FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. It is a pleasure to be here in San Francisco at this conference which brings together the two most dynamic elements of the world's most dynamic economy: American technology companies and American finance.

We live in a truly remarkable time for your industries -- and for the United States. In the last 300 years there has not been a protracted period when the country with the world's greatest GNP has had as high a ratio to the country with the world's second greatest GNP. There has not been a time in the last 300 years when the country with the strongest military forces had as large a ratio to the country with the second largest military forces. And there has not been a time in the last several hundred years when a country has been so powerful as an example around the world, from the English language, to Coca-Cola, to the Internet, as the United States is today.

Last year on a trip to Africa I had an experience that has stayed with me. I was at a meeting in Mozambique, one of the very poorest economies in the world. The room was filled with representatives of America's leading investment banks and brokerages. A man worriedly pulled me aside. He was Mozambique's only private Internet provider, and he feared that competition was coming.

That experience brought together what I think are the most important forces in the world today: American strength, competition and technology, and globalization. I would like to reflect today on what they mean for our country and for our national and international economic policies.

I. The New American Economy

Economists can debate new paradigms, but all can agree that these are good times for the American economy. The right things -- employment, real wages, national savings and investment -- are all up. And inflation, crime, the welfare rolls and the budget deficit are all down, indeed, lower than they have been in a generation.

The world looks very different than it did at the beginning of this decade, a time when America was said to be in decline. It is now clear that America will grow faster in this decade than Japan and Europe. Their four-decade-long story of convergence has ended and America is pulling further ahead.

Why this success? A large share of the credit must go to the two forces that this conference brings together: technology and finance.

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. New technologies have forced profound changes in the way economic and financial life is organized -- changes for which we are fortunate that our economy is superbly well adapted. And if you want to talk about patient capital look not to Japan, where the same old money was invested in companies using the same old technologies in the same old industries. Look right here in California, where millions are invested before revenues, let alone profits come, and anyone with a good idea can make their first million before buying their first tie.

The twin forces of information technology and modern competitive finance are moving us toward a post-industrial age. And if you think about what this new economy means -- whether it is AIG in insurance, McDonald's in fast-food, Walmart in retailing, Microsoft in software, Harvard University in education, CNN in television news -- the leading enterprises are American.

While we must seem a long way away sometimes, public policy and the right economic strategy has made an important contribution here in California.

• First, in sound macroeconomic policies:

• policies that recognized that a strong and sound currency matters;

• policies that recognized that Fed-bashing was a fool's game: it does not change short-term interest rates because the Fed does not respond, but it does increase long-term interest rates because the bond market does;

• and finally policies that recognized that budget deficits were a burden this nation could no longer afford to carry. As a result of the deficit reductions we have seen in this decade, more than one trillion dollars in capital that would otherwise have been invested in the sterile asset of government paper has instead been invested in America's future: in our productive businesses, in our workers, in our cities and in our homes.
• Second, we have made a shift from the politics and policy of envy to the politics of opportunity and worked to make government a positive force in our society and our economy. To note just a few examples:

• we have brought the federal government to bear in improving the quality of the education our children receive, from the creation in 1994 of the Early Head Start program for disadvantaged children under 3, to last year's 220,000 new Pell Grants and the $1500 Hope Scholarship tax credit to help ensure that every American can get at least a community college degree;

• we have worked to invest government seed money in technologies that will be critical to our future, for example in the $100 million President Clinton has proposed in his balanced budget to develop the next generation Internet;

• and we have worked to ensure that the Internet continues to develop for the good of every American, unfettered by clumsy regulation or discriminatory taxes and tariffs -- as evidenced by our support for the Internet Tax Freedom Act recently introduced in the House by Congressman Cox of California and in the Senate by Senator Wyden of Oregon.
• Third, we have worked to promote an open global economy, with 240 new trade agreements lowering barriers to American goods since 1993, including:

• the ratification of NAFTA and the completion of the Uruguay round of the GATT;

• and ground breaking international trade liberalization agreements within the World Trade Organization in the critical sectors of telecommunications and financial services.

• Just this month, President Clinton joined the heads of Latin American governments in Santiago de Chile to begin negotiations to create a Free Trade Area of the Americas.

Since President Clinton took office, the number of export-related jobs has increased by 1.7 million. On average, these pay 15 percent more than the average wage. Some 1.3 million jobs in California are supported by trade -- more than 20 percent more than in 1992. One third of the growth in GDP we have enjoyed in this expansion has come through exports.

