FROM THE OFFICE OF PUBLIC AFFAIRS

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 me first-hand about 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.

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 global financial center.

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 experienced first-hand the 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.

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 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 modern 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.

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 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.

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.

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 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.

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.