FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. I am pleased to be here with Finance Minister Al-Assaf for this Fourth Plenary Meeting of the U.S. - Saudi Arabian Business Council. Let me start by thanking Al DeCrane and Sheikh Abdulaziz Al-Quraishi, Co-Chairmen of this Council, and Vice Chairman Dick Debs for bringing together this distinguished group of business leaders.

By generating trade and promoting closer ties, the U.S. - Saudi Business Council is playing an important role in enhancing an already strong strategic partnership between our two countries. All of us have an interest in a secure and stable Middle East; this interest is well served by greater economic interaction between the United States and Saudi Arabia.

I would like to comment briefly this morning on the U.S. - Saudi economic relationship, and then turn to addressing several of the opportunities and challenges that each of our countries face in continuing to stimulate economic growth and strengthen our commercial ties.

As this audience knows, we are just concluding the World Bank/IMF Annual Meetings here in Washington. In that context, let me welcome Saudi Arabia's increasing engagement in international economic fora, including participation in discussions on reforming the international financial architecture. An important priority for the United States in recent years has been to bring a broader range of nations into international conversations that were once dominated solely by the major industrialized countries. In that spirit, we look forward to Saudi Arabia's continued involvement as the community of nations works together to address the complex financial issues we face.

On a bilateral level, the economic ties between our two nations run deep. The United States is the leading source of foreign investment in Saudi Arabia and for the last decade has

been Saudi Arabia's largest trading partner. Since the last plenary meeting of the U.S. - Saudi Business Council in 1996, U.S. exports to Saudi Arabia have increased by over 40 percent, to more than $10.5 billion in 1998.

In addition to the growing trade and investment ties between our countries, a key tool in our cooperative relationship has been the U.S. - Saudi Arabian Joint Economic Commission, which is managed by the Saudi Finance Ministry and the U.S. Treasury. Since its inception in 1974, this partnership has conducted nearly 40 major technical assistance programs in a broad range of fields, from trade to agriculture to science and technology. Let me just mention a few examples of the contributions that the Commission has made. They include:

• Creating the Saudi Finance Ministry's National Center for Financial and Economic Information to support Saudi economic policy officials in their analysis and decision-making.

• Providing training to Saudi physicians, nurses, and other health professionals to improve the quality of medical care available in Saudi Arabia, especially at emergency care and trauma facilities.

• Contributing to the development of a modern Saudi highway system throughout the Kingdom to facilitate the transport of goods and services. I am told - and am sure that many in this room can attest - that the enormous progress that has been made in this regard in recent years is evident to any frequent visitor to Saudi Arabia.

The Joint Economic Commission has benefited both of our countries in numerous ways, among them the creation of a forum of Saudi and American business leaders that eventually became the U.S. - Saudi Business Council. Great strides have been made in Saudi Arabia's strengths and capabilities through the cooperative work of the Commission. Moving ahead, this invites us to explore new and creative means of working together.

Economic conditions today in both of our countries present us with opportunities to take steps now to ready ourselves for future challenges. In the United States, our focus on fiscal discipline has brought to an end a generation of budget deficits and led us to the threshold of an era of budget surpluses. For the fiscal year that ends tomorrow, we will record a budget surplus of at least $115 billion, the largest dollar surplus in history.

For Saudi Arabia, the rebound of oil prices over the past nine months has eased somewhat a constrictive economic and financial environment that had choked growth. When the value of a barrel dropped below $13 last year, the Saudi budget deficit grew to 10% of GDP and the economy contracted by 1.6%. With the price of oil nearly double today where it was last December, financial pressures have eased and Saudi Arabia is expected to record solid growth this year.

How then can we leverage today's better times to prepare for the future uncertainties that a global economy brings? Let me discuss briefly the United States' leading economic priority - preserving our fiscal discipline and improving the government's fiscal position - and then address two key priorities for Saudi Arabia: promoting free trade and private investment; and creating a larger and more productive private sector through privatization and deregulation.

Our overarching economic objective in the United States as we prepare to enter the next century is to maintain the same fiscal strategy that has led to the budget surpluses the economy now enjoys. We believe that the best way to maximize the prospect for continued expansion is by assuring that the vast majority of projected unified surpluses are used to pay down debt. This strategy has a number of significant virtues. Let me highlight three:

• First, it maintains the virtuous cycle we have worked so hard to achieve, providing for high rates of investment and capacity growth that maximize productivity growth and reduce inflationary pressure.

