FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure to speak tonight at your Woodrow Wilson Center, which has a well-deserved reputation for scholarship on public policy issues of importance to this country. I have experienced this first hand. David Lipton, who served with extraordinary distinction as Under Secretary of Treasury for International Affairs in dealing with the current global financial crisis, came to Treasury from the Wilson Center. Let me also add that I appreciate this opportunity join you in honoring Dana Mead, with whom we have worked most constructively over the past few years, especially on international economic issues.

Tonight I would like to offer some reflections on the global financial crisis. which has presented two challenges to the international community. The first challenge is to address the crisis itself, doing all that is sensible to help the affected countries return to stability and growth and to limit contagion. A second challenge, one that must be pursued simultaneously, is to build a new architecture for the international financial system. Most of what has been written about this crisis and these two challenges concerns economic policy issues and judgments. However, of equal importance, but much less discussed, are the political and legal issues involved and I'd like to focus on these this evening.

At the heart of both, addressing the current crisis and building a new architecture, is the tension -- and the question of how to resolve that tension -- between the sovereignty of nations on the one hand, and the demands and dynamics of the transnational global economy on the other hand. That seems to me a profoundly important dichotomy that will occupy us for a long time to come.

The current crisis is, in many respects, the most serious international financial disruption of the last fifty years. While it is often said that the crisis began in Thailand, in my view, that is not so. Thailand was simply the first country in which financial institutions erupted. This crisis is the result of problems that developed over many years: in industrial nations, great excesses in credit extension and investment into developing countries with increasingly inadequate weighting of risk as good times continued; and in developing nations, badly flawed financial systems, various other structural problems and macroeconomic policy imbalances. And, just as capital once flowed into emerging market countries without, in too many instances, proper analysis of risks, it is now too often flowing out in a non-discriminatory, overly negative reaction to the risks.

This crisis presents enormously complex and in many ways unprecedented issues. There are no magic wands or easy answers and a crisis that is a product of problems that developed over many years will take time to work out. With this in mind, let me make some observations about the political and legal dimensions of crisis response and architectural reform, which have received far too little attention relative to the intense focus on the economic dimensions.

First, the politics, in particular, providing strong leadership on the often unpopular components of sound economic policy and generating broad public and political support for such economic policy.

The politics of good economic policy starts with leadership -- political leaders who understand the economic problems of our complex world and have the political courage and ability to make and pursue decisions that are often very difficult politically. I have seen a lot of political leaders over the past six years, and this combination is not so easy to find, though there have been some outstanding instances. A good example is President Clinton's reaction when we met with him in the Oval Office on a Monday night in 1995 to discuss the Mexico relief package in response to the peso crisis. I told the President that a poll published that day showed that the great majority of the American public was opposed to support for Mexico, but I then said that without that support there was a real chance that the economy of Mexico could collapse, and that a Mexican crisis could spread elsewhere in Latin America and beyond. Without hesitation he told us to go ahead with the package, and today Mexico is back on the path toward stability and growth, though with many challenges still to face.

Coupled with strong leadership is the need to create broad public and political support for effective economic policies, and that requires getting all stakeholders to conclude that these policies are in their interest. In Korea, the new leadership brought together unions and companies to build support for reform. Now, short-term interest rates have fallen from 25% to 7% and the currency has substantially strengthened. A similar process occurred in Thailand, though in both cases enormous challenges remain ahead. In Russia and Indonesia, on the other hand, as you all know well, the political system never took ownership of reform and both economies are in dire straights.

Just as the politics of effective economic policy is critical in developing countries, so is it critical in industrialized countries. In Japan, for example, the absence of strong political support for bank reform and fiscal stimulus has led to seven years of extremely slow growth and three quarters now of recession, which in turn has affected not only the people of Japan but has been a central problem for the rest of Asia and the entire global economy.

I believe that the ability of democracies to make politically difficult economic decisions -- both with respect to their own economic policies and with respect to effective international organizational activity -- will be central to the success of democracy and to the success of the global economy in the decades ahead.

Another major factor not often discussed with respect to this crisis and to future architecture is a strong legal system. A key factor in the crisis in many countries was a failure of the legal system -- pervasive corruption, a lack of clear laws and an ineffective judicial process. Building a sound legal and judicial framework includes establishing the rule of law, transparency, court systems and mechanisms by which disputes can be resolved quickly and fairly, and combating corruption.

In some respects, these political and legal challenges are ones that governments have faced for a long time. One difference now is how much it all matters in the interdependent global economy, where decisions can affect not only the country involved, but to a far greater extent than before other countries around the globe. Moreover, while some have argued that in this world of huge global markets, government has become largely irrelevant, this crisis demonstrates how wrong that is. These huge markets, including bank credit extension, powerfully reward sound policy and punish unsound policy, and these policy regimes of nations are set by governments. For all of these reasons, there is now a heightened importance of each country taking the right actions internally, as well as of nations working together to create international mechanisms that encourage countries to make the right decisions, and that deal effectively with over-arching issues of the global economy. And, central to meeting the needs of the global economy, as I said earlier, is reconciling the sovereignty of nations with the transnational nature of the global economy.

These are the kind of issues the international community will continue grappling with as it works on improving the architecture of the global economy, and that architectural reform is critical, because, in my view at least, if we are going to maintain and expand a market-based economic system, which I believe is the best path forward for the global economy, we must work towards a system that is far less prone to instability, more effective in dealing with the instability that does occur, and provides a real opportunity for all to share in the benefits of global growth.

Let me conclude by saying a word about the challenge we face in our own country in building support for international economic policies and leadership.

Congress, after a year long debate, is finally on the verge of approving IMF funding with tomorrow morning's Senate vote on the budget. But we still have not paid our arrears to the United Nations, we still lack the authority to negotiate new trade agreements, even though expanding trade is very much in our interest, and protectionist pressures seem to be building. I am deeply concerned that public support for forward-looking international economic policies may be waning at a time when our country's economic, national security and geopolitical interests require just the opposite.

In recent years, we have seen both an erosion of the traditional bipartisan base of support for international economic engagement and, at the same time, a re-ignition of one historical strain in American thought, a rejection of the outside world. This has occurred for at least two reasons: anxiety brought by the rapidity of change in this era of the global economy and dramatic technological developments; and the end of the Cold War, which caused the foreign policy consensus to lose its centerpiece -- the effort to contain Communist expansionism.

The response to all of this, however, ought not to be to turn inward, or to try to dismantle the global economy that has benefited so many. The response should be to improve the workings of the institutions of the global economy and to implement sound economic policy at home, including fiscal discipline, and promoting our competitiveness through education, research and the like.

For our country to respond in this constructive mode, however, public understanding of the benefits to our economic well being of a market based global economy and of strong U.S. leadership in that global economy must be greatly increased. And contributing to the heightened understanding is another area, in addition to scholarship, where the Woodrow Wilson Center can and should continue to play a very important role. All of us -- public sector officials, the business community, foreign policy experts -- must work together on this challenge. The business community has an especially important role to play, since it understands the importance of U.S. leadership, and has the means and incentive to convey that understanding in a systematic fashion in the public domain so, it is fitting that you have honored Dana Mead, both for what he has already done and for what, as head of the Business Roundtable, he will be doing going forward.

The new global economy offers great opportunities for our country and all the nations of the globe as we enter the 21st century, but, to realize those opportunities, the United States, as the world's leading economy, must meet the domestic and international economic policy challenges of that new global economy. That in turn, will require all of us public officials, the Woodrow Wilson Center, your honoree and the Business Roundtable that he heads-to redouble our commitment to the development of informed, broad-based public support for meeting those challenges. Thank you very much.