FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. I'm glad to be here at such a crucial moment for our two countries and for the global economy.

If the trials of the past year have reaffirmed anything it is the strength of the ties that bind the United States and Brazil - and bind Brazil and all of our hemisphere to the broader global economy. In days gone by, many in Latin America used to refer to the Colossus of the North. Today, we in Washington know that if there is a Colossus of the South it is Brazil.

Brazil's transformation in this last decade of the 20^th century has been unique. But its core elements have echoes around the world. Powerful forces are creating a new global economy for the 21^st century: one with enormous opportunities for improving the lives of the world's people, but that also brings new challenges and risks.

When economic historians look back at this period, they will identify three developments driving the creation of this new world:

• The global move away from centralized, state-led development - toward a greater reliance on markets and the power of private enterprise.
• Revolutions in communications and information technologies that are bringing people and economies together in ways that were unimaginable even a few years ago.
• And the dawn of an age of emerging markets, with countries where more than three billion live reversing decades of stagnation and seeing rapid growth in incomes.

All of us - in the United States, in Brazil and around the world - will be tested by these developments and the enormous changes that they set in train. The kind of standards of living and security that our people are able to enjoy in the future will depend in large part on how we meet that test.

Against this backdrop, I would like to reflect today on three topics:

• First, some of the lessons of the financial crisis that the world and Brazil have come through in the past few years.
• Second, the broader prerequisites for an effective national economic strategy in this new global marketplace.

• And third, I would like to reflect briefly on our common stake in building a strong and stable global financial system and in meeting the broader challenges that globalization presents.

The past few years have been a difficult period whose causes and implications economists and others will be debating for years to come. Some of the mechanisms of these financial crises were 21^st century. But in many ways, the root cause was as old as finance itself: too much money borrowed, on the basis of too little capacity to repay. And the right response to crisis, once it struck, was equally timeless - depending above all on a government's capacity to act decisively to restore confidence and growth.

Our support for the exceptional international financial package that was mobilized for Brazil last year - and especially, our own $5 billion bilateral contribution to that package - was a reflection of the enormous stake that we have in Brazil's success. It was equally a reflection of our confidence that President Cardoso and his team would do what was necessary to put the economy back on track.

The fact that Brazil is already starting to repay some of that financing - indeed, announced yesterday that it will repay the full $3.2 billion in bilateral financing that is coming due later this month - only re-affirms that our confidence was not misplaced.

Indeed, looking around the world today, while there are certainly important caveats and risks, we can say that the crisis economies whose governments were able to respond decisively and with international official support have been well rewarded.

Consider:

• In Korea, net foreign reserves have risen to more than $65 billion. And private forecasters expect the economy to grow this year by more than 8 percent.
• In Thailand, net reserves are now hovering close to $30 billion. Overnight interest rates are below 1 percent. And private sector forecasts predict growth of 3 or 4 percent this year.

Here in Brazil, inflation over the last ten months has not risen back to high levels, as many feared following the devaluation of the real. And the recession is proving much shorter and shallower than many expected. Private forecasters expect that the economy may even show modest growth in 1999, compared with the decline of 4 percent that was expected only 6 months ago. The forecast next year is for solid growth.

Almost all of Latin America has been affected by these crises, with a recession that has left few untouched. But after a decade of reforms, none of its major economies has changed course. Growth in the region should resume next year, with private sector forecasts of upwards of 3 percent growth in the largest economies. And Latin American sovereign bond spreads have been steadily narrowing for several months.

Brazil's contribution to the transformed global picture is one on which I will be congratulating President Cardoso and his team during my stay. But we all know that there is an important difference between getting out of the intensive care unit, and leading a full and healthy life. The challenge for Brazil and others in the region - for all their recent achievements - is to combine financial stability with strong inclusive growth.

What does this require in a new global economy? Let me highlight three core ingredients that have been the central emphasis of the Clinton administration and - I believe-very important to the economic turn-around that Americans have enjoyed in the 1990s.

This new economy is growing newer by the day. But new techniques and financial instruments cannot substitute for old-fashioned fiscal virtues. As we have learned in the United States in the 1980s and 1990s, ultimately, sustained macro-economic stability and growth in any country depends on government over time matching its perception of what the state needs to do to the capacity to mobilize the resources necessary to achieve that.

Until these two are matched, problems will inevitably arise - whether in the form of inflation, excessive real interest rates, or an excessive dependence on foreign capital that periodically raises questions about the long-term capacity to repay. And enduring growth and stability will likewise remain in doubt.

The critical importance of a solid fiscal foundation for growth was a major topic of discussion when I met with the incoming economic team in Argentina earlier this week. It will be important for the success of every country in this region and, as the authorities recognize, it will be crucially important for Brazil.

We know from our own experience how difficult it can be to bring a government's aspirations and its resources back together when they have long been misaligned. Achieving it here in Brazil will depend on the Administration's commitment to build on the improvements that we have seen in the past year to achieve lasting pension system reform and building a more sustainable fiscal relationship between different tiers of government. But success will equally depend on the commitment of those with whom they the Administration will need to work - both inside and outside the public sector and in every level of government.

2. Establishing a Framework for Markets to Operate

If changing expectations and capacities in the public sector is the first ingredient of economic success in this new economy - then changing them in the private sector must be the second. The right macro-economic policies can lift a large burden from the economy. But without efforts to support the market system as it evolves, we will none of us be able to realize our full economic potential.

The new paradigm of public policy in our time is one based on supporting not supplanting the market, and on establishing institutions that can make the private sector an attractive and profitable place to be - and thus the engine of economic growth.

