If the technology and sophistication of modern capital markets have recently helped propagate financial crises more rapidly across the world, it may be that they also help to drive a faster resolution. Certainly the mood as the international financial community has met in Washington this week has been very different than would have been expected last October.

At that time, in the wake of the Russian financial crisis, amid signs of significant strain in United States and global financial markets and evident concerns about global growth, the G7 warned that the balance of risks in the global economy had shifted, and emphasized their commitment to promote sustainable global growth. Six months on, as this week's G7 Communiqu‚ noted, there have been improvements in some areas, reflecting both signs of improved better performance in some emerging market economies and the more growth-oriented policy steps that have been taken in a number of G-7 countries during the period.

The improved global outlook has generated some understandable relief. But as one of my old tennis coaches used to say: "you're never as good as you think you are when you think you're good, and you're never as bad as you think you are when you think you're bad." The ebbs and flows of global opinion always shift more quickly than the ground beneath. The crisis has abated. But it is still a dangerous world out there, and profound challenges remain.

I would like to focus today on the immediate challenges presented by the economic situation in each of the major parts of the world economy, before bringing the pieces together to talk about what it means for the lasting return of global growth.

I. The United States

Globally, the United States remains a beacon of strength. If anyone a few years ago had predicted the combination of inflation, unemployment and growth rates we see today not to mention a rising fiscal surplus it is fair to say that the prediction would have been greeted with some skepticism.

Why this remarkable performance? Two factors stand out. The first was effective macro- economic policies: policies that properly left the Federal Reserve to its own devices; and policies that recognized that multi-million dollar budget deficits could not be supported indefinitely. The second was the renaissance of American business, driven by a far-reaching change in the drivers of modern wealth creation.

It cannot be an accident that communism, planning ministries throughout the developing world and large corporations run by command and control all ran into a brick wall in the same decade and had to be restructured. Across America and across the world, new technologies and closer economic integration have forced profound changes in the way economic and financial life is organized changes for which American firms and workers are superbly well equipped.

The combination of public prudence and private dynamism will stand us in good stead as a new century approaches. But as Goethe once said, the time when the light is brightest is also when the shadows are darkest. On the other side of some of our successes are risks that remain:

• Complacency must surely be one. Complacency will be self-denying prophesy if it leads to unrealistic expenditure plans, excessive capacity creation, inappropriate asset valuations, or misguided credit expansion and acceptance of leverage. Experienced bankers know that good loans are made in bad times, and bad loans are made in good ones.
  

• Cutting the deficit has more than doubled our rate of national saving, to 7.5 percent in the first three quarters of last year. But that is still well below the rates we achieved in the 1950s and 1960s. And meanwhile the rate of personal savings has fallen to a 55-year low.
  

• Our growing current account deficit is another important weakness in our economy: because of the way it distorts the composition of economic output, because of the protectionist pressures if creates, and because of the questions that the accumulation of foreign debt must raise for the long term.

Raising our national savings rate can reduce our dependence on foreign capital without reducing valuable investment here at home. That is one very important reason why it is so important that we address the long term problems facing Social Security and draw down the national debt. But for the adjustment process to be healthy, there needs to be a market for American exports.

As Federal Reserve Chairman Greenspan has noted, the United States cannot indefinitely be an oasis of prosperity. It has to be a matter of concern, for the United States and for the global economy, that the United States accounted for more than two-thirds of industrial country growth last year and probably a similar share this year. In real terms, the United States' net purchases of goods and services from the rest of the world rose by more than $100 billion last year. Put it another way, just under one sixth of the economic growth that the rest of the world achieved in 1998 took the form of increased net exports to the United States.

Now, let me turn to the rest of the global economy.

II. Europe and Japan

Europe

The coming together of European nations symbolized by the arrival of the Euro is a remarkable achievement, of which the Euro-eleven are rightly proud. At the same, historic though the project has been, the preparations for EMU have sometimes come with a tendency for Europe to turn inward in economic matters. It will be critical for policy makers to resist this temptation in the months ahead as the world works to achieve stronger and more balanced global growth.

It is a striking reflection of the weakness of European domestic demand that, despite the Asian crisis, the European current account surplus at nearly 2 percent of GDP was probably little changed in 1998, at around $110 billion. As the G7 reaffirmed this week, the need for a more balanced global growth strategy makes it all the more critical for Europe to pursue policies aimed at lasting expansion in domestic demand.

Macro-economic policies will be part of the solution. But so too will be structural reforms aimed at unleashing the dynamic potential of European business and labor. It is perhaps no accident that the countries in the Euro area that have made the deepest structural reforms such as the Netherlands, Ireland and Portugal have also recently enjoyed the most vigorous recoveries.

