FROM THE OFFICE OF PUBLIC AFFAIRS

I am delighted to have this opportunity to discuss our economic future with the leaders of an industry that will play an enormous -- and enormously under-estimated -- role in that future.

In the late 20th century economy, an industry's visibility is less and less correlated with its importance -- and the weight of its products an ever poorer gauge of their economic value. In no sector is this more true than the chemical industry. American consumers stand in much the same relationship to your industry as they do to the air they breath, one of far-reaching dependence and almost as far-reaching disregard:

• we are a country of proud home and car owners But I doubt many Americans realize when they buy a new home that they have bought nearly $13,000 worth of chemical products before even the carpet is laid -- or that many drivers stop to count the more than $2,000 worth of chemical products and chemical processing contained in their new car.
  
• we take pride in our information revolution. But we measure it largely in bits and bytes. We rarely stop to consider the new life in chemistry that has been at the vanguard: the technological breakthroughs in your industries that have revolutionized every inch of our lives, from fertilizers to finger-printing, from new fabrics to better photo- processing.
  
• we know that the American economy has become part of a global economy. Yet few would probably guess that the chemical industry, long our largest export sector, has also recently been about the most successful, with $167 billion in cumulative trade surpluses in the past ten years, and buyers from Tierra del Fuego to Timbuktu.

It may be little exaggeration to say that where American chemical manufacturers go, so goes the country. But the reverse is even more true -- you have an enormous stake in the state of the domestic economy and that of the broader global economy. And looking around the world, there are today enormous reasons for concern.

Risks Facing the Global Economy

By wide agreement, what used to be called the Asian financial crisis is now a global financial market problem that may be as serious as any the international community has faced since the World War II. There has been what Federal Reserve Chairman Alan Greenspan has called a "very dramatic change in the whole risk profile of the world" -- with implications for every American.

The economic crises and large-scale withdrawal of capital from emerging markets in Asia, Russia and elsewhere have already affected US exports and the job growth that goes with those exports. Petrochemical exports to Japan and emerging Asia for the year-to-date are down by nearly one-quarter, and private forecasters are suggesting that the crises could add one percentage point or more as a share of GDP to our overall current account deficit.

No less troubling has been the recent impact of these crises on American financial markets. In the wake of the Russian crisis in August, almost across the board financial institutions have been running toward quality and away from risk. As a result, even the most respected American companies have found it more costly to raise funds on equity or debt markets and major financial institutions are revising their profit estimates and downsizing their payrolls.

Our goal is clear: to work to restore stability and growth in Asia and Russia and prevent further contagion in other markets. Our strategy for achieving this will rest on three critical pillars:

• strengthened policies in the major industrial economies;
  
• second, strong policies in the emerging economies;
  
• and third, global leadership and support for effective containment of these crises and prevention of possible future ones.

II. Strengthened Policy in the Industrial Economies

The United States

Let me start here at home. In a month or two we will be enjoying the longest peacetime expansion in American history. It has been a low inflation expansion and it has been an expansion that -- to a greater degree than any other of the past 40-odd years -- has been led by exports and investment. In the chemical sector alone, both real investment in plant and equipment and export volumes have grown by ten percent a year on average in the past decade.

Why this success? Two reasons stand out. First, the competitive drive, creativity and flexibility of American companies. It cannot be an accident that communism, planning ministries throughout the developing world and large corporations run by command and control all ran into a brick wall in the same decade and had to be restructured. New technologies in all areas of industry have forced profound changes in the way economic and financial life is organized -- changes for which we are fortunate that our economy is superbly well adapted.

If you want to talk about patient capital look not abroad where too often the same old money was invested in companies using the same old technologies in the same old industries. Look right here in your own industries, where millions are invested in pathbreaking technologies before revenues, let alone profits, come, and molecular biologists such as Kary Mullis can be set on the road to hundreds of millions of revenues and a Nobel prize, before the notion of polymerase chain reaction had spawned a single marketable product.