All of this is impressive. And indeed, people from around the world come to America and people from around America come to the valley. But I would suggest to you that prosperity without public purpose may prove hollow and short-lived. We have achieved an enormous amount in these latter years of this century. But we have an enormous amount yet to do if we are to be sure of carrying those achievements safely forward.

II. The Challenges We Face

There has been another time in our nation's history when an explosion of new wealth and new technology was transforming the way many Americans lived; when our companies were enjoying unprecedented success; when our elected leaders vowed to shrink government and preached self-reliance; but when workers were fearful for their security and blamed their insecurity on immigrants and foreign competition. That time was 1927.

There followed a series of catastrophic economic and foreign policy errors that sent the world shuttling toward what were perhaps the darkest years in human history. History does not repeat itself. Any historical analogy between the world today and the world of the 1920s is surely imperfect. But the experience of the late 1920s offers important lessons -- and challenges for policy makers today.

1. Domestic Leadership

Technology does provide Americans with remarkable opportunities, but they are not there for those who cannot read, and a child born today in Harlem is less likely to learn to read than a child in Shanghai or the very poor Indian state of Kerala.

This is a period of remarkable freedom and opportunity, but when conditions in this country are such that two percent of American men in the prime of their lives are in prison, we are also squandering enormous opportunities for our people and our economy.

The Internet is doing remarkable things for our financial system, but very little for the significant fraction of Americans who do not have a bank account and have to pay usurious fees just to get their paychecks cashed.

If our success is to continue, if our economy is to be what it has to be, and if it is to be a secure prosperity that we enjoy -- then we as a country have to do more to ensure that all are included.

None of us would say we know all the answers. Certainly, we have learned that just throwing money at these problems doesn't work. And certainly we know that no government program is a substitute for individual responsibility. But equally we have learned that these problems do not and will not simply solve themselves without public action.

If we consider what technology means for education, for enabling long distance learning and more effective, close-up learning in our schools; if we consider what technology means for fighting crime, in better information and communication at the local, state and national level; if we consider what technology has already done to complement the skills and increase the productivity of some of our least-skilled workers -- then it seems clear that technology will be one important part of the solution to the problems this country faces, even if it will surely not be the whole solution.

It is a new economy. But success still depends on old virtues, education, savings and hard work and these we must strive to promote for all our citizens.

2. Leadership Abroad

As important as our responsibility to promote strong, stable and inclusive growth at home is our responsibility to promote strong and inclusive growth at the international level.

In considering what this responsibility entails it is worthwhile considering the enormous changes that have taken place beyond our borders these past several years. The last decade has seen substantially more rapid progress in the developing word than the industrialized world. We have witnessed growth that is unprecedented in human history: countries where more than 2 billion people live are growing at rates where standards of living double in less than a decade, something never seen in the economic history of the United States or any country in Europe.

That profound change, creating for the first time a global economy, doubling standards of living again and again, in countries where a large fraction of the world's population lives is an event that I would suggest ranks in economic history with the Renaissance and the Industrial Revolution.

This growth in the developing world -- home to over 70% of the world's population -- is tremendously important for our economy and our security. Sustaining this progress to build a truly global prosperous economy will involve many different things. Let me focus today on the area we at Treasury are most involved in: the flow of capital and finance.

There are many reasons for the progress that has already been achieved: the spread of market institutions and market ideology, and the spread of new technology are high among them. But I would suggest to you that a very important part has been played by the annual one quarter of one trillion dollars in global capital that has flowed to the developing world in recent years -- capital that has been a source of growth in emerging economies as it has been a source of innovation and diversification in the industrialized world.

Our efforts at the international level must begin with this fundamental linkage between strong growth and strong capital flows around the world. Our goal must be to make the global capital market work more effectively as a source of opportunity -- and reduce its capacity to be a source of instability.

I do not need to remind this audience of the threat that the recent financial instability has posed to American jobs, American savings and American security. Thankfully, we can talk in a much more encouraged way about the region today than we could three months, even one month ago:

• in Korea and Thailand, we can see new governments working with steadfastness to implement the adjustment measures agreed with the International Monetary Fund -- steadfastness that is paying dividends in stable currencies and rising reserves;

• in Indonesia, though the situation is still extraordinarily difficult, we can see that is at least more stable -- not just in terms of the currency but the broader political environment -- than we might have thought possible a few weeks back;

• and throughout the emerging market economies, we see a number of shoes that have not dropped -- in Latin America we have seen determined actions by governments not contagion; in China we have seen unwavering commitment to the renminbi peg not devaluation; and most recently in Russia we have seen financial market calm rather than panic in the face of a dramatic cabinet reshuffle.

