FROM THE OFFICE OF PUBLIC AFFAIRS

I am pleased to be with you here today. Your Council plays an important role in promoting Brazilian-U.S. trade and investment. It fosters useful dialogue and greater understanding between our two business sectors and it makes considered policy recommendations to both governments.

I want to speak to you today about Brazil, but I would like to put it in the context of the larger world economic picture. We live in an age of globalization-the unprecedented, rapid flow of private capital, ideas, technology, goods and services around the world. With the coming of computers and the Information Age, the pace of globalization is so fast, and its reach so wide, that at some point early in the next century almost every person on earth will have the ability to communicate any kind of data to almost any other person, instantly and cheaply.

The approach to globalization issues taken by the Administration of President Clinton is based on the belief that market-based economic systems provide the best environment for creating jobs, generating economic activity, and raising living standards, both in our own country and around the world. Perhaps the greatest benefits of globalization over the next generation will come from making possible the safe and sustainable flow of goods, capital and ideas between the developed world and the developing one. The labor force in the United States and Western Europe is aging. All of the world's population growth is going to occur in the developing world. That is where the expanding markets and the manpower will be, and that is where attention must be given now.

To spread the benefits of globalization to all people requires a coordinated effort among the leading industrial nations, by international institutions, and above all by the developing nations themselves. It is vital that they nurture the kind of institutions, and follow the kind of macroeconomic policies that can attract international capital by being safe, attractive places for investment. The policies include enforceable land and contract rights; labor market reform that encourages job creation and entrepreneurship; and policies of privatization that open up opportunities and reduce business costs. The institutions that should be nurtured include banking and financial systems that promote productive investment; judicial systems that make foreign investment safer and more predictable; and open accounting and procurement policies which provide a level playing field for all types of investment, foreign and domestic.

The challenge of globalization has special resonance in Brazil. Brazil is one of the leading emerging market economies in the world. It is more than just the economic leader of Latin America. It is much of Latin America, with 52 per cent of its land area and 55 per cent of its people. Its Gross Domestic Product of close to $750 billion last year was about 50 per cent of the entire continent. Although foreign trade is a small share of Brazil's economy, the size of that economy means that its neighbors benefit from Brazilian growth. One-third of the exports of Argentina, for example, go to Brazil. Brazil is also central to Mercosur, which has been a major force for regional integration and trade liberalization. With only a few exceptions trade between Brazil and Argentina is now free and rose to nearly $15 billion in 1998.

Brazil is important to the United States. It is our eleventh most important trading partner. Total trade between our two countries was over $23 billion last year, an increase of 68% from five years ago. In that connection, the Administration strongly supports the creation of a Free Trade Association of the Americas, and is working hard in the ongoing negotiations to make concrete progress toward that end.

It used to be said that when the U.S. sneezed, Europe caught a cold. By the same token, events in Brazil are likely to have significance across all of the world's emerging markets. We saw that in events a year ago in the aftermath of the Russian financial collapse and in the period leading up to this year's devaluation. Even those countries that had few direct economic links to Russia and Brazil were affected because capital flows to emerging markets worldwide dried up and lending spreads-the difference between what emerging market borrowers pay and what the U.S. government pays -- widened sharply.

The economic prognosis for Brazil today is far better than what was generally predicted last January, when the government floated the exchange rate after experiencing massive losses in its foreign exchange reserves. Perhaps the severity of the post-devaluation crises in Asian countries conditioned expectations for the worse. Its large foreign and domestic net debt, nearly 43 percent of GDP at the end of 1998 - one-third of which was linked to the exchange rate - created the fear that a sudden rise in interest payments would drain the fiscal accounts. Fairly recent memories of hyperinflation-when the CPI rose over 2,000 per cent a year-contributed to fears that devaluation would lead to disaster. But as your Council pointed out to the Congress, Brazil is not Asia. Its economy is more diverse, its banking sector stronger, its culture not as vulnerable to "crony capitalism." To the credit of the Cardoso government, there has been no depreciation-inflation spiral, no fiscal difficulties in servicing the debt, and no wide scale corporate or financial sector bankruptcies. Consumer price inflation has been about 6% year to date through September, and according to the most recent surveys, expected to be 8% for the year. Short-term interest rates have fallen from 45% in March to 19% today. The central bank is taking steps to see that interest rates to the private sector come down as well. A recent Reuter's survey produced the opinion that the exchange rate is expected to close this year in the 1.90 to 1.95 to the dollar range. While this is a significant depreciation in both nominal and real terms compared to last January, it is far from the collapse feared by many last winter.

