FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. I am delighted to be here today to talk about Latin America's role in world capital markets with such a distinguished gathering.

It must give everyone in this room a sense of quiet satisfaction for there to have been a major developing world financial crisis these past months -- and for Latin America to have been a bit-player. And it must be no less a source of satisfaction to see some Asian reformers today being told to learn some lessons from Latin America.

A source of satisfaction -- but if cliches become cliches because they express truth, then certainly the cliche about the perils of complacency captures a very important truth for all of us in the Americas today. We have achieved a great deal in these latter years of the 20th century. But we have a great deal still to do if we are going to realize the enormous opportunities this new global economy holds out to Americans of every latitude.

Let me spend my time today discussing what I believe to be three major challenges we face in the years ahead: cementing and maintaining financial stability; furthering continental integration; and working to lay the grounds for rapid, more inclusive growth and development at home.

I. Investing in Financial Stability.

The risks to world financial markets posed by the crises in Asia have not all passed. And to be sure, Latin America is not going to emerge out of these events entirely unscathed. Reduced confidence in emerging markets as a whole and the negative terms of trade effects of recent events will are all likely to take their toll on the region for some months to come.

For all that, when we consider what might have happened, what many feared would happen at such a time -- the message of the past few months for Latin America is overwhelmingly positive. The fact is that we have seen in Latin America's weathering of this crisis a very significant maturation of the Latin American reform process that began a decade or so ago:

• we have seen it in the taking of early and decisive policy actions by governments such as Brazil to shore up market confidence and address potential imbalances;
• we have seen it in the successful accumulation of reserves by the major economies in the region throughout the crisis, with reserves in Mexico, Brazil and Argentina all now higher than they were last summer;
• we have seen it in the unwavering commitment of many governments to introduce and maintain high levels of transparency about financial and economic data and the direction of policy -- transparency that has greatly reduced market suspicions at a time when the usual suspects were very much being rounded up;
• and we have seen this maturation in the very large, less tangible reserves of credibility on which economies in the region have been able to draw in responding to difficulties in a more controlled way than has been possible in the past.

Latin America's relative insulation from the Asian typhoon tells us how far we have come. It can also, in important respects, tell us something about where the international community should be heading when it comes to building strong and stable financial markets.

It is no accident that Latin Americans have been prominent participants in the special G22 grouping that has met twice in recent months to discuss the longer term reform questions coming out of Asia. As this group and others involved with these issues will attest, we have a lot to do to make the global financial system more secure and resilient to crises. But I think we know what some of the answers are. And we know that Latin America is in many of these areas is, for once, a model to be emulated -- not avoided.

First, we know that we need to ensure there is greater transparency and openness in both the private and public sector around the world. No one in Argentina can now doubt the power of abundant information in helping to reduce risk and increase market confidence. Equally, while there are obvious questions of cause and effect, it is worth noting that Mexico's economic turnaround started around the same time it started to publish economic and financial information for all to observe on a regular time-frame.

Second, we know that we need all to work -- as the most recent Committee on Hemispheric Financial Issues meeting in Santiago in December committed every member to work -- to strengthen banking supervision and prudential regulation, with the universal adoption of the Basel Core Principles for Effective Banking Supervision, and high quality training to ensure our supervisors are up to the challenges that modern financial markets present.

To be sure, most Latin American economies have a way to go in building strong, open and competitive financial systems. And of course, a sound banking system means more than a list of internationally recognized standards -- it means cultivating a credit culture, sound supervision, limits on the quality of assets at a bank's disposal, limits on government safety nets, and effective controls on self-dealing. But the change in Latin America is visible. And the rewards are clear.

Going forward, Latin America, which has far and away the greatest presence in global bond and equity markets of any emerging market region, needs to continue to set the pace: for example, by ensuring that every country, not just seven subscribes to the International Monetary Fund's Special Data Dissemination Standard, and by promoting effective regional surveillance, built on the principle that friends warn friends when trouble is near.

Finally, we should be looking to see this hemisphere lead the way in finding creative solutions to the third, most difficult long-term reform challenge we face in responding to all the financial crises we have seen in recent years. Namely, the challenge of finding mechanisms to bail in investors not bail them out and to ensure that policy makers do not confront the choice between uncontrolled chaos and confusion on the one hand and large bailouts on the other -- which is too often the choice they confront today.

This task has a microeconomic and a macroeconomic dimension. Countries need bankruptcy laws. And they need effective judicial institutions to enforce them. That is part of being in a global capital market. But we also need procedures for dealing with situations where countries get themselves into very profound financial difficulties at the sovereign level. In short, we need systems that can handle failure, because until the system is safe for failure we will not be able to count on success.

