the economic
interests of every American.
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To begin, I think it is important to place the recent events in Asia in the context of the emergence of the
global financial system. Over the last several years, we have entered a new era for global financial
markets and the global economy ~ an era of interdependence, complexity and opportunity. Expanding
economic ties through greatly increased trade and vastly increased capital flows has brought tremendous
benefits to the American people through greater exports, more high-paying jobs, and higher standards of
living and through lower inflation than would have been expected with the strong growth we've had.
And countries in the developing world and emerging markets have also benefited enormously from this
environment, which has allowed them to attract previously unimaginable flows of private capital for
investment. That investment has helped foster growth and lift millions out of poverty.
Yet just as this era brings great opportunities for the United States and the rest of the world, so does it
present new risks. In recent months, these risks have been brought home as financial instability in Asia
has shaken the region and affected markets around the world. Just a few years ago, it would have been
unimaginable for the fluctuations of the Thai baht, or the fortunes of the Korean stock market to impact
U.S. markets to be printed on the front page of newspapers every day.
In the face of this challenge, our first job is clear: to help stabilize the immediate crisis. Yet, to make the
most of the opportunities and limit the risks of the new global financial system and to have a viable
situation for the years ahead, we must also modernize the architecture of the international financial
markets that we helped create and that has served us so well for the last fifty years. This will be a long
and complex process — which we actually began several years ago — involving both great intellectual
effort and extensive international coordination, yet it is imperative for the strength of our economy and
the prosperity of our citizens as we enter a new century.
The United States has enormously important economic and national security interests at stake in
promoting restoration offinancialstability in Asia. When we act to resolve the Asian crisis, we act to
protect and benefit the American people.
The countries in Asia are our customers, our competitors and our security partners. Financial instability,
economic distress, and depreciating currencies all have direct effects on the pace of our exports, the
competitiveness of our companies, the growth of our economy and, ultimately, the well-being of
American workers. Thirty percent of U.S. exports go to Asia, supporting millions of U.S. jobs, and we
export more to Asia than Europe. In states like California, Oregon and Washington, exports to Asia
account for more than half of each state's total exports.
Thus far, the effects on our economy, though real, are relatively moderate and the most likely scenario
for the next year is continued solid growth and low inflation. However, the risks in this crisis are not just
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confined to the Asian countries now most directly involved. Roughly forty percent of our exports have
been going to emerging markets around the globe. If the crisis were to spread more broadly to other
emerging markets, then the impact on American workers and businesses could be much greater. Simply
put, we cannot afford to stand back and gamble that the crisis will resolve itself.
The United States also has critical national security interests in seeing a restoration of financial stability
in the region. We have 100,000 troops based in Asia, 37,000 on the Korean peninsula alone, where we
have spent 45 years keeping the peace, and where North and South Korea have only just begun
negotiating a possible end to their conflict. History has shown that economic distress and financial
instability can threaten political stability and security. A stable and prosperous Asia is more likely to be
a peaceful Asia.
Action on a global scale is not easy, but the United States cannot turn its back on this crisis in the hope
that we will remain insulated from its effects and markets alone will cure the problem. It's neither
desirable nor possible to save countries from the consequences of structural deficiencies and bad
policies, but we can work to support an international effort to help countries that help themselves, and
that is very much in the interest of the American people. By reestablishing financial stability and
economic well-being, these countries will once again be strong markets for American goods, will have
stronger currencies that will help the competitiveness of our goods in world markets, and will enjoy the
economic conditions conducive to political and social stability. There are no guarantees for success, and
even with success, these countries' financial and economic difficulty will persist for some while the
reforms take hold and lead to renewed confidence and a return to solid growth. But we must do
everything sensible to help address this crisis, because the alternative of doing nothing will lead to far
deeper and far longer financial instability and economic duress.
Before I discuss the steps the United States has taken to confront this crisis, let me offer a few thoughts
on what has happened in Asia.
While each of these countries enjoyed decades of strong growth and rising standards of living for their
people, they also had deep seated common and individual problems. At the core, for all of them, close
links between governments, banks and corporations led to fundamentally unsound investments by
corporations funded by unsound lending by banks. Their financial systems lacked transparency, which
masked the extent of the problem. They had inadequate financial regulation and supervision. In short,
the essential underpinnings to a modern financial system were weak or did not exist. Additionally,
several economies had large current account deficits, fixed exchange rates and inadequate monetary
policies — an unsustainable combination.
Foreign investors injected an extraordinary amount of capital into these flawed systems without due
weighting of the risks involved. From 1990 to 1997, foreign capital inflows quadrupled in the region.
Anyone who has spent substantial time enmeshed in markets, as I have, appreciates that financial
markets tend to go to extremes, including the market for bank credit extension - and when they reverse,
they sometimes do so with great force.
In Asia, massive amounts of capital flowed into banks, which then extended unsound loans, including a
fundamental mismatch between short term bank funding in foreign currency and lending on long term
projects of questionable merit.
No single factor that I have described would likely have produced afinancialcrisis. While economies
usually adjust in a relatively orderly fashion to market swings, in this case the combination of factors
proved combustible. When these crises began, foreign investors started to withdraw capital, local
companies sought to hedge hard currency exposures, exporters stopped bringing their export earnings
home, and citizens moved their savings abroad. I think it has now become accepted that most of the
pressure on these currencies came from local sources and not foreign investors. This process brought
stock prices and land values down sharply across the region, imposed severe strains on Asian banks and
companies, and led to acute depreciations of exchange rates and greatly reduced or negative economic
growth.
The international community has been involved in a major effort to focus countries on these underlying
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problems, and to assist them in addressing them. These issues have been a central focus of the IMF in all
its many interactions with these countries as well as our interactions with these countries both bilaterally
and multi-laterally. And as I will explain later, the United States has been working actively to strengthen
the architecture of the international financial system to help better prevent and better manage financial
crisis that could threaten our interests. However, before a crisis occurs, we have the capacity to advocate
but not to force sovereign countries to take actions they do not believe to be in their interest.
From the very beginning of this crisis, we at Treasury, in close cooperation with Chairman Greenspan
and the staff of the Federal Reserve Board, have been deeply involved in crafting an international
response involving the countries in the region, the G-7, the World Bank, and the Asian Development
Bank — all working with the International Monetary Fund. The President's national security team
including Secretary Albright, Secretary Cohen and National Security Advisor Berger, have been
integrally and critically involved in this effort.
The program we have supported has focused on four key elements: supporting reform programs in
individual nations; providing temporary financial assistance when needed; encouraging strong action by
Japan and the other major economic powers to promote global growth; and fostering policies in other
developing and emerging economies to reduce the risk of contagion. Let me describe each of these
elements.
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First, and most importantly, our approach requires that these countries take the concrete steps necessary
to reform their economies. These programs, which are designed with the IMF, address the specific
causes of each nations' crisis and can be adapted as the situation changes. The fundamental objectives of
these reforms are to restore financial stability and confidence, promote stronger and more stable
exchange rates, attract new flows of capital, and restore economic growth. These reform programs have
at their core strengthening financial systems, improving transparency and supervision, eliminating the
interrelationships between banks, the government, and commercial entities, opening capital markets, and
appropriate monetary and fiscal policies. If countries don't take these steps, no financial assistance is
made available.
These are not austerity programs. These are primarily programs of structural and financial reform.
However, in financial crises like these, where confidence is critical, some fiscal and monetary tightening
is necessary to stabilize the currency and restore confidence. It is the crisis and the ensuing loss of
confidence — not the reform programs ~ that leads to economic hardships for the population. The reform
programs are the best and probably the only viable way for these countries to limit the degree and
duration of economic distress and reestablish confidence, stability and growth.
The second element of our approach is to support these programs of reform with temporary financial
assistance if necessary. When a nation's financial stability is at risk, this money provides the breathing
room for a nation to establish the conditions to restore economic confidence, attract private capital and
resume growth. These programs of financial assistance allow the external debt to be refinanced over a
longer period of time. Without this, these countries face the risk of default, either by the sovereign or
systemically in the financial sector, which could readily result in deep and prolonged distress in these
countries, possible contagion effects for emerging and developing countries around the world, and
potentially serious impacts on the industrialized countries, including our own.
The central provider of this financial assistance is the International Monetary Fund, with additional
support from the World Bank and the Asian Development Bank. In addition, the United States has
joined other industrial countries in indicating its willingness to provide supplementary financial
resources in some situations if a country fully adheres to the reform program and further resources
become necessary. Up to this point, we have not actually disbursed any of this money, and those
disbursements ~ to the extent they occur — will be in the form of short term loans whose payment is
guaranteed by the borrowing government.
While the temporary financial assistance is an important part of an effective response to these problems,
let me stress, no amount of official money alone can solve these problems and official money is not the
key. Only when sound policies are pursued, will confidence — and capital — return.
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Private financial institutions have an important role to play in solving these problems. In the case of
Korea, for example, we stated that the United States would provide funds only in the context of
international banks addressing Korea's immediate financing needs. This linkage has helped produce a
short-run rollover by bank creditors in Europe, Japan and the United States which has helped calm
Korean markets more recently. What is important now is that the private financial institutions move
forward on a voluntary basis to negotiate with Korea a longer-term financing plan to help reestablish
financial stability. And an approach like this can be an important part of any viable response to similar
crises in the future.
The third element of our approach is to encourage the major industrial countries to act to strengthen their
own economies and take the steps necessary to promote the strong economic and financial environment
globally which can contribute to resolving the crisis in Asia. The policies pursued by the United States
over the past five years, which have produced lower budget deficits, lower interest rates, low inflation,
and strong growth have made a major contribution to supporting growth around the globe. But we
cannot play this role alone.
In Europe, whose economies, when combined, are larger than the United States, and where growth is
starting to rebound, it is very important to undertake structural reforms and other policies necessary to
strengthen this recovery so that Europe, too, can be an engine of global growth.
Japan, the second largest economy in the world, has an especially crucial role to play. It is absolutely
critical that Japan take the steps necessary to deal with the issues in its financial system, to generate solid
growth in domestic demand and to open its markets. A weak Japan is a source of weakness for the
region. A strong Japan would be a source of strength for the region. Strong actions by Japan are vitally
in the interest of Japan, the Asian region and the global economy.
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China also plays a critical role in Asia's economic stability. I want to welcome the statements by Chinese
officials made in recent weeks reconfirming their commitment to exchange rate stability and to dealing
effectively with the economic challenges that they face.
Fourth, and finally, we have worked closely with the IMF to encourage other emerging markets to make
policy adjustments to reduce their vulnerability to contagion from the countries now in crisis. From the
APECfinanceministers meeting in April to the meeting of global finance ministers and central bank
governors in Hong Kong in September to the meeting of Latin American finance ministers in Santiago
last December, we've worked closely to promote structural, financial, and macroeconomic policies that
are critical to stability. We have also worked closely with Russia, Eastern Europe and other transitional
economies to help reduce their risk of contagion.
At the beginning of the crisis in Asia, there was widespread concern that it might spread throughout
emerging markets around the globe. But thus far, the strong efforts to re-establish financial stability in
Asia, and reform measures in many developing countries elsewhere have succeeded in limiting the
contagion effect after the initial impact.
The IMF is the right institution to be at the center of these support programs. This institution, which was
established at the initiative of the United States fifty years ago, has long benefited Americans. The core
mission of the IMF has always remained the same ~ to promote financial stability, trade and economic
growth.
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The United States has worked forcefully to help the IMF meet the new challenges of the modern
financial system, and there is simply no other institution capable of performing its mission. With
tremendous expertise and technical resources, the IMF has the ability to shape effective reform
programs. As a multinational organization, it is able to require an economically distressed country to
accept conditions that no contributing nation could require on its own. Finally ~ and critically important
~ the IMF internationalizes the burden during a globalfinancialcrisis by using its pool of capital instead
of the United States having to bear that burden alone.
The American people should also know this: over the past fifty years our contribution to the IMF has not
cost the taxpayer one dime. When the IMF draws on our commitments, we receive a liquid, interest
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bearing offsetting claim on the IMF. There are no budget outlays. Our contribution does not increase the
deficit, or divert resources from other spending priorities.
Support for our periodic pledge to the IMF, and support for a new emergency fund, the New
Arrangements to Borrow, which supplements the IMF's resources to deal with crises such as this one, is
critical. This funding is absolutely necessary to enable the IMF to respond effectively if this crisis were
to spread and intensify — which we all want to avoid event — and to deal with future crises that could
similarly affect the interests of the American people. Moreover, failure to provide funding could reduce
our leverage in the IMF, and could shake confidence in American leadership in the global economy at a
time when confidence is so important in re-establishing stability in Asia.
There is no question that the approaches to crisis prevention, and to dealing with crisis when they occur,
must advance to meet the new challenges of the international financial system, and we have been and are
working energetically toward that objective. But we cannot afford to wait for these extremely
complicated issues to be resolved to deal with IMF funding. The United States needs an IMF that is
financially equipped to help protect U.S. interests right now. If we close the door on the IMF, we hurt
ourselves.
The financial instability in Asia involves enormously complicated problems and presents challenges the
global financial system has never faced. While there are specific dimensions in each of these programs
that could be debated, I am confident that overall these are strong well-crafted programs and the best and
probably the only viable way to help these countries re-establish stability and confidence. Moreover,
these problems are going to take time to resolve, and we must proceed energetically but with patience,
and with determination.
A number of concerns have been raised with respect to these programs. Let me try to respond to them.
First, some have said that it's not in our interest to help countries that are seen as our competitors,
especially when falling currencies make their products cheaper. The exact opposite is the case. Without
support, it is highly likely that these countries will have much deeper recessions and much weaker
currencies, hurting U.S. exports and our competitiveness with far greater damage to American
businesses and workers. With support, these countries have the best chance to restore growth, restore the
capacity to buy more of our goods, and restore currency values.
A second criticism has been that these programs do not require nations to take specific steps to promote
the environment, protect core labor standards and ensure human rights. Let me be clear: these issues are
critically important to the United States, and we are pursuing them actively through other initiatives and
in other fora. And there is no question that financial stability, growth and prosperity provide an
environment most conducive to advancing these objectives, while instability and economic duress are
inimicable to these objectives. Moreover, designing and obtaining sustained adherence to programs to
restore financial stability is extremely difficult. To add these three objectives ~ however important —
would vastly complicate this effort and greatly reduce its chance of success. Also, if these objectives
were added others would clearly seek to add still more objectives, and the whole undertaking would
become impossible.
Third, some have said that providing financial assistance to these countries shields investors and
countries from the consequences of bad decisions and sows the seeds of futures crises. This problem —
often called the problem of moral hazard ~ has two dimensions: the impact on the behavior of countries,
and the impact of the behavior of investors and lenders. For the countries, it should be obvious that they
are not now shielded from the effects of their bad decisions. They may receive temporary financial
assistance, but they also inevitably go through a very difficult economic period before recovery takes
hold. No country would opt to go through what Mexico went through, or what various Asian countries
are going through now.
As to investors and lenders, the problem is more complicated. Let me just say that I would not give one
nickel to help any creditor or investor. And, in fact vast numbers of investors and creditors have taken
large losses in Asia. Foreign banks and other creditors to corporate and other borrowers throughout the
region now have many troubled or bad loans, real estate investors have almost universally sustained
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large asset depreciations, and investors have suffered the consequences of stock markets that are down
more than fifty percent from their highs. Just today three major U.S. banks ~ J.P. Morgan, Chase, and
Citibank — have reported that developments in Asia have had a substantial negative impact on their
profits. The crisis in Asia has clearly taken its toll on American investors and creditors.
To those who argue that we must ensure that all creditors take a loss, my answer is this: The reality of
the situation is much more complex. A byproduct of programs designed to restore stability and growth
may be that some creditors will be protected from the full consequences of their actions. But any action
to force investors and creditors involuntarily to take losses, however appropriate that might seem, would
risk serious adverse consequences. It could cause banks to pull their money out of the country involved.
It could reduce that nation's ability to access new sources of private capital, and, perhaps most tellingly,
it could cause banks to pull back from other emerging markets.
Having said this, it is critically important that we work toward changing the global financial architecture
so that creditors and investors bear the consequences of their decisions as fully as possible, while
minimizing adverse consequences. But devising such architectural changes is difficult and complex. We
cannot wait until that work is complete to take the steps necessary to deal with the crisis at hand that so
powerfully affects our interests.
Fourth, some say that doing nothing would be best, because markets would ultimately solve the problem
on their own. Let me say as someone who spent 26 years on Wall Street and who has an enormous belief
in markets, there are problems that markets alone simply cannot solve. In this country, we recognized
that long ago, with measures such as the Federal Reserve System, the Securities and Exchange
Commission and deposit insurance. Laws and institutions support healthy free market activity by dealing
with issues beyond the ability of unfettered markets to handle. There is simply too much risk that
markets alone will not resolve these problems of financial instability, and therefore given our stakes in
Asia we must try to help get these countries back on track.
The global economy needs architecture as modern as the markets. That is why, even as we have tried to
confront the immediate crisis in the Asian region, we have also begun an intensive effort to improve the
global financial system to both better prevent crises from occurring and better deal with them if they do
occur. President Clinton began this effort four years ago at a G-7 meeting in Naples. At the summit that
followed in Halifax in 1995, we launched a broad international effort to strengthen safeguards in the
global financial system. Two important parts of this initiative are an international program to strengthen
disclosure and the development of core principles for supervision in emerging market financial systems.
To build on these efforts, we have begun an intensive internal effort with the Federal Reserve Board and
others, to identify and analyze possible mechanisms for dealing with new challenges to the international
financial system. As I have said, this is a very complex undertaking which will take time and, while
there have been some suggestions which may look attractive on their face, there are no easy answers. We
also will be working with our G-7 partners and others on this issue, and at President Clinton's initiative,
we will convene a meeting later this spring with finance ministers from around the world to share our
views on this subject and to begin to develop a consensus on further steps.
This initiative will focus on four objectives: improving transparency and disclosure; strengthening the
role of the international financial institutions in helping to continue to deal with the challenges of today's
global markets; developing the role of the private sector in bearing an appropriate share of the burden in
times of crisis; and strengthening the regulation of financial institutions in emerging economies.
This is a period of considerable uncertainty and challenge for the global financial system, and for the
countries most directly involved in the crisis. As I said earlier, even under the best of circumstances,
these crises take a time to abate. The process is bound to be a difficult one for the people of these
countries. But the approach I have described today is the best and most likely the only viable way to
succeed. While nobody can say for certain what will happen, the countries in Asia have great underlying
strengths, such as high savings rates, firm commitments to education, and strong work ethics and, with a
sustained commitment to the necessary reforms, they are well-positioned to re-establish strong economic
growth and sound currencies going forward.
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The United States has enormous economic and national security interests in a strong and vibrant Asia.
Financial instability in Asia is a threat not only to the region, but to economies all over the world, and
even ourselves. We cannot ignore these risks. We must act to best protect and promote our interests.
As I said at the beginning, we are at the frontier of a new era. When America has entered new eras in the
past it has done so with vigor and determination. Our leadership is critical to guiding the global
economy into the 21st century, and to protecting the interests of the American people. This is no time to
turn our back. We must confront the crisis today, and build for tomorrow. The actions we take now are
critical to our economic well-being today, and for the future. Thank you very much.
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TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
Remarks as Prepared for Delivery
April 14, 1998
RR-2366
SECRETARY ROBERT E. RUBIN
BROOKINGS INSTITUTION
STRENGTHENING THE ARCHITECTURE OF
THE INTERNATIONAL FINANCIAL SYSTEM
Today I would like to discuss the international financial system in the wake of the financial crisis in
Asia; what we can learn from these events about the opportunities and risks of a global financial market;
and how we can strengthen the architecture of the international financial system to realize the potential
of a 21st century global economy.
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These issues of architecture will be at the top of the agenda this week when the world financial
community gathers here in Washington for the spring meetings of the Group of Seven industrialized
nations and the policy making bodies of the International Monetary Fund and the World Bank. In
addition, Chairman Greenspan and I will host a special meeting of a group of ministers and governors
from advanced, emerging and transition economies to discuss architecture. In a moment I will discuss
the US approach to changes in the international financial architecture, which we will bring to these
meetings, just as the other nations of the world will bring their ideas and suggestions. But first, I think it
is important to place these discussions in broader historical context.
Over the last ten to fifteen years, we have seen the rapid evolution of a new era of the global economy
and global financial markets, an era that presents enormous opportunities for workers, farmers and
businesses around the globe. And the changes have been dramatic. Greatly increased flows of trade,
capital, information and technology have helped promote global output. Most large businesses, both here
in the United States and elsewhere have become global. Developing countries have become important
participants in the global economy; for example, they now absorb more than 40 percent of our country's
exports. Financial liberalization and technological innovation have produced an ever broader range of
new services and products.
A decade ago, official capital flows to developing countries were much greater than private capital
flows. Today, annual private flows of capital to developing countries around the world are more than
seven times larger than official flows. In 1996, more than $250 billion in private capital flowed to
emerging markets - compared to roughly $20 billion ten years ago. All of this explains why fluctuations
in the Thai baht, or the fortunes of the Korean stock market can now affect workers, farmers and
businesses in the United States and all over the world and appear daily on the front page of our
newspapers. A decade ago practically no one outside the affected countries would have noticed.
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Global economic andfinancialintegration with respect to trade and capital flows have brought
tremendous benefits here in the United States through increased exports, more high-paying jobs, higher
standards of living and lower inflation. The huge increase in private capital flows to developing
countries have, among other things, helped finance a great increase in imports from industrialized
countries, including our own. Developing countries form Latin America to Asia have also benefited
greatly, as increased capital flows financed greater investment and contributed substantially to the high
rates of growth in many such countries, promoting higher standards of living and lifting millions out of
poverty. The recent economic turmoil in Asia should not, for example, detract from what Asia has
achieved over the last 25 years. Even under the more pessimistic forecasts, living standards in Korea,
Thailand and Indonesia would still be three times higher at the end of this year than they were 20 years
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ago, and the poverty rates much lower. Even with the current crisis, per capita income would be higher
than in 1995.
As we have seen in recent years, however, this new era brings not only great opportunities and benefits,
but also new challenges and risks. How effectively the international community meets these challenges
and manages the risks, will have an enormous impact in the years ahead on our economic well-being,
and the economic well-being of all countries.
One great challenge is to greatly broaden participation in the benefits of the global economy. Despite
vast global economic growth over the past decade, over half the people of the world still live in poverty
and that is a problem not only for the countries with high poverty rates but for all of us. The developing
countries are our markets for the future, and their economic well-being promotes our economic
well-being. Here at home, global financial integration benefits the great majority of Americans, but one
of the concerns often expressed — and it is a concern that I share — is that, throughout the industrialized
countries, including the United States, those who are well-equipped to compete in the global economy
are doing better and better, and those who are not so well-equipped risk falling further and further
behind.
But the answer to these challenges is not to turn inward, or to dismantle the global economy that has
benefited so many. The answer is for all nations, including the United States, to make it easier for those
who are dislocated to reenter the economy successfully; to focus on education and training to equip
citizens with the tools to prosper in the global economy; to build social safety nets to protect the people
who would otherwise be left behind; to work for broad implementation of core labor standards
throughout the globe; and to promote democracy and human rights. The benefits of the global economy
will only be realized if we and all other nations build broad-based support at home for forward-looking
international economic policies. That support will only occur if these benefits are broadly shared.
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A half century ago, when the world was emerging from a very different period of history, Franklin D.
Roosevelt urged Americans to support him in working with other nations to create international
institutions that would spell the difference "between a world caught again in the maelstrom of panic and
economic warfare...and a world in which the members strive for a better life through mutual trust,
cooperation and assistance." The result was the Bretton Woods institutions — the International Monetary
Fund and the World Bank — followed later by a range of other collaborative arrangements, such as the
World Trade Organization, central bank networks, and the regional development banks. This
international architecture has worked to support growth and financial stability and open markets around
the globe, greatly benefiting generations of Americans.
Throughout their history, the international financial institutions have had to adapt to a changing global
economic landscape, and they have, by and large, done so successfully. But over recent years, the pace
of change in the global economy has accelerated. The Asian crisis has demonstrated how badly flawed
financial sectors in a few developing countries, and inadequate risk assessment by international creditors
and investors, can have significant impact in countries around the globe. Once, unsound
macro-economic, financial and other policies in emerging economies would have had little impact on
other nations. Now, unsound policies in these countries can harm economies throughout the global
economy — such as our large budget deficits did in the 1980s — and the problems of each country are the
problems of all of us.
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That is why, even before the turmoil in Asia, the United States and the international community have
been working to strengthen the international financial architecture. Our goals are clear: to promote
broadly shared growth in both the developed and developing world, to be better able to prevent future
crises, and to deal with them when they occur, and by making the architecture as modern as the markets.
The United States began this effort four years ago at a G-7 leaders' meeting in Naples and, working with
other nations, the first concrete steps were launched at the G-7 summit the following year in Halifax.
Going forward will not require the kind of far-reaching institutional change that we saw in 1945, but the
international architecture does need to adapt substantially for the very different circumstances that have
developed over the past decade, and to fully prepare for the challenges of tomorrow. This adaptation
involves great intellectual complexities and great international political complexities and will occur not
at one time, but in pieces over an extended period of time.
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There are a whole range of issues that are profoundly important to the strength of individual economies
and the global economy ~ sound macroeconomic policies, education, health care, and the environment
number among them. There is also a detailed agenda for reform of the IMF concerning, among other
things, its lending programs. But today I would like to focus on three challenges that have been brought
home by the financial crisis in Asia and that are most directly related to financial stability and building a
stronger global financial market. These are: providing better information through improved disclosure
and transparency; building strong national financial sectors; and creating mechanisms so that the private
sector more fully bears the consequences of its credit and investment decisions, including in times of
crisis.
The first critical area is better information. When investors are well-informed, use that information
wisely, and expect to bear their consequences of their actions, they will make better decisions. That is
good for them and can be a powerful force in promoting good policies among nations. National policy
makers also need better information, to guide their actions, and anticipate potential problems.
However, there are obstacles to getting good information about economic and financial matters. One is
the temptation - in the private sector and in government - to avoid disclosing problems. But sooner or
later, as we have seen in Asia, the problems will make themselves known — and in the meantime they
only become more severe. In the Asian economies that suffered crises, very effective strategies for
achieving many years of rapid growth had masked the growth of problems. In many cases, lack of data
meant that no one had a true understanding of this build up or of these economies' vulnerabilities.
Another obstacle is the difficulty of collecting relevant information on a timely basis. In the modern,
very complex global financial markets investors and policy makers need more types of information then
ever before. For example, public and private institutions have to better identify and disclose the effects
of derivatives and other off-balance sheet items onfinancialrisks and vulnerabilities.
Just as important as having good information is using that information well. Risk and credit evaluation
have often not kept pace with the development of new products and markets. Indeed, in the Asian crisis
we were struck by how few of the international creditors and investors in these economies had the
appropriate expertise and knowledge on weighting of risk.
While to some measure this may simply reflect the seemingly inevitable tendency for investors and
creditors to at times get overly optimistic or pessimistic ~ and at those times to forego adequate analysis
~ the incentives to be rigorous should be maximized, which at the least involves questions of moral
hazard and regulatory regimes. When creditors and investors come closer to functioning with full
analytic rigor, markets will more effectively perform their critical disciplining function in favor of good
policy, disclosure, strong financial sectors and the like.
Even before the Asian crisis we had been involved in an intensive effort to improve the quality and
quantity of international economic and financial information, including greater IMF transparency. Many
countries are now publishing more and better data as a result of these efforts and the IMF is more open
about its analysis. But events in Asia have shown we need to strengthen these initiatives. We propose
four steps to do so.
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First, there needs to be a substantial expansion in the types of economic and financial data made
available. In particular, it is essential to get good information on the external liabilities of both the public
and private sectors. The IMF's Special Data Dissemination Standards should require countries to provide
a complete picture of usable central bank reserves, including any forward liabilities, foreign currency
liabilities of the commercial banks, as well as indicators on the health of the financial sector. The Bank
for International Settlements should expand its reporting on cross border bank flows to get better,
broader, and more timely data on external lending to a country. Governments and international financial
institutions also need to make this data more easily accessible to investors, particularly through the
internet.
Second, we need to explore how to obtain and publicize a broader range of qualitative descriptive
information on financial sector matters that affect the risk of investing in emerging markets, including
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detail on banking supervision, bankruptcy procedures, perhaps judicial systems, credit cultures and skills
in the banking sector. We must now resolve the many difficult issues with regard to these qualitative
matters, for example, how best to describe them and who should perform this function.
To support these efforts on disclosure, private sector groups should provide their own ideas about the
data and information they would find most helpful, and ways to encourage wider use of available
information and appropriate focus on risk.
Third, the IMF needs to make its analyses and lending conditions more transparent. This will involve
more frequent and regular publication of a number of IMF documents, analyses, and letters of intent.
However, while greater transparency to help investors reach an informed judgment about potential
problems is essential, giving the IMF the responsibility to publicly predict formal warnings of crisis is
not. While it is possible to identify problems that may develop into difficulties and occasionally into
crisis, it is not possible in our view to reliably predict combustion into crisis.
Fourth, we need to increase incentives for countries to improve transparency. The discipline of the
market is always the best and most powerful incentive, and can work here to induce better disclosure.
Analysts and rating agencies also need to pay close attention to the availability and quality of data and
information when determining credit worthiness and asset allocations. In addition, the IMF and other
international financial institutions should publicize their concerns about important gaps in countries'
disclosure and consider conditioning access to loans on countries' willingness to improve their
transparency.
The second critical area we are focused on is strengthening national financial systems. A common
element amongst the countries involved in the crisis in Asia - and, for that matter, in virtually all
countries experiencing financial crises — is a badly flawed domestic financial sector.
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Developing a strong financial system that is a match for the challenges of a global financial market is a
long and difficult process. The institutions and laws we have in the United States to supervise our
domestic financial system were developed over a period of a hundred years and must constantly be
updated. We ourselves had an enormousfinancialsector problem with our Savings and Loan crisis in the
1980s. That crisis stemmed in part from a failure to supervise those institutions adequately as they
moved into new services, and to a delay in taking decisive corrective action. Building strong financial
sectors will unquestionably be key to financial stability and growth in emerging economies.
Given the effects that weak financial systems can have internationally, the time has come for a more
systematic approach to strengthening national financial systems that would involve a more intensive
assessment of the vulnerabilities in national financial systems and steps to promote reforms. To do this,
we need action in the following areas.