Still very significant is the situation in Japan, which effective implementation of the welcome measures recently announced will be crucial. Successful Japanese efforts at economic stimulus, financial restructuring and deregulation and market opening are important for Japan, Asia and the global economy.

Still, we are sufficiently out of the emergency room that we can and must now look beyond today's problems to the longer term reform challenges we face. In many ways the emergence of global financial markets can be likened to the invention of the jet airplane. We can go where we want to go much more quickly, we can get there more comfortably, more cheaply and most of the time more safely -- but the crashes when they occur are that much more spectacular. Governments can respond to the invention of jet airplane by improving air traffic control and lengthening the runway or by banning jet landings. It is obvious which is better.

Let me just mention three of the challenges we will face in working to reduce the risk of crises and deal more effectively with those that do take place.

The first effort will be ensuring there is greater transparency and openness in both the private and public sector around the world. No one can now doubt the power of abundant information in helping us manage risk and reduce financial stability. There are obvious questions of cause and effect, but Mexico's economic turnaround started around the same time it started to publish economic and financial information for all to observe on a regular time frame.

As you know, every domestic prospectus filed with the Securities and Exchange Commission has been available on-line since May 1996. We may be a long way from that at an international level. But I consider it a minor, but not insignificant, triumph of the IMF that in Korea somebody who teaches a night school class in accounting told me that he normally has 22 students in his winter term and this year has 385. We need such progress for every company in the global economy and every country. And we need that transparency to apply to central banks. In particular, we must recognize that it means nothing for a central bank to report its reserves if it does not report the encumbrances on those reserves.

The second challenge will be to work to strengthen financial systems, both globally and at the level of individual countries. That means improved prudential standards, investing in training for bank regulators and supervisors, and the promotion of effective financial infrastructure. But the ingredients of sound banking systems go well beyond a list of internationally recognized standards -- it means cultivating a credit culture, sound supervision, limits on the quality of assets at a bank's disposal, limits on government safety nets, and effective controls on self-dealing.

The third, and most difficult task will be to find mechanisms to bail in investors not bail them out and to ensure that policy makers do not confront the choice between uncontrolled chaos and confusion on the one hand and large bailouts on the other -- which is too often the choice they confront today. This task has a microeconomic and a macroeconomic dimension. Countries need bankruptcy laws. And they need effective judicial institutions to enforce them. That is part of being in a global capital market. But we also need procedures for dealing with situations where countries get themselves into very profound financial difficulties at the sovereign level. In short, we need systems that can handle failure, because until the system is safe for failure we will not be able to count on success.

These and other reforms will be critical to seizing the opportunities and managing the risks of a 21st century global economy. And make no mistake: American leadership will be critical to ensuring that these changes happen, and happen in a way that promotes our interests.

That is why it is so important for us to maintain our support for the IMF so it is ready to deal not just with today's crisis, but other crises down the road. The late 1920s and early 1930s provide a vivid enough reminder of the risks of a laissez-faire approach to financial sector problems. Quite simply, to fail to support the IMF at this time is a bit like canceling your life insurance when you have already gotten sick: it is just not a risk we can afford to take.

All of you know that not financing the IMF -- not financing the United Nations, not supporting Fast Track -- are critical issues for all of us who are concerned about the future of our economy.

III. Conclusion

This is a remarkable conference. Such a combination of technical creativity and financial backing would have been unimaginable a decade ago and probably would be unimaginable in any other country. Let me be clear: we get it in Washington about what technology and finance have done and can do to make people's lives better and we have worked to put the right framework in place. And yet, if you take anything away from what I have said here today, it is that, as important as technology and finance are, their full potential will not be realized without a sense of public purpose.

When President Clinton was here in San Francisco in February he made the point that if you look at every period of dramatic change in this nation's history -- be it the Civil War or the Industrial Revolution -- the advances have come when we have deepened the meaning of freedom, expanded it to more people, and widened the circle of opportunity and prosperity to build a stronger, more united nation. That must be the purpose for all of us as we approach a new millennium. No two industries better reflect the possibilities of a 21st century global economy than finance and technology -- and none has a greater stake in ensuring that every American takes part. Thank you.


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