Japan

In Japan, the prospects for renewed growth and reform have now been center stage for more than eight years. An important evolution has taken place in Japan=s approach to the crisis since the fall: on the fiscal, financial stabilization and monetary policy fronts. Prime Minister Obuchi's steps to re-capitalize the banking system have been especially welcome, and have already produced results in the form of a much lower Japan premium in global inter-bank markets.

Whether these actions will be enough to achieve the lasting recovery that Japan and the world have waited for so long is an unanswerable question. The key going forward will be to remember that the improvements in confidence, and economic benefits that flow from them, will less be a response to stimulative policy steps already taken than to the belief that these steps will not be reversed. As the Japanese authorities recognize, it will be important not to react to the improving sentiment in Japan by doing anything to put that belief in doubt.

As the G7 affirmed, going forward it will continue to essential that Japan implement stimulus measures until growth is restored, using all available tools to support strong domestic- demand-led growth. Structural measures could play an important, catalytic, role in this context, by enhancing economic efficiency and competitiveness in the financial and non-financial sectors.

I. The Emerging Market Economies

When I spoke to this group last year the Asian financial crisis was raging. At that time I emphasized the need for a decisive response to restore confidence and growth in these economies, built on two elements: strong domestic policies, and large-scale conditioned international financial assistance centered around a well-financed International Monetary Fund.

While risks remain, it appears that the strategy pursued was broadly appropriate. Where confidence-inducing policies have been pursued and there has been international support to provide confidence that bank runs would not be able to take hold, we have started to see a return to stability and growth. Where policy has been less determined, performance, to be sure, has been less satisfactory.

The Asian Crisis Economies

The Asian crisis economies that have pursued policies that the IMF was able to support notably the Philippines, Thailand, and Korea have made major strides toward stabilizing their economies and implementing reforms to revive long-term confidence and growth. Indeed, so far the pattern of their recovery appears more "V-shaped" than might have been hoped a year ago.

Visiting Korea in February a country that last January was standing on the brink of a general default I was particularly impressed by the progress that a year=s decisive leadership and strong policies had achieved. But there is an important difference between recovering from a heart attack and changing your lifestyle to be sure you never have another one. Great vigilance will be needed going forward to press with the reforms needed for more lasting growth and stability.

Casting a larger shadow over these countries= prospects are the continued problems of some of their neighbors. While Indonesia=s recent success in implementing parts of its macro- economic adjustment program has improved economic stability, micro-economic reforms are proceeding very slowly and political uncertainties are a major barrier to the establishment of a basic environment of confidence in the rule of law, especially among the Chinese population.

China and India

The two giants of developing Asia, China and India, stand out as economies that have weathered the Asian financial storm surprisingly well. But each faces enormous risks and challenges ahead if they are to secure lasting future growth; and be the full-fledged members of the global market system we would all like to see them become.

We were glad to hear Zhu Rhongji, the Chinese Premier reaffirm during his recent visit here his desire to see China continue to be a source of regional economic stability. But as the leadership recognize, recent events heighten the need to address China=s long-term problems especially the problems of the state-owned-enterprise sector and mounting levels of financial sector debt. he world has a great stake in Prime Minister Zhu's success in combating these problems going forward, and sticking to the path of liberalization and economic opening.

In India, events in the political arena look set to dominate for some months to come. There has for some time been a cross-party consensus in favor of market reforms and liberalization. The problem has been translating this into real change. The key to future growth will be mustering the political will to act finally to build a positive environment for private investment, both domestic and foreign: not least, through successful and significant cuts in public borrowing.

Latin America

Perhaps the most pleasant surprise of recent months has been that the devaluation of the Brazilian real did not cause the contagion that many would have feared. That it did not do so is a tribute to Brazil's success in implementing strong fiscal policies to regain confidence and also partly a reflection of the fact that the crisis had taken so long to play out. This meant that a large volume of trade and other finance had already moved out of Brazil. When the devaluation finally did take place, this money was there on the sidelines, ready to return if and when credible policies were restored.

It is a striking reflection of the improvement in sentiment across the region that Latin American borrowers raised fully $11 billion in international bond markets in the first three months of 1999, compared to just $5 billion in the final quarter of 1998. As the G7 noted this week, Brazil has recently made important progress implementing the revised economic program that was supported by the IMF last month in the context of coordinated voluntary assurances on the part of Brazil's major private creditors. Going forward it will be vital for the authorities to persevere, avoid complacency in the short-term and address longer term challenges squarely and soon.