The second major reason is prudent, pro-growth policies: policies that have put the federal government in surplus for the first time in a generation. As a result of the deficit reductions of the past decade, more than one trillion dollars in capital that would otherwise have been invested in the sterile asset of government paper has instead been invested in America's future: in research and development and plant and equipment, in our workers, in our cities and in our homes.

I am confident that the dynamic duo of competitive industry and prudent policy leave America well-placed to face future shocks and that the momentum of the recovery can be sustained, albeit perhaps at a slower pace than has been true most recently. But as strong as you are and as well-equipped as you are to respond to changing global conditions -- as the Vice- President said last week -- economic growth that is global requires economic leadership that is global. The United States cannot be the importer of only resort.

Continental Europe

For too long, perhaps, too many American analysts have considered Europe to be trapped in the past. To be sure, the structural challenges facing Europe have lately loomed large. Unemployment in Europe is today double what it was in 1979, and more than double the rate in the United States. By some measures, real investment in the continental economies has been stagnant since 1991.

As the Europeans themselves have recognized, the structural reform agenda becomes a more pressing issue with the advent of European economic and monetary union -- an enterprise that, if successful, has enormous potential to pull countries and markets together and make Europe a stronger and more prosperous trading partner for the United States.

European governments' success in addressing Europe's structural challenges will be critical to the success of monetary union itself. And their efforts can only take on greater urgency at a time when strong European growth will be so critical to global growth and stability. But from the factory floor to the highest levels of officialdom -- particularly in France and Germany - - I have detected a wind of change running through Europe not unlike that blew through American business in the late 1980s. And let me be clear: if EMU works for Europe, it will work for the United States and for American business.

Japan

In Japan, it is not so long ago that books were being written about the advent of the Japanese superstate, and commentators were making much of the fact that the land occupied by the Emperor's palace in Tokyo was worth more than the whole of California. What a difference 5 or 6 years can make. Japan is now in a severe economic recession, the most protracted in its postwar history, the financial system is burdened with upwards of $1 trillion in bad debts and the very best banks in Japan are paying substantial premia to borrow in yen.

I do not need to remind this audience that Japan's success in dealing with its problems will carry major implications for the region and for the global economy as a whole. In this context we welcome the Diet decision to make available a significant amount of public funds to strengthen Japan's banks -- provided that these funds are used forcefully and with appropriate conditions.

Yet, given the depth of Japan's recession, we believe it would also be appropriate and beneficial if Japan increased government spending, deepened the size of its tax cuts, and moved forward with effective policies for stabilizing the financial system and getting bad assets off bank balance sheets. President Kennedy once said that problems that are made by man can be solved by man. But even when solutions are known and recognized, they need to be implemented if they are to work.

III. Strong Policies in the Emerging Market Economies

Emerging Asia

If there has been an even larger surprise in the global economy in the past year it is surely the decline of the Asian "tigers". As you know, these crises are still a moving story and the countries concerned are undergoing severe economic and social distress. But in those nations that were first hit and where policy has been most determined, there has been evidence of containment.

Countries that have consistently followed policies that the IMF were able to endorse and support -- specifically the Philippines, Korea and Thailand -- have begun to see signs of a return to stability. In Korea and Thailand the currencies have broadly stabilized, nominal interest rates are down in the low teens, and real interest rates have fallen to well below pre-crisis levels. At the same time these governments are now working to expand their fiscal policy to use the room provided by their sound policies for the fastest possible return to growth.

In Indonesia, as has become increasingly apparent this past year, the major problems have been more political than economic. Its experience has underlined that democracy is very important. But it has underlined even more forcefully that every bit as important as democracy is belief in personal safety and in the security of property rights and free contract.

China has been the fastest growing economy in history since reform began in 1980 -- to the point where, by some calculations, it is now the second largest economy in the world. This has brought China new and deserved weight in the economic arena. But that same success has also added urgency to the need to build a stronger long-term foundation for market development. As the Chinese have recognized, their continued commitment to addressing deep-seated financial sector problems and maintaining a stable currency will be the key to their own growth and stability going forward -- and to the growth and stability of the region as a whole.