First, we need to develop a more complete range of global standards to guide individual governments'
efforts. As a result of the Halifax initiatives, the Basle Committee has now developed the "Core
Principles for Effective Banking Supervision." IOSCO, the organization that brings together securities
regulators from around the globe, is already well on the way to developing an analogous set of principles
for the supervision of securities firms. But we believe core principles should be developed and adopted
in additional areas that affect the underlying strength of a financial system, including bankruptcy
regimes, accounting and disclosure, loan classification, and overall corporate governance. Other
practices which need to be adopted include promoting credit risk management, helping address the
problems of connected and directed lending, maturity and currency mismatches, and encouraging a
strong credit culture and the requisite skills in a nation's banking system. Different countries have and
will continue to have different ways of doing these things, but we must agree to certain high quality
internationally acceptable standards.
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Second, we need to fill a gap in today's international architecture to provide for international surveillance
of countries'financialregulatory and supervisory systems, just as the IMF now carries out surveillance
of macroeconomic policies. There are a number of different ways that this could be done - perhaps
through a joint initiative with the IMF and the World Bank, with the use of existing expertise of
regulators. But it is critically important to find an appropriate way to fill this gap.
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Enhanced surveillance will help induce national authorities to bring their practices up to
internationally-acceptable levels, as I set forth in the standards I just discussed, and reduce financial risk.
These assessments can lay the groundwork for policy discussions and appropriate assistance, where
needed, from the IMF and the multilateral development banks for programs to strengthen financial
systems. In addition, analysis of this kind should feed into the range of key documents we believe the
IMF should be releasing more systematically. This would then bring into play the most powerful
incentive, the markets.
Third, we should consider examining other incentives that could be brought to bear for strengthening
financial systems. For example, authorities in major financial centers could consider conditioning access
to their markets by banks from other countries on a strong home country supervisory regime, as
demonstrated by adherence to the Basle Core Principles, plus whatever relevant additional standards are
developed.
Let me also make two additional points relating to financial sectors and capital markets. Experience
shows that when countries allow foreign financial service providers into their markets - with all the
competition, capital and expertise they bring with them - the strength of financial systems is greatly
enhanced. The recent WTO agreement in financial services is a major step forward here.
In addition, while attempts to limit inflows of capital, such as Chile's short-term capital controls, have
been advocated by some, it is key—independent of the merits or drawbacks of such measures — that this
sort of approach not distract policy makers from implementing the underlying sound policies that are the
real foundation for stability and growth. Having said that, it may be worth exploring narrower,
prudential limits on banks to prevent an excessive buildup of short-term foreign currency liabilities.
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The third and final critical area that I want to discuss today is building effective mechanisms for
creditors and investors to more fully bear the consequences of their actions. We cannot prevent crises
from happening entirely. When crises do occur, as most recently in Asia, the provision of temporary
financial support by the IMF, conditioned on countries pursuing sound policies, is essential in providing
countries the breathing room they need to stabilize their currencies, restore market confidence and
resume growth. It limits the risk that the crisis will worsen or spread. But, and the balance here will
always be difficult, the private sector must fully bear the consequences of its decisions in the context of
restoring financial stability.
There are two reasons to focus on the private sector bearing the consequences of its actions. In a world
in which trillions of dollars flow through international markets every day there is simply not going to be
enough official financing for the crises that could take place. There is also a risk with international
assistance of what economists call "moral hazard:" that providing official financial assistance shields
creditors and investors from the consequences of bad decisions and sows the seeds of futures crises.
Some protection of creditors may be an inevitable by-product of the overarching objective of restoring
financial stability, but this protection should be kept to the minimum possible.
When investors bear more responsibility for their actions, they have a better incentive to analyze and
weigh risks appropriately. This, in turn, will promote good policy in all countries, including our own,
and help prevent instability and crisis. Markets are a powerful force and our goal must be to make
markets work better, while still providing the essential international support to help countries in crisis
and guard against contagion risks.
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There are a number of ways that the private sector can be involved when the IMF is providing
emergency support at a time of country crisis, as the recent cases in Asia have shown. In Korea,
international banks stretched out and renegotiated a substantial proportion of outstanding loans while the
IMF has provided emergency financing to Korea, drawing upon its new, short term, high interest lending
facility, conditioned on strong policies. In Indonesia, foreign banks are now negotiating with a
committee representing private sector corporate debtors, while the Indonesia program with the IMF is
aimed at putting in place a more stable macroeconomic environment.
While the whole question of private sector involvement is extremely complicated ~ and there are many
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areas that may not have yet been fully explored - let me just mention a few thoughts as to possible
mechanisms.
In general, the promotion of new, more flexible forms of debt agreements and indentures would provide
a framework for direct negotiations between creditors and investors. In addition, the IMF should explore
lending into arrears ~ in other words, the IMF continuing to provide financing to countries even when
those countries may be behind on the debt payments to some private creditors — to create a situation in
which debtors and creditors work things out themselves. A broader, international bankruptcy regime of
some sort may have great appeal, but, at least with current knowledge, the political obstacles may be
insurmountable. However, strong bankruptcy laws and institutions covering debtor-creditor relations can
mean business failures have a better chance of being resolved quickly and with less impact on the
broader economy. Governments could then reduce the scope of formal guarantees to create a more
healthy environment with the presumption that corporate debt will not be protected, and that where
appropriate banks will be allowed to fail. Various insurance plans for creditors have also been suggested,
but none so far proposed seem likely to be effective and some may create additional moral hazard
problems.
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Before I conclude, I want to comment on a critical immediate issue. The IMF has been central to the
effort to restore financial stability in Asia and the IMF will be central to restoring financial stability in
response to crises in the years ahead — matters that are critically important to the economic well-being of
the American people. All of this underscores the importance of Congress approving full funding for the
IMF, as requested by the President. As a result of the recent situation in Asia, the IMF's normal financial
resources are approaching historically low levels. The IMF might not have the capacity to respond
effectively if the Asian crisis were to deepen, spread to other developing countries throughout the globe,
or if a new crisis were to develop in the near term. Every day that this continues is another day of
vulnerability for American workers, farmers, and businesses. Congress should act and act now. And our
capacity to influence the IMF to deal with these new challenges turns upon our capacity to support the
IMF with the funding it needs.
As I said earlier, there are many steps we need to take to build a strong global economy that benefits
everyone. But the objectives I have described today ~ better information; stronger national financial
systems; and mechanisms so that the private sector more fully bears the consequences of its investment
decisions — are critical elements in strengthening the architecture of the international financial system,
especially with regards to preventing and dealing with financial instability and crisis.
Progress will take time and immense amounts of energy on the part of the international community, and
in our country, close cooperation between Congress and the Administration. But our success in meeting
the challenge of strengthening the internationalfinancialarchitecture will be critical to global prosperity
— and our own country's economic well-being — for years and decades to come. Thank you very much.
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TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE
Remarks as prepared for delivery
April 28, 1998
RR-2406
SECRETARY ROBERT E. RUBIN
FOREIGN POLICY ASSOCIATION
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It is a pleasure to speak with you this evening and I am honored to accept an award from such a
distinguished group which focuses on the broad range of the nation's foreign policy concerns. By
honoring me, you honor President Clinton's entire national security and economic policy team, as well as
the career men and women in the White House, the Treasury Department and throughout the
government with whom I've had the privilege of working the past five years. Most importantly, you
honor President Clinton, who, in this period of new challenges in foreign policy, has brought to these
challenges a deep understanding that we live in a global economy and that our economic well-being
depends on strong U.S. leadership and engagement in the global economy. I well remember at the time
of the Mexico crisis, I went to the Oval Office to tell the President that the Federal Reserve Board and
Treasury felt that Mexico was on the verge of likely default. At the same time, I told him that a recent
poll showed that 80 percent of the American public did not want us to provide help to Mexico. He saw
that default in Mexico would not only profoundly affect Mexico, but would also profoundly affect our
national security and economic interests. So the President said that this is something we have to do, let's
go ahead and do it.
Having said that, however, I am deeply concerned ~ and I know the President shares this concern ~ that
public support for forward looking international economic policies may be waning at a time when this
country's economic, national security and geopolitical interests require just the opposite. We have all
seen the signs over the past few years of a creeping tendency toward turning inward in America, and at
times, even a rejection of the reality that what is happening in the rest of the world affects us. As I speak
tonight, for example, the United States lacks fast track trading authority, and our trading partners are
now moving forward with new trade agreements without us; we have failed to pay our arrears to the
United Nations — and if we fail to pay by the end of the year, we will lose our vote in the General
Assembly; and we have failed to approve funding for the International Monetary Fund, at a time when a
sufficiently funded IMF to deal with potential crises is critical to our economic and national security
interests and the rest of the world is waiting to fund once we do.
Tonight, I want to speak about the importance of building support for forward-looking international
policies. Let me start by placing this discussion in the context of the end of the Cold War and the
emergence of the global economy and global financial markets.
With the end of the Cold War, the foreign policy consensus lost its centerpiece. In the wake of that
transformation, there have been two significant — and related — developments I would particularly like
to discuss this evening. First, there has been an increased focus on international economic policy as a
result of the globalization of the economy. At the same time, there has been an erosion of the traditional
base of support for international economic engagement, and, at the same time, a re-ignition of one
historical strain in American thought, a rejection of the outside world.
Over the last twenty-five years, we have seen the rapid evolution of the global economy and global
financial markets. A quarter century ago, imports plus exports equaled 15 percent of our economy.
Today, they equal 30 percent. Large U.S. corporations once viewed themselves as American companies
with a few offices abroad. Now they see themselves as global corporations headquartered in the United
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States. Vast international flows of trade, capital, information and technology have sped the world's
economies toward integration.
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Perhaps the changes have been the greatest in developing countries. Twenty-five years ago, the flow of
aid to developing countries was much greater than private capital flows. Today, after so many
developing countries have embraced market reforms, the annual private flows of capital to developing
countries around the world are more than seven times larger than official flows. In 1996, more than $250
billion in private capital flowed to emerging markets ~ compared to roughly $20 billion ten years ago.
This has helped lift millions of people out of poverty in the developing world and turned these countries
into important participants in the global economy; for example, they now absorb more than 40 percent of
our country's exports. That is why, in my tenure as Treasury Secretary, I've visited a whole host of
developing and transitional countries, including Vietnam, Brazil, Ukraine, the Philippines, India, and
China, and this summer I will visit Africa ~ countries and regions far from the traditional focus of
Treasury Secretaries.
This new era of the global economy and global financial markets has brought tremendous benefits for
U.S. workers, farmers and businesses. Millions of Americans owe their jobs directly or indirectly to
trade, and all of us benefit through the lower prices and greater choice that international competition
fosters. It is no exaggeration to say that our economic well-being is inextricably linked to the rest of the
world.
But with the opportunities and benefits, have come new challenges and risks. How effectively we meet
these challenges will have an enormous impact on support for forward-looking international policies and
our economic well-being in the years and decades ahead. Let me focus on three critical challenges.
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First is the challenge of greatly broadening participation in the benefits of the global economy. Global
financial integration benefits the great majority of Americans, but one of the concems often expressed and it is a concern that I share ~ is this: in the United States, and other industrialized countries, those
who are well-equipped to compete in the global economy are doing better and better, and those who are
not so well-equipped risk falling further and further behind. Dynamism in the global economy does fuel
rapid change, and that change benefits the vast preponderance of workers, farmers and businesses. But it
also can create dislocations, although I think it is worth observing that technology contributes far more
to dislocations than trade.
Looking at the developing world, despite vast global economic growth over the past decade, over half
the people of the world still live in poverty and that is a problem not only for the countries with high
poverty rates but for all of us. The developing countries are our markets for the future, and their
economic well-being promotes our well-being. Moreover, social instability, disease, and environmental
degradation in those countries can affect us.
The response to all of this ought not to be to turn inward, or to dismantle the global economy that has
benefited so many. The response is for the United States - and all nations - to make it easier for those
who are dislocated to re-enter the economy successfully; to focus on education and training to equip
citizens with the tools to prosper in the global economy; to build social safety nets to protect the people
who would otherwise be left behind; to work for broad implementation of core labor standards
throughout the globe; and to promote good governance, democracy and human rights. The benefits of
the global economy will only be realized if we and all other nations build broad-based support at home
for forward-looking international economic policies. Garnering that support would be greatly enhanced
if these benefits are more broadly shared.
A second critical challenge is to strengthen the architecture of the international financial markets to help
prevent financial crises, or better manage them should they occur. Fifty years ago, foreign policy experts
met at Bretton Woods and devised the architecture of the international financial system. That
architecture has served us well for over a half century, but it needs updating in an age of a vast and
complex international financial system. We must make the architecture as modern as the markets.
The need to update the architecture has been brought home most recently by the financial crisis in Asia.
As you well know, by doing everything sensible to help these Asian countries get back on track we
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support our exports to the region and help strengthen their currencies. This, in turn, helps the
competitiveness of our goods in world markets and reduces the risk that financial instability will spread
to other developing countries. It also lessens the chance of contagion, which would compound all these
problems. That is why the United States has exercised very strong leadership throughout this situation
towards helping resolve the Asian crises.
Even before the turmoil in Asia, the United States and the international community had been working to
strengthen the international financial architecture. We began this effort four years ago at the Naples G-7
meeting and we launched the first steps the following year at the summit in Halifax. These issues are
very complex ~ intellectually and politically. Unlike the Bretton Woods institutions, which were
essentially put in place at one time, I believe what will happen here will be that reforms will take place
in pieces over an extended period of time.
Our approach has focused on three areas:
First, providing better information through improved disclosure and transparency. This is partly a
problem of making useful information available, and partly a problem of investors using the information
wisely, and analyzing risk better. In Korea, we were surprised by how little risk assessment investors
and creditors had done.
Our second area of focus is on building strong national financial sectors. A common element amongst
the countries involved in the crisis in Asia — and, for that matter, in virtually all countries experiencing
financial crises around the world — is a badly flawed domestic financial sector.
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Our third area of focus is to work to ensure that the private sector more fully bears the consequences of
its credit and investment decisions, including in periods of crisis. In today's world, where trillions of
dollars flow through international markets every day, there is simply not going to be enough
international assistance for the crises that could take place. There is also a risk associated with official
financing which economists call "moral hazard:" that providing such assistance shields creditors and
investors from the consequences of their actions and sows the seeds of futures crises. Some protection of
creditors may result as a by-product of the overarching objective of restoring financial stability, but this
protection should be kept to the minimum possible.
While we are focusing on strengthening the architecture for the longer term, it is absolutely imperative
that IMF resources now be sufficient to deal with new crises should they occur. In fact, IMF resources
are at historic lows. While the probability of the crisis worsening or spreading or of a new major crisis is
low, the potential impact on our economy of any significant crisis is simply too great to risk not having
the capacity to respond effectively. It is critical that Congress approve the President's request for IMF
funding as quickly as possible.
The third and final challenge we face is to rebuild the consensus about the critical importance of U.S.
leadership and engagement in the world to the national security and the economic well-being of the
American people. This challenge has not been met.
In 1947, George Marshall gave a speech at Harvard proposing the plan that would bear his name to help
rebuild Europe. He said, "An essential part of any successful action on the part of the United States is an
understanding on the part of the people of America of the character of the problem and the remedies to
be applied. Political passion and prejudice should have no part." Afterwards, President Truman, Senator
Arthur Vandenberg and members of both parties launched a campaign to educate the public about the
Plan and build support for it. The Marshall Plan, which was initially met with skepticism and opposition,
eventually passed overwhelmingly in both houses of Congress.
We need a similar focus today. There needs to be a redoubled effort by all of us - public sector officials,
the business community, foreign policy experts - to communicate with the American public about the
dynamics of the new global economy and the importance of U.S. leadership in the global economy to the
economic well being of the American people.
A poll once showed that Americans, when asked what we spend on foreign aid, said fifteen percent of
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the budget. When asked what we should spend, they said five percent. We actually spend a little over
one percent of our budget on these aid programs, including our contributions to the international
financial institutions and the UN. Unless there is broad based public understanding of the importance to
U.S. interests of strong U.S. leadership in the global economy, we will fail to support the UN and we
will lose our vote; we will fail to support the IMF, and be more vulnerable to economic crises; and
without fast track, we will stand by as the rest of the world moves forward and liberalizes trade, with us
on the outside of the tent, rather than the inside. All of this has enormous consequences to our economic
well-being and our national security. That's why it's so critical to develop broad public understanding of
global interdependence and the importance of U.S. leadership to our interests— and that is where all of
you ~ individually and institutionally - have a critical role to play.
The members of the Foreign Policy Association have contributed enormously to the conduct of
American foreign policy by the focus, thought and seriousness it has brought to the subject. But in the
world today, your role has never been more important — as individuals, in the businesses and firms for
which you work, and as an organization — in developing public support for forward looking foreign
policy.
Our success in meeting the challenges I've discussed this evening — and again, let me emphasize, the
overarching challenge is to promote public support for global leadership - is critical to our country's
economic well-being for years and decades to come. As this century draws to a close, it offers a very
clear lesson. Withdrawal from international affairs cannot work and engagement in international affairs
leads to prosperity. Thank you very much.
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TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE
Remarks as prepared for delivery
May 8, 1998
RR-2428
SECRETARY ROBERT E. RUBIN SPEECH
MANSION HOUSE LONDON, UNITED KINGDOM
More than thirty years ago, I spent a year in London as a student at the London School of Economics. It
was one of the most important and wonderful years of my life — in large part because I had no
responsibilities. Living and working with students from around the world taught mefirst-handabout the
issues of the world and the viewpoints of those from other lands in a way I never could have learned at
home. When I left I always wanted to come back and live in London. I've never had that opportunity but
I have spent a lot of time here and I have always felt at home.
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I also feel quite at home, from my business days, in the City, the world's first global financial center;
indeed, at the turn of the century, the world's only such center. In the decades since, the City has retained
that importance. Today, more foreign banks have offices here than any other metropolitan area, and
London is the world's center for foreign exchange trading. At the eve of the twenty-first century, the City
remains a dynamic and vital globalfinancialcenter.
I gained my practical experience in global markets in another financial center: Wall Street. During 26
years on Wall Street, and five years working on economic policy in the Clinton Administration, I have
experiencedfirst-handthe intersection between politics and economics in today's fast paced world.
Today I would like to focus on core issues at this intersection: the critical importance of a nation's
policies keeping pace with demands of the global economy, and, for that to happen, the critical
importance of a nation's politics keeping pace with the demands of the global economy. I want to
address these matters for two reasons. First, the success of each nation in meeting its heightened
challenges in domestic and international economic policy deriving from the global economy will
determine its fate in the global economy. Second, in this era of interdependence, the actions of each
nation can and will affect other nations as never before.
The interdependence created by international economic ties is, of course, not entirely new. But massive
political and economic changes in recent years have vastly increased the extent of our interdependence.
Behind the vast increase in interdependence lie a number of factors — especially the abandonment of
central planning for free market policies and private sector-led growth which has greatly broadened the
scope of world markets and the impact of technology which has linked nations in ways unimaginable
just five years ago.
The scale and integration of global financial markets and the global economy have expanded
dramatically, and there has been an explosion of trade and investment. This, in turn, has produced higher
rates of growth and opened up new opportunities for many. As President Clinton has so often said, our
job now is to continue to make the most of these new opportunities and to act so that their benefits are
widely shared.
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The changes in the global economy have been felt worldwide, but they have had the greatest impact on
developing and transitional countries. In many of those nations, standards of living have increased
substantially and millions have been lifted out of poverty, although there is most certainly an enormous
amount left to do. In Latin America, for example, a growing list of nations have had significant success
in promoting the mutually reinforcing movement towards the policies of market economics and the
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politics of democracy. In the process, they are transforming themselves into dynamic economies and
increasing their economic ties with industrial nations, as are developing countries all over the globe. For
example, exports to emerging markets by the United States now account for more than 40 percent of our
total exports. Here in the United Kingdom exports to emerging market economies now account for 47
percent of non-European exports. And private capital flows to emerging markets have increased from
$20 billion ten years ago to $250 billion last year.
But these new opportunities have also brought new risks, as we have seen most recently in the Asian
crisis. While global capital markets have enormous power to finance investment and growth, they also
treat harshly countries viewed as pursuing unsound policies. In turn, those impacts are felt not only in
the countries involved but around the world. That is why the pursuit of sound domestic and international
economic policies in each nation is more important for all nations than ever before. Twenty five years
ago, for example, fluctuations in the Thai baht, or the fortunes of the Korean stock market would have
been little noticed and would have had little effect outside those countries. Now they appear daily on the
front page of newspapers around the world and have significant economic effects on workers, farmers
and businesses from Bangkok to Brussels.
This growing interdependence has given all nations an increasingly greater stake in each other's success,
and all nations have a responsibility to pursue sound polices. It is in that framework, for example, that
during the 1980s and very early 1990s, the rest of the world criticized the United States for our large
budget deficits, which had adverse impacts on countries around the globe. And it is in that spirit that the
finance ministers of the major industrialized nations gather in London this week to review each nation's
economic situation as well as the common interests we share.
At the heart of our discussions will be the critical question of what governments should do to promote
economic growth and financial stability in their respective countries. Some have argued that in this
world of huge global markets, government has, in essence, become largely irrelevant. I don't think there
is any question that, as President Clinton and Prime Minister Blair have often said, The underlying
strength of a modern economy is a productive and competitive private sector. But, as both the President
and the Prime Minister have also said, government remains critically important, although its role is
changing. In a modem economy, governments have a necessary and vital role in creating the legal,
institutional and economic setting in which the ingenuity, skill, enterprise and dynamism of the private
sector can flourish and in which the benefits of growth are broadly shared. And there are some issues
that markets alone simply will not address effectively — education, training, the provision of a social
safety net, environmental protection and core labor standards, to name a few matters where government
is essential
The pursuit of these and other policies essential to success in the global economy is not an easy task
politically and each nation will follow a different path in pursuing these policies. But we all share a
common challenge: for our nations' policies to keep pace with the demands of the global economy, our
political systems must function effectively to meet those demands.
Let me now turn to what, in our view, are some of the most important policy challenges that
governments in the United States, Europe, and Asia face today.
First, the United States. Early in the first term of the Clinton Administration, a reporter from a
well-respected European newsmagazine interviewed me. At the end, he said that our economy was doing
very well but that ten or twenty years from now we'd be a second tier economy. I asked why he thought
that, and he said because of the state of our public schools and our inner cities.
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These are critical challenges that, particularly at a time when the U.S. economy is doing well, we must
meet. In addition, we must maintain fiscal discipline, help those who are dislocated by trade and
technology, and protect those who would otherwise be left behind. Finally, and very importantly, we
must be strongly engaged with respect to the issues of the international economy. In an interdependent
global economy, strong American involvement in addressing these issues is important not only to our
own people, but to the rest of the world.
For the last fifty years, the United States has been a leader in liberalizing global trade, promoting growth
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in developing countries, fostering a strong global economy, and dealing with the problems of financial
instability. This is no time to turn our backs on the strategy that has so benefited my country and the
world. Yet there are loud and growing voices urging us to turn inward. We follow them at our peril. As
seen by the debates in the United States over the President's authority to negotiate trade agreements, the
obstacles we have faced in securing funding for the IMF, and the impasse we have reached over our dues
to the United Nations, we have much work to do in building broad-based public support for the forward
looking international economic policy that is so central to our own economic well being.
One obstacle to building this public support is anxiety about the rapidity of change in this era of the
global economy and dramatic technological developments. Yet ironically, it is exactly that globalization
and technological change that fuels the economic growth that benefits so many. The key is not a vain
effort to turn back the clock and to reject these forces for good, but to equip all of our people to succeed
in this new environment, to maintain a sound economic policy regime more generally, and to greatly
improve public understanding of the opportunities and dynamics of the global economy and the benefits
of forward looking economic policy.
Let me turn now to Europe.
In our view, three challenges stand out; launching the European Economic and Monetary Union;
furthering Europe's integration with the rest of the world; and addressing specific domestic issues that
each nation faces to foster growth and create jobs.
The launch of the Euro begins a new phase in Europe's integration, an era of tremendous promise. A
successful Euro would help build a more efficient common market and would create powerful impetus
for countries to pursue sound policies and structural reforms ~ both of which would foster a stronger and
more prosperous Europe ~ and that is very much in the interest of the United States and the rest of the
world.
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Some have raised concerns about the effect of a successful Euro on the international role of the dollar.
We do not share these concerns. We expect the dollar to continue to play a central role in the
international system. This role stems from the size and strength of the U.S. economy, the extensive ties
between the U.S. economy and the rest of the world, the depth and liquidity of U.S. financial markets,
and sound macro-economic policies. None of this will change with the creation of a successful Euro. We
look forward to a successful Euro that would benefit Europe, the United States and the rest of the world.
As the Euro helps to further integrate some nations in Europe, it is critical that Europe does not build
walls between itself and the rest of the world. More affirmatively, we strongly favor further liberalizing
trans-Atlantic trade. As to ties among European nations, it is our view that monetary integration should
not delay bringing the transitional economies of Eastern and Central Europe into the EU. Enlargement of
the European Union will do much to cement Eastern Europe's transition to market democracy; it is a
corollary to NATO expansion.
Finally, the European nations continue to face structural and other issues that are key to economic
growth and job creation. No one, least of all we in the United States, underestimates the difficulty in
making markets more flexible, helping workers adapt to the global economy, and preparing for an aging
population — and we have much to do in all of these areas. But it is precisely in tackling these types of
issues, which are made even more important by the advent of the Euro, that politics must keep pace with
economic imperatives.
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Here in the United Kingdom, while unemployment is at an 18-year low. Prime Minister Blair has
pointed out that for you too there is still much to be done. As his agenda has emphasized, modernizing
your nation's social safety net and improving education and training are clearly critical to the UK's
continued success.
Let me now briefly turn to Asia.
One of the great economic accomplishments of the past fifty years has been the phenomenal economic
growth of Japan. But as this economic growth has slowed through the 1990's, Japan's economic situation
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has become the focus of much attention in Asia and across the world. Japan faces the challenge of
implementing quickly and effectively its substantial fiscal stimulus plan, strengthening its financial
system, opening its markets and deregulating its economy. All of these are obviously difficult political
challenges, but critical to Japan's own economic well being and to the economic well being of Japan's
Asian neighbors and the rest of the world.
China, with one fifth of the world's population, also faces enormous domestic challenges. As Premier
Zhu Rongji made clear in his recent remarks at Guild Hall, high priorities include restructuring of
state-owned enterprises, adaptation of China's social safety net, and far-reaching reforms of the banking
system. And here too, these enormous shifts in policy will pose great political challenges.
In Asia more broadly, we are beginning to see a return to financial stability in a number of the countries
affected by the recent crisis, but there is an enormous amount to do even when reform has taken hold to
get back on the path of sustained economic growth. The financial assistance mobilized by the
International Monetary Fund has played a key role in providing breathing room for these countries.
What is important now is sustained adherence to strong reform programs, as difficult politically as that
may be. Sound macroeconomic policies, stronger financial systems and more open markets are key to
restoring financial stability and to the long term economic health of these nations.
The crisis in Asia has illustrated the importance of the work that the international community began
three years ago to strengthen the international financial architecture to help prevent such crises and to
deal with them more effectively when they occur. The Bretton Woods institutions have served the
international community well for fifty years, but - as will be discussed in our meetings today and
tomorrow and at the upcoming Leaders' meeting in Birmingham ~ that architecture needs to be
modernized for the challenges of today's global economy.
The United States believes architectural reform should focus on three areas: First, an increase in
transparency so that investors have better information with which to make good decisions. However,
investors must then use that information well. We were struck during the Asia crisis how little rigorous
risk analysis was done by many creditors and investors. Second, we must strengthen domestic financial
systems, to reduce the risk of economic and financial crises. Virtually all financial crises in developing
countries either began in or were exacerbated by badly flawed financial sectors. These efforts will focus
on measures to promote the adoption of sound financial sector policies and new global standards, the
cultivation of a strong credit culture, and the possible development of new institutional arrangements for
international surveillance of domestic financial systems. Finally, we must work to create mechanisms so
that creditors and investors more fully bear the consequences of their actions and thereby address the
so-called moral hazard problem. These mechanisms may include incentives to facilitate debt-creditor
negotiations and exploring "lending into arrears" by the IMF.
Before I conclude, let me mention one more critical objective in the global community: continuing to
promote growth and reform in the poorest countries. Despite the enormous progress made in developing
countries over the last quarter century, half of the people of the world still live in poverty. In particular,
the continent of Africa has been largely left behind in the globalization process. Having said that, there
have been encouraging signs in that region recently, and the United States is committed to building on
that progress so that Africa may also share in the benefits of the global economy. And of course, there is
much work to do in other developing regions of the world.
When I first started working on Wall Street as an investment banker, few could have predicted the
integration of the world's financial markets and of the global economy that has occurred over the last
thirty years — or how the economic domestic policies of one country now can affect other countries
around the world. And few could have predicted the great benefits but also harsh penalties that the
global markets now bring in reaction to national economic policies. For all of these reasons, sound and
effective economic policies are more important than ever. And pursuing such policies almost always
requires meeting difficult political undertakings - be it building public support for international
engagement, or creating a consensus for needed structural reforms, or adapting to market economics.
Nations that successfully meet these economic and political challenges will realize the promise of the
global economy for their own people and meet their responsibilities to the world.
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The role of governments in setting the framework and providing the underpinnings is critical, but so too
is the role of the private sector in being dynamic, productive and competitive. President Clinton has
often said that today's globalization and technological development constitutes the most far reaching
economic change since the industrial revolution, and has the potential for enormous economic good for
all the people of the globe. Our challenge - on the eve of the next century - in both the public and
private sectors is to harvest that potential and set the course toward making the 21st century an era of
greatly improved economic well-being for all the world's people.
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TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE
June 4, 1998
RR-2495
Secretary Robert E. Rubin before the Washington International Trade Association
It is a pleasure to be with you tonight and to be honored alongside Senator Roth, who has been a strong
advocate for free trade and America's leadership in the global economy. I have worked closely with
Senator Roth on a number of important domestic and international issues and he has shown real
leadership on a broad array of such issues. By honoring me, you honor President Clinton's entire
economic policy team, as well as the career men and women in the White House, the Treasury
Department and throughout the government with whom I've had the privilege of working the past five
years. Most importantly, you honor President Clinton, who deeply understands that we live in a global
economy and that our economic well-being depends on strong U.S. leadership and engagement in the
global economy.
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Yet at a time when our country's economic, national security and geopolitical interests require forward
looking international economic policies, public support for such policies may be waning. At the end of
last year, for example, Congress failed to grant the President fast track trading authority, even though we
risk being left behind as other countries liberalize trade and investment without the United States, failed
to approve payment of our dues to the United Nations, even though we risk losing our vote in the
General Assembly by the end of this year, and failed to provide funding for the IMF, even though the
resources of the IMF are dangerously low as a result of the recent financial crisis in Asia.
Tonight, I want to speak about the importance of building support for forward-looking international
policies. The context for my discussion is the emergence of a global economy, which has brought
tremendous benefits for workers and businesses, but which has also produced risks and challenges ~
challenges that can only be met by spreading the benefits of the global economy and bolstering support
for forward looking international policies.