II. Continental Integration

Continued integration is one of the greatest challenges we face in this hemisphere as we approach a new century. This integration has so many dimensions:

• it is about the volume of phone calls between the United States and the Latin America growing 150 percent in this decade -- faster than to any other part of the world; and phone calls just to South America growing 170 percent;
• it is about the travel between the United States and Latin America growing nearly twice as fast as travel with the rest of the world;
• it is about American students -- North and South -- traveling and studying in other parts of the hemisphere in ever greater numbers;
• it is about a near-doubling in the stock of United States foreign direct investment in Latin America since the start of the decade and an even sharper rise, albeit from a low base, in Latin American FDI in the United States during this period;
• and it is about trade: the reduction of cumbersome customs regulations and border restrictions, the 30-odd bilateral and multilateral trade agreements that have been signed in this hemisphere and, ultimately, the creation of a Free Trade Area of the Americas.

It is critical that when we think about integration we do not allow it to be measured by solely in terms of trade agreements. But as the President underlined in Santiago last month, it will be very important to move ahead with the negotiations for the FTAA in the years ahead. This will eventually have to mean Congress granting the President the customary Fast Track negotiating authority that has been afforded to Presidents in the past -- but the early critical negotiations that laid the round for the for the Uruguay Round of the GATT took place without Fast Track. And the same can and must be true of the FTAA.

The FTAA will be important not just for the future of this region but also because it will in many ways be the template for the major global challenge at the dawn of a new century: forging the healthiest, sturdiest possible relationships between the mature economies and the emerging markets. And an important part of that challenge will be about ensuring that all the individual parts of the integration process add to the sum of the whole -- rather than subtracting from it.

With regard to trade, in particular, we will need always to think about FTAA and other regional subunits in terms of their potential to add to world trade. Trade agreements within the Americas that are trade creating have been and will always be welcomed. But they should not and will not be welcomed when they merely divert trade from one country or region to another. That cannot be the way forward for this hemisphere and it cannot be the way forward for the global economy.

III. The Challenge of Inclusion and Integration at Home

I have concentrated here on international policies -- the collective challenges we face in laying the foundations of a more integrated and prosperous continent. But these efforts are not separable from what we each do at home.

We now have government by the people across the hemisphere. What we still need to create is effective government for the people across the Americas. As a highly conservative commentator here in the United States has noted, people cannot hate their government and love their country.

While we are differently situated, many of the "second generation" challenges we face domestically are the same in North and South America:

• rapid, sustained growth demands high rates of national savings -- yet as nations very few of us save at rates close to those that most European or Asian economies achieve;
• growth must be inclusive if it is to endure -- yet America, North and South, is home to some of the highest rates of income inequality in the world and too many of our people are living on the margins;
• strong enforcement of legitimate law is critical to building a strong civil society, the key to a vibrant democracy -- yet in many countries judicial systems remain fragile and in none is the "reinvention of government" complete.

Certainly, the United States cannot entirely exempt itself from these issues while a child born in Harlem has a smaller chance of living to the age of five and a smaller chance of graduating high school than a child born in Shanghai; and when more than 10 percent of Americans do not have a bank account and pay perhaps 10 percent at the local pawn shop to get every pay check cashed.

That is why President Clinton, President Zedillo, President Cardoso, President Frei and the other leaders chose so wisely in selecting education as the major theme of the Summit of the Americas in Santiago last month. Uniquely, education is something that can both increase the size of the pie and include more in its benefits -- ever more so as we move into a post-industrial world in which opportunity depends not on what people can lift but on what they can understand.

If achieving financial stability was the challenge of the latter years of this century, then investing in our people is our challenge of the next. Because in a global economy, it is the only way to maximize every nation's most unique and precious asset: its people.

Doing better will sometimes be a matter of resources. Without adequate resources, there cannot be adequate investments in people. But equally, if not more, important will be spending more wisely the resources we have now. In too many of our countries, too much of the education budget gets spent on higher education for the few. We need to spend those resources on better education for the many. And too often our education systems are judged by the quantity of jobs they provide for teachers not the quality of the education it provides for our children. We need to focus on education in substance and not just in form.

The latest research into the functioning of the human brain confirms what common sense would suggest, that the time when mind is at its most plastic and open to knowledge and ideas is in the earliest years of life. That is why, even on the narrowest economic calculus, investing in broad-based primary education offers every country by far the largest economic returns of any public investment.

Universal access to and completion of quality primary education, and access to secondary education for at least 75 percent of all children were the aims the leaders committed themselves to in Santiago. Those commitments can and must be honored.

This is a task that should be and must be a task for individual nations to finance. But a Hemispheric effort can make a big difference. In the past three years the IDB has approved more than $1.5 billion in loans for education -- around 7 percent of its new lending. In the wake of the Santiago Summit the IDB is committed to more than doubling the amount of new lending for primary and secondary education between 1998 and 2002 -- to $5 billion. At Santiago the bank was also requested to move to establish a special regional fund for education in the Hemisphere, to meet the special challenges which educating our continent will present.

Investing in people, developing strong civil societies and more inclusive nations really are common challenges of the nations of this hemisphere. And as the Summit underlined, cooperation across countries as well as within them will be an important part of the solution. If can continue the work of integration after the Santiago Summit just as it was continued after Miami, and we can continue to pursue the right policies, domestically and internationally, for strong and inclusive growth, I am convinced that the next decade really can be a special kind of time for this hemisphere. If this century was the American century, the 21st century can and must be the century of the Americas. Thank you.