Latin America

Turning to Latin America, it is a huge tribute to what has been achieved in Argentina and Mexico in recent years that we have had a major crisis in emerging market economies -- and each of these nations has weathered the storm to a degree that would have surprised many commentators even a year ago. Many feared that the Mexican crisis of 1994 would spur an inwards turn in the region. The reality was that it served as a wake-up call, and has led to a strengthening of policy in most of Latin America. As we have seen recently in Brazil, this has not inoculated the region against Asia and Russia's ills, but it has afforded an important degree of protection.

Brazil has faced serious pressures in recent months, pressures that have underlined the need for the country's longstanding fiscal vulnerabilities to be addressed. In the plan recently presented to Parliament, President Cardoso has committed the government to a fiscal adjustment program that -- decisively implemented -- can provide a foundation for future growth and stability. And as we go forward the United States and the international community have expressed our desire to support these efforts, in whose success we all have such an important stake.

Central and Eastern Europe and Russia

For central and eastern Europe, the very real question for the coming months and years will be which way the magnetism is stronger -- toward the west, and all the markets and prosperity they afford -- or to the East and to Russia. Nothing in life is certain. And we have learnt in the past ten years that the transition to a market economy is not a straight and narrow path. But if we look to Poland, and if we look to the Czech Republic -- and the steps that its government has taken in response to recent market pressures -- I think we see grounds for thinking that the winds of change in this part of the Continent will continue to blow westward.

Turning to Russia, the situation is difficult. Since the reform process began in Russia the market reformers had been running a race to lay the foundations for a successful market economy, a race in which they were squeezed between, on the one hand, the forces of oligarchy and crony capitalism and on the other, the more retrograde elements of the Duma.

If the oil price had not fallen so dramatically, if the government had been more successful in performing core functions such as tax collection and bank regulation, if there had not been a major crisis in Asian emerging markets, and if Yeltsin had not fallen ill -- if any or all of these things had not happened, the reformers might have won their race. But these things did happen and in August the government's time ran out.

The new government of Prime Minister Primakov will have to make its way as it deals with the problems which that failure has wrought. The United States stands ready to support the Russian people in the months to come -- as shown by last week's agreement to provide an emergency food aid package But while we can do an enormous amount with the support that we and the rest of the international community provide, the same truth applies to Russia that applies to every other emerging economy. We cannot want change more than the country itself does. We stand willing to support a viable economic program in Russia in the future as we have done in the past. But ultimately Russia will make her own destiny.

IV. The Need to Think -- and Act -- Globally

The third and major pillar of our strategy is continued American engagement with the international community as we work to respond effectively to these crises and build a stronger system in the future:

• the passage of new funding for the IMF was an important step forward in our ongoing efforts to improve the IMF's capacity to respond to crises. Going forward we must continue to work within the IMF, with our G7 colleagues and with others to explore how this progress can be continued;
  
• more broadly, we will need to build on recent efforts to build a global financial architecture for the 21st century -- one that is better equipped to prevent crises and in which those crises that do occur will be less costly for the countries concerned and for their neighbors;
  
• and in all this, we must remember that the greatest contribution that the United States can make to the global economy will always be the continued strength and dynamism of our own economy -- an economy that still accounts for more than one fifth of global GDP.

Like never before, the United States is truly -- as President Clinton has said -- the world's indispensable nation. But to repeat -- to say we are indispensable is not to say we can carry the burden alone. At the APEC summit in Kuala Lumpur in a few weeks' time and to other international fora it will be critical for every country to do its part to ensure the global momentum toward open markets is continued and cooperative efforts to promote short and longer term stability are sustained.

After the difficult years of the first half of this century, the world swung decisively toward international institutions, cooperation and open markets. That is the path that has helped create the global economy in which American companies and workers now have such an enormous stake. And it is the path that we can and must work to strengthen and encourage all nations to follow as we face the many challenges to come. Thank you.