FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. I would like today to talk about the new global economy; its implications for recent and prospective economic performance in the United States and Europe; and the new challenges that it poses that we need to work together to confront.

What is that new global economy? In thinking about that question, there is one experience that I always come back to. Several years ago a Treasury delegation was in Africa. We went to visit a small village about two hours outside of Abidjan, in Cote d'Ivoire, in a kayak, where I was able on behalf of the US government to open the first clean water well that that village had ever had. Afterwards, we were going back on the kayak, and somebody handed me a cell phone. It was Bob Rubin, with a question for me about the IRS budget. We spoke for a few minutes, and no one thought anything of it.

That was in 1997. And afterwards I remembered that in 1988, I was in the back of a car in Chicago that had a telephone in it. It was a sufficiently remarkable event that I called my wife to tell her I was in a car with a telephone. That was not an unreasonable reaction to have in 1988. Nine years from the backseat of a car in Chicago to a canoe two hours outside Abidjan.

Three things come together in that story:

First, new technology and the opportunities that they create.

Modern advances in technology are taking us to a post-industrial age, with profound implications for economies and societies. The same power of new technology we saw on that canoe was at work in Mozambique, when we met a businessman and asked him how he was doing. He said: "OK, but I'm worried about competition." Then we asked him what he did. He was the country's only Internet provider. But he was worried about new competition.

Breakthroughs in information technology, communications technology, and production technology: taken together, they are pushing out the frontier of the possible, with enormous implications for our economies and our societies.

Second, the rise of markets.

It was not a public telecommunications company that made that phone call in Cote d'Ivoire possible. It was entrepreneurs; it was the private sector making a difference. It cannot be an accident that Soviet-style communism, planning ministries in the developing world and large US corporations run by command and control all ran into a brick wall in the same decade and had to be restructured. There has been a basic shift in the balance of economic advantage, toward systems in which economic power and opportunities are more decentralized - and the skills and ideas of the individual are given greater weight. This is true at the level of individual businesses. As I will discuss, it is also true at the level of national economies.

Third, convergence and global integration.

The most obvious trend that is brought out by that story is in many ways the most dramatic: the emergence of a global economy that is worthy of the name. When history books are written 200 years from now about the last two decades of the 20th century, I am convinced that the end of the Cold War will be the second story. The first story will be about the appearance of emerging markets - about economies where, taken together, billions of people live, moving toward the market and seeing rapid growth in incomes. This is an event, I would argue, whose importance in economic history can be compared only to the Industrial Revolution and the Renaissance.

Taken together, these three forces have brought about a kind of paradigm shift in the rules governing global economic success and failure, with profound consequences for relative national economic performance.

Ten years ago, the joke was that the Cold War was over, and Japan and Germany had won. Observers looked to the US and saw an economy dogged by slow productivity growth, corporate downsizing and record budget deficits. And when they looked abroad, they saw other models of economic organization that the US would do well to emulate.

What a difference a decade makes. Today, it is fair to say that that the tables have been turned; because the global economic developments of the 1990s have been ones for which the US turned out to be relatively well equipped.

Specifically:

• The US emphasis on decentralized decision-making and competition has served us well in an era that puts greater emphasis on markets and puts incentives before coordination.
• Our greater readiness to accept radical change has turned out to be a valuable asset at a time when the very nature of economic value has started to shift. It used to be that a country's success could be judged by the size of its skyscrapers and steel plants. Today, Microsoft has a greater market capitalization than the entire American steel, auto and aerospace sectors combined. And the "short-termist" US capital market had a lot to do with the fact that large amounts of domestic capital was forced out of the first sector and into the second. It is striking to consider that nearly one third of our 25 largest companies did not even exist a generation ago.
• And our continued support for openness and integration has helped expand our markets and enabled international trade to be the safety valve on a high-pressure economy. The competition it has brought to consumers, the pressure it has brought on producers to improve has been an important source of the sharp increase in productivity growth that we have recently seen.

Against this backdrop, the move from fiscal deficit to surplus has turned out to pay especially large economic dividends. As a result of the deficit reduction that occurred in the 1990s, more than 2 trillion dollars that in 1993 was forecast to be absorbed by government borrowing was instead made available for productive private investment. That fiscal turnaround would probably always have had favorable implications for US capital costs and the level of private investment. But the benefits have been that much larger in an environment of burgeoning private creativity and growth.

If the move toward greater emphasis on individual effort, entrepreneurship and competition has been a move in the direction of traditional US strengths, it is fair to say that it has been a move away from traditional European values such as collectivism, economic security and coordination. This has made the lesson of recent economic developments, for Europe, more complex.

• On the one hand, these trends have helped to strengthen the case for the leading European projects of this period: notably the creation of a single market, the birth of the single currency, and, to a lesser extent, the enlargement of the EU. Each of these projects offered the potential to enhance Europe's attractiveness to investors and create a larger, more integrated European market.
• On the other hand, the sheer pace of change in the broader global economy has magnified the kind of structural and macroeconomic changes that will be necessary to make these projects a success. And they have posed a difficult conflict between the exploitation of new opportunities and the preservation of old values.

How will this conflict play out? Different countries have responded more quickly than others. But it is possible that the reforms that have already been achieved will turn out to have a momentum of their own.

