FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. Looking around today, we can take some satisfaction from the fact that conditions in global markets are better than they were a year ago.

The marked change in the global outlook is a tribute to the strong domestic policy responses that we have seen in many of the economies hit by crisis, and the international support that we were able to mobilize to support those responses. It is also in part a reflection of the somewhat more balanced growth that has been achieved among the major industrial economies, where developments have hinted at the possibility that the United States can cease to the single main engine of global economic growth.

What is most important now is that we not take this recovery in global confidence for granted:

• All of the major industrial economies need to focus policies on balanced growth.
• Progress in some emerging market economies has been significant. But the pattern of recovery remains uneven, and all must press ahead to assure lasting growth.
• Much has been achieved in the reform of global financial architecture, but crucial priorities for protecting long-term stability and growth remain.
• Countries in Sub-Saharan Africa that account for a large share of the global population still cannot provide the most basic standard of living for their people.
• And the threat of corruption looms large, both within countries and internationally.

I would like to address these five core global priorities today.

The United States' economic performance has continued to be exceptional - as we approach a tenth year of expansion. But all of us should guard against the assumption that the good times will continue indefinitely. That means private lenders and borrowers planning prudently; it means households putting aside savings based on their future needs and not the continuation of recent rates of return. Most importantly, it means reserving a lion's share of projected budget surpluses to pay down the national debt, and avoiding inappropriate and economically unwise tax cuts of the kind that President Clinton vetoed today.

Crucial to a sustained and balanced United States expansion will be greater balance in global economic growth. This makes it especially important for there to be stronger growth in the other major industrial economies.

Some upturn in domestic demand appears to be under way in Europe. Looking ahead, recovery must be increasingly based on domestic demand. It will also be essential to achieve structural reforms that can support higher levels of investment and the more rapid creation of private sector jobs.

Even more critical to more balanced global growth - and recovery in Asia especially -- will be a lasting turnaround in Japan, the world's second largest economy and, until this decade, perhaps the most striking success story in the industrialized world. There are now some initial signs that Japan's economy is moving out of the deep recession in which it had been mired for so long. It seems clear that policy steps taken over the past year to stimulate the economy and stabilize the financial system are having an effect.

However, prospects remain uncertain in the face of continued weakness in private demand, notably business investment, and persistent deflationary pressures. Private forecasters are unusually divided, with many expecting growth to fall back again next year. In this context, Japan's commitment to continued stimulus, using all available tools, will be critical until a solid, self-sustaining recovery led by domestic demand is firmly entrenched.

We can all be encouraged by the turnarounds we have seen in many of the emerging market economies in the past year. Forceful domestic policy steps in Korea, Thailand, the Philippines and Brazil - combined with the substantial financial support that was mobilized by the official community - have brought important progress in setting these countries on the path to recovery. Market confidence in these and other emerging market economies is on the mend.

However, while many emerging market economies are now beginning to see the rewards of strong policy measures, this progress can only be sustained by continued commitment to economic reform - in the financial sector especially.

We must also remember that other countries have not yet put a viable long-term basis for economic growth stability in place. Russia, in particular, remains a critical concern as it confronts the consequences of its economic and financial collapse in August of 1998 in a turbulent domestic political environment. We will discuss with the Russian authorities this weekend their prospects for putting a credible reform strategy in place, and certainly the dominant issue will be the establishment of a functioning rule of law.

The core challenge of the World Bank and the IMF and their shareholders must always be to look to the long-term - and to ensure that they are doing all they can to support the development of a strong and stable, truly global financial system.

There is no question that the international financial institutions are absolutely indispensable. But that does not mean we can be satisfied with them as they are.

Financial crises of the scale and severity we have seen recently pose a major threat to the construction of such a system-to which the international community has rightly and vigorously responded in what has come to be called the reform of the global financial architecture.

Important progress has been made in this effort. But critical priorities remain, especially with regard to encouraging the adoption of more sustainable debt management and exchange rate policies by national governments, and developing more sophisticated tools for crisis response.

These are among the issues that we would expect the new G20 group of key industrial and emerging market economies to discuss when it meets for the first time later this year. This new group, to be launched formally this weekend, will account for more than 80 percent of global GDP and will institutionalize this Administration's long-standing belief that the future of the new global economy cannot be a matter for the discussion of the major industrial nations alone.

4. A New Approach to Development Assistance for the Poorest Countries.

With the partial recovery in global confidence we also have an opportunity to intensify the International Financial Institutions' search for more effective ways to support enduring growth in the very poorest countries.

Sub-Saharan Africa's per capita income is today lower than in 1980. Indeed, in parts of Africa, children born today are more likely to die before their fifth birthday than to learn to read, and teenage girls are more likely to become HIV positive than to graduate from high school.

In the end, the only ones who can offer those children a better future are the governments and citizens of the countries themselves. But when many of the poorest are also laboring under weight of the debts they owe to the international community, we owe them a fresh look at the way we try to help.

More than fifty years of development assistance has taught us that where countries are truly committed to inclusive, enduring growth - international support can make a powerful difference. But equally, we have seen how often strong commitments and good intentions - on both sides - fail to translate into concrete improvements in the lives of the poorest. At best, such failed support leaves countries no better off than before. At worst, it traps the country, and us, in a cycle of lending which is devoted in part to assuring that past loans can be repaid.