What does that require? Here in Brazil you talk about reducing the "Brazil cost" but the agenda that is captured in that term is not specific to Brazil:

• Completing the successful transfer of public industries into private hands. Brazil has recently made remarkable headway in privatizing telecommunications, power, and state banks. But all recognize that there is further to go. I will highlight in my discussions with officials that the program needs to press forward in the next year despite the delays that hampered the government in this area in 1999.
• Building a strong and efficient domestic financial sector that can channel financial resources to all that will use them well - both through continued reform of public sector financial institutions and by helping the private financial sector to develop its capacity to provide long-term finance to business and consumers.
• And, crucially, building the intangible infrastructure for markets: including strong and consistent norms of transparency and integrity in both the public and private sector; respect for contracts and effective means of enforcing them; continued efforts to root out corruption; and a strong and enduring rule of law.

Macro-economic virtue, the right market institutions - in the competition for economic opportunity in a more global economy these will be crucial assets for any country. But in a world in which capital, and business can move, the most distinctive asset of any country will increasingly be its people - and the quality of investments in people will be an increasingly important determinant of national economic success.

That is why President Clinton, since the very start of his Administration, has always placed such emphasis on investments in people. And that is why President Cardoso has been so right to make education and social inclusion such an important part of his mission in government.

President Clinton has spoken often about the need to broaden the circle of economic opportunity to include all of our citizens. That must be a moral imperative for both of our nations today. But it is equally an economic imperative at a time when the same forces that are bringing the world's economies together are also making our internal domestic economies more interconnected. Increasingly, in such an environment, an economy's strength overall will be limited by the strength of its weakest parts.

In approaching these issues, two lessons of recent global experience bear emphasis:

• We have learned - or been reminded - that without major public efforts, too little will happen to reduce poverty; too few children will learn to read; and basic health care will not be provided.
• At the same time, we have learned equally that public bureaucracies evaluated only on the basis of inputs and run for the convenience of its administrators can absorb large amounts of public money without producing tangible benefits for people.

As President Clinton, President Cardoso and others discussed in Florence last month, in all our countries the answer to this dilemma must lie in bringing to all of our core public sector services the same emphasis on innovation, quality service and the customer that the best of our private sector now achieves.

I am told that the Sao Paulo American Chamber of Commerce has recognized its own stake in - and potential contribution - to this effort, in its work helping to develop effective low-cost ways to improve the quality of Brazilian education. Equally, public sector innovations such as the expanding program of government grants to help keep children in school and to eliminate child labor have given us a glimpse of what a concerted application of these lessons in Brazil might achieve.

The recent study indicating that close to one half of university students were now the children of parents who did not finish the first year of secondary school must be good news to all who care about the democratization of economic opportunity in Brazil and the national economic opportunities that that would bring. But here, too, there can be little room for complacency, when more than 730,000 children between the ages of 7 and 14 are estimated to be working on the land or in workshops instead of learning to read and write in school.

If successful competition in a world market is the national economic challenge of a millennium generation - then successful international cooperation must be its global one. Let me highlight two key areas where strong collaboration between our two nations and globally will be especially important: building a strong and stable international financial architecture and managing regional and global economic integration.

With the storms clouds more distant and confidence on the mend - we must not become complacent about building a stronger global financial system for the future. As the United States has long stressed, reforming our international financial institutions to make them better equipped to respond to modern risks will be a critically important piece of that endeavor. Another will be a greater capacity for industrial and emerging market economies to work together.

We welcome, in this context, the first meeting in Berlin this month of the G20, the new permanent informal mechanism for dialogue on key economic and financial issues among industrial and emerging markets. Brazil's participation in that grouping will be important. For, if what is different about these crises is the degree to which they trace back to the capital account and the sudden outflow of foreign capital, then recent experience in Brazil has pointed up a number of ways for countries to help stop these dynamics taking hold.

Notably:

• By building a stronger national balance sheet. Countries need to be working to build debt structures that help to cushion unexpected shocks, not worsen a crisis of confidence. That means investing in an adequate level of reserves; paying more for the protection afforded by longer term debt; and paying more to avoid the currency risk implicit in foreign currency borrowing.
• And by adopting more sustainable exchange rate regimes. Coming out of these crises, it should become increasingly the norm that countries involved with the world capital market avoid the risky "middle ground" of pegged exchange rates with discretionary monetary policies. In this region especially, an increasing number of countries are in fact moving toward "corner" regimes: be they firmly institutionalized fixed rate regimes or a pure float.

At the same time, we have been reminded in recent days that globalization is and must be much more than a narrow economic challenge. As President Clinton has emphasized, global economic integration simply will not work if it means local disintegration - and if our people do not believe that integration works for them.

That is why, as we look to promote global trade and all the opportunities that it affords, we need to recognize globally - as we did within our own economy when inter-state commerce took off in the second half of the 19^th century - that in a world of deeper interconnections between economies there will be a greater need to consider together the issues that we have in common.

In short, at a time when the world is coming together and man-made and natural barriers to trade are coming down - it becomes vital to prevent a race to bottom, a bottom in which governments cannot promote fair taxes, uphold fair labor standards, regulate product safety, protect the environment, or promote other key values.

The challenge is one of synthesis. We must not begin a new century by impeding the most benign economic trend of this century - the rise of economic integration. In this region and globally, we must work to ensure that trade liberalization proceeds. But nor can we afford to ignore these broader concerns if we are to build the kind of global economy that we all want to see. The two giants of this hemisphere have an enormous stake in working to ensure that this kind of synthesis is achieved. Thank you.