For example:

• Risk-taking and entrepreneurship are perhaps not yet the norm in much of Continental Europe, where the OECD estimates that it takes 12 times longer to set up a new business than it does the US, and four times the cost. But that is changing fast, with the very rapid emergence of a single European financial market, and innovations such as the German Neuer Markt now making their mark.
• By any reckoning, the information revolution in much of Europe has not progressed as far as it has in the US or Japan, with IT accounting for only 4 percent of euro area GDP last year, compared to 7 percent for the US and 6.5 percent for Japan. But moves toward Europe-wide deregulation have helped to create the most dynamic and well-developed mobile phone markets in the world - and have put Europe at the cutting edge of new economy trends such as "m-commerce".
• By and large, the Euro area still lags far behind in the creation of jobs, with an unemployment rate that is higher than any government should accept, and only 67 percent of the working age population in jobs, compared with nearly 80 percent in the US. But several countries have acted to improve labor market flexibility and thus potential growth in employment. And those who have gone furthest in this direction, such as the UK, Netherlands, Ireland and Denmark, have enjoyed sharp declines in structural unemployment and above-average growth.

So, Europe is changing - in some cases, quite dramatically. The trouble, as Continental European policy makers know well, is that the world, in many ways, may be changing even faster. This is perhaps the main reason why very impressive reductions in European budget deficits have yet to translate into substantial increases in rates of domestic European investment, or upward revision of private sector estimates of the European rate of sustainable growth.

Economics is not a discipline that is susceptible to eternal truths. I have argued that a system that emphasizes decentralized decision-making has turned out to be well placed to respond to the economic trends of the 1990s. But European systems that emphasized coordination and cohesion were in many ways well adapted to the shape of the world economy in the decades after World War II.

In every period of economic history, economists and others have opined about the relative merits of different kinds of economic system. And more often than not, the prevailing wisdom has probably been broadly right. Where the believers in that wisdom go wrong is in thinking that it will be wise forever. The reality is that economic theories change, because economies do. It may be true, for example, that more cohesive economic systems make radical changes less easily, and that is a disadvantage for Europe in this current moment. But such systems also tend to be better at more incremental change. And none can say that the time of more continuous, incremental change will not return.

The upshot is that it would be very unwise for any of us, least of all in the US, to take anything about our current economic performance for granted. None of us know what the next ten years in the global economy will hold. We must simply do what we can to make our best preparations for the future.

For the US that means:

• Working to preserve our hard-won fiscal discipline and the increased room for domestically funded investment that such discipline creates. That means continuing to pay down debt and avoiding excessive tax cuts that could put future surpluses in doubt.
• Working to tackle our greatest micro- and macro-economic weakness: the very low rate of private saving. Even with recent improvements, our national saving remains uncomfortably low - both relative to other industrial economies and to our own experience in the 1950s and 1960s.
• And working harder to include every American in the productive enterprise of the nation, through further expansion of our support for the working poor and stronger efforts to combat social exclusion: particularly in the quality of our basic public education, where the US lags behind Europe. This is a moral imperative. It is also an economic imperative at a time when increasing our productive capacity means a reduction in future inflationary threats.

Europe, for its part, must guard against a kind of complacency borne of diminished expectations.

It is not just Europe that has a stake in Europe sustaining achieving a higher sustainable European growth rate in the years ahead. A more attractive European investment climate will equally be critical to supporting a more balanced pattern of global growth, with a reliance on investment-led, rather than export-led, European growth.

No one knows better than Europe's reforming governments the kind of commitment and political will that will be needed to complete the transformation now under way. But the potential is clearly there. It has not escaped notice that the four countries that have moved furthest with structural reforms, real fixed investment in the 1990s has risen between three and ten times faster than for the Euro-area as a whole. And certainly, in the recent German and French tax reform proposals we have impressive signals of the will to press forward with further reform.

So, the emergence of a new global economy will pose a range of challenges for national policy to which we will all need to respond. But such a world also throws up new global challenges that we can only confront together.

For example:

• Building an effective international financial infrastructure to prevent financial crises such as those in Asia - and to respond effectively to crises when they occur.
• Working together to curb the dark side of globalization: the money laundering and other "crimes without frontiers" that are that much easier in an integrated world.
• And working to create what President Clinton has called "a global economy with a human face": a global trading system that supports openness and competition between nations, but not a worldwide race to the bottom.

There will be no single relationship more crucial to fashioning the right kind of global response to these challenges than the relationship between the US and Europe.

• We see the strength of that relationship in the more than $200 billion in US goods and services that the EU imports every year, fully one-fifth our total exports. And in the near doubling of flows in the other direction in the past five years alone, which has helped to keep down prices and offer wider choice to American consumers and producers.
• We see it in the fact that more than half of U.S. investment overseas is in EU countries - and that EU investment in the U.S. has itself doubled since 1995, making EU firms an increasingly common part of our economic landscape. One in twelve manufacturing jobs in the U.S. is in a European-owned factory.
• And of course, we see it in our increasingly close cooperation in the diplomatic arena: in the liberation of Kuwait; the reconstruction of Kosovo; and several other of the world's major recent trouble spots.

To be sure, we will have our differences: as we have seen, most recently, with regard to the FSC. We are pleased that the House this week passed legislation that repeals the FSC and replaces it with a tax ruling that complies with the WTO ruling. However we regret that the European Commission has not accepted the new legislation in spite of the fact that the new law is neither a subsidy, nor is it export contingent. Nevertheless, following recent bilateral negotiations, the EU has agreed to a review of the WTO-consistency of the legislation, and to hold in abeyance the imposition of retaliatory sanctions until the outcome of that review is known. It is critical that we continue to work together in a cooperative manner to resolve this question.

In spite of these occasional differences, I am more than hopeful - indeed, I am certain - that in a new global economy, the ties between our governments, businesses, and our peoples that we see reflected here today will only grow stronger in the years ahead.