At the Cologne Summit, the G7 leaders committed the international community to confront these lessons head on, with an expanded initiative for the Heavily Indebted Poor Countries (HIPC). Together with earlier debt relief commitments, the Cologne Initiative would more than triple the amount of debt relief available under the HIPC framework, from $13 billion in today's dollars to as much as $50 billion.

At these meetings we expect broad agreement on how to finance this initiative, with a central reliance on mobilizing the IMF and World Bank's own resources. To help meet our share of needed bilateral contributions the President has also this week submitted an amended budget request asking Congress for nearly $1 billion in appropriations over the next four years.

Debt relief is only a means to a much higher objective. We believe that most important of all to the success of this effort will be the establishment of a new framework for the international community's efforts to combat poverty - one that is centered around the belief that countries themselves must take the lead in poverty reduction efforts if lasting change is to be achieved.

Under our new approach, governments would need forcefully to demonstrate, at the highest political levels, a commitment to poverty reduction and the reforms and domestic funding needed to give effect to such commitment.

That means:

• A growth-oriented, integrated poverty reduction plan, drawn up by the recipient countries themselves, with the support of the World Bank and IMF, and centered around measurable and monitorable targets for infant mortality, literacy and other key indicators.
• A requirement that the recipients of debt relief earmark the savings from debt relief for genuinely additional spending on poverty reduction.
• Concrete steps to raise transparency - for example, through mandatory publication of the national budget and new mechanisms to monitor and improve the quality of public spending.
• Steps to enhance national ownership and understanding of programs: for example, through involving more civil society groups in the elaboration of the poverty reduction plan and through more extensive dialogue between these groups and the World Bank and IMF.

One set of problems that has perhaps been given insufficient emphasis in the past - but whose importance has recently been greatly underlined - is those relating to corruption.

The United States has for some time been a leading force in international efforts to combat corruption. For example, we have led efforts to conclude - and ratify among all its signatories - the OECD Anti-Bribery Convention, and to complete a WTO agreement on transparency in government procurement. Our efforts to combat these issues on a domestic level have been vigorous and ongoing; notably, in the release, earlier today, of a comprehensive National Money Laundering Strategy.

We have also successfully urged the IMF and the World Bank to give greater explicit consideration to problems of governance and corruption in all its country programs. This has brought concrete actions, and reflected most recently in the IMF and World Bank's decisions in Indonesia.

There is perhaps no stronger antidote to corruption than successful economic reform. Anders Aslund has made this point very powerfully in the case of Russia, where the state-controlled price of a ton of crude oil in 1990 was the same as the free-market price of a pack of Marlboros. This created opportunities for quick fortunes to be made by those able to purchase oil domestically and resell it overseas. He has estimated that at least 79 percent of GDP was lost in this type of distortion in 1992.

In its continued support for economic and structural reforms that combat this kind of distortion, the IMF has been an important anti-corruption force where policy makers are committed to change. But as the Russian case has shown all too clearly, no amount of international effort will bring about change if that domestic commitment is lacking.

However, especially in light of recent events, there is one kind of corruption that the International Financial Institutions can and must make it their business to confront: namely that involving the misappropriation or diversion of their own resources.

As I said in my testimony to Congress earlier this week, we and other G-7 countries this weekend will be calling for authoritative reviews by the IMF and the World Bank to identify ways to strengthen safeguards on the use of IMF and World Bank funds, especially in cases where there is heightened risk of diversion or misappropriation of funds.

We believe and expect that this review should focus its attention on three critical areas:

Whenever the IMF provides finance in an environment where there is a risk that those funds will be misused, it should require external audits of the recipient's central bank. More generally, the IMF has to be moving to a point where this is routine practice.

There is also a need for a clear understanding of the IMF's ability to insist on external audits of other parts of the government - when there are reasonable grounds for suspicion that they are involved with the inappropriate use of IMF funds.

Audits are an important tool but they are not sufficient. The IMF also needs to upgrade its capacity to spot potential weak points in the program country's foreign exchange and payments system - and help countries to address those weaknesses as part of IMF programs.

Especially relevant, in this context, would be lack of transparency and accountability in the central bank's reserve management procedures, intervention in the foreign exchange market and off-market provision of foreign exchange to commercial banks - all of which provide opportunities to divert funds for improper purposes or provide preferential access to hard currency to favored groups.

Under present policies, the IMF's capacity to penalize countries for permitting the misappropriation of official funds comes down to the capacity to cease disbursements and in limited cases to request advance repayment. This is a powerful weapon that we would expect the IMF to make full use of and develop in the future. The review should consider a wider range of circumstances under which penalties for corrupt use of funds can be applied - including those situations where disbursements have been completed and IMF programs are no longer in force.

6. Concluding Remarks

Each of these issues are important and complex, involving both the public and the private sectors and concerted actions at both the national and international level. To be sure, no one country or group of country has all the answers - which is why dialogue in a wide variety of fora is so essential. But I hope and expect that in this improved global environment we will have an opportunity at these meetings to take this agenda forward. Thank you.