FROM THE OFFICE OF PUBLIC AFFAIRS

Good evening.

Thank you, Bill [Rhodes, Vice-Chairman of Citigroup], for your kind introduction, and for inviting me to speak to the Americas Society tonight. It is a pleasure to be here to discuss United States economic policy toward Latin America and the Caribbean, and to speak to you about my recent experiences there.

For President Bush, and for me, economic development isn’t defined by abstract concepts and measurements of national averages -- it’s about creating the circumstances so that real individual people can reach their human potential. President Bush envisions a world where every human being has the tools and the opportunity to succeed, and to improve the future for their children and their nation. As he has said "There are no second class citizens in the human race." This is our North Star. The question is: How do we achieve it?

We know from experience that countries that have succeeded in raising living standards for their people have pursued three basic policies. First, they govern justly, by enforcing law and contracts fairly, respecting human rights and property rights, and fighting corruption. Second, they encourage economic freedom, by removing barriers to trade, opening their economies to investment and competition, pursuing sound fiscal and monetary policies, and divesting government of business operations. And, third, they have invested in their people, by providing the best possible systems for education, health care, and clean water.

None of this is easy. It requires leadership. Local, accountable leadership.

I am convinced that we must and can reshape the framework of international economic assistance so that it encourages that leadership on the ground and fosters that vision of success everywhere.

With President Bush’s leadership, our policy is rooted in the fundamental tenets of success for all countries:

• Leaders have the responsibility to own the policies necessary for economic success.

• The role of the United States and the rest of the international financial community is to clarify the responsibility of local leaders, to support leaders pursuing good policies and to provide early warning to nations headed down the wrong path. Because the pain and costs associated with financial crises are so great, preventing financial crises must be the first priority for the IMF.

To reach that ideal, we must first build the mechanisms that will let those principles govern.

Today, there is no predictable process for nations that have reached a level of unsustainable debt. There is no firm limit on IMF lending. And in reality, there can’t be, because if such a limit were imposed, no one knows what happens next. Today, with no clear process for sovereign debt restructuring in place, when a nation is on the brink of financial collapse we have two stark and uninviting options – unwarranted lending or sending the troubled nation off a cliff into a catastrophic default.

To move toward a world that averts crises before they happen, we have to develop a clear and predictable process for any nation that arrives at a position where its debt level is unsustainable. When that clear process is in place, firm limits on IMF lending need not be breached, and national leaders in emerging countries will understand the limit of what they can draw. National leaders in emerging economies would bear responsibility for their policy actions. The IMF, the United States, and the entire international financial community could focus its energies on encouraging nations along the path to success and avoiding crises.

I want to underline a point here. What I’ve just described is where we want to be – it is not where we are today. Today we are just beginning to build a sovereign debt restructuring process that will enable us to move toward this better world. First, we are developing clauses that could be included in sovereign debt contracts that support collective action by a debtor nation’s creditors. We have had many bilateral discussions with nations that are clearly investment grade today, encouraging them to lead the way for their emerging economy colleagues, and I believe we are making progress. At the same time, we are working with the IMF on a complementary mechanism that could be implemented statutorily. I believe pursuing both ideas is necessary and important. Investors will be more likely to invest when they know that the procedure for crisis resolution is not in itself an additional risk.

Until we have these mechanisms in place, we have to deal with the world as it exists today, and incrementally move it toward our ideal.

Turning more directly to Latin America, I want to make a few comments about specific countries. Let me begin with Brazil. In 1990, the inflation rate was almost 3000%. Leadership from Brazil’s policymakers has brought price stability to the nation, improving the real purchasing power of the people. Brazil has also made substantial progress in disciplining fiscal policy, consolidating its financial sector, reforming the energy sector, and modernizing the labor code. These reforms have helped produce real economic achievements: foreign direct investment has increased from $988 million in 1990 to $22 billion in 2001. These investments have helped modernize the private sector in Brazil, spurring productivity. While substantial challenges remain for Brazil --lowering trade barriers, reducing government ownership of companies, and reducing the barriers to job creation -- the country has made real progress, and these policies have put it in a far more resilient position going forward. The steady commitment to sound economic policy was a critical element in the U.S. government’s support for a new IMF program for Brazil last month.

