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.
- 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 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.
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 the financial system; and that means structural reforms to open the economy, raise transparency and let market forces operate.
- 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.
- 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.
- 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.
- 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 heart 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 U.S. behest, begun charging penalty interest rates on extraordinary loans.
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.
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. 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.