Over the last twenty-five years, vastly increased international flows of trade, capital, and information,
along with the development of new technologies, have all contributed to increased integration among the
world's economies. Here in the United States, the percentage of our economy that accounts for trade has
doubled to 30 percent, demonstrating this integration. The changes have been greatest in developing
countries, where nation after nation has embraced market economic reforms, attracting enormous
amounts of investment, and fostering growth that has lifted millions out of poverty. And these countries
have become more important trading partners to the United States, absorbing 40 percent of our exports.
That is why in my tenure as Treasury Secretary I have visited a host of developing and transitional
countries, including Vietnam, Brazil, Ukraine, the Philippines, and China, and this summer I will visit
Africa - countries and regions far from the traditional focus of Treasury Secretaries.
The development of the global economy has brought tremendous benefits to Americans. Millions owe
their jobs directly or indirectly to trade, and all benefit through the lower prices and greater choice that
international competition fosters. Our economic well-being truly is inextricably linked to the rest of the
world.
But with the opportunities and benefits, have come new challenges and risks. To help our nation make
the most of the opportunities in the global economy, President Clinton has pursued a coordinated
international economic strategy. Some have argued that in this world of huge global markets,
government has, in essence, become largely irrelevant. And there is no question that the underlying
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strength of a modern economy is a productive and competitive private sector. But governments have a
necessary and vital role in creating the legal, institutional and economic setting in which the ingenuity,
skill, enterprise and dynamism of the private sector can flourish and in which the benefits of growth are
broadly shared.
With that in mind, the President's international economic strategy has had three basic components:
liberalizing trade to open markets to U.S. goods and services; promoting growth and reform in
developing countries to help foster the markets of tomorrow and promote political stability; and
addressing financial instability, both when it occurs, and in the long term, by developing an architecture
of the international financial system that is as modern as the market. These components often overlap
and are mutually reinforcing. For example, IMF programs, including the recent reform programs to
restore growth and confidence in countries experiencing financial crisis, have long included significant
trade liberalization measures because they are critical to prosperous market economies.
Yet, despite the success of the President's international economic policy —and I do believe that it has
been a key factor in the nation's current economic success ~ we have seen both an erosion of the
traditional bi-partisan base of support for international economic engagement in recent years, and, at the
same time, a re-ignition of one historical strain in American thought, a rejection of the outside world.
This has occurred for at least two reasons: anxiety brought by the rapidity of change in this era of the
global economy and dramatic technological developments; and the end of the Cold War, which caused
the foreign policy consensus to lose its centerpiece — the effort to contain Communist expansionism. In
this new environment, questions concerning the importance of U.S. leadership have grown.
A great task facing this country today is to rebuild public support for forward looking international
policies. Doing so requires meeting two basic challenges.
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First, is broadening participation in the benefits of the global economy. The global economy benefits
most, but there is a risk that those who are not well-equipped to compete will fall behind. Moreover, the
rapid changes of the global economy inevitably create dislocations for some. But the answer to these
problems is not a futile effort to try to halt the incredible tide of globalization that has benefited so
many. Instead, the answer is to continue to strengthen a domestic counterpart to a forward looking
international economic policy that helps to equip all of our people to compete in the global economy,
through education and training, special programs for those outside the economic mainstream in our inner
cities and distressed rural areas, health care, and the like.
Early in the first term of the Clinton Administration, a reporter from a well-respected European
newsmagazine interviewed me. At the end, he said that our economy was doing very well but that ten or
twenty years from now we'd be a second tier economy. I said I disagree, but asked why he thought that,
and he said because of the state of our public schools and our inner cities. And I believe that these are
critical issues that, particularly at a time when the U.S. economy is doing well, we must address.
The second critical challenge we face is to vastly improve the efforts of all of us ~ public sector
officials, the business community, foreign policy experts ~ to communicate with the American public
about the dynamics of the new global economy and the importance of U.S. leadership in the global
economy to the economic well being and national security of the American people.
Unless there is broad based public understanding of the importance to U.S. interests of strong U.S.
leadership in the global economy, we will fail to support the UN and we will lose our vote in the General
Assembly at the end of this year; we will fail to support the IMF, and be more vulnerable to economic
crises; and we will fail to pass fast track and stand by as the rest of the world moves forward and
liberalizes trade, with us on the outside of the tent, rather than the inside. All of this has enormous
consequences to our economic well-being and our national security.
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Here's where business can play an important role ~ you have the understanding of the importance of the
global economy and the means with which to convey that understanding. Our leadership in the global
economy must be grounded in public support, and what we all need to do is build that public support.
Making the most of the opportunities of the global economy, and minimizing the risks requires us all to
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work together meet our challenges and to promote public support for our engagement in the world. And
our success in meeting that challenge is critical to our country's economic well-being for the years and
decades ahead. Thank you very much.
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TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
Remarks as Prepared for Delivery
June 30,1998
RR-2568
Secretary Robert E. Rubin
Sasin Institute of Business Administration
Chulalongkorn University
Bangkok, Thailand
Let me say that it is really a great pleasure to be here and I am deeply honored to be at this great
university which I know plays a very important role in educating the young men and women of
Thailand.
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As the future business leaders of this nation, your education at the Sasin Institute will provide a strong
foundation for you to help meet the great and important challenges of your country. The fact that this
Institute was established as a joint venture with two great American universitiesCthe Kellogg Graduate
School of Management at Northwestern University and the Wharton School of the University of
PennsylvaniaCreflects the close and long ties, the great feelings of friendship between the United States
and Thailand. We believe very strongly that a growing, prosperous and vibrant Thailand is important to
the political stability and economic well-being of Southeast Asia, and that the economic well-being of
Southeast Asia is very important to the economic well-being and national security of the United States.
Our nation has strongly supported Thailand's work, with the assistance of the International Monetary
Fund, to reestablish financial stability and economic growth in the wake of your financial crisis. And we
greatly respect and support the courage and leadership that your government has shown in moving to
confront directly the challenges this crisis has presented. More generally, we will continue to work with
great intensity with the International Monetary Fund, the World Bank, the Asian Development Bank and
the international community, and all of the countries in the region to help Asia recover and to reestablish
its financial stability and economic health. We believe deeply that a prosperous and successful Asia is
critically important to the economic well-being of the American people.
Today, I would like to offer some reflections on the Asian financial crisis, which began almost one year
ago. While it is still far too early to make definitive judgments on this momentous event, let me offer a
few observations. RR-2568
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From the very beginning, this crisis has presented unprecedented and enormously complex challenges to
the international community. For example, a number of countries have had great difficulties at the same
time, and events in one country have had substantial impacts on currencies, trade and economic
activities in other countries in the region, and for that matter, in countries beyond the region. Moreover,
the effort to combat the crisis has been made far more difficult because the largest economy in the region
by multiples, and the second largest economy in the world, Japan, was in difficulty at the beginning of
the crisis, and is now in recession. Clearly, in this era of the new global economy and new global
financial markets, the actions of each nation can affect other nations as never before and each nation has
a responsibility to address its respective challenges. Moreover, all of this was made even more difficult
by the vast flows of private capital that have gone into the region in recent years, and in fact have fueled
growth that helped to lift millions out of poverty, a result of these vast flows of foreign capital, of the
development of a true global financial market. One observer said recently that the Asian financial crisis
is the first economic crisis of the 21st century.
In Asia, although the situations in each country with difficulties were different in some respects, there
were also some deep, common problemsCweak financial sectors, noncommercial relationships amongst
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the banks, governments, and industrial companies, and a lack of transparency in financial transactions
and government decision-making, to name a fewCand all of this eventually led to severe financial
instability. These problems are not and will not be self-correcting; they require the help of the
international community and a reorientation of the role of government and the political will to
implement that reorientation. Governments must turn away from the kinds of interventions in the
economy that helped give rise to this crisis in the first place, and turn to the action necessary for
restructuring and reform that are requisite for restoring growth. In the broadest sense, governments, in
our view, must adhere on a sustained basis to sound macroeconomic policy and to deep and far-reaching
structural reform programs. All of this will inevitably be a difficult path, it is the best and probably the
only effective route back to financial stability, a resumption of economic growth and higher living
standards.
The crisis, as you know better than anyone, has led to enormous hardships for the people of Thailand
and the region. However, these hardships and economic difficulties are a product of the crisis, not of the
reform programs. The reform programs are a response to the crisis, and economic circumstances, in my
judgment, would be vastly worse and the hardship would last for far longer without effective reform.
At the heart of the international effort has been the International Monetary Fund, the World Bank, and
the multilateral development banks. These institutions have been following a strategy of strengthening
financial systems, especially banks; ending directed lending between the financial systems, the industrial
sector and the government, opening markets, encouraging sound macro-economic policies and
improving social safety nets. There are no sure or easy answers to these vastly complex and
unprecedented problems. And the reform programs that have been implemented in Thailand and
elsewhere represent the best judgments of the time of the actions that will lead to recovery. Then, the
programs have been adjusted as circumstances have warranted.
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Much remains to be done to recover from crisis, but it's also true that much has been accomplished. For
example, there was without doubt a serious risk of global contagion, of a spreading of crisis across the
globe, that was avoided at the end of December in the situation in Korea. The private banking sector was
on the verge of default and Korea's reserves were virtually depleted. The international community that
coalescedCthis was all basically in the last week of DecemberCthe international community that
coalesced the IMF and World Bank and with American leadership helped catalyze a voluntary standstill
and then extension, maturity extension, of credits from the international banking sector to the banking
sector of Korea. Since then, I might add, Korea has very, very substantially increased its international
reserves.
Beyond that, the governments of Korea and Thailand, after some initial difficulties in each case, have
clearly committed themselves to strong reform programs and are moving forward in all of the areas I've
just mentioned. The situation in Indonesia is obviously far more complicated. Elsewhere around the
world, developing and transitioning countries have intensified actions on areas that they believe will
make them less vulnerable to the kind of financial instability we experience in Asia today.
In all of the Asian countries that have been experiencing difficulties, even those countries that are in the
process of implementing strong reform programs, economic activity is still declining. As we go forward,
there are enormous challenges to be met by the people of the countries, the governments and the
international community. In order for these countries to resume financial stability and economic health,
banking sectors need to be put on a sound financial basis and non-commercial lending ended. Problems
of corporate indebtedness need to be effectively addressed; impediments to trade and investment need to
be reduced; and the social safety net needs to be improved, to name just a few.
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Moreover and very importantly, there must be a political environment that supports sustained adherence
to reform programs. Pursuing policies essential to success in the global economy is a very difficult task
politically. The politics of reform must keep pace with the policies of reform, and that is true in the
developing nations and that is true in the developed countries, very much including our own. Effective
democratic institutions that take account of the concerns of government, business, labor and all affected
parties provide, in our judgment, the most conducive environment for building effective public support
for the requisite reforms involved in economic growth and economic success.
9/10/98 1 1:37 AM
�Secretary Robert E. Rubin remarks to Chulalongkorn University, Bangkok
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Let me now turn for a moment to Japan and China, both centrally important to the economic prospects
of Thailand, the region, and very likely the world. The Japanese economy is probably the greatest
success story, the greatest economic success story, of the past fifty years, but in recent years Japan has
had great economic difficulty. We have been deeply concerned about the weakness of the Japanese
economy and the resulting weakness of the yen. It is critical to the economic health of Thailand, the
region and once again perhaps the world that Japan take the steps necessary to allow its underlying
strengths to once again generate a strong economy, though this time led by domestic demand and a
healthy currency. The world welcomed the recent fiscal stimulus program enacted in Japan and that is an
important step forward. The focus of the world now is on Japan effectively addressing the problems in
its banking sector in a manner that gains the confidence of world markets.
With respect to China, which I just visited with President Clinton, in our meetings Chinese leaders once
again expressed a strong understanding of the great challenges they faced as they make the
transformation to a market-based economy, and a strong commitment to meeting those challenges. They
also reaffirmed their judgment that maintaining the RMB exchange rate is in their self interest, a
judgment with which we agree. China's success in its reform program, and more generally, China's
economic success is very important for China and, we believe, very important for the rest of the world
and maintaining its exchange rate has been a source of stability for the region.
When I speak at home and elsewhere in the world on the Asian crisis, I always say that it is very
important to step back for a moment and remember that the countries in the region have had decades of
strong growth based on great underlying strengthsCa strong work ethic, high savings rate, discipline, and
an intense focus on education. I then say that over time, by addressing their problems, these countries
can once again draw on those strengths and attract increased foreign investment, expand trade and return
to sustained and vigorous economic growth. It will not be an easy path, but it is an accomplishment well
within the reach of this region.
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Let me now turn to Thailand for a moment. From the very beginning, the United States has supported a
substantial and well constructed IMF program responsive to the problems that gave rise to the crisis in
the first place. After the change in government, the new government in Thailand immediately committed
itself to the reform program, and it worked steadily to implement its various parts.
The Thai government has pursued sound macroeconomic policies and made significant progress in
beginning to restructure the banking sector. By closing 56 finance companies, requiring banks to
recapitalize, and implementing stronger prudential standards, the government made a clear statement
that it was breaking with past behavior and determined to put in place a financial system based on
appropriate international standards. The government is moving ahead with auctions of assets of closed
finance companies and is working toward necessary related improvements to the bankruptcy and
liquidation laws. It is also putting in place social safety nets. About half the recent increase in the fiscal
deficit target is to provide for greater spending on social welfare, training and emergency job creation
programs. Moreover, all of this has been done in a regional context that is very difficult and it is likely to
remain difficult for some time to come.
There is still an enormous amount of work that remains to be done in your country and because of the
problems in the region and other factors, economic conditions are likely to continue to be difficult for
some time. Having said that, it is worth observing that with the reform programs that Thailand that
putting in place, the baht has recovered from its low of 56 to roughly 42 today and interest rates have
begun to decline somewhat. The path that you are on is the best and most likely means of getting back to
solid growth and financial stability. Though this will be a hard path to follow, as I said a few moment
ago, failure to implement reform would lead to far worse conditions and far longer duress. And once
again, let me be clear, the United States stands with you as you face these challenges. From the very
beginning, we supported a well-financed IMF program appropriately geared to the issues that gave rise
to the crisis in Thailand and more recently we have said we would strongly support additional IMF
funding if needed. Thailand's exports to the United States remain strong and American companies
continue to invest in this country.
The experiences of the past year underscore the challenges for all nations with respect to the global
financial system itself. The crisis has intensified the effort by the international community, an effort
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begun about three years ago, to strengthen the international financial architecture to better prevent crises
from happening and when crises happen, to deal with them more effectively. We look to the experience
of Thailand and other nations in dealing with crisis to help inform this process and, I might add,
Thailand is very actively involved in the group of 22 nations that are intensely focused on moving
toward proposals which will then be put forth to win international consensus.
The activity on architectural reform has focused on three areas: strengthening financial systems;
increasing transparency and disclosure; and appropriate burden sharing by private sector creditors and
investors in the event of a crisis. Let me say a brief word about each of these.
First, we must strengthen financial sectors. Difficulties in the Asian nations and difficulties in recent
years in all developing countries that have experienced financial instability have either begun in or have
been greatly exacerbated by badly flawed financial sectors. Efforts here need to focus on sound financial
sector policies, such as banking decisions being made solely on a commercial basis, implementation of
recently adopted core global standards with respect to banking; the development of a strong credit
culture; and the possible development of new institutional multi-lateral arrangements for international
surveillance of domestic financial systems.
Second, increased transparency and disclosure offinancialinformation from governments and from the
private sector so that investors and creditors have better information with which to make good decisions.
We believe governments also need to become more open about their own policy decision-making
processes. Having said that, this will only work if investors and creditors use that information
effectively. One of the things that has most struck us about the Asian crisis, is that after problems began
to develop and we spoke to the institutions that had extended credit or invested in the region so often we
found that these institutions had engaged in relatively little analysis and relatively little weighting of the
risks that were appropriate to the decisions. In addition, the IMF and the World Bank need to increase
their transparency regarding the operations of those institutions.
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Finally, and very importantly we must create mechanisms so that creditors and investors more fully bear
the consequences of their actions. This is an exceedingly complex issue, but it is one we cannot shy from
tackling. Because of the size of the markets and the size of the capital flows today, at some point there
will simply not be sufficient official money to deal with the crises that could develop. Furthermore, we
need to reduce the risk that providing officialfinanceshields creditors and investors from the
consequences of bad decisions and therefore sows the seeds of future crisisCthe so-called, moral hazard
problem.
Let me conclude by saying that after one year, much has been done but an enormous amount remains to
be done in the time ahead. The situation, as I said at the beginning of my remarks, is unprecedented and
enormously complex. And as we stand here today, there are indeed many complexities and uncertainties
that lie ahead. I don't believe that there is any question that the best path for the countries experiencing
difficulties is the path of sustained reform and of drawing on the underlying strengths that led to their
great economic growth in recent decades. This will not be easy but over time it will provide the best
route and perhaps the only route to renewal of stability and growth. And that is true in Thailand, and for
the region as a whole. And let me say with absolute certainty that the United States stands with you in
this effort. All of usCthe developing nations and developed nationsChave a tremendous stake in a
successful Thailand, and a successful region.
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As Thailand's future business leaders you will play a critical role in creating a prosperous future for your
country. Ultimately, the private sector is central to creating opportunity and economic well being for
your country, and as a consequence, you will be in the front lines of the effort to create long-term growth
for your country and prosperity for the people of Thailand. You will benefit from a growing Thailand,
but you also bear the responsibilities for helping make Thailand grow and for spreading the benefits of
growth to all of the people in this country. I might add that I spent 26 years in the private sector and it
was an extraordinary experience. But it has also been an extraordinary experience to then have the
opportunity beginning five and a half years ago to come to the public sector and to use that experience to
deal with the issues of the nation. I have found that to be an extraordinarily fulfilling experience. I hope
that as you think about your careers, you consider the possibility of you too, bringing your education and
your private sector experience to public service in Thailand. I wish you the best as you face the
9/10/98 11:37 AM
�Secretary Robert E. Rubin remarks to Chulalongkorn University, Bangkok
• http://www.ustreas.gov/press/releases/pr2568.htm
challenges of the years ahead, in building this great country. Thank, you very much.
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��Speech by Treasury Secretary Rober...a University. Soweto, South Africa
http://www.ustreas.gov/press/releases/pr2590.htm
TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
$
FOR IMMEDIATE RELEASE
July 14, 1998
RR-2590
Speech by Treasury Secretary Robert E. Rubin at Vista University. Soweto, South Africa
It is a pleasure to speak with you today and I am delighted to be in South Africa, and here in Soweto at
Vista University. Soweto is a place that for the many people of your nation and for many around the
world is a symbol the struggle to achieve political rights, social stability and economic opportunity.
After visiting some entrepreneurs here this morning and looking out at this audience of students, I see
Soweto also emerging as a place of hope.
This is my first visit to South Africa, indeed, my first to Africa and I come with great enthusiasm and
interest. Part of the purpose of this trip is to continue the process President Clinton began with his trip in
March: first, to establish regular focus and discussion among senior officials of our country and those of
Africa to further improve our working together on the great array of issues of mutual concern, and
second, to help convey to Americans an accurate and balanced view of Africa and its many countries.
I'm here in my capacity as the U.S. Secretary of Treasury, but also as someone who spent 26 years in the
highly entrepreneurial world of Wall Street. During the time I spent in the private sector, I lived
first-hand the emergence of the global economy and global financial markets, events that helped
developing countries around the globe attract investment, foster growth and lift millions out of poverty.
$
But just as those developments have brought enormous opportunities for nations around the world, so
have they brought new risks. This was demonstrated most recently by the financial crises in Asia, which
has affected nations in many other parts of the world including South Africa. However, as we all
consider the implications of the Asian crisis for the development of African nations and their integration
into the global economy, it is important to remember that many Asian nations ~ while having underlying
problems which eventually led to crisis ~ by integrating into the global economy and attracting private
capital, have had twenty to thirty years of high rates of growth. Countries like the Phillippines, Korea,
Thailand, Malaysia, Singapore ~ and the list goes on - are far better off today than they were before the
process of integration began.
South Africa now has the opportunity to learn from the Asian experience. Moreover, South Africa, as the
largest economy in Sub-Saharan Africa, has an unique opportunity to be a force in Africa's economic
development and integration into the global economy to the benefit of South Africa, the other nations of
Africa, and the rest of the world.
Against that backdrop, today I want to discuss some of the economic challenges South Africa faces that
are critical to promoting long term economic growth and social well-being. There are obviously many
such challenges, as there are in any country, including my own, but I want to focus on three that strike
me as particularly important for the South Africa of tomorrow: making the economy work for all South
Africans; deepening the integration between South Africa and its neighbors, and furthering the
integration of South Africa and other African nations into the global economy.
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South Africa has achieved a great deal as it has undergone tremendous political and economic changes
in the last few years. Those who believed that South Africa's economy would collapse under majority
rule have been proven wrong. Macroeconomic policies have been strong and stable, and the GEAR
program sets forth a medium term plan to keep them that way.
9/10/98 11:34 AM
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Spp ch by Treasury Secretary Rober...a University. Soweto, South Africa
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But as you know well, South Africa has enormous challenges ahead. More than half of blacks live below
the official poverty line, and one out of three black males and almost half the black females are
unemployed. And many black South Africans lack the basic necessities of life. About 67 percent of
black households do not have running water, compared to less than 3 percent of white households.
As President Mandela and Deputy President Mbeki have stressed, the key for South Africa is to bring
the majority population into the economic mainstream. In my view, no nation - very much including the
United States ~ can ever achieve anything close to its full economic potential until its economy works
for all its people. Moreover, this isn't just an economic imperative; it's also key to fostering social
well-being and a sense of community.
My years in the private sector, followed by my experience in the public sector, have given me the
opportunity to look at the U.S. economy and many others - both developing and developed ~ and from
that experience to draw some observations about the essential elements for economic success. Each
economy, of course, is different, but I would like to focus on four areas that seem to me critical to
promoting growth in South Africa and broad-based participation in the benefits of that growth.
First is to continue pursuing the strong macroeconomic policies that have proven so critical to sustaining
South Africa's financial stability during the transition from apartheid. Despite recent financial market
pressures, I believe that South Africa's key macroeconomic policies, now embodied in the GEAR
program, are on the right track.
Second is to provide quality education for all. In the global economy, economic success requires a
well-educated workforce. South Africa has spent over 21 percent of its budget on education since 1990,
but the legacy of apartheid has left the majority population undereducated. The challenge now is to give
to the whole population access to quality education — a challenge, I might add, that we are still working
to meet in our country.
Third is to find ways to make labor markets more flexible while protecting the interests of workers.
There are never easy answers, but it is important that labor policies and practices pay attention to those
who seek jobs as well as to those who have them, and also to consistent and sustained growth in
productivity. Productivity growth is the only path over time to competitiveness in the global economy,
lower unemployment and higher standards of living.
Fourth is to expand access to capital. South Africa has a world class, sophisticated system of banking
and finance. However, access to credit is very unequally distributed. This is partly a legacy of apartheid,
under which large segments of the population were prevented from having title to property. And the
South African banking sector did not serve the great majority of the population. One of the most
important steps South Africa can take is to develop a formal banking sector to which all creditworthy
borrowers — be it to borrow to start a large or small business or to buy a house — can gain access to
credit. Let me comment about one aspect of access to capital which I feel could be especially important,
microfinance to provide access to credit for people who currently lack such access. At a time when the
existing formal economy does not create sufficient jobs, microenterprises and small businesses can offer
the prospect of sustainable incomes and entry into the formal economy. Earlier today I visited a child
care facility here in Soweto, a microenterprise that not only creates jobs, but also enables parents to more
readily to go to work. I also participated in a round table discussion on this subject where the advantages
that microfinance can bring to South Africa were made clear. I have participated in similar discussions in
distressed inner cities in the United States, where we are experimenting with similar programs to expand
access to credit in under-served areas. While circumstances are quite different in our two countries, I
believe we can learn from each other in this area.
Let me turn now to the challenge of regional integration which I believe can be a force for growth
throughout Africa.
South Africa has been a leader in regional integration through its participation in the Southern African
Development Community. With its sophisticated financial system, global linkages and expertise in vital
sectors such as mining. South Africa is well positioned to benefit from deepening and broadening
economic integration with your neighbors. This will benefit your neighbors' economies in the process.
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By harmonizing laws, regulations and institutions, South Africa and its neighbors can achieve
economies of scale, create larger markets, and promote better policies, all of which will promote
investment and growth.
I know that some in the region worry that their economies are not yet strong enough to integrate with
South Africa's much more developed economy. Likewise, many in South Africa worry that local
industries will relocate to those economies where labor costs are lower. These sorts of debates also take
place in the United States concerning our trade policies, but I think all the evidence is that trade among
countries benefits all participants, whatever their relative stage of development. The key is to focus on
education and training to maintain a competitive work force and help those who are dislocated as a result
of trade or technology to re-enter the economy quickly.
All over the continent countries are coming together in regional groupings. On Monday, I met with eight
central bank governors in Abidjan representing the nations of the West African Economic and Monetary
Union, where we had an interesting discussion on their plans to develop a common external tariff, a
regional stock exchange, cross border bank licensing, and common banking regulations in all eight
countries, in addition to its existing common currency, exchange rate and monetary policy. Tomorrow I
will travel to Namibia for a SADC conference and later this week I will travel to Kenya to discuss the
revival of the East African Cooperation group among Kenya, Tanzania and Uganda.
Many of these efforts revolve around integrating financial markets, where I have spent my whole
working life. I think there is no question that for financial markets to be successful they need to mobilize
savings, attract capital and mobilize resources efficiently, and have a substantial infrastructure and
appropriate regulatory structure. Uniting several economies into one financial system can meet these
requisites better than a single economy can on its own.
Having said that, regionalism must be part of a larger strategy of global integration, not an instrument
for erecting trade and investment barriers around the region and towards the global economy. Moreover,
while regionalism can be very positive in raising all members to the policies of the most forward
looking, it should not be used as an excuse to slow reform to the pace and level of the least forward
looking.
This question of global integration is the third challenge I wish to discuss. As I noted earlier, emerging
markets around the globe have benefited enormously from global integration, even taking into account
the recent crisis. I know the recent pressure on the Rand has raised questions in South Africa about the
appropriate path going forward. I believe strongly that South Africa should continue to follow the path
of global economic integration. The experience of economically developed and developing nations
around the world provides strong evidence that integration into the global economy produces sustained
growth and higher standards of living by promoting internal competitiveness and encouraging an
economy to make the best use of its resources. However, global integration must be combined with a
strong commitment to prudent macroeconomic policies, a sound and well-regulated domestic financial
system, and transparency in government and business operations.
Pursuing policies — policies that are essential to success in the global economy -- is politically difficult
in any country, and in the United States, we certainly have had throughout our history ~ and continue to
have — real struggle around forward looking economic policy decisions. Moreover, this challenge may
be heightened in South Africa, by the legacies of apartheid. But we can't and you can't turn away from
these difficult political challenges. The politics of reform must keep pace with the policies of reform.
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And as you pursue those policies, we are committed to standing with you and supporting you, because
the success of South Africa and the other nations of Africa is not only in your interest but ours as well.
That mutuality of interest is fundamental to President Clinton's Partnership for Economic Growth and
Opportunity with Africa. One contribution the United States can make is to maintain and increase our
traditional openness to trade to those countries that do the most to reform their economies. With South
Africa we can even envisage the day when we can conclude a free trade agreement together.
This afternoon I have focused on broadening opportunity within the nation, regional integration and
global integration because all tliree are critical to the future of South Africa, as well as other nations in
9/10/98 11:34 AM
�Speech by Treasury Secretary Rober...a University. Soweto, South Africa
http://www.ustreas.gov/press/releases/pr2590.htm
the region. A nation that integrates globally will enjoy the maximum opportunity to raise their standards
of living for their people. A region that integrates all its nations can offer a strong base from which to
attract investment and promote growth. And a nation that integrates all its citizens economically will
have an advantage in today's competitive economy.
As students representing South Africa's leaders of tomorrow you will bear the responsibility of creating
a strong South Africa for the future, with an economy that works to the benefit of everyone. Let me say
that I have been fortunate in my career, to have had an extraordinary experience during my time in the
private sector, followed by the opportunity over the past five and a half years to bring that experience to
bear on the great public policy issues facing our country. I've found that extremely rewarding and I hope
that you will consider bringing your experience to bear, whether it be from the private sector or the
public sector on the great challenges facing your country. I wish you the best as you face these
challenges, and help South Africa prosper in the years and decades ahead. Thank you very much.
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9/10/98 11:34 AM
��Title of Press Release
http://www.ustreas.gov/press/releases/pr2671 .htm
TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE
September 9, 1998
RR-2671
"Repairing and Rebuilding Emerging Market Financial Systems" Remarks by Lawrence H. Summers
Federal Deposit Insurance Corporation International Conference on Deposit Insurance Washington, DC
Thank you. I am delighted to have this opportunity to discuss these issues at such a distinguished
gathering.
Let me start by congratulating our hosts on their timing. Events in Asia have highlighted the difficulties
of designing effective deposit insurance and banking regulations — ones that will promote stability,
without also promoting crises. These and other riddles have assumed center stage in recent months in
considering the lessons from the crises. I doubt there are going to be many easy solutions. But with the
combined efforts of the people in this room we will have a much better chance of finding effective ones.
t
A crisis that began in Asia more than a year ago has now spread to include Russia and raised concerns in
markets around the world. This finds us in new and difficult terrain. But one thing is certain. Repairing
troubled financial systems and building healthy ones for the future will both be crucial to crossing it
safely.
I would like to discuss each of these challenges today, sketching some of the broad principles that have
emerged for strengthening financial systems in emerging market economies and for dealing aggressively
with the deep financial sector problems we see in Asia today. But let me start with a few general
observations that should guide us in these efforts.
I. The Centrality of Finance and the Lessons of History
This week's Washington Post articles have underlined that interruptions in finance and financial
disruptions have the most profound human consequences far beyond profits and losses. In Korea today,
eleven year-old children are being plucked out of school to beg at car windows, and family firms of three
generations' standing are being forced into bankruptcy. Yet it would be an even greater catastrophe if
countries were to absorb the wrong lesson from these crises ~ if they were to develop the idea that
withdrawing from the global system was right and building better functioning market economy was
wrong. Unfortunately, this concern is not without some foundation.
Ever since there has been finance there have been financial disturbances and no doubt countries will face
financial disturbances and countries moving in the wrong direction in the years to come. But
international financial citizenship — respecting obligations and contracts and dealing cooperatively with
creditors in exceptional circumstances where necessary - is a crucial part of being a member of the
world community and enjoying its benefits and support. Countries that choose to embrace unilateral
actions as a substitute for reform and cooperation hurt the world system - and by severing links with
world markets hurt the prospects of their own citizens most of all.