Uruguay is another good example. For several years, that country has effectively implemented sound economic policies, embraced free markets, liberalized trade and maintained low inflation. Moreover, President Batlle’s administration has made courageous commitments to ensure that Uruguay remains a strong financial center. Those commitments include the difficult but necessary steps of closing unsustainable banks and strengthening the supervisory and regulatory framework for bank management in the remaining institutions. In that context, the United States supported IMF assistance to Uruguay in August this year.

But some Latin American governments – like some governments in other parts of the world -- have not committed to stable, sound, growth-oriented policies, and as a result, they have suffered more severely from recent shocks. Unsound fiscal and monetary policies have spurred inflation and burdened developing economies with overwhelming debts. Poor governance and corruption deter local entrepreneurs and foreign investors alike. No one wants to invest time and money where a corrupt official or a well-connected crony can abscond with the fruits of the enterprise. Restrictions on economic freedom, such as punitive tariffs, government-backed monopolies, rigid labor systems and tortuous regulations stunt innovation and productivity. Inadequate investment in education prevents workers from taking on higher value employment and growing out of subsistence and poverty.

Leaders have to take responsibility for their nation’s progress and stand accountable to their people. Outsiders can’t eliminate corruption, can’t enforce contracts, can’t simplify the tax code so that people actually pay what they owe. Instead, outsiders, whether the United States, other developed nations, or multilateral institutions should reinforce efforts underway on the ground to create an environment for prosperity and success. We must support and encourage leaders who are accountable to the people they serve, as they make the difficult, unique decisions to create growth and stability in their time and place. In the end, only a country’s leaders can deliver such policies.

Argentina, an important ally of the United States, is a poignant example. For most of the 1990s Argentina was a success story after making significant positive reforms in economic policy, including monetary policy, fiscal policy, structural policy, and international trade policy. The most significant reforms eliminated hyperinflation. Economic growth turned around sharply: after falling during the 1980s, real GDP began growing at over 4 percent per year. However, starting in the late 1990s, policy setbacks – combined with external shocks -- sharply reduced economic growth in Argentina and ultimately led to the financial crises in 2000-2001 and the current halt to economic activity.

The United States cannot, and must not, impose a solution on the Argentine people. We offer our advice and counsel; we offer technical assistance. But Argentina – like each other nation – must implement the policies necessary to succeed. When those policies are in place and the path to economic sustainability and growth exists, we stand ready to support Argentina through the IMF and other international financial institutions.

Today’s international financial system, with its lack of a sovereign debt restructuring process, didn’t provide a predictable, stable path for Argentina. That is the lesson we must learn.

Prosperity will spread in Latin America as national leaders create the climate for success. Trade is a potent ingredient in that process. We are working with our hemispheric partners in the WTO and we are committed to concluding the Free Trade Area of the Americas by January 2005. We are also moving ahead with bilateral trade agreements as well, because we know that increased trade will increase competitiveness, productivity, wages and living standards throughout the region. U.S. companies are already the leading source of foreign direct investment in the hemisphere, and as we reduce trade barriers the public and private sector ties among the people of this hemisphere will continue to strengthen.

People everywhere have the desire and the ability to succeed. To unleash that potential, governments need to focus on creating an environment at home that allows all individuals to achieve their potential, and the international financial community must focus on preventing crises and reinforcing local leadership.

We will continue to support leaders who move their nations forward, and to encourage the rest of the world to do the same. By governing justly, investing in their people and expanding economic freedom, leaders everywhere improve the lives of all their people. The United States will continue to support these leaders in Latin America, and to encourage leadership throughout the hemisphere.

Thank you.