• Second, by raising the pool of domestic savings, paying down debt avoids the painful choice we would otherwise face between reducing domestic investment and increasing even further our reliance on foreign finance and the trade imbalance associated with that reliance.

• Third, paying down debt re-loads the fiscal cannon, preparing the government to respond to future contingencies such as recessions or economic and financial disturbances overseas.

While paying down debt has to be our first fiscal priority, we also face critical challenges that need to be addressed today in order to give us the best possible opportunity for continued prosperity in the future. We believe that now is the time to ensure the long-term solvency of Medicare and Social Security. While it is impossible to predict with any certainty what economic conditions in this country will be one or decade from now, what is clear is that the sooner we act to strengthen these critical social safety nets, the easier it will be to protect these programs for future generations.

Just as our budget surpluses here in the United States give us an opportunity to address the challenges I have mentioned, so too does today's oil price provide Saudi Arabia the chance to make structural changes in preparation for the next time a shock occurs in that market.

When I spoke to this group three years ago, I highlighted the need for the diversification of the Saudi economy so that its fate would not be so closely tied to the price of oil. Some progress has been made on that front. For example, Saudi Arabia's non-oil exports increased by 40% between 1993 and 1998.

At the same time, however, Saudi Arabia can go farther in lifting its economic dependence on the oil market. Today, oil accounts for over 85% of total Saudi exports. Developing a more balanced and diverse economy is a challenge that many countries in the Middle East face - a challenge that if acted upon could improve the economic and financial stability of the region.

In the wake of last year's downturn in oil prices, Saudi leadership has articulated a need to accelerate efforts to promote private investment and a larger private sector. These are the right steps for Saudi Arabia, and the right time to take them is now. Let me turn to addressing these objectives.

Perhaps the best available means for Saudi Arabia to diversify its economy and attract foreign investment is through the further liberalization of its trade and tax laws. Providing a level playing field to foreign investors - both in the investment and ownership opportunities available to them and in the way they are treated under the tax code - will ultimately benefit the Saudi economy.

The pace and manner in which Saudi Arabia liberalizes its tax code and foreign investment laws are, of course, matters for the Saudi government and Saudi people to decide. But let me just note our own experience in the United States: The participation of foreign businesses in American markets have been of tremendous benefit in building strong and efficient capital markets in the United States, which have in turn played a major role in the restructuring of the U.S. economy during the past decade. I believe that Saudi Arabia stands to gain similar advantages by opening its market and allowing greater private sector competition to improve the productivity and capacity of its economy.

A further objective for strengthening the commercial ties between the American and Saudi economies is accession to the WTO on commercially meaningful terms. We are fully supportive of this objective and look forward to working with Saudi Arabia to ensure that it meets the necessary conditions for accession.

One area of economic reform in which Saudi Arabia has recently begun to make discernible progress is in the privatization and deregulation of a number of its state-owned enterprises. For example, since 1997, Saudi Arabia has permitted private operation of its ports, and in May 1998, the Saudi government authorized the private operation of its postal services.

More recently, the Saudi Arabia has moved to corporatize its telecommunications monopoly in preparation for its eventual sale. The successful privatization of Saudi Telecom - one that is conducted in a fair and transparent manner - would serve as an important model for future privatization, both in Saudi Arabia and the entire region. Ideally, this would create momentum for transferring ownership of the power and transportation sectors into private hands as well. Reform in these sectors would not only help improve the efficiency and provision of critical services, but would also support the government's fiscal consolidation efforts.

In the three eventful years since this group last gathered, we have seen the commercial ties between the United States and Saudi Arabia continue to strengthen, thanks in part to the efforts of this audience. At the same time, the global financial crisis, fluctuations in the price of oil, and other factors make clear that unforeseen challenges will continue to arise. In order to prepare our economies to weather whatever storms might descend upon them in the future, we must continue efforts to modernize our economies and addresses the fiscal challenges that we face. Given the opportunities presented by conditions in both our countries, we should not pass up the chance to address these issues today. I am confident that by taking the necessary steps, we can prepare our economies for the future and enjoy substantial dividends from a broader and deeper bilateral relationship. Thank you.