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So let there be no doubt about the basic ends and means: continued rapid growth in the developing world
based on their moving more toward market principles and integrating more closely with the world
economy is what we should all want to see. The challenge is not to halt the flow of capital around the
world - but to build financial systems that can channel those flows effectively and ensure that they can
be sustained.
9/10/98 11:31 AM
�Title of Press Release
http://www.ustreas.gov/press/releases/pr2671 .htm
No country has been immune to financial sector problems in recent years and none has the monopoly on
wisdom when it comes to finding the best way to address them. Even before the recent crises, more than
two-thirds of the member countries of the International Monetary Fund ~ developed and developing ~
had had significant banking problems in the last fifteen years. These have often cost the economy and
the taxpayer a great deal.
Spain ended up paying out 15 percent of GDP to clean up its banking problems. In Chile the price was
closer to 20 percent. Our own Savings and Loan crisis ended up costing the taxpayer roughly 3 percent
of GDP — a sum that was greatly increased by mistakes of supervision and regulation which helped to
cause the crisis and later perpetuated it.
But lessons have been learned ~ and recent events have only underlined the need to work to see these
lessons applied, both at the level of individual countries and internationally. For some time now the .
United States has taken the lead in mobilizing intensive dialogue about the international financial
architecture among governments of industrial and developing countries. These discussions began in
April and build on previous G7 efforts set in train at the Lyons Summit. They have been wide-ranging
and constructive, leading to a number of potential areas for reform. Elaboration of specific proposals
must await the conclusions of the international working groups. But let me sketch out some of the broad
principles that have emerged for strengthening domestic financial systems to avoid crises and resolving
them effectively when they strike.
II. Principles for Strengthening Domestic Financial Systems
I
Reducing the risk of financial crises is not primarily about reducing the quantity of international capital
flows. It is about raising their quality. We have seen in recent months in Asia — as at many points in the
past in other countries — the danger of opening up the capital account when incentives are distorted and
domestic regulation and supervision is inadequate. Let me be very clear. Inflows in search of fairly
valued economic opportunities is a good thing. Inflows in search of government guarantees or
undertaken in the belief that they are immune from the standard risks is quite another matter.
The challenge across the emerging market economies is much less to slow the pace of capital account
liberalization than to accelerate the pace of creating an environment in which capital will flow to its
highest return use. That means governments pursuing strong, mutually consistent monetary, fiscal and
exchange rate policies. It means governments putting in place all the legal and regulatory underpinnings
for markets that lessen the probability that financial imbalances will arise, and can help contain the
effects when they do occur.
Experience - especially that of the past year - points to a long list of critical ingredients for a strong and
efficient banking system.
First on the list must be a strong supervisory regime. That means tough entry requirements; prudential
norms for capital, liquidity and currency exposure; limits on connected and directed lending; strict rules
governing income recognition, classification and provisioning; reporting and disclosure requirements; a
risk-based regime for remedial actions; consolidated supervision; and an effective framework for dealing
with insolvent institutions.
Let me add, here, that the Asian crisis has especially brought home the dangers of large amounts of
connected and directed lending — much of it opaque and undertaken on the basis of implicit or explicit
commitments to government underwriting. Commentators and others have recently made much of the
problem of moral hazard . There is has been too little emphasis on moral hazard problems in the
misallocation of capital within these countries..
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Second, rules and standards need to be enforced by a thorough system of bank examination. Supervision
needs to be backed up by an independent bank supervisory authority with the ability to enforce
compliance. Elegant risk-weighted capital ratios are not enough. The bank examination process has to be
on-site, detailed, regular and complete, focusing on credit quality and internal controls. Matched books,
for example, is all very well: it means little if companies are taking on foreign currency debt service
commitments on the basis of domestic assets that will not generate the ability to repay.
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�Title of Press Release
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In the wake of the crises the IMF has worked with Thailand, Korea and Indonesia to put in place more
effective loan classification and other procedures to address manifest failings in bank supervision and
credit management. In the lead up to the crisis, loan classification and provisioning practices in these
economies had often made it virtually impossible for market participants ~ even supervisors — to gain a
true picture of the condition of institutions. The more general lack of effective risk management at the
level of individual institutions and the supervisory community as a whole was a key factor allowing the
excessive build-up of foreign exchange obligations in the Asian crises and will be a major focus of
international reform efforts going forward.
Yet, the very depth of these crises underlines the need for a third element ~ a true credit culture at the
level of individual institutions and firms. This ultimately rests on the rules of law and all that that
implies ~ not least independent judiciaries and effective bankruptcy regimes. Corruption and other illicit
practices cannot go unpunished if the public is to have any confidence in the safety and integrity of
domestic financial institutions.
The crises have taught us that supervisory and broader financial infrastructures may not have fully kept
pace with the rapid development of their domestic economy and their closer integration with global
financial markets. The Basle Committee has already developed core principles for effective banking
supervision that can serve as a blueprint for steps to improve supervision at the national level. The
International Organization of Securities Commissions (IOSCO) is engaged in a similar project. Events in
Asia have focused attention on ways that these might be broadened and expanded to address some of the
particular problems highlighted by recent events — for example, with the development of comparable
core principles in the area of corporate governance.
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Yet common standards and principles will achieve little if countries and institutions do not implement
them. And experience suggests that the lag between words and deeds can be long indeed. The collective
global stake in timely prevention of crises and the contagion they cause calls for creative thinking about
more powerful incentive mechanisms— including especially the role of enhanced disclosure
requirements to strengthen the disciplining effects of the markets themselves. We will need also to
explore ways of building on recent steps to improve cooperation among the international financial
institutions in this area and upgrade their financial sector capability.
One related point that is worth stressing in this context the very valuable role that foreign participation in
the financial sector can play. Last years's WTO agreement on financial services was an historic step in
committing countries to openness and encouraging foreign financial service providers - and all the
capital, expertise and competitive pressure they bring with them. Here in the United States we
discovered long ago that inter-state banking is more diversified and more stable. In the same way,
greater internationalization of finance can reduce risks at the same time as lowering the cost of capital.
Mexico and Argentina have both successfully applied this lesson by encouraging widespread foreign
financial sector participation in the wake of the 1995 Tequila crisis. The Korean and Thai reform
programs include important liberalization of the domestic economy in addition to radical financial sector
reform - and look to foreign competition and participation as a way of supporting those efforts.
III. Principles for Resolving Financial Sector Problems
So far I have been reflecting on the basic elements of building healthy and enduring banking systems.
But in several countries today the task faced is that of repairing very troubled financial systems at a time
of acute economic distress. A recognized irony of financial crises is that, unlike most kinds of crises,
simply stopping what caused them does not take you closer to a solution. In many ways, the opposite is
true: resolving the crises in Asia will involve reviving some of the things that caused it.
The dilemma is simply put. Economies will not recover without a resumed flow of lending to the
corporate sector. Yet lending activity will not resume unless banks are recapitalized and the debt burdens
of corporations are assessed and then reduced. Yet merely restarting credit flows without a fundamental
change in the practices of banks, corporations and regulators runs the risk of the same past mistakes
being repeated, and corporate debt/equity ratios and nonperforming loans continuing to rise.
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You will remember that we faced similar dilemmas -- fortunately on a very different scale - during the
Savings and Loan crisis. It is fair to say that in the early years the authorities tended to focus excessively
on worries of a credit crunch and too little on proper supervision and regulation of banks. Underlying
problems grew bigger as a result. Several years later, however, evidence of problems of a credit crunch
did arise.
Thailand, Korea and Indonesia have each been working to address banking sector problems by merging,
intervening in or closing banks and finance companies. In all three countries the problem is turning out
to be much larger and more complex than originally expected ~ and as a result the impact on growth has
been more severe. Government estimates of the potential cost of restructuring run from $20 billion in
Indonesia to upwards of $100 billion in Korea.
Across Asia the international community has an enormous stake in the right strategies being pursued to
help countries and companies grow out of crisis and to put the financial sector back on a stable footing.
The challenges are immense, but the past year's efforts have yielded some important lessons:
first, strategies that help solve a systemic crisis turn out to be very different from the ones that are
needed to address more isolated financial sector problems — it becomes more difficult to pursue
case-by-case approaches when even "strong" firms are well below water.
second, in an environment of systemic financial crisis, financial sector restructuring cannot proceed
independently of corporate restructuring. That is why Thailand's announcement last month of a major
public recapitalization plan that recognizes this logic is such a welcome development.
third, governments need to be prepared to spend very large amounts of public funds and to do so
aggressively. There are understandable fiscal concerns. Yet history suggests that governments who try to
put off large public expenditures will ultimately raise their magnitude by prolonging the crisis.
fourth, maintaining liquidity support for banking systems in crisis can be extremely difficult when a
country lacks the financial instruments to do it effectively. In many crisis countries, for example, the
lack of well-developed government debt markets has limited or eliminated the scope for open market
operations. Here, as elsewhere, the search is on for new and creative solutions.
fifth, attention needs to be paid to finding effective strategies for disposing of bad assets. Governments
need to get bad assets off bank balance sheets and dispose of them in a way that allows markets to clear.
Yet these efforts have been seriously impeded in Asia by large numbers of creditors having recourse.
Legislation has been announced to address this problem in some of the crisis countries but the signs are
that more sweeping changes — and more streamlined disclosure procedures ~ will be needed to break the
bottleneck.
finally, we have learned that countries have to strike a difficult balance, both ex ante and ex post, in the
design of deposit insurance — avoiding confidence problems when banks are restructured yet not making
them so generous that they undermine stability and overburden the budget. The irony of too many places
in Asia is that while the belief in wide-ranging implicit guarantees did much to bring on the crisis ~ the
lack of credible and explicit depositor guarantees has in some cases helped to worsen it by causing
indiscriminate pressure on banks.
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It is fair to say that the challenges you will be addressing at this conference ~ getting beyond general
principles to devising concrete schemes for reducing the risk of crises and containing them effectively ~
are as important as any challenge faced by the global policy making community at a particularly difficult
time. The solution to the puzzle will contain many different elements — and dealing effectively with
banking sector problems, particularly in Japan, will be a very important part. But I do think that as
financial markets are integrated in the future the rewards will be even greater. Thank you.
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9/10/98 11:31 AM
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�Deputy Secretary Lawrence H. Summe... Association. Milwaukee, Wisconsin
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TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
Remarks as Prepared for Delivery
August 4, 1998
RR-2626
"THE GLOBAL ECONOMIC SITUATION AND WHAT IT MEANS FOR THE UNITED STATES'*
DEPUTY TREASURY SECRETARY LAWRENCE H. SUMMERS
REMARKS TO THE NATIONAL GOVERNORS ASSOCATION
MILWAUKEE, WISCONSIN
Thank you. It is an honor to be here. Let me say, first, that I am particularly glad to be following Daniel
Yergin here today. Because it is against the backdrop of the events described in his book - the global
embrace of the market and all that that implies -- that today's turbulent economic times should be
considered.
I would like to spend most of my time today discussing the global economic situation, the United States
response to it, and the vital role of the IMF in that response. But let me begin with a few words about
conditions here at home.
The American economy today is the strongest it has been in a generation: 16 million new jobs in the past
five and a half years, stable prices, real wages increasing at their fastest pace in 25 years, and lest we
forget, the budget deficit is no more. At the start of the first Clinton Administration the deficit for 1998
was projected to be $357 billion. Today, as you know, we expect a significant surplus.
These successes have come because our policies have been prudent, and in a deeper sense, because
America is superbly placed to take advantage of the kinds of trends that Daniel Yergin has described.
Emerging markets are paving the way for the world's first truly global economy. Countries where three
billion people live have moved toward the market, with vast populations seeing a doubling, sometimes
trebling of incomes in a single generation. And if you think about emerging markets, about Latin
America, about Central and Eastern Europe, about Asia ~ America is uniquely linked to all of these
regions and uniquely placed to prosper from their emergence.
Information technology and modern competitive finance are fast moving us toward a post-industrial age.
And if you think about what this new economy means ~ whether it is AIG in insurance, McDonald's in
fast-food, Walmart in retailing, Microsoft in software, Harvard University in education — the leading
enterprises are American.
And yet, as a wise former Secretary of State once said, "history knows no resting places and no
plateaus". As strong as our economy is ~ as well-equipped as we are to compete ~ our capacity to
continue this success in an ever-more interconnected world will depend in no small part on events
beyond our shores. And looking around the world, there are today enormous reasons for concern.
I. A Critical Time For The Global Economy
What has been labeled the Asian financial crisis is today having a very substantial impact not merely in
these countries but globally.
• The Thai, Indonesia, Korean and Malaysian economies are all now expected to shrink
substantially this year — by upwards of 12 percent in the case of Indonesia — with unemployment
and inflation rising to unprecedented levels.
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• Japan, the world's second largest economy, has been mired in recession for seven years and faces
banking problems several times larger than our own Savings and Loan crisis in the early 1980s.
• In South Africa, where the US exports more than to all of the states of the former Soviet Union,
we have seen the rand depreciate by over 20% in the last 3 months.
• And in Russia, continuing structural problems have been exacerbated by contagion effects from
Asia and have raised serious questions about the future. Russia's trouble, in turn, has the potential
to become Central Europe's ~ and the world's.
Make no mistake. Containing these problems is critically important to America's future. It is about
safeguarding American jobs, American savings and American national security.
Trade has accounted for one third of our growth in this expansion and is the prime engine of high-wage
jobs. More than 30 percent of those exports ~ and 40 percent of our agricultural exports — go to Asia.
Already, exports to the economies in crisis are down by nearly one third, year-on-year. Private forecasts
are suggesting that the crisis ccmld add one half, even one percentage point of GDP to the United States
current account deficit this year.
• Consider the implications of a sustained crisis for California, where about half of last year's
exports went to Asia.
• Or Colorado, where exports to Thailand alone grew nearly four-fold between 1993 and 1996.
American markets have been remarkably strong in recent years, including through the last year, and
American savings are ever more dependent on our markets. But history teaches us that the performance
of our markets continues to become more closely linked to the performance of global markets, because
our companies' profitability depends increasingly on these markets and because ever more capital flows
across international borders.
The Cold War is over but the world is still a fragile place. In too many ways - nationalist forces,
economic frustration, incipient ethnic conflicts, a shortage of institutions knitting nations together Asia bears resemblance to Europe at certain points early in this century. Seen in that light, a strong
response to the crisis that prevents it from festering is forward defense of America's core interests.
I am convinced that few issues we confront will be as important to the way the 21st century begins as
our management of these crises. Our goal is clear: to work to restore stability and growth in Asia and
Russia and prevent further contagion in other markets. Let me now say a little about the means.
II. An Effective Response
Our response in addressing these situations has been based on three principles.
• First, a strong domestic response is the absolute prerequisite for restoring stability because any
amount of financial support that goes into an economy will flow right back out if policies are
unsound and governments are not credible. That means sound monetary and fiscal policies; that
means policies to strengthen thefinancialsystem; and that means structural reforms to open the
economy, raise transparency and let market forces operate.
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• Second, in many ways, sovereign financial crises have elements of a self-fulfilling prophecy ~
like bank runs, everyone expects failure or everyone expects everyone else to expect failure which
leads to a rush to be the first one out and thus causes failure. Temporary, conditioned international
financial support provides countries a bridge to overcome this self-fulfilling prophecy.
• Third, there must be strong policies to support growth in the major economies of the region.
Because no country will emerge safely from crises in an environment of region-wide deflation and
declining demand.
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o The United States must continue to do its part in maintaining sound economic and financial
policies that provide the basis for sustainable economic growth that we are experiencing
today.
o The Chinese have recognized that their continued commitment to addressing their financial
sector problems and to maintaining a stable currency will be critical to the stability of Asia.
o Japan, the largest Asian economy, has an even more crucial role to play. The new
government has reaffirmed the importance of fiscal action to stimulate domestic demand
and tackling decisively the problems in the financial sector. But as confidence has declined
so too has the scope for further delay
The crisis is still very much an unfolding story, and very large challenges lie ahead. There is no question
that there is enormous economic distress being felt in the countries worst affected. This is inevitable
given the massive withdrawals of private capital that have occurred. But it is encouraging that in those
countries that were first hit and where policy has been most determined there has been evidence of
containment:
• In Korea and Thailand the run on the currency has stopped and production shows signs of
stabilizing. The Korean won has risen more than 35 percent since January, retracing almost
four-fifths of its decline, and import volumes have actually been rising in recent months.
• And in Latin America, a quick response to market pressure in Brazil last fall has helped to
maintain stability in a region not so long ago considered highly vulnerable.
The case of Mexico is instructive. In early 1995 Mexico was mired in crisis and a matter of days away
from default. The economy shrank by 6 percent that year. But with strong policies and conditioned
support from the United States and the IMF, it grew over 5 percent the year after and has sustained that
pace ever since. Unemployment has fallen and investment and real wages are on the rise.
To be sure, the implementation of the principles I have been speaking about involves questions of
balance.
• National sovereignty should be respected, politics should be understood, and the provision of
support should not engender a backlash against the providers. These criteria must be balanced
against credible policies that will contain the crisis, reduce the risk of future crisis, and have the
potential to increase confidence. In Asia, the problems related to "crony capitalism" are at the
leart of this crisis and that is why structural reforms must be a major part of the IMF's solution.
• Economic growth ~ not austerity - is a crucial objective of support programs, but a resumption of
market confidence is essential to restore growth, with this balance being particularly difficult to
strike when banks are failing and currencies collapsing. It does bear emphasis that interest rates in
Korea and Thailand are near pre-crisis levels and, in real terms, are well below pre-crisis levels.
And in Thailand, the government has chosen not to make full use of the fiscal expansion provided
for in the IMF program.
• A balance must be found between the imperative of maintaining confidence and avoiding bailouts
of investors who should have known better. As Secretary Rubin has often said, he would not give
one dime to help any creditor or investor, but the imperative to create confidence and to avoid
disaster can in some circumstances compel actions that do benefit some creditors. To be sure,
investors in non-Japan Asia have lost, by some estimates, as much as three quarters of a trillion
dollars, in part because of the programs for resolution of private-sector debt entered into by Korea
and Indonesia along with the IMF.
• The final area of balance is in the application of conditional support. In each crisis country, the
international community's interest is to reinforce market confidence while national policy makers
are motivated to act in an expeditious yet prudent manner. This is one reason why the IMF has, at
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U.S. behest, begun charging penalty interest rates on extraordinary loans.
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III. The Way Forward
The United States has enormous stakes in containing financial problems around the world. What will be
most crucial going forward is the steps other countries take, particularly in Japan and in Russia.
• Japan's actions to fix its problems and to get its economy growing are crucial to the future of the
world economy.
• The success of the Russian government in carrying forward on its reform program is of the utmost
importance economically and politically.
• And, as the world's largest and strongest economy, we too have a critical role. Most important is
keeping our economy strong, maintaining the strength of our example, and encouraging others to
take necessary policy steps.
What is also essential is providing the IMF with the support that it needs. The IMF has been critical to
our containment of the Asian financial crisis to date.
Let me be clear. Without the IMF there would have been no effective international response to events in
Asia and we would, without question, be facing a situation far more serious and damaging to American
interests than we face today. There would have been no conditioned reforms; there would have been
larger devaluations and greater reductions in these countries' capacity to purchase our goods; and I am
confident that there would now be much more pressure on the United States — at events such as this one
— to respond unilaterally with taxpayer resources.
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The crises have taken their toll on the IMF's resources, and as of today, the IMF has less than $10 billion
that it could prudently use to respond to an intensification of the present crisis. Moreover, its lack of
resources could well become a constraint to action in case further problems arise, and by reducing
confidence, its lack of resources make future problems more likely. And the IMF's ability to get new
resources awaits approval by the United States.
Making good on our commitments has not cost American taxpayers one cent. Appropriations for the
IMF are scored as a zero net cost to the budget. That is because the IMF acts like an international credit
union. We and other countries are providing a line of credit, and when the IMF draws on our
commitments, we receive a liquid, interest bearing offsetting claim on the IMF.
To say that the IMF has been indispensable is not to say we must be satisfied with the institution we
have now. The IMF needs to be more transparent and accountable to the public, allow for increased
external evaluation, and work at ways of making more information available to the markets. With
pressure from the United States, the IMF has come some distance in these areas but it is not past the
finishing line. It seems clear to me that the way forward is for the U.S. to continue to shape the IMF's
approach to economic policy around the world.
But maybe the way forward is to look backward when, as in the 1930's, there was no effective
international response to financial crises. The result was competitive devaluations, deflation, contraction,
and widespread depression that laid the ground for what was as great a conflict as human history has
seen.
The speaker who follows me this morning has written eloquently of American diplomatic history as
"oscillating between isolation and commitment". In the 1920s and early 1930s we oscillated in one
direction — with disastrous consequences for America, and the world. With the leadership of Franklin D
Roosevelt and our post-war leaders we swung decisively ~ and triumphantly — in the other.
When we consider our failure to pay our dues to the United Nations and prospective loss of our seat in
the general assembly; when we consider our failure to ensure adequate funding for the IMF; the
conclusion can only be that we are fighting another swing of the pendulum into perilous isolation.
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America's success and economic strength is not now in question. What is today very much in question is
our ability to invest that success wisely. Quite simply, not to invest in an effective IMF at such a time
would be like canceling your life insurance when you have just gotten sick. It is simply not a risk we
should take. And with your help, it is not risk we will take. Thank you.
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��Deputy Secretary Lawrence H. Summe...Fund, "Equity in a global economy"
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TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
Remarks as Prepared for Delivery
June 8, 1998
RR-2501
"Equity in a Global Economy"
Remarks by Lawrence H. Summers
Deputy Secretary of the Treasury
International Monetary Fund
Washington, DC
It was 150 years ago this year that Marx and Engels wrote the Communist Manifesto. They turned out to
be wrong in a number of respects. But they were surely right to stress the enormity of the change in
human affairs that a global market economy would represent. It would be difficult to think of a time
when the "colossal productive forces" of capitalism they wrote about have been more palpable ~ to more
of the world's peoples.
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When history books are written about the last two decades of this century, it is possible that the end of
Soviet-style communism will be the second story. The first story could well be the appearance of
emerging markets — the fact that developing countries where more than three billion people live have
moved to embrace capitalism. And for the first time in human history, living standards for huge
populations have quadrupled or more in a single generation.
Few doubt that a global economy based on market forces offers enormous potential. In different ways our sense of ideology, our sense of common interests, our sense of what promotes global stability — all
point us toward a world of changing technologies, increased market forces and increased globalization.
There is no question that this is good for many and good for the size of the pie. But there is a real
question as to whether it leaves too many people behind.
This is an important moral issue and an important issue for the political viability of this approach ~
because, as we are learning, wherever economic reality lies, it will be that much more difficult to follow
if too many people doubt that it works for them. Necessarily, it presents itself differently in developed
and developing countries:
• in developing countries, the question is whether the adoption of market-based approaches can
support rapid growth, but only at the cost of rising inequality and harsh adjustment programs that
impose excessive costs on the poor and vulnerable.
• in developed countries, the issue is less about the merits of markets than about globalization — and
the fear that it poses a threat to the well-being of the less skilled that cannot be countered by sound
domestic policies.
• finally, and at the broadest international level, there is the belief that the mobility of capital, and
the leverage which that mobility provides, affords it too much leverage and democratic
governments too little ~ to the detriment of ordinary people everywhere.
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I would like today to offer some observations about these critical issues and the best way that policy
makers might seek to address them going forward.
I. Does market-led development breed inequality?
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Forty years ago Simon Kuznets suggested there was a negative relationship between growth and income
equality in the early stages of development, and for a long time that proposition went unchallenged.
Partly as a result, the belief persisted that growth with equity was impossible ~ and that development
and poverty reduction could often be at odds. Time, and a mountain of empirical evidence has given ever
weaker support for these claims.
First ~ as Klaus Deininger and Lyn Squire have shown in recent work at the World Bank — more
rigorous empirics and better data, covering 91 countries over more than 30 years, suggests scant evidence
of a Kuznets-type rise in inequality over the early stages of growth. Indeed, periods of rapid growth have
come with a rise in income equality at least as often as a decline.
Second, we have seen enormous reductions in poverty as a result of rapid growth. Consider Japan, or the
"Asia Tigers", or China and Vietnam - all cases in which many millions were lifted out of poverty in
scarcely a decade. Once again, the World Bank evidence is powerful: Deininger and Squire found that
growth produced rising incomes for the bottom fifth of the population in all but 15 percent of the
economies represented.
Third, we have seen rising evidence that, far from being the handmaiden of growth, certain kinds of
inequalities can actively impede it. Specifically, there seems to be quite a strong negative link between a
highly unequal starting distribution of assets and subsequent rates of growth. Of the 15 developing
countries with the most unequal distribution of land in the Bank sample ~ only two grew by more than
2.5 percent a year between 1960 and 1992.
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The bottom line for policy makers is that we now know that no given path of inequality is an
unavoidable consequence of macroeconomic adjustment and market reform. Just as government has
enormous power to shape how fast a society grows — it has enormous scope to influence how equitably
it grows. The challenge is to put in place policies and institutions that will not just increase the size of
the pie but help include more in its benefits.
Eight years ago when John Williamson first summarized the gospel according to Washington, there was
a place on the list for the re-ordering of public spending priorities away from unproductive expenditures
~ and into win-win investment in basic education and social services and critical infrastructure.
This element of the Washington Consensus has not entirely fallen by the wayside in the course of market
reforms in Latin America, the Former Soviet Union, and elsewhere. But if most now agree that
macroeconomic reforms took precedence over microeconomic in the earlier stages of reform, and
reducing the size of government took precedence over improving its quality ~ then it is fair to say that
education and other basic social investments were especially ill-served by these biases.
Today, the lessons about the links between equity and growth find deeper expression in the policies of
the International Financial Institutions ~ policies which increasingly recognize that austerity is no
substitute for adjustment. We see this:
• in the IMF's increased emphasis on the needs of the poor in designing adjustment programs, and
encouraging governments to improve the quality of public spending and shift more resources to
primary education, health care and critical investments. Since 1990 military spending has declined
from 5.5 percent to 2.2 percent of GDP in IMF program countries and has declined as a share of
public spending while social spending has risen;
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• and in the sharply increased shares in social lending of the development banks. The World Bank,
for example, is now the single largest source of external financing for education in developing
countries. Since 1980 its lending for education has tripled and education's share in the total has
more than doubled.
I am confident that whatever consensus exists ten years from now will give more weight still to these
issues. But there should continue to be a presumption that issues of poverty and equality are best
addressed directly, rather than indirectly, through more pervasive forms of protection, intervention and
state controls.
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That means, above all, investing in education. In 1990 around 130 million primary-school age children
were not enrolled in a school, 60 percent of them girls. Yet years of development history show us that a
dollar spent on education pays for itself many times over — and a dollar toward female education most of
all, in reduced fertility, healthier populations and higher wages.
And it must mean working to democratize access to finance. The world over, private financial markets
fail when it comes to the very poor. Yet if you deprive poor people of the chance to lend or save then
they are a good deal more likely to stay that way. The success of micro credit institutions the world over
- from South Africa to South Central ~ shows how much can be achieved here, at what small cost. The
First Lady likes to say it takes a village to raise a child. Equally, it takes capital to build a prosperous and
cohesive village.
II. Does Integration Impoverish the Unskilled?
For all the dramatic rise in integration we have seen in the past decade, the share accounted for by
imports from low-wage countries has increased by only one and a half percentage points. In the last 30
years, it has risen by only about three percent of GDP.
Compare that to the eight percentage point rise in the share of health care that has occurred during that
period; to the 11 percentage point rise in the female share of the workforce; to changes in the levels of
education attainment and in the mix of occupations due to changing technology ~ and it is difficult to
believe that increased trade with developing countries could account for more than a fraction of the rise
in wage inequality we have seen in the United States in the past twenty years. In fact, most studies have
concluded that it could account for 10 ~ perhaps 20 - percent of the problem.
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Yet to absolve globalization from the blame will not make the problem of rising inequality go away.
And it is scarcely a phenomenon that is now well understood.
My guess is that it has its roots in two primary trends. First, technologies that have tended to be
skill-reinforcing, and second, greater market forces that have tended to make everyone be paid more like
salesman — on the basis of what they produce. The implication is that the dispersion of wages within a
given occupation or company may have moved closer toward that of people who are paid on
commission. Differing tax and benefit structures and labor market institutions in Europe have seen these
things manifest themselves in higher unemployment more than rising inequality. But it seems clear that
similar underlying forces have been at work.
Will these trends continue? No one should forecast confidently. When I went to graduate school two
propositions in this area were central. The first was that the returns to education were declining,
Americans were in danger of becoming over-educated and social investment in education could be
excessive. The second was that the income distribution was remarkably stable in postwar America,
despite a whole set of policies directed at addressing it.
These were mistakes of extrapolation. One needs to be careful about extrapolating from the last 20 years.
While the bulk of attention has focused on skill-reinforcing technologies, and while these are clearly a
major element of the story, it is worth noting that supermarket scanners, spell-checkers, cash registers
with pictures instead of numbers - all these are information technologies that reinforce those with less
skill. Equally, computers will replace radiologists reading X-rays before they replace nurses. Equity
traders will be replaced before gardeners ~ credit analysts before hairdressers.
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Nor can the march of market forces in compensation be thought to be ineluctable. Just as countries, in a
world in which everything else moves, are coming to realize that their most unique asset is their people,
so companies, in a world in which everything, including their people, can move, are coming to realize
that their most distinctive resource is their culture. With teamwork an increasingly important value in
business, companies are recognizing the benefits of a loyal workforce — and likewise the possible costs
to downsizing and invidious comparisons between personnel.
We should note, too, that the last two years have shown some signs, if not of a reversal, then at least of
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an important pause in the long-run trend here in the United States. Between 1996 and 1997 the hourly
wages of the bottom fifth of US workers rose by 3.2 percent in real terms ~ more than twice as fast as
the wages of those at the top.
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As in the developing countries, governments are not powerless. It is a feature of the successful move to
more market-based strategies that all of the elasticities have increased - small changes in incentives can
reap very large changes in behavior, and the burden of a given intervention can shift far from the initial
target. That means that the deadweight losses associated with direct redistributions have increased. But it
also enhances the effectiveness of more supply-based strategies for reducing inequality.
This has been reflected in a much greater emphasis on the quality and quantity of education, including in this country ~ a major expansion in pre-school programs, proposals for universal testing to maintain
school performance and expanded college tax subsidies. Equally we have seen it in a welfare reform bill
which stresses both motivating greater work effort and improved preparation for work.
