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FROM THE OFFICE OF PUBLIC AFFAIRS October 23, 2002PO-3570 It is a pleasure to be here this morning to discuss the For any discussion of the global economy I think it is useful to begin with a statement of goals. Goals help us assess where we are and where we want to go. The Bush Administration’s international economic policy has been guided by two goals: first, increasing economic growth, as measured by improvements in productivity and higher per capita income; and second, improving economic stability, as measured by a reduction in the severity, length, and frequency of economic downturns and crises. These goals apply to all countries – the Economic Growth and Stability in the
My academic research and experience in the government has taught me that getting international economic policy right starts with getting economic policy right at home. So let me start with the The policy responses to last year’s recession were quick and decisive. President Bush’s tax cut came at exactly the right time. Along with the operation of automatic stabilizers, the tax cut helped mitigate the recession. On the monetary side, the Federal Reserve moved early and aggressively to lower the federal funds rate. Low interest rates continue to support the economic recovery. These fiscal and monetary responses helped keep the recent recession mild by historical standards: real GDP fell only 0.6 percent over the first three quarters of 2001, well below the 2.3 percent average of all other recessions since the mid-1950s. While the quarterly pattern of GDP growth has shown some fluctuation, it confirms our view of a well-founded underlying recovery. The healthy rebound in the fourth quarter of last year was followed by particularly strong growth in the first quarter of this year, which in turn was followed by a modest rise in the second quarter. All indications are that the just completed third quarter experienced healthy growth and the economy will continue to grow at 3 to 3 ½ percent. Growth is no longer concentrated in consumption. Investment in equipment grew in the second quarter for the first time in seven quarters, assisted by the expensing provisions of legislation enacted in March, while orders and shipments data are signaling further gains in the third quarter. Interest rates have been the lowest since the 1960s, sparking a record pace of new home sales and allowing automakers to boost sales by offering generous financing and discounts. The unemployment rate reached a 7-month low in September. With the right policies the current Economic Growth and Stability in Other CountriesEconomic growth in the other G-3 countries, however, has been disappointing. The recovery is fortunately picking up a better pace in Economic growth in other emerging market areas has been higher than in Growth in the dynamic Asian economies is particularly strong. Here in Policies to Promote Economic Growth and Economic Stability
Keeping economic growth strong when it is strong and increasing growth when it is weak, rests on adopting the right economic policies. A fundamental principle of the Bush Administration’s approach is that every country must have ownership over its own economic policies. Every country has responsibility for addressing its own economic challenges and forging its own economic destiny. History and experience provide ample evidence of the kinds of policies that deliver higher productivity growth and higher living standards. Sound fiscal policies and low-inflation monetary policies are, of course, essential. But they are not enough. Pro-growth legal and regulatory policies encourage business investment, innovation, and entrepreneurship. Investments in health and education provide for physical well-being and build the skills of the labor force and population as a whole. Sound tax policies – particularly lower marginal tax rates – improve incentives for work and investment, while strong rule of law and intolerance of corruption gives people confidence that they will be able to enjoy the fruits of their work and investments. Strong financial systems allow capital to be put to its most efficient use. Free trade provides new avenues for growth and fosters the diffusion of technologies and ideas that increase productivity. The Bush Administration is committed to pursuing pro-growth policies such as making the tax cuts permanent, controlling the growth of government spending and reducing the deficit. The corporate responsibility act, which provides for new standards for corporate accountability, will enhance the strength of our capital markets by ensuring that people saving for their future can get accurate information for sound investment decisions. With the passage this summer of trade promotion authority for the President, the Bush Administration is committed to pushing ahead to lower trade barriers throughout the world, including through the new round of multilateral negotiations begun at History also tells us a great deal about the kinds of policies needed to improve economic stability. My own research has examined the role that more effective monetary policy has played in reducing volatility in output. Monetary policy geared toward low inflation, combined with sound fiscal policies that allow automatic stabilizers to operate over the business cycle, are key to promoting sustained and stable economic growth. While economic stability is important for all economies, it is particularly important to emerging markets. The frequency of financial crises in the 1990s has served to discourage investment and damage expected profitability in many emerging markets. As a result, after averaging nearly $150 billion per year from 1992-1997, private capital flows to emerging market countries fell off to less than $50 billion per year in 1998-2000. Restoration of strong private investment flows at lower interest rates is crucial to enable these countries to invest in the productive base of their economies and raise the living standards of their people. Policies that reduce a country’s vulnerability to financial crisis are therefore important both for improved economic stability and higher economic growth. These include prudent debt management policies, strong prudential standards, avoidance of currency and duration mismatches, and greater transparency. Exchange rate arrangements are also important, in particular avoiding soft pegs and choosing either a flexible exchange rate or full dollarization. The Korean Example First, Second, and equally important, the Korean government has brought about significant structural changes in the economy. The financial markets have recognized these strong policies. Credit rating agencies have restored Concluding Remarks As the recent slowdown has demonstrated, we share a common interest in increasing economic growth and improving economic stability in the global economy. Each country has a role to play in adopting the right economic policies to advance these goals. Experience has demonstrated what policies lead to rising standards of living and growing prosperity. In the final analysis, the prospects for the global economy rest upon our continued dedication to applying those lessons. |
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