Real GDP is expected to decline only marginally this year, far less than the 3-4 per cent contraction that was estimated at the time of devaluation. Latin America in general has had negative growth this year, and - ironically - the decline in Brazil's GDP is not as great as several other countries that did not have currency crises.

The impressive resilience of the Brazilian economy, nine and a half months after moving to a floating exchange rate, is attributable in large part to the response of the Brazilian authorities. Our former Treasury Secretary, Bob Rubin, used to say there is no substitute for credible policy and credible policymakers. The combination of significant fiscal measures, deep privatization, firm monetary policy and strong leadership at the central bank has been critical for these past months.

The challenge ahead is for Brazil to consolidate the return to stability and restore a healthy rate of economic growth. To do this, it needs to move ahead with deeper fiscal and structural measures to ensure a permanent basis for fiscal sustainability. Perhaps the most important step it can take is to press ahead with fiscal reform. Unlike the crisis in a number of Asian countries, Brazil's crisis was more a reflection of public rather than private sector imbalances. Its large fiscal deficits have been a major source of concern to world investors, with foreign investors asking during last year's crisis whether the nation could sustain its public sector debt. In 1998, in the runup to the crisis, Brazil's budgetary balance excluding interest payments was roughly zero. But the growing burden from the high interest needed to defend the real generated, in that year, an overall deficit that exceeded 8 per cent of GDP.

The move to a floating exchange rate has not reduced the need for fiscal and structural reform, although the sharp fall in interest rates has provided some needed room. Brazil has also taken firm measures that allowed it to achieve a primary surplus - excluding interest costs - likely to be well over 3% of GDP this year.

But most of the needed fiscal response has come in the form of temporary measures, such as the CPMF financial transactions tax, and higher COFINS tax rate. The challenge ahead is to make progress on longer-term measures, particularly social security reform and the Fiscal Responsibility Act, which limits how much different levels of government in the country can borrow. The imbalances in the social security system have reached nearly 5 per cent of GDP this year and are growing. Social security reform is a very big part of achieving fiscal reform.

Brazil has a strong interest in maintaining an open climate for foreign direct investment. It attracted a remarkable total of $30 billion over the last 12 months, fully financing the current account deficit. Foreign direct investment is vital to the nation. It builds factories, introduces new technology, and supports local employment. Much of its progress in this regard has come about because of the government has unleashed the power and efficiency of the private sector and of foreign investment. The important telecommunications, electricity and petroleum sectors have been opened up to private ownership. To continue this success, the authorities need to maintain a friendly environment by ensuring stable and predictable property rights.

Brazil also needs to assure that the benefits of growth are shared by all its people. Like other countries in the region, Brazil has a high degree of income inequality. The Real Plan slashed inflation from over 2000% to just 2% in just 4 years, and made an important contribution to improving the well being of the poor. Brazil has an interest in continuing the fight against income inequality and poverty, and has taken important measures recently to improve its social safety net.

Looking forward, I see many reasons for optimism. Brazil is a large and diverse economy that is rich in natural resources and human capital. The Real Plan's success in bringing stability from 1994 to January 1999 is by no means lost. If Brazil stays on the path of reform; we in the U.S. have high expectations. As a prospering economy, a staunch friend of the United States, and the leader of Latin America, it can be a full partner and a major beneficiary of the new economy of the coming century.