III. Are Governments Powerless Before a Global Market?
It is often said that governments today have less power, but in a sense they hold a society's fate in its
hands more than ever before. The right policies are now better reinforced and the wrong policies are
more swiftly punished. Thus, the impact of policies has never been greater. The element of truth in this
statement about the powerlessness of governments is that certain things thought important for
government to do are becoming more difficult.
There is no question that increased economic integration - be it of the 50 American states, the European
Union or other less well-developed regional trade arrangements — requires a careful balancing act
between the benefits of mobility and competition within jurisdictions, and the need to avoid a damaging
race to the bottom.
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The implication is that the plane of global integration cannot fly on the single wing of freer trade and
capital mobility. It must be complemented by the second wing of global cooperation on the range of
challenges that integration brings ~ from fair treatment of labor to global warming, from preventing
money laundering to food safety and other consumer protections.
As President Clinton said last month at the SOth Anniversary of the WTO in Geneva, our goal as we
integrate and converge must be leveling up, not leveling down:
. that is why we are working to open up the WTO to ensure that capital is not the only factor of
production that gets a hearing;
• that is why we are working with other countries to promote global cooperation against corporate
and legal tax havens, and working actively in the OECD on the issue of tax competition;
• that is why we have worked, within the IMF and the other IFIs to ensure that labor and
environmental concerns are given due weight in devising reform programs and sustainable
development strategies ~ and why we have called on the WTO to step up its environment efforts
and work with the International Labor Organization to ensure that open trade respects the rights of
workers;
• and that is why we have given such strong encouragement to the World Bank and the IMF in their
efforts to place governance issues at the top of their agenda, and have worked at the OECD to
attack the supply-side of corruption with the criminalization of foreign bribes.
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These are all international imperatives. But the vital domestic complement to this approach must be
ensuring that the global economy works well for those at home. Just as the GI Bill of Rights was an
integral part of the strategy behind the Marshall Plan, just as our interstate highway system was partly
the result of an effort to marshal our Cold War defenses — we must work to make both real and apparent
the connection between our pursuit of stability and prosperity abroad and our pursuit of stability and
prosperity for every American.
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These are important issues substantively and they are also important issues politically. Indeed, it may
well be that the biggest threat to our national security is economic insecurity ~ and the backlash it
produces at home.
So this conference could not be more timely or the subject more important. History teaches that
internationalism cannot be a goal pursued by elites for its own sake. Domestically and collectively, we
need to invest in policies and institutions that can realize the opportunities of this new global era, and a
large part of that will be about investing in policies to ensure that everyone is included. You might say as Marx did not - that we have nothing to lose but the false choice between growth and equity, and a
world to win. Thank you.
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TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE
March 19, 1998
RR-2309
"Opportunities Out of Crises: Lessons From Asia,"
Remarks by Deputy Treasury Secretary Lawrence H. Summers to the Overseas Development Council
Thank you. I am delighted to have this opportunity to discuss recent events in Asia with such a broad
and distinguished array of thinkers on these issues.
I would like to spend my time today discussing the short and longer term causes of the recent crises in
Asia; the opportunity they present for putting Asia's growth on a more sustainable footing; and some of
the implications for the International Financial Institutions.
I. Systemic Roots of the Crisis
I
In the wake of these crises there has been a great deal of discussion about the "Asian model". To the
extent that there exists such a model ~ given the enormous differences between the economies of the
region ~ it lies in a number of common features in their economic and financial approach, an approach
that in many ways tracks the postwar development of Japan.
This was built on the fundamentals -- on high savings, high levels of education and hard work. But it
was also an approach that favored centralized coordination of activity over decentralized market
incentives. Governments targeted particular industries, promoted selected exports, and protected
domestic industry. There was a reliance on debt rather than equity, relationship-driven finance not
capital markets, and informal rather than formal enforcement mechanisms.
This model has had important and profound successes. And the performance of Asia has truly been
spectacular. But it has been a difficult and ongoing question of interpretation quite how much of that
spectacular growth was due to strong universal fundamentals, such as high savings and high levels of
education, and how much due to practices uniquely Asian. What we can say is that even before the onset
of the recent financial problems a reassessment was under way, not merely within American universities
but within Asia:
• disappointing economic performance had led to plans for a "Big Bang" liberalization of the
financial sector and repeated calls for sweeping deregulation;
• prominent Korean observer Kim Dae Jung - now, of course, the president ~ had published books
calling for wholesale reform of the economic system: for an end to government-directed lending to
industry, for non-inflationary macroeconomic policies, for reforming the chaebol, and for opening
up the financial system.
• respected academic studies of Asia's growth record — pioneered by Alwyn Young — began to
suggest that the miraculous growth of Asia might owe rather little to sustained growth in
productivity and a great deal more to rapid accumulation of capital.
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These longer term issues were conflated, in recent years, with a set of shorter term problems of
macroeconomic management: the maintenance of mutually inconsistent monetary policy and exchange
rate regimes; excess inflows of private capital channeled into unproductive investments; substantially
reduced competitiveness; significant failures of debt management that led to unsustainable quantities of
short-term debt. All of these elements ~ short- and long-term - came together to produce these crises,
and were then reinforced by lack of market confidence so as to set up a situation with many of the
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features of a bank run.
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This, then, is a distinct kind of crisis. It has a common element with almost all financial crises: money
borrowed in excess and used badly. But it is also profoundly different because it does not have its roots
in government improvidence. Relative to nearly all of the crises we have seen in recent years, the
problems that must be fixed are much more microeconomic than macroeconomic, and involve the
private sector more and the public sector less.
Another way to put this would be that the reforms are less about changing the short-term policy mix than
they are about changing the long-term institutional environment. Short-term adjustments in policy can
and have been needed to revive confidence and correct imbalances. But the overriding focus has been on
addressing the same long-term challenge at the root of those earlier reassessments: the challenge of
building a new system of governance better attuned to the demands of an integrated modern market
economy. II. The Approach to Reform
We can see the core elements of such a response in the reform programs the International Monetary
Fund, along with the World Bank and the Asian Development Bank, have supported in Asia. The goal in
each area of policy is both to tackle the short-term problem of confidence and to clear the way for a new
growth path built on private investment and individual opportunity.
Macroeconomic reforms have involved, not merely short-term adjustments to restore confidence and
growth, but long-term reforms to make the framework for macroeconomic policy more transparent and
accountable. Each of the programs commits the government to regular publication of foreign reserve and
other data and greater public scrutiny of policy decisions — both so as to build consensus and to reduce
the scope for unpleasant surprises.
I
Financial sector reforms have envisaged, not merely restructuring of the financial system, but laying the
ground for a new one. While attention has focused on the closure or merger of insolvent financial
institutions, at least as important to the long-term resolution of these crises will be the commitment to
build a new supervisory and regulatory infrastructure and foster modern credit evaluation and risk
management techniques within privatefinancialinstitutions themselves.
Corporate sector reforms have all involved a recognition that there need to be bankruptcy regimes in
place, and system-wide improvements in accounting standards and corporate disclosure to facilitate the
move to a more arms-length, market-driven investment culture. If one were writing a history of the US
capital market, one of the most important innovations one would say had shaped that market would be
the idea of generally accepted accounting principles. It is a minor, but not insignificant, triumph of the
IMF program that when I and other members of the Administration were in Korea earlier this year, a
teacher of night school courses in accounting told us he normally has 22 students in his winter term. This
year he has 385.
Reforms of the role of government have sought, not merely an end to those public interventions directly
contributing to the crisis, but fundamental change in what government is expected to do. The emphasis
is on reducing direct public involvement in the productive sector ~ as, for example, in the Korean pledge
to eliminate non-economic lending to industry. And it has been on opening the economy to foreign
participation and competition with sweeping trade and financial sector liberalization, both to improve the
efficiency of the economy and to let long-term capital in.
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But this is only one part of the story. The emphasis of these programs has been at least as much on
improving the quality of government intervention ~ to make it more transparent, less open to corruption,
and more focused on the things that sustainable market-led growth depends on, but markets alone cannot
provide. Most notably, all of the most recent reform programs include measures to improve the quality
of the social safety net, and to maintain and improve government spending on education, health and
other basic services.
It is arguable that reform would not be politically sustainable in these situations without an assurance
that the pain of adjustment will not fall only on the poor. What we know for sure is that they would not
be economically sustainable, in the long run, without these kinds of reforms. Years of research into the
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business of "picking winners" in development has given a clear verdict: when it comes to the long-term
economic return, public investments in health and education and an effective social insurance system
win out every time.
Decisively implemented, these changes will help address Asia's shorter and longer term imperatives:
they will increase confidence and attract private capital in the short run. And they address the longer
term problem of allocating capital on a more market-oriented basis. They are also important for the
International Community, because an Asia that addresses these problems will be a stronger, more
balanced contributor to global growth and trade. And, we should remember, they will offer the prospect
of resuming sustained growth in living standards and opportunities in a region where two-thirds of the
world's population live.
Ill The Role of the International Financial Institutions
This many-sided response is a response to the particular challenges facing Asian economies in these
crises — and in each case, to the specific circumstances of each country. But it is not an Asian response.
Nor is it an Anglo-Saxon response. It is, rather, an effective response, grounded in the now very broad
consensus in favor of economics based on markets ~ and market-supporting institutions.
For all the debates we have seen recently about the proper role of the IFIs, they have focused to a very
large extent on the means and modes of official assistance. The end goal, of laying the foundations for
market-led growth, is no longer in question. What has been a matter of continuing debate and pressure
on the part of the United States has been the desire to ensure this objective is being met as effectively as
possible.
I
Let me just highlight three areas where we have pressed for change in areas that have been brought out
with particular salience in the Asian case:
1. Laying the foundation for stable finance
We have pressed to ensure that the IMF would never again stand for "It's Mostly Fiscal", by working to
adapt the IMF's policies and practices to meet the needs of a more integrated and market-driven global
economy. For example:
• the US-initiated creation of the new Emergency Financing Mechanism, to provide for more rapid
agreement to extraordinary financing requests in return for more intense regular scrutiny.
• by successful urging the IMF to take the lead in international efforts to promote greater disclosure
of economic and financial data and improved banking supervision in emerging markets. More than
40 countries have already subscribed to the IMF's Special Data Dissemination Standard created in
April 1996. And the IMF was closely involved in the development, by the Basel Committee, of
Core Principles For Banking Supervision and Regulation that were formally approved by the G7
countries last year.
• and most recently, through the US-inspired Supplementary Reserve Financing facility to let the
IMF lend at premium rates in short-term liquidity crises and improve borrower incentives — a
mechanism that grew out of recent developments in Asia and has played a major role in the IMF's
assistance to the region.
Let me applaud the commitments that Jim Wolfensohn has made since becoming President of the World
Bank to upgrade the organization's involvement and expertise in the area of financial sector reform ~ if
there is one area where I welcome a competition among the IFIs it is here. And indeed, a large, in many
cases the major portion of new ADB and World Bank lending to Korea and Thailand in response to the
crises has been focused on this sector.
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2. Greater Emphasis on Good Governance
The Asian crises have brought out even more clearly what Jim Wolfensohn and Michel Camdessus had
already recognized: that good governance is a core institutional underpinning for growth. With strong
United States urging and support, both institutions have rightly been moving toward making reduced
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corruption as central to their assessment of countries as more traditional, narrowly economic concerns
such as tariff reform and tax administration.
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Putting the fight against corruption at the heart of development programs is an economic as well as an
ethical imperative. Corruption results in distorted allocation of resources. And new laws and supervisory
systems will do little to safeguard stability if there is no credible ~ and honest — authority to enforce
them. As we are learning, any country's capacity to take on major reform challenges such as those faced
in Asia will depend critically on the credibility of its policy makers and public institutions - credibility
that corruption fatally undermines.
It is my hope and expectation that there will be a great deal of further attention given to this issue in the
months ahead. But as you know, promoting good governance does not only, or even mainly, involve
"anti-corruption" measures. Greater transparency and accountability of public institutions, the
elimination of cartels, subsidies, trade restriction and other distortions ~ all of these will have a direct
effect on the scope for cronyism and corrupt practices, and a direct, and positive long-term effect on
growth. The proposal for an IMF code of fiscal transparency provides just one example of ways that the
IMF could press governments to move further in this area in the future.
3. Greater Emphasis on the Social Implications of Reform
A concern with the quality of public spending ~ as well as the absolute quantity - has been a
long-running object of United States pressure on both the IMF and the World Bank. We have pressed the
IMF to pay closer attention to the needs of the poor in designing adjustment programs, to encourage cuts
in unproductive expenditures such as military spending and shifting of more resources to primary
education, health care and essential public investments. Since 1990 military spending has declined from
5.5 percent to 2.2 percent of GDP in program countries, and has declined as a share of government
spending while social spending has increased.
I
All of the recent programs have been designed to ensure that the necessary adjustments do not come at
the expense of the poor:
• in the Indonesian and Thai programs, spending on health, education and social programs have
been expressly protected from any fiscal consolidation, and where possible, efforts to target
spending on the poorest in society have been intensified. In Korea, the program commits the
government to strengthening the labor insurance system, and the promotion of active labor market
policies to lessen the shock to employment due to the crisis;
• in designing programs to supplement the IMF program, both the World Bank and the Asian
Development Bank have been acutely aware of the need to focus on the impact of policy on the
most vulnerable, both in the new lending provided to these countries and through the restructuring
of existing lending programs to promote urban and rural employment and basic health services.
Planned new World Bank lending to Thailand and Indonesia, for example, foresees upwards of
$600 million in new loans for improving the social safety net in each of these countries.
There is a broader point that needs to be made in these discussions. We do not emphasize financial
stability for its own sake. Stabilizing capital flows is a means to a more ultimate objective: of increasing
living standards and economic opportunities for all of the world's population. Yet in working to promote
free flows of capital we will not and cannot allow ourselves to get caught in a race to the bottom — a
bottom in which governments cannot promote fair taxes, uphold fair labor standards or protect the
environment.
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That is not the world we want to build. It is not the world we are building. That is why we are working
with other countries to promote global cooperation against corporate and legal tax havens. That is why
we are working actively in the OECD on the issue of tax competition. It is why we have worked, within
the IMF and the other IFIs to ensure that the concerns of labor and the environment get a fair hearing in
devising reform programs and sustainable development strategies. And it is why fair labor and
environmental standards have played a core role in our bilateral and multilateral trade liberalization
initiatives.
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IV The Immediate Need to Support the IMF
I
The crises have brought home the absolute indispensability of the IMF as the core provider of
emergency, conditioned international support to countries in financial difficulty. Long experience has
taught that countries cannot be helped by the IMF ~ or, indeed, any of the multilateral institutions -- if
they are not willing to help themselves. But without the IMF, even those countries that are committed to
reform might face default -- either at a government level or through the failure of the financial system as
a whole ~ which could have devastating effects on their own economies and significantly raise the risks
of contagion in other markets.
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It has rightly been said, in this context, that if the IMF did not exist we would have to invent it. But of
course, we do not need to imagine such a possibility, we can simply look at the history of the late 1920s
and early 1930s, when there was no collective response, and no United States leadership to address
serious financial problems, and lenders and creditors were left to sort things out by themselves. The
result was a vicious cycle of devaluations, deflation and depression, which laid the ground for the
greatest conflict the world has ever seen.
For all the controversy surrounding the IMF in recent months, it is striking that relatively few of the
critics -- more than one perhaps, but it is fair to say relatively few -- have consistently suggested that
there should be no IMF to respond to these situations. The call, rather, has been for a different IMF.
We agree on the need for change at the IMF. Indeed, we have done much to change it and point it in new
directions these past few years. And we will be keeping up the pressure for change because there is ~
there will always be — room for improvement at the IMF, and every one of the IFIs, if they are to be up
to the challenges of a fast-changing global economy. But ~ leaving aside, for a moment, the merits of
the particular reforms being called for ~ there is a curious recklessness in the proposition that to make
the IMF do its job better we should jeopardize its ability to do it at all.
Without new resources, the Fund's capacity to respond to future outbreaks of Asian flu ~ or other crises
that may arise down the road — is very much in doubt. We must and will continue to equip the IMF —
equip all of the IFIs — to meet the demands of a demanding new world. But we must not, and will not,
do this in a way that undermines the very international financial stability we are seeking to promote —
and in which our economy has such an enormous stake. Thank you.
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TREASURY NEWS
F R O M T H E O F F I C E OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE
March 9, 1998
RR-2286
DEPUTY SECRETARY SUMMERS REMARKS BEFORE THE INTERNATIONAL MONETARY
FUND
Thank you. It's good to see so many old friends. Let me start by applauding the International Monetary
Fund for organizing this conference. Some would consider it strange for the IMF to stick its head above
the parapet on this question at a time when many are questioning the benefits of free and open global
financial markets (and a good few are questioning the benefits of the IMF.) I consider it timely ~ and
absolutely essential. If there is one lesson to be drawn from the events of the recent past, it is that capital
account issues are here to stay ~ and they are issues with which the Fund will increasingly have to deal.
Its charter ought to give it the tools to accomplish that task.
The emergence of today's global financial markets can be likened to the invention of the jet airplane. We
can go where we want to go much more quickly, we can get there more comfortably, more cheaply and
most of the time more safely — but the crashes when they occur are that much more spectacular.
We regulate air safety. No-one sensible is against jet airplanes. But everyone sensible is for new kinds of
regulations because they exist. We have seen too many financial crises in these last years of the century,
crises that have come at unacceptable costs to the people in the countries affected by them. Those
catastrophes add urgency to the challenge of promoting safety and stability.
There will no doubt be a full and vigorous debate on the best way to realize the opportunities of a world
of free-flowing capital ~ and manage the risks. I don't aspire to any kind of conclusive synthesis today.
But let me offer five observations for your consideration.
1. Vulnerability to Crises Begins at Home
If we are to piece together the lessons of the recent crises and devise an effective approach to these
issues it will be important to start from the right place. Some conjure a specter haunting the world's
governments: the global capital markets whose advances they cannot resist, whose sudden rejections
they cannot survive. The facts of the most recent financial crises tell a different story.
The truth is that the crises that have occurred have disproportionately involved the judgments of
countries' own citizens. Careful studies by the G-10 and the IMF of the crises in the European exchange
rate mechanism and the Mexican peso crisis were able to attribute only a small fraction of the capital
flows involved to speculative trades by foreigners. This research was given added support by Jeff
Frankel and Sergio Schmuckler's observation that the Mexican Bolsa, dominated by Mexican residents'
transactions, responded much more quickly to the crisis than foreign investor-dominated closed-end
mutual funds. I understand that these studies have been echoed in the very recent IMF study into the
behavior of hedge funds in Asia.
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Where foreign capital has been involved it has most often been foreign capital that governments have
sought actively to attract: we saw this in Mexico, with the increasing resort to issuing
dollar-denominated Tesobonos to put off adjustment day at home; we saw it in Thailand, in the tax
breaks on off-shore foreign borrowing and other domestic incentives for Thai banks to take on
unsustainable amounts of foreign debt; we saw it in Korea, where discriminatory controls kept long-term
capital out, and ushered short-term capital in.
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Before we come to the issue of placing controls on foreign borrowing, we should be considering the
strong macroeconomic fundamentals that are critical to sustaining the confidence of a countries' own
citizens ~ and the kind of domestic safeguards needed to avoid dangerous practices associated with
reckless pursuit of low cost capital. A better place to begin in drawing lessons from these events is that it
is a bad idea for governments to reach excessively for capital, particularly if a disproportionate amount
of that capital is denominated in foreign currency and is short-term and high yielding.
2. Successful Liberalization Depends on Sound Domestic Practices
The case for capital account liberalization is a case for capital seeking the highest productivity
investments. We have seen in recent months in Asia ~ as at many points in the past in other countries ~
the danger of opening up the capital account when incentives are distorted and domestic regulation and
supervision is inadequate. Inflows in search of fairly valued economic opportunities is one thing. Inflows
in search of government guarantees or undertaken in the belief that they are immune from the standard
risks are quite another.
The right response to these experiences is much less to slow the pace of capital account liberalization
than to accelerate the pace of creating an environment in which capital will flow to its highest return use.
And one of the best ways to accelerate the process of developing such a system it to open up to foreign
financial service providers, and all the competition, capital and expertise which they bring with them.
The recently concluded global financial services agreement demonstrates that countries recognize these
beneficial effects of external liberalization.
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Mexico took the second route in 1995 — and has since reaped the benefits in rapid growth and a
strengthened domestic financial system. It is striking that the countries that are currently faring best in
Asia are those that have responded in the same way. Both the Korean and the Thai reform programs
include sweeping liberalization of the domestic economy in addition to radical financial sector reform —
and both look to foreign competition and participation as a way of supporting those efforts. By contrast,
some of the countries in the region that continue to look vulnerable are those that have seemed unwilling
or unable to tackle domestic distortions - and, indeed, have looked increasingly to the quickfixof
capital controls instead.
The critical point is that when a country takes the more basic precautions that should be part of any
liberalization process — when a country has the proper supervisory and regulatory practices in place —
these have enormous potential to control the more risky forms of borrowing. Countries need to adapt and
develop standards and rules to ensure safety and sound practice within a more liberalized system.
Matched books, for example, is all very well: it means little if companies are taking on foreign currency
debt service commitments on the basis of domestic assets that will not generate the ability to repay.
Effective prudential banking standards are especially vital. The Basle Committee has recently developed
core principles for effective banking supervision that can serve as a blueprint for steps to improve
supervision at the national level. IOSCO is working on a similar project. But the major responsibility
lies with national governments. Of particular importance is ensuring that investment decisions and
capital flows are not distorted by explicit or implicit government guarantees.
In short, governments can respond to the invention of jet airplane by lengthening the runway or by
banning jet landings. It is obvious which is better.
3. The IMF Has A Critical Role in Promoting Open and Stable Financial Systems
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In Mexico, in Asia, and throughout the world the IMF has become increasingly involved in helping
countries realize the opportunities of global capital markets - and manage the risks. That involvement
has been de facto. We need to make it de jure. That is why we have supported speedy codification of its
role in this area through the Amendment of the Fund's Articles of Agreement to include capital account
liberalization.
This is not about bureaucratic tidiness. It is about ensuring that the IMF is in a position to respond to the
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challenges raised by the crises of recent years ~ by working with countries to ensure that countries open
their capital accounts in a way that best protects them, and the international financial system as a whole,
from financial crises and the contagion which such crises can cause.
Each country must choose the approach that is right for them. Amending the Articles is entirely
consistent with this. Under the proposed approach, countries will accept the obligation to liberalize the
capital account fully, but what that means precisely will be up to them to decide in cooperation with the
IMF. Until they are ready, they could avail themselves of transitional arrangements as approved by the
Fund. They would simply have to commit not to backtrack without IMF approval.
I am open-minded about the appropriate phasing of liberalization. But it is worthwhile noting some of
the potential drawbacks of capital controls: they can, in the wrong hands, be a way to avoid necessary
policy adjustments, and thus a sure-fire route to prolonging and exacerbating the costs of those
adjustments; they can undermine the goal of domestic liberalization by introducing new economic
distortions and creating scope for official rent-seeking and corruption.
Even those countries most associated with "successful" use of short-term controls recognize that the
drawbacks mount over time and do not see the controls as a permanent feature of the landscape. Once
again, the end objective must be to reform those aspects of the domestic environment which leave scope
for dangerous imbalances to develop in the first place.
I worry that ingenious arguments for speed bumps or other forms of capital controls are a little like the
arguments developed over the past two centuries for the scientific tariff. They are logically correct. They
relate to circumstances that are empirically relevant. But they are almost certainly invoked more
frequently on behalf of the wrong policies than the right ones. In a different context the question has
been asked whether, if it was discovered that ten percent of alcoholics could drink again without ill
effects, it would be a service or a disservice to publicize this discovery.
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It has been for too long that IMF could have stood for "it's mostly fiscal." In today's world, the
preoccupation needs to be much more with helping countries grapple with the challenge of building a
sound domestic financial system that can handle international capital
4. The Global Financial System Will Only Succeed if it is Safe for Failure The challenge of building a
safe and efficient global financial system starts with the efforts of domestic authorities. It surely does not
end there. We all need to look at the international financial system and do what we can to change it so
we don't have crises like this every three years. There will never be enough money in the world to
respond in any kind of official lender of last resort function to all the crises that potentially can come in
developing countries and industrial countries as global capital flows increase. That cannot be the way
forward.
I think some of the elements of a better solution are clear.
Greater transparency
If one were writing a history of the American capital market I would suggest to you that the single most
important innovation shaping that capital market was the idea of generally accepted accounting
principles. We need that internationally. It is a minor, but not insignificant, triumph of the IMF that in
Korea somebody who teaches a night school class in accounting told me that he normally has 22
students in his winter term and this year he has 385. We need that at the corporate level. We need that at
the national level. And we need that transparency to apply to central banks. In particular, we must
recognize that it means nothing for a central bank to report its reserves if it does not report the
encumbrances on those reserves.
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Strengthening domestic financial systems
In keeping with my earlier comments, we need to focus our attention on strengthening financial systems,
both globally and at the level of individual countries. That means improved prudential standards and the
promotion of effectivefinancialinfrastructure. But the ingredients of sound banking systems go well
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beyond a list of internationally recognized standards ~ it means cultivating a credit culture, sound
supervision, limits on the quality of assets at a banks' disposal, and effective controls on self-dealing.
Creditor responsibility
We need to have an architecture in place, so that policy makers do not confront the choice between
uncontrolled chaos and confusion and large bail outs which is too often the choice they confront today.
That has got a microeconomic dimension and a macroeconomic dimension. Countries need bankruptcy
laws. And they need effective judicial institutions to enforce them. That is part of being part of a global
capital market. We also need procedures for dealing with situations where countries get themselves into
very profound financial difficulties at the sovereign level.
We need systems that are consistent with legal procedures around the world. We need systems that can
handle failure because until the system is safe for failure, we will not be able to count on success. We
consider the American financial system to be strong, not because all of its institutions succeed, but in
large part, at least, because the failure of one does not jeopardize the whole. We need to build more
systems like that. For world capital markets to function properly, investors must make investments based
on the fundamentals of national economies, and not the likelihood of international rescues. The
enormously difficult analytical challenge — for the IMF, for all of us — is to find a way to build such a
system safely, and without undermining the stability we are aiming to promote.
5. The Interests of Capital Are not the Only Interests That Count
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One theme of my remarks today has been the need for governments and the international community
collectively to consider the system as a whole in responding to the challenges of a global financial
market. That means working to strengthen domestic and international financial systems. And it means
working to develop effective safeguards against crises and effective mechanism for dealing with crises
when they take place. But what it cannot mean — what it must not mean, is focusing solely on the
concerns of capital: be it domestic or international.
A focus on stabilizing capital flows is a means to a more ultimate objective. It is not an end in itself. In
working to promote free flows of capital we must not neglect the broader risks they pose to the people
this new global economy is meant to serve ~ and the environment in which those people live. As capital
becomes so much more mobile than labor there are legitimate concerns that companies will exploit that
greater mobility by playing off competing jurisdictions against one an other. The fear is that we will find
ourselves in a race to the bottom ~ a bottom in which governments cannot promote fair taxes, uphold
fair labor standards or protect the environment.
That is not the world we want to build. And it is not the world we are building. That is why we are
working with other countries to promote global cooperation against corporate and legal tax havens. That
is why we are working actively in the OECD on the issue of tax competition. It is why we have worked,
within the IMF and the other IFIs to ensure that the concerns of labor and the environment get a fair
hearing in devising reform programs and sustainable development strategies. And it is why fair labor and
environmental standards have played a core role in our bilateral and multilateral trade liberalization
initiatives.
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None of these questions has easy answers. But we neglect them at our peril. These past years we have
been laying the first foundations of a truly global economy. Trade, investment, capital, information and
know-how are flowing more freely than ever before to the places where they can be most effective in
creating wealth. But events in Asia are a further reminder that the tide of global integration brings
serious challenges in its wake. The potential is breathtaking. It will require a new network of policies
and institutional arrangements to ensure that this potential is realized. And it will, most definitely,
depend on an effective IMF. Thank you.
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TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE
February 23, 1998
RR-2241
"Arnerican Farmers: Their Stake in Asia, Their Stake in the IMF,"
Remarks by Deputy Treasury Secretary Lawrence H. Summers
Thank you. I am glad to have this opportunity to discuss recent developments in Asia and the United
States response to those events.
There is little need to remind this audience that Asia matters. There is little need to remind you that
resolving the financial crises in the region is about protecting core American interests - protecting
American wages, American savings and American security. No one can be certain what the precise
impact of these events will be. But one thing is clear: American farmers and ranchers will be among the
first to feel the effects. And they will be among the first to suffer from a failure to restore financial
stability as soon as possible.
I'd like to discuss three topics this evening:
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• the crises in Asia and risks they pose to the United States — the agricultural sector, in particular;
• the United States response to these crises and key role of the International Monetary Fund;
• the urgent need to offer continued support for the IMF in the context of these efforts.
I. The Crises in Asia and the Risks to American Agriculture
These crises come at a special time for the United States -- a time of rapid, sustained growth, a time of
low inflation, a time of historic increases in employment. We have a responsibility to do all we can to
protect this strong performance. In an interconnected world, that means protecting our growing stake in a
stable and prosperous global economy.
Our exporters, with agriculture, as always, at the forefront, have played a major role in our recent
economic success. Financial instability, economic distress, and depreciating currencies all have direct
effects on these highly integrated sectors: on the pace of our exports, the competitiveness of our
companies, the growth or our economy and the well-being of our workers:
• in the past four years, nearly one-third of our economic growth has been due to exports ~ exports
which now support more than 11 million jobs, and pay, on average, 15 percent more than jobs in
non-trade-related sectors. And some 45 percent of the recent growth in our exports has been in
Asia.
• Asia is the largest market for agricultural exports, and has been growing at the second fastest rate.
Fully 45 percent — $28 billion — of United States farm exports go to the region. The South-East
Asian economies and Korea, the countries worst affected by the crises to date, account for 12
percent of all American agricultural exports.
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As early as last December USDA was estimating that the crises in Asia would cut United States exports
by $500 million this year. Without the multilateral assistance package assembled by the IMF, USDA
now believes the crises might have reduced United States exports worldwide by 3 to 6 percent over the
next two years relative to what would have been. For this fiscal year, the loss in exports would have
been $2 billion, with sales in Southeast Asia and Korea alone falling $1.25 billion.
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None of these, very imprecise estimates take account of the further knock-on effects if the crises were
further prolonged, or spread to emerging markets in other regions — leading to a cycle of costly
devaluations and impeding open trade.
And, of course, it would not only be trade that was affected. A long drawn-out crisis:
• could also affect our financial markets, and with it everything from investment in tools and
equipment for workers to mortgages for new homes;
• it could raise serious concerns for national security, given the proven potential forfinancialcrises
to trigger broader conflicts. We have 100,000 troops in Asia, 37,000 on the Korean peninsula
alone, where North and South Korea have only just begun negotiating a possible end to their
conflict.