Mexico has done a remarkable job in keeping its economic fundamentals strong, with President Zedillo rightly focused on bequeathing his successor whoever that may be a growing and stable economy. Argentina has been buffeted as a result of its strong trade linkages with Brazil. But it is a tribute to its solid fundamentals that few have questioned the durability of the Convertibility Plan. Yet all the economies of the region will need to continue to buttress their defenses in the months ahead to move out of danger.

The Former Soviet Union and Central Europe

The economies of Central Europe have endured the crises in Russia and Brazil largely unscathed. Rising external imbalances have put some downward pressure on growth, especially in the Czech Republic. But nearly all of these economies have made progress in the past eighteen months that will provide valuable protection against further shocks. Poland and Hungary stand out as strong performers, with growth rates of 5 percent or more and inflation now down to single digits.

That said, the storm clouds to their East are still all too apparent, as Russia continues to face the consequences of the abandonment of its macro-economic and exchange rate regime last August. With the government still unable to raise the revenues to pay its bills or service all of its debts, and political uncertainty both on the rise, the period of danger in Russia surely has not passed.

The G7 reaffirmed this week that Russia=s return to macro-economic stability and growth is possible only in the context of a viable fiscal program, significant improvement in government revenues, and progress in institutional and structural reforms. The United States has joined its G7 colleagues in welcoming recent progress in Russia's negotiations with the IMF on the steps the authorities need to take to start meeting these challenges. As always, we will examine carefully the details of any proposed program and stand ready to support a credible strategy.

The Poorest Countries

In these fast-moving times we cannot and must not lose sight of the parts of the world where the story cannot change fast enough. The 1990s have shown that market economics works in Sub-Saharan Africa, just as it does anywhere else. In several countries, we have seen 7 percent growth rates after years of stagnation and decline, and rising capital inflows from the lowest of low bases. But there is a long way to go yet.

Countries shape their own destiny. We cannot want reform, growth, and stability in a country more than its own government and people do. But even the most committed reformers can find that a legacy of bad policy and aid dependence is a heavy burden to shake off. That is why the budget that President Clinton has presented to Congress proposes significant additional funding for debt relief for poor, highly-indebted nations who are making strides toward reform. We hope that the other major industrial economies and the international financial institutions will also play their part in this effort.

Kosovo

No survey of the challenges facing the world today would be complete without a word about the tragic story still unfolding in Kosovo. As the G7 noted, the brutal violence against the ethnic Albanians of Kosovo and their expulsion have caused an enormous human tragedy, an overwhelming flow of refugees, and serious economic consequences for the neighboring countries. Bilateral and multilateral donors are doing their part to respond to the humanitarian crisis. But that can only be the beginning of our response. Going forward, the international financial institutions must and will stand ready to help these countries rebuild their broken economies, and sustain the economic reforms that will be vital to their development and stability long-term.

IV. The Challenges We Face

It continues to be a time of great challenge for the global economy. For the kind of strong outcome we all want to see, a number of pieces have to come together. The United States needs to maintain the momentum of its expansion. Growth needs to be established in Japan and reestablished in Europe. Confidence, and the finance that confidence can bring, needs to come to the emerging market economies on the basis of strong policies. But the global economy is more than the sum of its parts. And a healthy global economy depends on global choices.

Three such choices stand out going forward:

• First, the right focus is more global growth and more balance in global growth. The risks around the world are still very much tilted toward lack of growth, spare capacity, and slowdown rather than toward economic overheating. Concerns are about excess supply not excess demand. And in many places worries about rising prices have given way to concern about falling prices. The G7 has this week re-affirmed a commitment to a growth strategy based on strengthening domestic demand that contributes to achieving more balanced growth and reduce external imbalances. That was the right strategy in October and remains so today.
  

• Second, open markets and integration and the resistance of protectionist pressures. Just as financial events have been very important to what happens to global trade flows these past two years, it is likely that the reverse will be true in the months ahead. A crisis in the global financial system must not be permitted to give rise to a crisis in the world trading system.
  

• Third, strengthening the global financial system to make financial crises less likely to occur and less costly for the world's people when they do. The goal, as President Clinton said in his landmark speech to the Council of Foreign Relations last fall, is to tame the cycle of boom and bust at the global level as we in the United States have worked to do in our own domestic economy.

The challenges that the international community faces today are as complex as they are important: they are not going to be answered in a single communique or meeting, or even a series of such meetings. But important progress has been made since the dark days of October. What will be critical going forward will be making the right choices when the storm clouds are less close at hand. Thank you.