To repeat, any forecast of the impact of these crises — like the situation in Asia ~ is highly uncertain. A
great deal will depend on the success of United States-led efforts to restore stability and growth in the
region and to limit the impact on our economy.
II. The United States Response
We have taken direct action through USDA's Commodity Credit Corporation to lessen the effects of the
crises on US farmers and ranchers by making available $2.1 billion in export credit guarantees to Korea
and other Asian countries. GSM is working. American exporters have already sold over $362 million
worth of beef, cattle hides and skins, cotton, pork, soybean meal, and wheat since the package was
announced in early January.
I
A similar effort is underway to support our capital goods exports. Last Friday, in London, Ex-Im Bank
organized a multilateral export credit agency (ECA) initiative to keep tradefinanceflowing to Asian
countries undertaking reform programs. In conjunction with the pursuit of policies that maintain
creditworthiness, Ex-Im Bank announced that it is prepared to provide short-term trade insurance of up
to $1 billion each to Indonesia, Korea and Thailand — a major increase from Ex-Im Bank's pre-crisis
level of $62 million.
Providing this support is truly a win-win proposition for the United States: it gives immediate protection
to American exports and jobs, while at the same time speeding the long-term recovery of these important
markets.
In the midst of the crises, all of these efforts will help to keep trade flowing and markets open. But there
is a limit to what they can achieve while thefiresof financial instability are still burning. The overriding
imperative must be to restore stability and growth so that these countries will once again be strong
markets for American goods, and will enjoy the economic conditions conducive to political and social
stability. To support that objective we have:
• given strong United States support to tough IMF-led reform programs in Thailand, Indonesia and
Korea to restore market confidence and lay a surer foundation for growth;
• where these reforms are to be carried out, supported the provision of temporary, conditioned,
international assistance, centered around the IMF, to give countries the financial breathing space
to put their economies back on track;
• encouraged strong action by other economies in the region — especially Japan and China ~ to
promote their collective interest in long-term financial stability and growth;
• stepped-up US-led efforts to strengthen the international financial system to safeguard against
these kinds of crises and respond to them effectively when they do take place.
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Let me say a little about the content of the reform programs we have supported in Asia and the
implications for United States trade.
While each program is tailored to address the specific causes of that country's crisis, the focus
throughout has been on making the economy more market-oriented and better able to allocate capital and
to allow market forces to operate. Important, long overdue changes will need to occur in the structure of
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these economies -- changes which have been welcomed, in many cases by officials in the countries
themselves.
t
The upshot is that these programs will serve a dual purpose for United States exporters and farmers. Not
only will they help stabilize the situation in the short-term and support our existing markets in Asia; they
will also help open up many new markets and opportunities for United States companies and United
States farmers. Specifically:
• Indonesia's stabilization package commits the government to eliminating a range of
officially-sanctioned import and export monopolies, removing export taxes on resource products,
reforming the government procurement process, and accelerating the pace of privatization. Tariffs
on food imports have been cut to a maximum of 5 percent, effective immediately.
• and in Korea, the government will streamline its cumbersome import clearance procedures on
products such as corn grits, soyflakes, and peanuts; it will eliminate trade-related subsidies,
reducing high price supports for rice and beef and reducing the number of agricultural products
subject to tariff rate quotas and noneconomic directed lending to industry will come to an end.
In some ways the IMF has done more in these past few months to liberalize these economies and open
their markets to United States goods and services than has been achieved in rounds of trade negotiations
in the region. And it has done so in a way that serves our critical, short and longer term interest in the
restoration of confidence and growth in this vital part of our world.
III. The Need to Support the IMF
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Everyone here understands the critical role for short-term international support at times of financial
crises — support that can put a floor to a plummeting exchange rate, a declining economy, and a
shrinking capacity to buy imports.
The international community will not help countries who are not committed to helping themselves. But
without short-term outside support, even those countries that are pledged to the right reform policies
might face default — either at a government level or by the financial system as a whole — which could
have devastating effects on their own economies and significantly raise the risks of contagion in other
markets.
This is not just an hypothesis. The world has had ample experience with international financial problems
that do not meet with a cooperative response. A recent Washington Post column talked about what was
for 50 years called America's Great Depression: the events that began in the 1870s, which hit our
farmers worst of all. And of course, an even clearer example of what happened when the United States
was not prepared to lead with respect to international financial problems was provided by events in
Europe in the early 1930s, when devaluation — competitive devaluation ~ deflation, contraction, and
widespread depression laid the ground for what was as great a conflict as human history has seen.
The United States has an immense interest in helping stop these vicious chain-reactions in their tracks.
And in the IMF we have the most effective way for us to provide that help. That is why the United States
needs urgently to follow through on its commitment to support the increase in IMF quotas that was
agreed last year, and contribute to an important new emergency facility, the New Arrangements to
Borrow, to supplement the IMF's resources in these types if situations.
Fifty years of bipartisan support for the IMF has not cost the American taxpayer one cent, because it has
not had a major default, and because its lending is backed by very substantial gold reserves. The IMF
presently has $65 billion in loans outstanding ~ and $40 billion in reserves.
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It operates much like an international credit union. We and other countries provide a line of credit, and
when the IMF draws on our commitments, we receive a liquid, interest bearing offsetting claim on the
IMF. That is why there are no direct budget costs. That is why our contribution does not increase the
deficit, or impact other spending priorities.
The United States has been an active proponent of changes at the IMF to make it more effective in
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support of US interests. In the last three years we have worked to:
I
• adapt the IMF to a world that is much more dominated by capital accounts than any we've had
before, and to one in which greater transparency of international financial and economic data is a
critical bulwark against instability
• ensure the IMF is keenly focused on its primary goal of promoting growth and prosperity for all in
its member countries. By paying closer attention to the needs of the poor in designing adjustment
programs and encouraging governments to cut unproductive expenditures, such as military
spending
• bring the same values that the IMF stresses to its clients ~ of transparency and accountability ~ to
the IMF itself, with much wider publication of IMF internal data, and greater use of external
evaluations.
These are a few examples of where progress is under way. There are other, larger questions that we will
have to face in the months ahead as we learn and distill the lessons from the Asian crisis.
If we are to keep up with the dramatic pace of change in this new global economy, we can and must
update and improve the IMF, just as we must work to improve the entire international financial
architecture of which the IMF is a part. But we must do this in a way that supports rather than
undermines the long-term international financial stability in which American workers, American
farmers, and American companies have such an enormous stake.
Not to support the IMF at this critical time would be a little like canceling one's life insurance when one
has already gotten sick. This is simply not a risk we should take. And it is not a risk the American
taxpayer would want us to take ~ when we can invest in the protection of the IMF at zero cost to our
budget.
t
At this critical time we have a responsibility to do all we can to protect America's core economic and
security interest in an open and prosperous Asia. And that means protecting the IMF's capacity to
respond, not just to today's challenges, but to the challenging new century to come.
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TREASURY NEWS
FROM THE OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE
February 11, 1998
RR-2217
"Emerging From Crisis: the Beginnings of a New Asia"
Remarks by Lawrence H. Summers, Deputy Secretary of the Treasury, Economic Strategy Institute
Thank you for giving me this opportunity to discuss the seismic changes under way in Asia and what
they will mean for the United States.
It is now a little more than seven months since the troubles in Asia first hit the newsstands, with the July
2nd devaluation of the Thai currency. Since that first day the United States has been intensely focused
on finding the right way to restore stability to the region: the right way for American workers and
businesses, the right way for Asia, and the right way for the global economy. These economies have a
long way to go before stability and long-term growth are restored for good. But in many of them, we can
at least say that the core elements of a resolution are starting to fall into place.
I
I will spend a little time today describing the United States' stake in a successful end to these crises. But
my main focus will be on Asia - and the opportunity that these crises afford to put Asian finance on a
firmer long-term footing.
I. Our Stake in Restoring Stability
In an interconnected world, a threat to the growth and stability of Asia is a threat to our own: to
American workers' wages, their savings and their security.
Nearly one third of our exports go to Asia: more than we send to Europe. California, Oregon and other
Western states are even more exposed, with more than half of their exports going to Asia. Already,
major Fortune 500 companies such as Three M, Boeing and Motorola have felt the impact of the crises
in Asia in reduced export orders that will translate into fewer new high-paying jobs, and smaller pay
checks for American workers.
It says something about this new global economy that USA Today now reports every morning on the
day's events in Asian markets. Americans have roughly 2.5 trillion dollars in portfolio investments
overseas. Most important of all, the fate of our investments in markets at home is increasingly linked to
events in markets elsewhere. Federal Reserve figures reported yesterday suggest that Americans now
have nearly 30 percent of their assets invested in the stock market ~ more than they have invested in
their homes, and more than at any time since records began. Prolonged instability in Asian and other
markets stands to have a direct impact on those assets ~ and a direct impact on everything from
investment in tools and equipment for workers to mortgages for new homes.
Finally, we have a core national security stake in resolving these crises because a prolonged financial
crisis threatens the stability of a strategically vital region with a bloody past. We have 100,000 troops
based in Asia, 37,000 on the Korean peninsula alone, and history shows well enough the scope for
financial instability to trigger broader conflicts.
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In short, as Secretary Rubin has said, we have acted to help restore stability in Asia for a clear purpose:
to protect and benefit the American people.
II. Systemic Roots of the Crisis
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While there are enormous differences between these economies and it is easy to over-generalize, I think
it is fair to say that there have been a number of common features of the economic and financial
approach pursed by many Asian countries in what has historically been a tremendously positive period.
It is an approach, in many respects, that tracks the postwar economic success of Japan.
This "Asian" approach to finance was built on the fundamentals - on high savings, high levels of
education and hard work. But it was also an approach that favored centralized coordination of activity
over decentralized market incentives. Governments targeted particular industries, promoted selected
exports, and protected domestic industry. There was a reliance on debt rather than equity,
relationship-driven finance not capital markets, and informal rather than formal enforcement
mechanisms.
While this model has had important and profound successes ~ and while the performance of Asia has
been truly spectacular ~ it is a difficult question of interpretation how much is due to the strong
universal fundamentals of high savings and education and how much due to particular practices distinct
to Asia. Even before the onset of the recent financial problems a reassessment was under way from a
number of quarters:
I
• Japan's disappointing economic performance had led to plans for a "Big Bang" liberalization of
the Japanese financial sector and repeated calls for deregulation of goods and services.
• prominent Korean observer Kim Dae Jung ~ who is now, of course, the President-Elect — had
published books and articles calling for wholesale reform of the Korean economic system: for an
end to government-directed lending to industry, for the promotion of non-inflationary
macroeconomic policies, for reforming the chaebol, and for opening up the financial system.
• respected academic studies of Asia's growth record — by economists such as Paul Krugman,
Alwyn Young, and others — began to suggest that the miraculous growth of Asia might owe
rather little to sustained growth in productivity and a great deal more to rapid accumulation of
labor and capital.
• concerns about the distinct features of these markets began to be raised more forcefully by their
trading partners. In Korea, for example, the close and preferential relationship between the
chaebols, the banks and the government ~ and resulting poor market access and excess capacity has been a mounting source of friction with the United States.
These longer term issues were conflated, in recent years, with a set of shorter term problems of
macroeconomic management: the maintenance of mutually inconsistent monetary policy and exchange
rate regimes; excess inflows of private capital channeled into unproductive investments; substantially
reduced competitiveness; significant failures of debt management that led to unsustainable quantities of
short-term debt. All of these elements - short- and long-term ~ came together to produce these crises,
and were then reinforced by lack of market confidence so as to set up a situation with many of the
features of a bank run.
It is important to recognize that this is a distinct kind of crisis. It has a common element with almost all
financial crises: money borrowed in excess and used badly. But it is also profoundly different because it
does not have its roots in improvidence: excessive budget deficits, excess rates of inflation or
insufficient rates of saving.
The recognition that reform and renewal is essential to shaping effective economic policy ~ both in
countries with major IMF reform programs and in other important economies of the region. Relative to
nearly all of the crises we have seen in recent years, the problems that must be fixed are much more
microeconomic than macroeconomic, and involve the private sector more and the public sector less.
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III. The Challenge of Reform
The critical challenge of reform programs in all these economies is to create an environment that is
conducive to private investment. This means:
• not just restructuring the financial system, but laying the ground for a new one - one in which
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lenders can trust in transparent and independent financial supervision and regulation and effective
bankruptcy laws, work-out procedures and other formal means of enforcement
• not just corporate debt work-outs, but system-wide changes with improved financial and corporate
accounting standards and better disclosure to put corporate governance on a solid footing and
assure shareholders their interests will be protected
• not just an end to government-directed lending, but wholesale market opening and deregulation to
increase the power of market incentives and reduce the scope for official rent-seeking and
corruption — to build a system, in short, which rewards hard work not hard graft, and settles
disputes in the courts not the palace.
The IMF programs in Thailand, Korea and Indonesia commit these governments to taking dramatic steps
toward this kind of systemic reform. To state just one example: by June the Indonesian government is
pledged to abolish a dozen officially sanctioned monopolies that have dominated a whole swathes of the
economy for decades - including every pad of paper sold in country, every piece of timber, and every
sack of flour.
These changes are important with respect to both Asia's shorter and longer term imperatives: they will
increase confidence and attract private capital in the short run. And they address the longer term problem
of allocating capital on a more market-oriented basis. They are also important for the International
Community because a more market-oriented Asia will be a better trading partner, better able to grow and
finance our imports and less likely to distort markets with excess capacity, excess concentration of
industry and selective protection.
HI. The Regional Underpinnings for Growth
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An important aspect of this crisis is its regional dimension. Disturbances are transmitted from country to
country and market to market in several ways. That makes each link of the chain important. All of the
economies of the Asia- Pacific need to respond to the crises by pursuing sound policies aimed at
promoting their shared interest in sound finance and solid growth.
The two dominant economies of Asia, China and Japan, have a special role to play in contributing to a
resolution of the current crisis.
When we talked recently with Zhu Rhongji, the Chinese Vice Premier, in Beijing we were happy to hear
him reaffirm China's commitment to a stable exchange rate, and to implementing long-needed reforms in
China's own, debt-laden state financial system. He clearly recognizes the importance to regional
financial stability of exchange rate stability in China.
Japan has played an important role in helping catalyze the international response to the Asian crisis, and
has a made a substantial financial commitment to the countries in crisis. But as Anwar Ibrahim, the
Deputy Prime Minister of Malaysia, recognized earlier this week, the most important contribution Japan
could make to the restoration of stability and growth in Asia is to take the steps necessary to strengthen
domestic demand, deregulate its economy and open it up to imports, and resolve its financial problems.
The Prime Minister took important steps late last year to cut taxes and increase expenditures. But these
were modest steps. Even by the Japanese government's estimates, they still leave Japanese fiscal policy
contractionary for FY 1998. And as a result, confidence in the outlook for the Japanese economy has
deteriorated since these steps were announced.
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Over the last several weeks there have been encouraging signals from some ruling party politicians and
some officials that additionalfiscalmeasures may be forthcoming soon. This has been well received by
the financial markets, but virtual policy is not enough. Substantial, early additional fiscal action is
critically important, not just for Japan, but for the region as a whole.
Japan has outlined some proposals to help shore up its banking system. The most important and
constructive of these is the proposal to put more public money behind the government's guarantee of
deposits in the banking system. Many of the other proposals are still not well defined. How they are
defined and implemented will be important, for most of the established experience in confronting these
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problems suggests that the ultimate success of the strategy will depend on the degree to which the
approach focusses on a number of critical goals:
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•
•
•
•
on providing clear and transparent rules for the use of public money
on instilling confidence among depositors, not protecting managers
on strengthening viable banks, not propping up weak ones
and, finally, on attaching clear conditions on the receipt of money, so shareholders bear their fair
share of the burden.
IV. The Reforms Ahead: Not a Bail-out But a Beginning
I have tried to make clear the stake the United States has in a successful outcome in Asia. And I have
tried to make clear the approach we are supporting. A central part of political debate involves support for
the IMF, which has played a large role in financing these programs.
In considering the merits of support for the IMF it is useful to recall what would happen on these
occasions if there were no IMF: there would be no conditioned reform; there would be no internationally
recognized source of apolitical advice; there would be further devaluations and greater reductions in
these countries' capacity to purchase our goods; there would be more pressure on the United States to act
unilaterally with taxpayer resources.
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We might have a different debate if IMF imposed a real cost on American taxpayers, but the crucial
thing to recognize is that it does not. Appropriations for the IMF are scored as a zero net cost to the
budget. It is difficult to know what the impact of the Asian financial crisis will be on the United States
economy, but if it is one half of one percent of GDP, as many observers suggest, this would translate
directly into higher budget deficits over the next two years. By contrast, through fifty years of bipartisan
support for the IMF has not cost the American taxpayer one cent, because it has not had a major default,
and because its lending is backed by very substantial gold reserves. The IMF presently has $65 billion in
loans outstanding - and fully $40 billion in reserves. It operates much like an international credit union.
We and other countries provide a line of credit, and when the IMF draws on our commitments, we
receive a liquid, interest bearing offsetting claim on the IMF. That is why there are no direct budget
costs. That is why our contribution does not increase the deficit, or impact other spending priorities.
There are legitimate questions that are debated within the IMF about how these programs should best be
handled. In the immediate response to the crises, some difficult trade-offs have to be made. In particular:
• the macroeconomic aspects of these programs need to be designed to balance the imperative to
prevent further declines in markets and a free-falling currency, on the one hand, and the
imperative of avoiding further knocks to domestic demand, on the other.
• equally, in seeking to bolster the financial system, international and domestic policy makers must
weigh the long-term need to ensure investors take responsibility for their actions against the
short-term necessity to prevent confidence declining further.
The IMF will not get these trade-offs right on every occasion — and nor will the officials in the countries
themselves. But one thing is clear: the IMF and the governments implementing these programs are
agreed on the overarching goal: the restoration of lasting and sustainable growth.
We have worked vigorously to bring about change at the IMF: by creating mechanisms for it to lend at
premium rates in short-term crises to improve borrower incentives; by increasing IMF transparency and
accountability through wider publication of IMF documents and more frequent publication of the Letters
of Intent for programs; by successfully insisting that the IMF focus on the need to prevent the burden of
adjustment falling heavily on the poor.
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There will be a need for more of these kinds of changes. But not to fund the IMF now would be a little
like canceling your life insurance policy when you have already gotten sick. It is simply not a risk that
we should take. Nor is it a risk Americans would want us to take - especially when we can invest in the
protection by the IMF at zero cost to our budget.
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Let me be clear on one final point. Our involvement in this crises is not about charity or comity with
other nations: it is about a hard-headed assessment of United States interests. Being involved in
supporting reform — and stabilizing financial markets — in Asia is as good an investment in the future of
our economy and living standards and security of American workers as we are likely to find. Thank you.
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9/10/98 11:55 AM
��THE WHITE HOUSE
Office of the Press Secretary
(Geneva, Switzerland)
For Immediate Release
May 18, 1998
REMARKS BY THE PRESIDENT
AT THE COMMEMMORATION OF THE 50TH ANNIVERSARY
OF THE WORLD TRADE ORGANIZATION
Palais des Nations
Geneva, Switzerland
7:48 P.M. (L)
THE PRESIDENT: Thank you very much, Director General Ruggiero, Federal
Counselor Couchepin, your Excellencies, thank you for the opportunity to address you on this
most important occasion.
Near the end of World War II, as leaders and ordinary citizens began to dream of a
system that would prevent a return to war, President Franklin Roosevelt asked the people of the
United States and the world to look ahead to peace with these words: He said, "A basic essential
to permanent peace is a decent standard of living for all individual men and women and children
in all nations. Freedom from fear is eternally linked with freedom from want."
It was that understanding that led a farsighted generation of postwar leaders,
determined to avoid past errors of protectionism and isolationism, to embrace what was then still
a revolutionary idea, that freedom ~ freely-elected governments, free markets, the free flow of
ideas, the free movement of people - would be the surest route to the greatest prosperity for the
largest number of people.
They were also confident that growing economic interdependence would lead to
greater peace among nations. The economic alliances and institutions they created ~ the IMF,
the World Bank, the GATT ~ built a platform for prosperity and peace that has lasted down to
the present day.
In the fullness of time, events have confirmed the convictions of the founders of the
international system. World trade has increased fifteenfold; average tarrifs have declined by 90
percent; the trading community has grown from 23 nations to 132, with 31 more working to join.
Russia and China, where the shackles of state socialism once choked off enterprise, are
�moving to join the thriving community of free democracies. Trade is creating prosperity among
the nations of the Americas and offers hope to the emerging economies of Africa and Asia.
On the edge of a new millennium, our people are creating a new economy, a very
different one from that our founders faced 50 years ago. The new one is driven by technology,
powered by ingenuity, rewards knowledge and teamwork, flexibility and creativity, and draws us
closer across the lines that have divided us for too long.
On any given day, over 3 million people take to the air on commercial flights. Three
decades ago, phone lines could only accommodate 80 calls at one time between Europe and the
United States. Today, they can handle one million calls at one time. In the United States alone,
economic output has tripled while the physical weight of goods produced has barely changed.
The world's new wealth largely comes from the power of ideas.
This new global economy of ideas offers the possibility, but not the guarantee, of lifting
billions of people into a worldwide middle class and a decent standard of living, the opportunity
to give their children a better life. Yet it also contains within it, as we all know, the seeds of new
disruptions, new instabilities, new inequalities, new challenges to the balance of work and
family, of freedom and security, of equal opportunity and social justice, of economic growth and
a sustainable environment.
The challenege of the millennial generation here gathered is, therefore, to create a world
trading system, attuned both to the pace and scope of a new global economy and to the enduring
values which give direction and meaning to our lives. We took the first vital step when we
created the World Trade Organization in 1995, a goal that had alluded our predecessors for
nearly half-century. The Uruguay Round that founded the WTO amounted to the biggest tax cut
in history — $76 billion a year when fully implemented. Since that event, world trade has
increased by 25 percent. Since 1995, we also have begun to build an infrastructure for this new
economy, with historic agreements on information technolgy, telecommunications, and finacial
services, which together affect trillions of dollars in global commerce every year.
At the G-8 Summit just concluded in Birmingham, the leaders worked on ideas to
strengthen the international financial architecture so that private capital markets can spur rapid
growth while minimizing the risk of worldwide economic instability. Now, we must build on
these achievements with a new vision of trade to construct a modern WTO for the 21st century.
I would like to offer you my suggestions.
First, we must pursue an ever more open global trading system. Today let me state
unequivically that America is committed to open trade among all nations. Economic freedom
and open trade have brought unprecedented prosperity in the 20th century; they will widen the
circle of opportunity dramatically in the 21st. One-third of the strong economic growth we have
enjoyed in America these past five years was generated by trade. For every country engaged in
trade, open markets dramatically widen the base of possible customers for our goods and
services. We must press forward.
�Redoubling our efforts to tear down barriers to trade will spur growth in all our
countries, creating new businesses, better jobs, higher incomes, and advancing the free
flow of ideas, information, and people that are the life blood of democracy and prosperity. At the
U.S.-EU Summit in London today, we embraced this goal and committed ourselves to reducing
barriers and increasing trade in a dozen important areas.
No matter how much some people might wish otherwise, globalization and the
technology revolution are not policy choices, they are facts. The choice is whether we shape
these forces of a new economy to benefit our people and advance our values, or retreat behind
walls of protection to be left behind in the race for the future.
At a moment when, for the first time in all human history a majority of the world's
people live under governments of their own choosing; when the argument over which is better ~
free enterprise or state socialism — has been won; when people on every continent seek to join
the free market system, those of us who have benefitted most from this system and led it must
not turn our backs. For my part, I am determined to pursue an aggressive market open strategy in
every region of the world. And I will continue to work with members of our Congress, in both
parties, to secure fast track negotiation authority.
Second, we must recognize that in this new economy, the way we make trade rules and
conduct trade affects the lives, daily ~ and the livelihoods, and the health, and the safety of
ordinary families all over the world. Therefore, our efforts to make the trading system more
open must themselves be made more open.
In order to build a trading system for the 21st century that honors our values and expands
opportunity, we must do more to ensure that spirited economic competition among nations never
becomes a race to the bottom ~ in environmental protections, consumer protections, or labor
standards. We should be leveling up, not leveling down. Without such a strategy, we cannot
build the necessary public support for continued expansion of trade. Working people will only
assume the risks of a free international market if they have the confidence that the system
will work for them.
The WTO was created to lift the lives of ordinary citizens. It should listen to them. I
propose the WTO for the first time, provide a consultative forum where business, and labor, and
environmental, and consumer groups can provide regular and continuous input to help guide
further evolution of the WTO. The U.S. and the EU agreed today to provide such a forum as part
of our new trade agenda. It is far more important for the WTO to follow suite. When this body
convenes again, the world's trade ministers should sit down with representatives of the broader
public to begin to do this.
Third, we must actually do more to harmonize our goals of increasing trade and
improving the environment and working conditions. Expanded trade can and should enhance the
environment. Indeed, the WTO agreement, in its preamble, explicity adopts sustainable
development as an objective of open trade, including a commitment to preserve the environment
and to increase the capacity of nations to do so. Therefore, international trade rules must permit
�soverign nations to exercise their rights to set protective standards for health and safety, the
environment, and biodiversity. Nations have a right to pursue those protections, even when they
are stronger than international norms.
I am asking that a high-level meeting be convened to bring together trade and
environmental ministers to provide strong direction and new energy to the WTOs environmental
efforts in the years to come — a suggestion that has already been made by Sir Leon Brittan of the
European Commission.
Likewise, the WTO and the International Labor Organization should commit to work
together to make certain that open trade does lift living standards and respects the core labor
standards that are essential not only to worker rights, but to human rights. I ask the two
organizations' Secretariats to convene at a high level to discuss these issues.
This weekend, the G-8 leaders voiced support for the ILOs adoption of a new declaration
and a meaningful follow-up mechanism on core labor standards when the ILO ministers meet
next month here in Geneva. I hope you will add your support. We must work hard to ensure that
the ILO is a vibrant institution. Today, I transmitted to our Senate for ratification the ILO
convention aimed at eliminating discrimination in the workplace.
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Because this new economy is based on ideas, information, and technology, the return on
investment in education has never been higher. And the adverse consequences of being without
skills has never been greater. These trends cannot be reversed. Our goal, therefore, must be to
help more people benefit from the possibilities of the new economy, even as we ensure that the
forces of technology and new trade patterns do not aggravate inequality or reinforce poor labor
conditions.
Here I must add ~ even as we do more to harmonize our goals of more trade and higher
incomes for ordinary people, each nation must do more to provide universal access to quality
education and training. Without that, no trade rules, however wisely conceived or effected, can
guarantee individual success to the people we are really trying to reach.
Fourth, we must modernize the WTO by opening its doors to the scrutiny and
participation of the public. Through long trial and error, we have learned that governments work
best when their operations are open to those affected by their actions. As American Supreme
Court Justice Lewis Brandeis said a long time ago, "sunshine is the best of disinfectants."
The WTO should take every feasible step to bring openness and accountability to its
operations. Today, when one nation challenges the practices of another, the preceeding takes
place behind closed doors. I propose that all hearings by the WTO be open to the public, and all
briefs by the parties be made publicly available. To achieve this, of course, would require a
change in the rules of this organization. But each of us could do our part now. The United States
today formally offers to open up every panel we are a party to, and I challenge every other
nation to join us in making this happen.
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Today, there is no mechanism for private citizens to provide input in these trade disputes.
I propose further that the WTO provide the opportunity for stakeholders to convey their
views, such as the ability to file amicus briefs to help inform the panels in their deliberations.
Today, the public must wait weeks to read the reports of these panels. I propose that the
decisions of the trade panels be made available to the pubic as soon as they are issued.
Fifth, we must have a trading system that taps the full potential of the Information Age.
This revolution in information technology is the greatest force for prosperity in our lifetimes.
The Internet is the fastest growing social and economic community in history, a phenomenon
with unimagined revolutionary potential to empower billions around the world. It has been
called the "death of distance," making it possible for people to work together across oceans as if
they were working together across the hall.
When I became President, there were only 50 sites on the World Wide Web. Four years
ago, there were still less than 3 million people with access to the Internet. Today, there are over
100 million people, with the number doubling every year.
Today, there are no customs duties on telephone calls, fax messages, e-mail or computer
data links when they cross borders. We have spent 50 years tearing down barriers to trade in
goods and services. Let us agree that when it comes to electronic commerce, we will not erect
these barriers in the first place. I ask the nations of the world to join the United States in a
standstill on any tariffs on electronic transmissions sent across national borders. We cannot
allow discriminatory barriers to stunt the development of the most promising new
economic opportunity in decades.
Earlier today at the Summit of the EU, we agreed to deepen our collaboration in this
area. And last week, the Japanese Prime Minister, Mr. Hashimoto, and I , agreed to move
forward together with a market-oriented, private-sector-led approach to enhance privacy, protect
intellectual property, and encourage the free flow of information and commerce on the Internet. I
hope we can build a consensus that this is the best way to harness the remarkable potential of this
new means of communication and commerce.
Sixth, a trading system for the 21st century must be comprised of governments that are
open, honest, and fair in their practices. In an era of global financial markets, prosperity depends
upon government practices that are based upon the rule of law rather than beaurocratic caprice,
cronyism, or corruption. Investors demand it. And their loss of confidence can have sudden,
swift, and severe consquences, with ripples throughout entire regional economies.
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With its insistence on rules that are fair and open, the WTO plays a powerful role toward
open and accountable government. But the WTO must do more. When we meet next year, all
members of the WTO should agree that government purchases should be made through open and
fair bidding. This single reform can open up $3 trillion worth of business to open competition
around the world. And I ask every nation to adopt the antibribery convention developed by the
OECD. Both these steps would promote both investor confidence and stability.
�Finally, we must develop an open global trading system that moves as fast as the global
marketplace. In an era in which new products lifecycles are measured in months, and
information and money move around the globe in seconds, we simply can no longer afford to
take seven years to finish a trade round — as happened during the Uruguay Round ~ or to let
decade pass between identifying and acting on a trade barrier we all know
ought to fall.
In the meantime, new industries arise, new trading blocs take shape, and governments
invent new trade barriers every day. We should explore what new type of trade negotiating
round or process is best suited to the new economy. There must be a way to tear down barriers
without waiting for every issue in every sector to be resolved before any issue in any sector is
resolved. There must be a way to do this that is fair and balanced to nations large and small, rich
and poor. Surely we can negotiate trade agreements in a way that is faster and better than the
way we have followed to date.
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For example, agriculture -- which I understand has been discussed quite a bit here ~ is at
the heart of our economy and many of yours. Tearing down barriers to global trade is, I believe,
critical to meeting the food needs of a growing world population. Starting next year, we should
aggressively begin negotiations to reduce tariffs and subsidies, and other distortions that restrict
productivity and the best allocation of food. We must develope rules rooted in science to
encourage the full fruits of biotechnology. And I propose that even before negotiations near
conclusions, WTO members should pledge to continue making annual tariff and subsidy
reductions so that there is no pause in reform.
We have to recognize that the fastest growing area of economic activity in the world is
services ~ the one least disciplined by WTO rules. So when services negotiations are launched, I
think it is essential to engage in wide-ranging discussions to ensure openness for dynamic service
sectors, such as express delivery, environmental, energy, audiovisual, and professional services.
We have to continue our strong momentum to dismantle industrial tariffs. A good place
to start would be an agreement on the sectors from chemicals to environmental technologies
proposed by APEC. And we must move forward in strengthening intellectual property
protection.
These are my proposals for a 21 st century trading system — one that is more open and
accountable; one that listens to the voices of citizens; that works to protect the environment,
and lift the lives and incomes of ordinary people; one that is in sync with the Information Age;
that promotes honest, effective government; and that makes better, faster decisions. In short, a
trading system based on the new economy and old, enduring values. To move forward, I am
inviting the trade ministers of the world to hold their next meeting in 1999 in the United States.
I ask you to think about the opportunity that has been presented to all of us ~ the chance
to create a new international economy in which open markets and open economies spark
undreamed of innovation and prosperity; in which the skills of ordinary citizens power the
prosperity of entire nations; in which the global economy honors those same values that guide
�families in raising their children and nations in developing good citizens; in which poor people,
at last, find opportunity, dignity, and a decent life; in which increasing interdependence among
nations enhances peace and security for all.
This will be the world of the 21st century if we have the wisdom and determination, the
courage and the clarity of our forebears 50 years ago.
Thank you very much.
END
8:13 P.M. (L)
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vi\4cu/Cx0ffice of the Press Secretary
(Moscow,Russia)
For Immediate Release
September 1, 1998
REMARKS BY THE PRESIDENT TO THE NEXT GENERATION OF RUSSIAN LEADERS
University Auditorium
Moscow University of International Relations
Moscow, Russia
4:50 P.M. (L)
THE PRESIDENT: Thank you very much. First I'd like to thank Maxim Safonov for
that fine introduction and for his very encouraging remarks. Rector Torpoulov, Minister
Primakov, to all the members of the American delegation — we have Secretary of State Albright,
Secretary of Commerce Daley, Secretary of Energy Richardson, National Security Adviser
Berger, our Ambassador Jim Collins, and five distinguished members of the United States
Congress here: Senator Domenici; Senator Bingaman; Representative Hoyer, King, and Deutsch.
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I think their presence here should speak louder than any words I could say that America
considers our relationship with Russia to be important. It is a relationship of friendship, of
mutual responsibility, and of commitment to the future. We are all honored to be here today, and
we thank you for your welcome.
On this first day of school, across both our countries, students are resuming their studies,
including their study of history. At this critical, surely historic, moment, let me start with a few
words about what I believe the past can teach us as we, and especially as the Russian people, face
the challenges of the present and the future.
Two hundred and twenty-two years ago, we Americans declared our freedom from the
tyranny of King George of England. We set out to govern ourselves. The road has not often —
or certainly not always — been easy. First, we fought a very long war for independence. Then it
took more than 10 years to devise a Constitution that worked. Then in 1814, we went to war
with England again. They invaded our capital city and burned the President's house, the White
House. Then in 1861, we began our bloodiest war ever, a civil war, fought over the conflicts of
slavery. It almost divided our country forever, but instead we were reunited and we abolished
slavery.
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In the 1930s, before World War II, our county sank into an enormous depression with 25
percent of our people unemployed, and more than one-third of our people living in poverty.
Well, you know the rest. We were allies in World War II, and after World War II we were
adversaries. But it was a time of great prosperity for the American people, even though there
�were tense and difficult moments in the last 50 years.
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The larger point I want to make as Russia goes through this time of extreme difficulty is
that over the life of our democracy we have had many intense, even bitter, debates about what are
the proper relations between people of different races or religions or backgrounds; over the gap
between rich and poor; over crime and punishment; even over war and peace. We Americans
have fought and argued with each other ~ as we do even today. But we have preserved our
freedom by remembering the fundamental values enshrined in our Constitution and our
Declaration of Independence; by continuing to respect the dignity of every man, woman, and
child; to tolerate those with different ideas and beliefs than our own; to demand equality of
opportunity; to give everyone a chance to make the most of his or her life.
Russia's great ally in World War II, our President, Franklin Roosevelt, said that
democracy is a never-ending seeking for better things. For Americans, that means, in good times
and bad, we seek to widen the circle of opportunity, to deepen the meaning of our freedom, to
build a stronger national community.
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Now, what does all that got to do with Russia in 1998? Your history is much longer than
ours, and so rich with accomplishment — from military victories over Napoleon and Hitler; to the
literary achievements of Pushkin, Tolstoy, Chekhov, Pasternak, and so many others; to greater
achievements in art, music, dance, medicine, science, space flight.
Yet for all your rich, long history, it was just seven years ago that Russia embarked on its
own quest for democracy, liberty, and free markets — just seven years ago — a journey that is
uniquely your own and must be guided by your own vision of Russia's democratic destiny.
Now you are at a critical point on your journey. There are severe economic pressures and serious
hardships which I discussed in my meetings with your leaders this morning. The stakes are
enormous. Every choice Russia makes today may have consequences for years and years to
come. Given the facts before you, I have to tell you that I do not believe there are any painless
solutions; and, indeed, an attempt to avoid difficult solutions may only prolong and worsen the
present challenges.
First, let me make a couple of points. The experience of our country over the last several
years, and especially in the last six years, proves that the challenges of the global economy are
very great, but so are its rewards. The Russian people have met tremendous challenges in the
past. You can do it here. You can build a prosperous future. You can build opportunity and
jobs for all the people of this land who are willing to work for them, if you stand strong and
complete ~ not run from, but complete the transformation you began seven years ago.
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d point I want to make is the rest of the world has a very large stake in your
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success. Today, about a quarter of the world's people are struggling with economic challenges
•\3 Vtyprofound — the people of your country; the people in Japan, who have had no economic
£ > | ^ ^ I ) " ~ growth for five years - it's still a very wealthy country, but when they don't have any growth it's
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harder for all other countries that trade with them who aren't so wealthy to grow ~ other
countries in Asia. And now we see when there are problems in Russia or in Japan or questions
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about the economy of China, you see all across the world the stock market in Latin America
drops; you see the last two days we've had big drops in the American stock market.
What does that say? Well, among other things, it says, whether we like it or not, we must
build the future together, because, whether we like it or not, we are going to be affected by what
we do. We will be affected by what you do; you will be affected by what we do. We might as
well do it together and make the most of it.
Now, in terms of what has happened in America, obviously it's always more enjoyable
when our stock market goes up than when it goes down. But I have talked to our Secretary of the
Treasury about this several times since yesterday. I want to reiterate the point that I think is
important for Russia, for America, for every country: we believe our fundamental economic
policy is sound; we believe our people are working at record rates; and we are determined to stay
on a path of fiscal discipline that brought us to where we are. I think that wherever there are
markets there will always be changes in those markets. But we must attempt to move in the right
direction.
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And that's what I want to talk to you about today: How can we move in the right
direction? When I look at all the young people here today — and I have read about you and your
background, young people from all over Russia, seizing the possibilities of freedom to chart new
courses for yourselves and your nation, making a difference by building businesses from modest
loans and innovative ideas, by taking technologies created for weapons and applying them to
human needs, by finding creative government solutions to complex problems, by improving
medical care and fighting disease, by publishing courageous journalism, exposing abuses of
power, producing literature and art and scholarship, changing the way people see their own lives,
organizing citizens to fight for justice and human rights and a cleaner environment, reaching out
to the world. In this room today, there are young people doing all those things. That should
give you great reason to hope.
You are at the forefront of building a modern Russia. You are a new generation. You do
represent the future of your dreams. Your efforts today will not only ensure better lives for
yourselves, but for your children and generations that follow.
I think it is important to point out, too, that when Russia chose freedom it was not
supposed to benefit only the young and well educated, the rich and well connected; it was also
supposed to benefit the men and women who worked in factories and farms and fought the wars
of the Soviet era, those who survive today on pensions and government assistance. It was also
supposed to benefit the laborers and teachers and soldiers who work every day but wait now for
pay checks.
I
The challenge is to create a new Russia that benefits all responsible citizens of this
country. How do you get there? I do not believe it is by reverting to the failed policies of the
past. I do not believe it is by stopping the reform process in midstream, with a few Russians
doing very well but far more struggling to provide for their families. I believe you will create the
conditions of growth if, but only if, you continue to move decisively along the path of
democratic, market-oriented, constructive revolution.
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The Russian people have made extraordinary progress in the last seven years. You have
gone to the polls to elect your leaders. Some 65 to 70 percent of you freely turn out in every
election. People across Russia are rebuilding diverse religious traditions, launching a wide range
of private organizations. Seventy percent of the economy now is in private hands. Not
bureaucrats, but consumers determine what goods get to stores and where people live. You have
reached out to the world with trade and investment, exchanges of every kind, and leadership in
meeting security challenges around the globe.
Now you face a critical moment. Today's financial crisis does not require you to abandon
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h toward freedom and free markets. Russians will define Russia's future, but there are
clear lessons, I would argue, from international experience. Here's what I think they are.
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First, in tough times governments need stable revenues to pay their bills, support salaries,
pensions, and health care. That requires decisive action to ensure that everyone pays their fair
share of taxes. Otherwise, a few pay too much, many pay too little, the government is in the hole
and can never get out, and you will never be able to have a stable economic policy. It is tempting
for everyone to avoid wanting to pay any taxes. But if everyone will pay their fair share, the
share will be modest and their incomes will be larger over the long run because of the stability
and growth it will bring to this Russian economic system.
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Second, printing money to pay the bills and bail out the banks does not help. It causes
inflation and ultimately will make the pain worse.
Third, special bail-outs for a privileged few come at the expense of the whole nation.
Fourth, fair, equitable treatment of creditors today will determine their involvement in a
nation tomorrow. The people who loan money into this nation must be treated fairly if you want
them to be loaning money into this nation four years, five years, ten years hence.
These are not radical theories, they are simply facts proven by experience. How Russia
^ g r j ^ » w e a c t s to them will fundamentally affect your future. Surviving today's crisis, however difficult
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' beginning. To create jobs, growth, and higher income, a nation must
convince its own citizens and foreigners that they can safely invest. Again, experience teaches
what works: fair tax laws and fair enforcement; easier transferability of land; strong intellectual
property rights to encourage innovation; independent courts enforcing the law consistently and
upholding contract rights; strong banks that safeguard savings; securities markets that protect
investors; social spending that promotes hope and opportunity and a safety net for those who in
any given time in an open market economy will be dislocated; and vigilance against hidden ties
between government and business interests that are inappropriate.
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Now, this is not an American agenda. I will say it again: this is not an American agenda.
These are the imperatives of the global marketplace, and you can see them repeated over and
over and over again. You can also see the cost of ignoring them in nation after nation after
nation.
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Increasingly, no nation, rich or poor, democratic or authoritarian, can escape the
fundamental economic imperatives of the global market. Investors and entrepreneurs have a very
wide and growing range of choices about where they put their money. They move in the
direction of openness, fairness, and freedom. Here, Russia has an opportunity. At the dawn of a
new century there is a remarkable convergence; increasingly, the very policies that are needed to
thrive in the new economy are also those which deepen democratic liberty for individual citizens.
This is a wealthy country. It is rich in resources; it is richer still in people. It has done a
remarkable job of providing quality education to large numbers of people. You have proven over
and over and over again in ways large and small that the people of this county have a sense of
courage and spirit, an unwillingness to be beat down and to give up. The future can be very,
very bright.
But we can't ignore the rules of the game, because if there is a system of freedom, you
cannot take away and no country ~ not even the United States with the size of our economy ~ no
country is strong enough to control what millions and millions and millions of people decide
freely to do with their money. But every country will keep a large share of its own citizens'
money and get a lot of money from worldwide investors if it can put in place systems that abide
by the rules of international commerce. And all Russia needs is its fair share of this investment.
You have the natural wealth, you have the people power, you have the education; all you need is
just to get your fair share of the investment.
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Now, 21st century economic power will rest on creativity and innovation. I believe the
l\-fCyoung people in this room think they can be as creative or innovative as anyone in the world. It
will rest on the free flow of information. It will rest on ideas. Consider this, those of you who
are beginning your careers: America's three largest computer and software companies are now
worth more than all the American companies in our steel, automotive, aerospace, chemical and
plastics industries combined ~ combined — our three biggest computer companies.
The future is a future of ideas. No nation will ever have a monopoly on ideas. No people
will ever control all the creative juices that flow in the human spirit, more or less evenly across
the world. You will do very well if you just get your fair share of investment. To get your fair
share of investment, you have to play by the rules that everyone else has to play by. That's what
this whole crisis is about. No one could ever have expected your country to be able to make this
transition without pain. You've only been at this seven years.
Look at any European country that has had an open market society for decades and
decades and decades. They have hundreds, indeed thousands, of little organizations, they have
major national institutions that all tend to reinforce these rules that I talked about earlier. Don't
be discouraged, but don't be deterred. Just keep working until you get it in place. Once you get
it in place, Russia will take off like a rocket, because you have both natural resources and people
resources.
Now, I think it's important to point out, however, that economic strength — let's go back
to the rules — it depends on the rule of law. If somebody from outside a country intends to put
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money into a foreign country, they want to know what the rules are. What are the terms on
which my money is being invested? How will my investment be protected? I f l lose money, I
want to know it's because I made a bad decision, not because the law didn't protect my money. It
is very important. Investors, therefore, seek honest government, fair systems — fair for
corporations and consumers, where there are strong checks on corruption and abuse of authority
and openness in what the rules are on how investment capital is handled.
Economic strength depends on equality of opportunity. There must be strong schools and
good health care, and everyone must have a chance to share in the nation's bounty. And
economic power must lie with people who vote their consciences, use new technologies to spread
ideas, start organizations to work for change, and build enterprises of all kinds.
t
Now, some seek to exploit this power shift that's going on in the world to take advantage
of their fellow citizens. When this nation went from the old communist command and control
system to an open free system, without all the intermediate institutions and private organizations
that it takes years to build up, vacuums were created. And into those vacuums, some moved with
an intent to exploit their fellow citizens to enrich themselves without regard to fairness or safety
or the future. The challenges for any citizen — this is not Russia specific —this would have
happened, and has happened, in every single country that has had to make this transition. There's
nothing inherently negative about this development. It is as predictable as the sun coming up in
the morning. Every country has had to face this. But you must overcome it.
You must have a state that is strong enough to control abuses: violence, theft, fraud,
bribery, monopolism. But it must not be so strong that it can limit the legitimate rights and
dreams and creativity of the people. That is the tension of creating the right kind of democratic
market society.
The bottom line is that the American people very much want Russia to succeed. We
value your friendship, we honor your struggle. We want to offer support as long you take the
steps needed for stability and progress. We will benefit greatly if you strengthen your democracy
and increase your prosperity.
Look what our partnership has already produced. We reversed the dangerous buildup of
nuclear weapons. We're two years ahead of schedule in cutting nuclear arsenals under START I .
START II, which still awaits ratification in the Duma, will reduce our nuclear forces by twothirds from Cold War levels. President Yeltsin and I already have agreed on a framework for
START III to cut our nuclear arsenals even further.
For you young people, at a time when India and Pakistan have started testing nuclear
weapons, America and Russia must resume the direction the world should take away from
nuclear weapons, not toward them. This is a very important thing.
t
We are working to halt the spread of weapons of mass destruction. We signed the
Comprehensive Nuclear Test Ban Treaty with 147 other countries. We're working to contain the
arms race between India and Pakistan, to strengthen controls on transfers of weapons
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technologies, to combat terrorism everywhere.
Our bonds are growing stronger, and as they do we will move closer to our goal of a
Europe undivided, democratic, and at peace. We reached agreement for greater cooperation
between NATO and Russia. And our soldiers serve side by side, making peace possible in
Bosnia.
We don't always agree, and our interests aren't always identical. But we work together
more often than not, and the world is a better place as a result. Building peace is our paramount
responsibility, but there is more we must do together. One thing we need to do more together is
prove that you can grow the economy without destroying the environment.
A great man looking at the condition of the environment charged that humanity was a
destroyer. He wrote, "Forests keep disappearing; rivers dry up; wildlife has become extinct; the
climate is ruined; the land grows poorer and uglier every day." Chekhov wrote those worlds 100
years ago. Just imagine his reaction to the present environmental conditions, with toxic pollution
ruining our air and water, and global warming threatening to aggravate flooding and drought and
disease.
s
Together, we can create cleaner technologies to grow our economies without destroying
the world's environment and imperiling future generations. Together, we can harness the genius
of our citizens not for making weapons, but for building better communications, curing disease,
combatting hunger, exploring the heavens. Together, we can reconcile societies of different
people with different religions and races and viewpoints, and stand against the wars of ethnic,
religious, and racial hatred that have dominated recent history.
If we stand together and if we do the right things, we can build that kind of world. If the
people of Russia stand for economic reform that benefits all the people of this country, America
will stand with you. As the people of Russia work for education and scientific discovery; as they
stand against corruption and for honest government, against the criminals and terrorists and for
the safety of ordinary citizens, against aggression and for peace, America will proudly stand with
you. It is the right thing to do, but it is also very much in the interest of the American people to
do so.
I was amazed there were some doubters back in America who said perhaps I shouldn't
come here because these are uncertain times politically and economically. And there are
questions being raised in the American press about the commitment of Russia to the course of
reform and democracy. It seems to me that anybody can get on an airplane and take a trip in
good times, and that friends come to visit each other in challenging and difficult times.
t
I come here as a friend, because I believe in the future of Russia. I come here also
because I believe someone has to tell the truth to the people, so that you're not skeptical when
your political leaders tell you things that are hard to hear. There is no way out of playing by the
rules of the international economy if you wish to be a part of it. We cannot abandon the rules of
the international economy. No one can.
�t
There is a way to preserve the social safety net and the social contract and to help the
people who are too weak to succeed. There is a way to do that. And there are people who will
help to do that. But it has to be done. So I come here as a friend. I come here because I know
that the future of our children and the future of Russia's young people are going to be entwined,
and I want it to be a good future. And I believe it can be.
Recently, a woman from Petrozavodsk — I hope I pronounced that right, Petrozavodsk — wrote
these words about your people, who won World War II and rebuilt from the rubble. Listen to
this. She said, we survived the ruins, the devastation, the hunger, and the cold. Is it not possible
that our people can do this again? If people raise themselves, they can move mountains. Toward
what end? Pushkin once said that so long as we burn with freedom, we can fulfill the noble
urges of our souls.
In all this dry and sometimes dour talk about economics andfinance,never forget that,
whatever your human endeavor, the ultimate purpose of it is to fulfill the noble urges of your
soul. That is the ultimate victory the Russian people will reap if you will see this process
through to the end. I hope you will do that and I hope we will be able to be your partners every
step of the way.
Thank you very much.
t
END
5:24 P.M. (L)
��THE WHITE HOUSE
Office of the Press Secretary
(Dublinjreland)
Embargoed For Release Until 10:06 A.M. EDT
September 5, 1998
RADIO ADDRESS BY THE PRESIDENT TO THE NATION
Ambassador's Residence
Dublin, Ireland
THE PRESIDENT: Good morning. On this Labor Day Weekend, when we celebrate the dignity
of work and enjoy the fruits of our labor, I want to talk to you about the continuing strength of
America's economy and what we must do to continue our progress in the face of increasing
uncertainty in the global economy.
As you know, I am just completing a trip to Russia, which has had a great deal of
difficulty as a result of the loss of investment from overseas; and to Ireland, which has done
much, much better because of its commitment to open trade and its ability to attract investment
from all around the world.
At home, yesterday we learned that the unemployment rate remained at 4.5 percent, more
evidence of the continued health of the American economy, at the same time as financial turmoil
has struck several countries, particularly in Asia and in Russia, and is now being felt in our own
stock market.
This proves the point I have made again and again since taking office ~ we are in a global
economy and we are affected by events beyond our shores. We cannot ignore them. And when
we do things to help others meet their economic challenges, we are helping ourselves.
Earlier this week I asked the Chair of my Economic Council of Advisors, Dr. Janet
Yellen, to report to me on the overall state of the American economy today. What I heard from
Dr. Yellen should be reassuring to America's families. While the Asian crisis has dampened
exports, especially for our farmers, and caused losses for somefinancialinstitutions, the pillars
of our prosperity stands solid: Inflation and unemployment are still at their lowest levels, and
consumer confidence near its highest level in 30 years. We still have an historic boom in
business investment and we're still creating jobs ~ 365,000 last month alone. Perhaps most
important, standards of living continue to rise. Wages are growing at twice the rate of inflation,
the strongest real wage growth in over 20 years.
t
After decades in which incomes stagnated in our country, a growing economy means real
opportunity for millions of families — the opportunity to buy a home, take a vacation, know your
children will be educated, save for your retirement, live out the American Dream.
�The bottom line is, for all the quicksilver volatility in the world's financial markets, the
American economy is on the right track. From autos to computers, from biotech to construction,
our industries continue to lead the world. But we have an obligation to keep America on the
right track, and a duty to press forward with the strategy that has helped turn our economy
around.
First, in this time of financial uncertainty, we must maintain America's hard-won fiscal
discipline. Our economic expansion is built not on the illusion of government debt, but on the
solid foundation of private sector growth spurred by low interest rates. Now we must use these
good times to build a secure retirement for the baby boomers and a secure future for our children.
Again I will insist that we set aside every penny of any budget surplus until we save the
Social Security system first. I'll resist any tax cut or any new spending plan that squanders the
surplus before we've even had one year of black ink, after 29 years of deficits.
Second, we must invest in the skills of our people. That's the key to long-term
prosperity. I'll work with the Congress in coming weeks to enact our agenda to make American
education the best in the world; for more teachers and smaller classes in the early grades, to extra
help with early reading, modernizing our schools, connecting all of our classrooms and libraries
to the Internet by the year 2000.
Third, we must master the complex realities of the new global economy. It can be a
source of tremendous strength for America. Indeed, about 30 percent of the remarkable growth
we've enjoyed in the last five and a half years has come as a result of our expanding trade.
I've said to Russia and our Asian trading partners, if you take the tough steps to reform
yourselves and restore economic confidence, America will work with the international
community to help you get back on your feet. I ask Congress to step up to its responsibility for
growth at home and financial stability abroad by meeting our obligation to the International
Monetary Fund. There is no substitute for action and no reason for delay. The International
Monetary Fund is a critical devise to get countries to reform and do the right things, and return
to growth. Without it, they won't be able to buy America's exports and we won't be able to do as
well as we otherwise could do.
Markets rise and fall. But our economy is the strongest it's been in a generation, and its
fundamentals are sound. Let's stay on the right track and take strong steps to steer our nation
through the new global economy, so that we can continue to widen the circle of opportunity as
we approach the 21st century.
Thanks for listening.
��THE WHITE HOUSE
s
Office of the Press Secretary
For Immediate Release
July 31,1998
REMARKS BY THE PRESIDENT
ON THE ECONOMY
The Rose Garden
11:57 A.M. EDT
THE PRESIDENT: Good morning. I want to thank the Vice President, Mr. Bowles, and
our economic team for joining us today to talk about the continuing strength of our economy and
what we have to do to make it stronger as we move toward a new century.
s
Five and a half years ago, we set a new strategy for the new economy, founded on fiscal
discipline, expanded trade, and investment in our people. Today our economy is the strongest in
a generation. While the latest economic report shows that growth in the second quarter of 1998
was more moderate than the truly remarkable first quarter, it shows that our economy continues
to enjoy steady growth. So far this year, economic growth has averaged 3.5 percent. This is
growth the right way, led by business investment and built on a firm foundation of fiscal
discipline.
We've also learned today that since I took office the private sector of our economy has
grown by nearly 4 percent, while we have reduced the federal government to its smallest size in
35 years. Wages are rising. Investment and consumer confidence remain high.
Unemployment and inflation remain low. Prosperity and opportunity abound for the American
people.
In the long run, we can keep our economy on its strong and prosperous course. Our
economic foundation is solid, our strategy is sound. Still, we know from events that, more than
ever, the challenges of the global marketplace demand that we press forward with the
comprehensive strategy we began six years ago.
First, we have to maintain our fiscal discipline. This week marks the fifth anniversary of
the 1993 economic plan that charted our course to a balanced budget and reduced the deficit by
over 90 percent by the time we signed the Balanced Budget Act in 1997. Thisfiscaldiscipline
has had a powerful, positive impact, driving interest rates down, pushing investment to historic
levels, creating a virtuous cycle of economic activity that has helped cut the deficit even further.
We must hold a steady course, and we should not spend a penny of the surplus until we have
saved Social Security first. Fiscal discipline helped to build this strong economy; fiscal
recklessness could undermine it dramatically. We must use these good times to honor our
parents and the next generation by saving Social Security first.
�Second, we must continue to investment in the American people. Five years ago I said
we had to close two gaps, one in the budget and the other in the skills of our people. Now, as we
hear of a shortage of highly skilled workers all across our country, we have more confirmation
that America simply must do more in education and training. To fill those high-wage jobs, we
must have a training system that works.
I
In 1995 I put forward a comprehensive proposal to modernize, overhaul, and streamline
our job training programs. I called it a G.I. Bill for America's Workers. With bipartisan support,
Congress is now poised to finish the job. I was so pleased by the bipartisan overwhelming vote
in the Senate last night for the G.I. Bill. And I look forward to prompt House action and to
signing the bill into law soon. Congress must continue this path to progress without partisanship.
They should abandon plans td make drastic cuts in our nation's education budget. An investment
in education is clearly the most important long-term economic investment we can make
in our future.
/te>i^\)
_
The third thing we have to do is to lead the world in this age of economic
interdependence, and we have to do more there. More than a quarter of our economic growth
during the past five years has come from exports. One of the reasons that growth moderated in
the second quarter is because we are feeling the direct, discernible effects of the Asian economic
downturn. Simply put, the health of the Asian economy affects the health of our own. Just with
our grain crops, about half of that crop is exported, and about 40 percent of
the exports go to Asia.
We have seen, therefore, this impact already in our rural communities. And I've talked
about that quite a bit in the last couple of weeks. The Asian financial crisis has literally led
to a 30 percent decline in farm exports to Asia.
The International Monetary Fund is designed to support necessary reforms in those
economies, to help them help themselves, and to restore growth and confidence in their
economies.
Now, I also want to say something that you all know — it is especially important for Asia
and for our economy that the new Japanese government move forward quickly and effectively to
strengthen its financial system and stimulate and open its economy.
It is going to be very, very difficult for Asia to recover unless its leading economy, Japan, leads
the way. I welcome the election of the new Prime Minister, as well as a former Prime Minister
with whom I have worked, Mr. Miyazawa, as the new Finance Minister. I am looking
forward to talking with the new Prime Minister tomorrow.
t
And again, I remind the American people of our long friendship and partnership in so
many ways — political, security, and economics — with Japan. We want to work with them and
we hope that this new government can fmd the keys to restore to the Japanese people, who have a
great economy and a great society, the growth that they deserve.
£
Finally, let me say, we must do our part. That is why a commitment to the International
�Monetary Fund is an investment not simply in other countries and their reform, but in our own
economy. We have to grow this economy by selling things to other people. They need the
money to buy our products. That is why Congress should step up to its responsibility, put, again,
progress ahead of partisanship, and renew our commitment and pay our fair share to the IMF. I
urge Congress to do this quickly and not to put at risk our prosperity.
Open and fair trade, a balanced budget, saving Social Security, better education, and
higher skills ~ the strategy that has boosted our economy for five and a half years will boost it
further as we boldly move into a new century. I will continue to do everything in my power and
to work as hard as I can with Congress to strengthen an economy that offers opportunity to all, a
society rooted in responsibility, and a nation that lives as a community with each other and with
the rest of the world.
Again, I want to say to all the economic team how much I appreciate the special and the
difficult work we have done these last months as our country has coped with the General Motors
strike ~ which, thank goodness, has now concluded on successful terms — and with the problems
in Asia and elsewhere.
Thank you very much.
t
Q Mr. President —
Q Mr. President -THE PRESIDENT: Wait, wait, wait. Everybody has got a question. Let me give you
answer to all of them.
Q
You didn't hear --
THE PRESIDENT: I know -- yes, I did, I heard of all you shouting about it.
No one wants to get this matter behind us more than I do ~ except maybe all the rest of
the American people. I am looking forward to the opportunity in the next few days of testifying.
I will do so completely and truthfully. I am anxious to do it. But I hope you can understand
why, in the interim, I can and should have no further comment on these matters.
Thank you very much.
END
12:03 P.M. EDT
��t
THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release
July 23, 1998
REMARKS BY THE PRESIDENT
AT RURAL RADIO CONFERENCE CALL
The Oval Office
3:12 P.M. EDT
THE PRESIDENT: Hello. This is Agriculture Secretary Dan Glickman, and I want to
start out by thanking all the folks out there in the country for joining us on this call, and
welcoming everybody to the Oval Office.
Having the honor of being Secretary for more than three years now, I've had for the most
of that time the pleasure of presiding over some of the strongest times in America's agricultural
history. But today, there are pockets of farm country that are in real, extreme distress.
I
While parts of our country are blessed with near-perfect growing conditions, other
regions of America are cursed with some of the worst weather in generations. And this abuse
from Mother Nature comes right when a new farm bill erased many of the protections that
farmers relied on in the past.
I don't think anyone wants to go back to the days of government telling farmers what and
how much to plant or when they should get out of bed in the morning and go to sleep at night and
all sorts of other things. But when President Clinton signed the 1996 Farm Bill, he made it clear
that we as a nation need to build a sturdy farm safety net for the future. And that is the
unfinished business of the 1996 Farm Bill.
Having recently spent time with farmers and ranchers in the Dakotas, in Georgia, in
South Carolina and Florida, time with families who have lost their land, time with many more
who are barely hanging on, I know just how important it is that Congress listen to President
Clinton. We are very fortunate in this time of challenge to have as our President a man who is a
son of rural America ~ someone who has spent lime during his boyhood summers working on
his grandfather's farm in rural Arkansas. Someone who knows firsthand that agriculture is hard,
risky work, and that government has a role to play in helping farmers and ranchers weather hard
times.
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Here to share his thoughts on building a strong, secure future for America's farmers and
1
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ranchers is our President, President Bill Clinton.
THE PRESIDENT: Thank you very much, Secretary Glickman. And I want to thank
you all for giving me a chance to speak to people in rural America.
Today, most of our fellow citizens are enjoying the dividends of the strongest American
economy in a generation. We have the lowest unemployment rate in 28 years. We're about to
have the first balanced budget and surplus in 29 years with the highest home ownership in
American history. But with the economic crisis in Asia hurting our farm exports with crop prices
squeezed by abundant world supplies and with farms devastated by floods and fires and
droughts, communities in parts of the South and Great Plains are withering. In Texas, almost
three-quarters of the cotton crop is lost; and in North Dakota, retired auctioneers are being
pressed into duty just to handle all the families who are being forced to sell their farms.
Secretary Glickman and I are joined in the Oval Office today by several young leaders of
the FFA. They represent the future of American agriculture and they deserve a chance to have
that future. As the former Governor of a state that depends heavily on farming, I know we must
never turn our backs on farmers when Mother Nature or the world economy turns a callous eye.
t
Our farm communities feed our nation and much of the world. They also nourish the
values on which our country was born, and which had led us now for over 220 years — hard
work, and faith, and family, devotion to community and to the land. We simply can't flourish if
we let our rural roots shrivel and decline.
For five and half years, I've worked to expand opportunity for farm families, providing
critical disaster assistance to ranchers who have lost livestock, purchasing surplus commodities
for school lunches, working to diversify the sources of income in rural America, increasing our
use of export credits by a third in the past year alone. But this year's farm crisis demands that we
provide more help to farmers teetering on the edge.
Last Saturday, I directed Secretary Glickman to buy more than 80 million bushels of
wheat to help lift prices for American farmers, while easing hunger in the developing world.
Today, in addition to helping citizens in 11 southern states, beat by unrelenting heat, I'm
announcing we will provide immediate disaster assistance for farmers throughout the state of
Texas to help those whose crops and livestock have been ravaged by drought.
Next week, I'll send Secretary Glickman to Texas and Oklahoma to talk with droughtstricken farmers and assess what other help they require. Once again, I urge Congress: We must
provide the $500 million in emergency assistance, sponsored by Senators Conrad, Dorgan,
Daschle and Harkin, for farmers and ranchers throughout the country who have been afflicted not
only by drought, but also by fires and floods and other disasters. They are our neighbors in need.
I
With these measures, we can help farmers weather the current crisis. But to strengthen
2
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rural America for the long run, we have to do more. First, we have to revive the rural economy
with exports. Today, products from one of every three acres planted in America are sold abroad.
We have to continue to open new foreign markets and enforce our existing trade agreements. We
must give the International Monetary Fund the resources it needs to strengthen and reform the
Asian economies so that they will have the money to buy our farm products.
Yesterday, unfortunately, the House of Representatives delayed this critical funding for
the IMF. American farmers cannot afford to wait; they need help now. We should also be
prepared to donate food generously to those around the world at risk of malnutrition or
starvation. As a general principle, I believe commercial exports of food should not be used as a
tool of foreign policy, except under the most compelling circumstances.
A week ago, I signed the Agricultural Export Relief Act, enabling U.S. farmers to sell
300,000 tons of wheat to Pakistan the next day. I urge Congress to provide me authority to
waive sanctions on food when it is in the national interest, and to work with me to incorporate
flexibility and sanctions policy more broadly.
Second, we simply have to strengthen the farm safety net. We should expand eligibility
for direct and guaranteed loans, improved crop insurance, which is not working for a lot of
farmers today, and extend marketing loans when crop prices are too low.
t
And we should give farmers more flexibility and planning when to receive federal
income support claimants and in planting new crops when their primary crops fail. I proposed
allowing our farmers to receive federal income support payments early last spring. There is now
some support for it apparently in the Congress; I hope very much it will pass soon.
Third, we must improve the infrastructure in rural communities. We have to preserve
universal service and defend the vital e-rate initiative so that all rural homes can count on
affordable telephone rates and rural schools, libraries and health centers can tap into the promise
of the Internet. We have to modernize rural schools and transportation systems, improve the
quality of rural health with advanced telemedicine, cleaner drinking water and safer food.
These steps are in the best tradition of our nation. Whenever disaster strikes, Americans
join together to help see their neighbors through. That's what happened in Florida when brave
men and women from across the country help put out the state's fires, and that's what we'll do
throughout rural America to save our farmers from losing their homes and crops.
At this moment of broad prosperity for our nation, we are certainly able to, and we clearly
must, help our neighbors on the farm throughout this current crisis so that we can strengthen our
rural communities for the 21st century. Now, I'll be happy to take your questions.
t
SECRETARY GLICKMAN: Thank you, Mr. President. I get to be the role of moderator
today, and our first questions come --
�I
THE PRESIDENT: You sound kind of like a deejay.
SECRETARY GLICKMAN: That's right. You should hear me sing. But we won't do
that here. Our first question comes from Shelley Beyer who is with the Brown Field Network
out of Jefferson City, Missouri. Shelley, are you on?
MS. BEYER: Yes, I am. Greetings, Mr. President and Mr. Secretary. Mr. President,
some of the measures that many lawmakers say would help low farm prices are not scheduled to
come up in Congress until after the August recess if at all this session. I'm referring mainly to
fast track authority. Of course, farmers and ranchers are experiencing low prices now. Would
you support moving up discussion on fast track?
THE PRESIDENT: Well, Shelley, fast track wouldn't actually help the farmers right
now. I would support voting on fast track whenever we think we can pass it. But, you know, we
had a huge struggle to pass fast track earlier this year and we failed. I believe it will pass early
next year. I don't believe that any votes have changed.
t
And keep in mind what fast track does. Fast track simply gives me the authority that
previous Presidents have had to negotiate new trade agreements tearing down trade barriers to
American products in other countries. By contrast, getting the funding for the International
Monetary Fund will immediately create markets for American products.
Let me just give you an example. About 40 to 50 percent of our grains are exported.
Forty percent of our export market is in Asia. If you take all the Asian countries except for Japan
and China, our exports are down 30 percent because of their economic problems ~ they're down
13 percent in Japan, they're down 6 percent in China.
Now, if we could get the International Monetary Fund funding, and those countries could
get more money, then they'll immediately have more money to buy our food. So I think that the
IMF funding will do more in the short run to boost American farm prices.
Now, over the next year, we've got to get the fast track authority so that we can continue
to open more markets. We will also begin negotiations in the World Trade Organization to try to
get every country that signed on to that to lower their agricultural tariffs and other barriers so that
we can sell in more markets.
t
So I agree that we need to do fast track. I am determined to get other countries to lower
their agricultural barriers, but all that takes time. And i f l had the fast track authority tomorrow,
it would still take time to open those markets and reach those agreements. We need to open the
markets now. That's why the International Monetary Fund is more important, because it will
flow cash into countries, they'll immediately have money when they can immediately start to buy
more food.
�I
SECRETARY GLICKMAN: Thank you very much, Shelley. Our second question is
from Gary Wergen of WHO radio in Des Moines, Iowa. Gary, are you on?
MR. WERGEN: I certainly am, Mr. Secretary. And, yes, you do sing well. We have
had experience with that. Mr. President, I'd like to follow up on Shelley's comments a little bit.
On the fast track issue, why haven't we been able to pull those Democratic votes? When you
were giving the State of the Union address, you made an impassioned plea; you addressed one of
the key issues, which was child labor, and Congress Boswell was convinced that you were
adopting his language and that we'd be able to get those Democratic votes. Yet, Mr. McCurry is
referring to this as political mischief at this point. Why haven't we been able to move this issue?
THE PRESIDENT: I believe that what happened was the members got dug in before
they saw the final bill. And I also think that there were more Republicans voting against it than
the Speaker thought. This was one issue where, notwithstanding our well-publicized conflicts.
Speaker Gingrich and I worked hand in glove and we worked very, very hard.
t
But the truth is that, for reasons that I wasn't privy to, by the time the bill was actually
brought up in the House, the people who were against fast track had been working against it so
hard they'd gotten so many commitments, that when ~ even though the bill, on its merits, I think,
was very much deserving of passing and met a lot of the concerns for labor rights, for
environmental concerns, and other things, we couldn't get the votes.
The only point I want to make is, to the best of my knowledge, we have not changed
either 10 Democratic votes or 10 Republican votes from no to yes. If we don't have those votes,
why would we kill the Africa trade bill, which is good for us, or the Caribbean trade bill, or even
more important by far, the International Monetary Fund, by tying all this stuff together? Why
not pass what we can pass now, get the immediate benefits and then work on passing fast track
when the election is behind us?
I think it's clear that it will pass early next year, because it's manifestly in the national
interest, and because, frankly, then a lot of the members of Congress who got committed against
it early, will be forced to look at what the actual details of the bill say and will feel freer to vote
for it.
SECRETARY GLICKMAN: Thank you, Gary. Next we go to Arkansas, the President's
home state. And third up is Stewart Doan of the Arkansas Radio Network, out of KARN in
Little Rock. Stewart.
MR. DOAN: Thank you Mr. Secretary and good afternoon from Little Rock, Mr.
President.
THE PRESIDENT: Hello, Stewart. What's the temperature down there?
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�t
t
MR. DOAN: Right about 100, sir. About the same as it was when you were out at
Chenal.
THE PRESIDENT: I know -- it was over 100 both days I was out there.
MR. DOAN: Yes, sir. Good to visit with you and behalf of the National Association of
Farm Broadcasters. We truly appreciate this opportunity to visit with you. Senator Harkin,
Senator Daschle, Congressman Gephardt, others, in describing the farm law of two years ago,
dubbed "freedom to farm," have called it "freedom to fail," and have blamed it for much of the
crisis that we find ourselves in today in American agriculture. Do you agree with that
characterization that they have placed on this bill and would you support, as they are pushing,
uncapping marketing loan rates ~ in other words, increasing the guaranteed minimum price for
grain, soy beans, and cotton?
THE PRESIDENT: Well, first of all, I think I would partly agree with what they say. I
think that fundamental cause of the crisis today is a price crisis. It's a market crisis caused by a
combination of things. You've got adequate ~ and more than adequate — world supplies. You've
got a significant decline in the economic capacity of Asia to buy our food products. You've got a
big drop in the currency values in other countries relative to the American dollar, which makes
our food, relatively speaking, more expensive, which makes it even harder. And that's a big
problem. And then in America, you've also got a disaster crisis. You've got some places where
they have no price and no crop. Usually when farmers have no crop, at least the no crop they
have has a high price, because the supply has dried up. But now the worldwide supply is so big
that they've got a double hit. So that's the fundamental problem.
When I signed the '96 Freedom to Farm bill, I pointed out that it had a lot of good
provisions in it, but it didn't have a real safety net. Let's remember what the good provisions
were. Number one, it got the government out of micromanaging planning decisions. Number
two, it had terrific conservation provisions. Number three, it had good rural development
provisions. And I had no choice but to sign it, because i f l hadn't we would have been back on
the '49 farm law, which would have been even worse for the farmers. But I said in '96, the crop
prices are not going to be high forever and when they drop we're going to regret not having an
adequate safety net. So the first thing we have to do is to develop an adequate safety net.
Now, let me just — you asked about the proposals by Senator Harkin and others; let me
just run through some of the things that I have proposed, and then I'll answer your question about
their proposal. First of all. Senators Dorgan and Conrad have a $500 million bill up there - it's
passed the Senate and I hope and believe will pass the House - which would improve and
expand crop insurance, it would compensate farmers whose crop and pasture land is flooded, it
would provide emergency feed assistance to livestock producers who are suffering from drought,
and allow us to use export enhancement funds that are left over in future years for food aid and
other purposes. These things I think will be quite helpful.
I
�t
Now, in addition to that, I've asked the Congress to help strengthen the safety net by
extending the term of marketing assistance loans, by allowing flexibility for farmers to receive
advanced AMTA payments. I asked for that last April. The Speaker and other House
Republicans are saying in the last week or so they are open to that. That would have I think a lot
of impact.
And I , finally, asked for a provision that would improve credit ability and modify the
one-strike policy for farmers who have had a debt write-down, and I've also proposed to let
USDA guaranteed operating loans be used to refinance. So if we were to do all these things, I
think we'd strengthen the safety net.
Now, in principle, I think it's clear that the commodity loan cap is not working and it
needs to be modified. The question is how should we modify it and how are we going to pay for
it within the context of the balanced budget. But in principle, I don't think there's any question
that what Senator Harkin and Congressman Gephardt and others say is right - that the present
cap is too low.
t
And there are some people who think this system is fine the way it works, but I don't. I
think what it will do is inevitably reduce the number of family farmers, even if it doesn't reduce
the acreage being farmed. And I don't think that's a good thing for America. So I would like to
see a system where farmers don't fail because of acts of God.
SECRETARY GLICKMAN: Mr. President, if I just may add just a couple quick things.
Number one, in our proposals in the 1996 Farm Bill we did not propose capping commodity
loans. We proposed keeping a formula where those loans would continue to float. So I do agree
with you that we will continue to work on this to try to provide some responsible ways to deal
with this issue so that we don't artificially keep farm prices too low.
But, in addition, we have proposed, as you stated, that we allow the extension of the loans
for a period of time ~ at least for six months — to allow farmers some flexibility in marketing, so
they don't have to just dump their grain on the marketplace when the nine-month period is over
with, as is in current law.
And as you say, we have this terrible provision in the '96 Farm Bill which says if you've
ever had a write-down or a restructuring of your farm loan you can never get another loan from
Uncle Sam. No bank has that kind of policy. I mean, we believe in redemption in America, but
the '96 Farm Bill created a situation where one strike and you're out forever. And I doubt if there
are a lot of American entrepreneurs that would be successful if they had to live by that particular
policy.
So there are a lot of things in that bill I think that we can try to improve, and working
together I think we can get these things done.
I
�t
Next we have Tony Purcell, with the Texas State Ag Network out of KRLD-Dallas. And
I think this is the same Tony that used to be in Wichita, right? Is Tony there? Okay, if Tony is
not there, then we move on to Mike Hurgert of the Red River Farm Network out of Grand Forks,
North Dakota. Mike, are you there?
MR. HURGERT: Mike, are you there?
MR. HURGERT: Yes, sir. Thank you very much, Mr. Secretary, and good afternoon,
Mr. President. I really don't know where to start. We have cut our wheat acreage this year in the
Red River Valley 25 percent; for the sixth straight year, we have scab disease. Right now, we're
wondering if there's a future for not only wheat production, but agriculture. What, in long-range
terms, what can we expect in terms of fixing this crop insurance program?
THE PRESIDENT: Well, first of all, we've expanded the size of the program, which I
thought was important; it was way too small in '93 when I took office. We've more than doubled
it, and we've expanded farmers' choices by creating new varieties of crop insurance. And we've
introduced the concept of revenue insurance in a large majority of the grain-producing parts of
the country.
t
But I still think there are some other things that have to be done. I think that even though
we've improved the program by offering coverage on preventive planning since '93 and
increasingly based the coverage on farmers' individual yields, it's just not working for most
farmers. And what we're trying to do now is to look at all the ways we can help our farmers get
through tough times that we can pass in the Congress.
Maybe Secretary Glickman would like to talk about this, but I must say, I've been waiting
for someone to ask this question, because when I was home last weekend talking to the farmers,
that's the only thing they said. They said, this crop insurance is a joke, it doesn't really help
anybody. So maybe, Secretary Glickman, that's too blunt for me to say that our government's
crop insurance program is a joke, but maybe you should talk a little more about some of the
things we're looking at to improve it.
SECRETARY GLICKMAN: Well, first of all, I would say that they have a terrible
problem with scab, which is a disease that affects wheat farmers in the Dakota-Minnesota area,
and we're going to spend $1.2 million this year and redouble our efforts to get rid of this
horrendous disease which reduces yields dramatically, and this is one of the importance of ag
research. Of course, you've signed the ag research bill and we've had some problems getting
Congress to fully fund it, but this part of it would help.
t
On crop insurance, I'm reminded of the old story President Truman used to say once in a
while, that the only good credit risk that a banker will lend money to is somebody who doesn't
need the money. And when it comes to crop insurance, if you never have a crop problem or a
failure, then you see to do better when maybe once ever six or seven or eight years, you have a
8
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problem.
What's happened is, so many of our farmers have repeated disasters - they have a flood,
then they have a freeze, then they have a pest, then they have other kinds of problems, and
because of that, their yields go down and they end up finding their premiums paid are much
greater than their benefits received.
The statute requires that crop insurance be actuarially sound, which means we have to run
this almost like we were a private insurance company, even with the amount of government
subsidy that's in the program. So you've instructed me to take this system and make it so that an
act of God will not cause somebody go to out of business, to look at this system. And one of the
things in the bill that Senators Conrad and Dorgan did was -- out of this $500 million is to
provide at least part of that supplemental crop insurance benefits which would make payments to
farmers who have had losses sufficient to trigger regular crop insurance indemnity payments at
three out of the last five years. That would probably benefit 45,000 to 50,000 farmers, and a lot
of them would be in the Northern Plains as well. But we clearly have a lot of work to do on this
issue.
t
In the old days, we used to have ad hoc disaster assistance payments. But Congress did
away with the crop insurance program and I agree with you. This is something that's perhaps my
greatest challenge as Secretary to try to figure this one out.
THE PRESIDENT: Mike, Senator Dorgan and Senator Conrad were just here with us in
the Oval Office just a few minutes ago and we were talking about this. I think the provision in
their bill is going to pass — I believe it will. But I would just say to any of our listeners there, if
you have got any ideas about what we can do with this program, this insurance program, to make
it fairer and more affordable and more functional, or how it could be modified in some ways, I
would urge you to directly contact Secretary Glickman or write to us here at the White House.
Because I am hearing from farmers all over the country that it's simply not working, and as Dan
Glickman said, it's really not like buying car insurance or home insurance or something like that.
It's almost like buying flood insurance in a 25-year flood plain where you just have no control
over what's going to happen. But we have a national interest in seeing that land, which is highly
productive, in North Dakota be planted.
So I think the whole concept behind the requirement that it be "actuarially sound"
misperceives the facts there. And I don't believe the Congress meant to say we don't want
anybody planting in North Dakota anymore because they've had foods and disease and pests and
everything. I don't believe that was the intent of the act of Congress. So I think this is one where
an honest error was made and we would like to correct it and if you've got any ideas, for
goodness sakes, give them to us.
I
SECRETARY GLICKMAN: Next, we have from Murfreesboro, Tennessee, Bart Walker
from WGNS. Bart, are you on?
�I
MR. WALKER: Yes, we are. Thank you very much. Mr. President, our question deals
with the farms in the future ~ the family farms of the future. The economy is booming here in
Rutherford County, the population is exploding. And as a result, the family farms are being
turned into subdivisions. At the same time, though, most students majoring in agriculture here at
Middle Tennessee State University, they're going into related agriculture fields, not into farming.
What we want to ask: Are there plans for low interest loans for other programs that
would enable and encourage graduating agricultural students to get into farming?
THE PRESIDENT: Yes. We actually have a program that provides low interest loans
for first-time farmers, as well as a program in the Department of Agriculture that gives kind of
technical support and assistance for new farmers. And one of the things that I've asked Secretary
Glickman to do is to assess the adequacy of that program and to look at some of the things that
we're doing in non-farm communities, setting up community financial institutions that make
extra loans and things of that kind to see if they might be relevant tofirst-timefarmers.
I
As I said at the beginning of our interview here, I got the national officers of the FFA
here with me. And these young farmers are the future of America. The average farmer is about
59 years old in America today. And I'm very concerned about that in places where, like in
Murfreesboro, where you're doing very well economically, if a farmer chooses to sell his or her
land to a developer, and you sub-divide it, well, there's nothing I can do about it and probably
nothing you would want to do about it. You don't remove the right to do that if that's what the
market is dictating. But I think where young people want to farm and are able to farm, if they
can get the credit they ought to be able to get the loans at affordable terms and at good repayment
terms.
One of the things that we've done for college loans since I've been here that I think might
have some applicability to first-time farmer loans I want to look at is to structure the repayment
in a way that's tied directly to income. So, for example, if a young person wants to go to college
and then take a job as a school teacher, and another would go to college and takes a job as a
stockbroker, and they borrow the same exact amount of money to get out of college, but the
stockbroker has an income of three times the school teacher's, under the new provisions of our
college loan program, the school teacher can pay back the money with a ceiling on it as a
percentage of his or her income. So if a young person wants to go into some sort of public
service - to be a police officer, a nurse, a school teacher, a social worker, something like that ~
they can do that.
t
Well, if you think about the early years of farming and how meager the income might be,
there may be something we can do to structure the same sort of loan program for first-time
farmers. So we're looking at a lot of other options. But we do have ~ to go back to your first
question — we actually do have a program in the department for first time farmers to provide for
loans and for technical assistance to help them get started.
10
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SECRETARY GLICKMAN: And I would also add, we now have an Office of Outreach
that provides technical assistance to farmers just starting out. And, again, I would encourage
people to contact us, as well.
The next question comes from Bill Ray of the Agrinet Farm Radio Network out of Kill
Devil Hills, North Carolina. Bill, are you on?
MR. RAY: Yes, I am, Mr. Secretary. Nice to be with you and welcome to the Outer
Banks. Probably a good day to be farming on the Outer Banks rather than some of the other
hotter spots. It's 92 degrees.
THE PRESIDENT: That's near Kitty Hawk, isn't it?
MR. RAY: That's exactly right.
THE PRESIDENT: I went there once, about 26 years ago. It's beautiful.
MR. RAY: Well, a lot of folks would like to have you back, Mr. President.
THE PRESIDENT: Thank you.
t
MR. RAY: Earlier, you talked and mentioned the biggest problem that you had with the
'96 Farm Bill had to do with no safety provisions. I remember vividly your remarks concerning
that earlier. My question is, what long-range plans would you now recommend to help food
producers in this country over the long haul?
THE PRESIDENT: Well, over the long haul, I believe that the provisions of the '96 bill - let me just say what I think we ought to keep. I've said what I think is wrong about it. Let me
say what I think we ought to keep. I think it would be better if we could avoid having the
government go back to micromanaging the farmers planning decisions. I think letting the
farmers make the decisions about what crops they're going to plant is the right thing to do. I
think we ought to keep the strong conservation provisions of the farm bill of'96.
And finally, I'd like to keep, and even strengthen the rural development provisions of the
farm bill. One of the things that we haven't talked about is, there are a lot of people who live in
agricultural communities who farm, who — either they — either the farmer or the farmer's spouse
gets a significant income from other kinds of work. And so what I would like to see is ~ I'd like
to see us do more on rural development, because the more we can diversify the economies of
these small towns, the more people can afford to farm because they'll have a salaried income
coming in, too, which will help them to deal with the problems of the bad years. So I think those
are the good things to keep.
t
I think that we should redouble our efforts in agricultural research. Secretary Glickman
11
�t
mentioned this. I hope that we can get the actual dollar figure I recommended for ag research
funded in this year's budget, because we get such a huge return from ag research.
The second thing I'd like to say is I think if we get an adequate farm safety net in this
present structure, and then we can continue to open farm markets and get fair treatment with the
fast track legislation, with the new agricultural negotiations we're going to have through the
World Trade Organization, with the funding for the International Monetary Fund, then I think the
future for our farmers actually looks quite good.
If you look at the all the new things that are coming out of agricultural research, if you
look at all the new applications of farm products that are being developed, and if you look at the
growth of world population and the projected agricultural production in other parts of the world,
I would say that the next 30 years for our farmers will probably be very, very good if we can
continue to invest in research and stay ahead of the curve, and if we can continue to open new
markets, and if we're smart enough and honest enough to recognize that we're always going to
have bad years, we're always going to have act of God, we're always going to have things like
this go wrong — especially when there's some evidence that there is a lot of change in our
climate, that's warming the Earth's climate and leading to more disruption ~ so let's put in an
adequate safety net, pay for it, deal with it, and say it's an investment in America's future. I think
if we just do those things, our farmers are going to quite well.
t
SECRETARY GLICKMAN: Thank you. Tony Purcell or Julius Gray from the Texas
State Ag-Network, are you on board?
MR. PURCELL: Yes, Mr. Secretary. We're right here - we were here before, but you
just couldn't here us.
PRESIDENT CLINTON: What's the temperature down there?
MR. PURCELL: We're pushing 100 degrees right now for the 19th day in a row.
PRESIDENT CLINTON: Well, I'm surprised you're not shorted out. I'm glad we can
hear each other.
MR. PURCELL: Yes, just barely. Mr. President, on behalf of the Texas farmers and
ranchers, boy, I'd sure like to thank you for that disaster assistance declaration. That will help us
get through the summer and into the fall. But you know that $1.5 billion direct loss to Texas
agriculture, that's going to mean a $5 billion hit to the general state economy. What kind of
disaster relief might be available not only for farmers and ranchers, but to related agribusinesses
who are suffering a loss?
I
PRESIDENT CLINTON: Depending on the dimensions, there are standards in the
12
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federal law for my disaster declarations, but normally, when a disaster declaration affects an
entire state in agricultural losses, then small businesses that are affected by it and communities
that are affected by it are also eligible for other kinds of assistance. And I tell you what I will do;
I'll have our people do some research on it and get back to you directly on it.
But let me also just say, there's one thing in this bill that's coming up that I think could be
quite helpful. I've mentioned this bill several times, the bill by Senators Conrad and Dorgan
that's got $500 million more in emergency assistance. A lot of the problems in Texas are
livestock problems, even though you've lost most of your cotton crop and had a lot of other
problems.
We had a program which permitted the federal government, in times of disaster for
people with their livestock, to buy up surplus feed and give it to the livestock farmers. That was
suspended in 1996 in the farm bill until 2002. Under our provision, under this emergency
provision, we'd get some of that back and we could get some feed down there to those livestock
folks that I think would be very, very helpful. So that's another thing we're trying to do for the
farmers. But I believe that there is some community and small business assistance it can flow to.
If Secretary Glickman can answer the question now, fine; if not, I'll have somebody directly
contact you later today.
t
SECRETARY GLICKMAN: Well, I would say there are several disaster assistance
programs, both from us and FEMA, Tony, and we'll be glad to get you those specifically. I
would say that the President is sending me out to Texas and Oklahoma next week. I will be, for
sure, in College Station, meeting with Texas A&M folks about the nature of the disaster and the
extent of it, and I would say that emergency loans that will be triggered in will help cover
production and physical losses. And we have also authorized emergency haying and grazing of
CRP - Conservative Reserve Program -- acreage in certain counties with significant losses in
hay and pasture production.
But once I come back and see the damagefirsthand,I will report back to the President
and try to determine what else we can do and what the extent and nature of the loss is.
THE PRESIDENT: But i f l could, to go back to your question about the nonagricultural
losses related to the agricultural crisis ~ as Secretary Glickman said, some of our emergency
programs were funded through the Federal Emergency Management Agency. And we have —
obviously, you have a governor's emergency management person there who works with us on
that.
I
Then, we also have some programs funded through the Small Business Administration,
some programs funded through the Commerce Department, some programs funded through the
Housing and Urban Development Department. We'll just have to do an inventory. And I would
urge all of the people who are listening to us through your network there to make sure that their
mayors or members of Congress or state officials have access to Secretary Glickman when he
13
�I
comes down there and give him as complete a picture as you can of what the problems are. And,
obviously, we'll do our best to bring to bear whatever resources we can legally provide to help
you deal with the terrible difficulties you are in.
Today, I announced that we were going to give $100 million to Texas and 10 other states
just to help with utility bills, with air-conditioning, with fans, with other things, for all these
people who don't have adequate cooling. We've had 100 deaths now between ~ basically
between Dallas on the West and then across Arkansas and North Louisiana, and then to
Tennessee and North Alabama and Mississippi, and all in through that 11-state area, all the way
over to the East Coast because of the record heat. And I'm hoping that we can help you with that
as well and save some more lives.
SECRETARY GLICKMAN: Mr. President, I think that exhausts certainly not the list of
capable reporters out there, but I think that we have gotten certainly a lot of good feedback and I
know people have been thrilled by you being on this national agricultural radio bridge. Do you
have any closing comments you might want to say to anybody out there?
I
THE PRESIDENT: Well, I would just like to say, first of all, that I'm very concerned
about the problems that are being faced up and down and North and West and East and South in
the Farm Belt. They're significant and they're different from place to place in our country. We're
doing our best to respond. I'm trying to listen to your elected representatives here. I'm trying to
move the system here as quickly as I can. I hope you will urge your representatives to vote for
the Conrad-Dorgan bill to get some more emergency assistance out there. I hope you'll support
us in building a more permanent, adequate farm safety net and in building new markets for our
farm products.
But if you have anymore ideas, I would urge you to get in touch with the Secretary of
Agriculture or with me. We did this interview in part just to reach out and show our concern to
farmers and to rural America and to ask for your ideas. If you have any ideas about anything else
we can do, if there's something we're overlooking, we want to get on it, we want to be
responsive. We know that it's not the best of times for a lot of our farmers and we want to be
there for you. America is doing very well as a whole and we think you should be part of that.
Thank you and God bless you all.
SECRETARY GLICKMAN: Thank you Mr. President.
END
t
3:40 P.M. EDT
14
�
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Michael Waldman
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<p>Michael Waldman was Assistant to the President and Director of Speechwriting from 1995-1999. His responsibilities were writing and editing nearly 2,000 speeches, which included four State of the Union speeches and two Inaugural Addresses. From 1993 -1995 he served as Special Assistant to the President for Policy Coordination.</p>
<p>The collection generally consists of copies of speeches and speech drafts, talking points, memoranda, background material, correspondence, reports, handwritten notes, articles, clippings, and presidential schedules. A large volume of this collection was for the State of the Union speeches. Many of the speech drafts are heavily annotated with additions or deletions. There are a lot of articles and clippings in this collection.</p>
<p>Due to the size of this collection it has been divided into two segments. Use links below for access to the individual segments:<br /><a href="http://clinton.presidentiallibraries.us/items/browse?advanced%5B0%5D%5Belement_id%5D=43&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=2006-0469-F+Segment+1">Segment One</a><br /><a href="http://clinton.presidentiallibraries.us/items/browse?advanced%5B0%5D%5Belement_id%5D=43&advanced%5B0%5D%5Btype%5D=is+exactly&advanced%5B0%5D%5Bterms%5D=2006-0469-F+Segment+2">Segment Two</a></p>
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Michael Waldman
Office of Speechwriting
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1993-1999
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2006-0469-F
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Segment One contains 1071 folders in 72 boxes.
Segment Two contains 868 folders in 66 boxes.
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Clinton Presidential Records: White House Staff and Office Files
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98 Speeches by [Alan] Greenspan, [Lawrence] Summers, [Robert] Rubin, POTUS
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Office of Speechwriting
Michael Waldman
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Box 59
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2006-0469-F Segment 2
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