FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure to speak with you this evening and I am honored to accept an award from such a distinguished group which focuses on the broad range of the nation's foreign policy concerns. By honoring me, you honor President Clinton's entire national security and economic policy team, as well as the career men and women in the White House, the Treasury Department and throughout the government with whom I've had the privilege of working the past five years. Most importantly, you honor President Clinton, who, in this period of new challenges in foreign policy, has brought to these challenges a deep understanding that we live in a global economy and that our economic well-being depends on strong U.S. leadership and engagement in the global economy. I well remember at the time of the Mexico crisis, I went to the Oval Office to tell the President that the Federal Reserve Board and Treasury felt that Mexico was on the verge of likely default. At the same time, I told him that a recent poll showed that 80 percent of the American public did not want us to provide help to Mexico. He saw that default in Mexico would not only profoundly affect Mexico, but would also profoundly affect our national security and economic interests. So the President said that this is something we have to do, let's go ahead and do it.

Having said that, however, I am deeply concerned -- and I know the President shares this concern -- that public support for forward looking international economic policies may be waning at a time when this country's economic, national security and geopolitical interests require just the opposite. We have all seen the signs over the past few years of a creeping tendency toward turning inward in America, and at times, even a rejection of the reality that what is happening in the rest of the world affects us. As I speak tonight, for example, the United States lacks fast track trading authority, and our trading partners are now moving forward with new trade agreements without us; we have failed to pay our arrears to the United Nations -- and if we fail to pay by the end of the year, we will lose our vote in the General Assembly; and we have failed to approve funding for the International Monetary Fund, at a time when a sufficiently funded IMF to deal with potential crises is critical to our economic and national security interests and the rest of the world is waiting to fund once we do.

Tonight, I want to speak about the importance of building support for forward-looking international policies. Let me start by placing this discussion in the context of the end of the Cold War and the emergence of the global economy and global financial markets.

With the end of the Cold War, the foreign policy consensus lost its centerpiece. In the wake of that transformation, there have been two significant -- and related -- developments I would particularly like to discuss this evening. First, there has been an increased focus on international economic policy as a result of the globalization of the economy. At the same time, there has been an erosion of the traditional base of support for international economic engagement, and, at the same time, a re-ignition of one historical strain in American thought, a rejection of the outside world.

Over the last twenty-five years, we have seen the rapid evolution of the global economy and global financial markets. A quarter century ago, imports plus exports equaled 15 percent of our economy. Today, they equal 30 percent. Large U.S. corporations once viewed themselves as American companies with a few offices abroad. Now they see themselves as global corporations headquartered in the United States. Vast international flows of trade, capital, information and technology have sped the world's economies toward integration.

Perhaps the changes have been the greatest in developing countries. Twenty-five years ago, the flow of aid to developing countries was much greater than private capital flows. Today, after so many developing countries have embraced market reforms, the annual private flows of capital to developing countries around the world are more than seven times larger than official flows. In 1996, more than $250 billion in private capital flowed to emerging markets -- compared to roughly $20 billion ten years ago. This has helped lift millions of people out of poverty in the developing world and turned these countries into important participants in the global economy; for example, they now absorb more than 40 percent of our country's exports. That is why, in my tenure as Treasury Secretary, I've visited a whole host of developing and transitional countries, including Vietnam, Brazil, Ukraine, the Philippines, India, and China, and this summer I will visit Africa -- countries and regions far from the traditional focus of Treasury Secretaries.

This new era of the global economy and global financial markets has brought tremendous benefits for U.S. workers, farmers and businesses. Millions of Americans owe their jobs directly or indirectly to trade, and all of us benefit through the lower prices and greater choice that international competition fosters. It is no exaggeration to say that our economic well-being is inextricably linked to the rest of the world.

But with the opportunities and benefits, have come new challenges and risks. How effectively we meet these challenges will have an enormous impact on support for forward-looking international policies and our economic well-being in the years and decades ahead. Let me focus on three critical challenges.

First is the challenge of greatly broadening participation in the benefits of the global economy. Global financial integration benefits the great majority of Americans, but one of the concerns often expressed -- and it is a concern that I share -- is this: in the United States, and other industrialized countries, those who are well-equipped to compete in the global economy are doing better and better, and those who are not so well-equipped risk falling further and further behind. Dynamism in the global economy does fuel rapid change, and that change benefits the vast preponderance of workers, farmers and businesses. But it also can create dislocations, although I think it is worth observing that technology contributes far more to dislocations than trade.

Looking at the developing world, despite vast global economic growth over the past decade, over half the people of the world still live in poverty and that is a problem not only for the countries with high poverty rates but for all of us. The developing countries are our markets for the future, and their economic well-being promotes our well-being. Moreover, social instability, disease, and environmental degradation in those countries can affect us.

The response to all of this ought not to be to turn inward, or to dismantle the global economy that has benefited so many. The response is for the United States -- and all nations -- to make it easier for those who are dislocated to re-enter the economy successfully; to focus on education and training to equip citizens with the tools to prosper in the global economy; to build social safety nets to protect the people who would otherwise be left behind; to work for broad implementation of core labor standards throughout the globe; and to promote good governance, democracy and human rights. The benefits of the global economy will only be realized if we and all other nations build broad-based support at home for forward-looking international economic policies. Garnering that support would be greatly enhanced if these benefits are more broadly shared.

A second critical challenge is to strengthen the architecture of the international financial markets to help prevent financial crises, or better manage them should they occur. Fifty years ago, foreign policy experts met at Bretton Woods and devised the architecture of the international financial system. That architecture has served us well for over a half century, but it needs updating in an age of a vast and complex international financial system. We must make the architecture as modern as the markets.

The need to update the architecture has been brought home most recently by the financial crisis in Asia. As you well know, by doing everything sensible to help these Asian countries get back on track we support our exports to the region and help strengthen their currencies. This, in turn, helps the competitiveness of our goods in world markets and reduces the risk that financial instability will spread to other developing countries. It also lessens the chance of contagion, which would compound all these problems. That is why the United States has exercised very strong leadership throughout this situation towards helping resolve the Asian crises.

Even before the turmoil in Asia, the United States and the international community had been working to strengthen the international financial architecture. We began this effort four years ago at the Naples G-7 meeting and we launched the first steps the following year at the summit in Halifax. These issues are very complex -- intellectually and politically. Unlike the Bretton Woods institutions, which were essentially put in place at one time, I believe what will happen here will be that reforms will take place in pieces over an extended period of time.

Our approach has focused on three areas:

First, providing better information through improved disclosure and transparency. This is partly a problem of making useful information available, and partly a problem of investors using the information wisely, and analyzing risk better. In Korea, we were surprised by how little risk assessment investors and creditors had done.

Our second area of focus is on building strong national financial sectors. A common element amongst the countries involved in the crisis in Asia -- and, for that matter, in virtually all countries experiencing financial crises around the world -- is a badly flawed domestic financial sector.

Our third area of focus is to work to ensure that the private sector more fully bears the consequences of its credit and investment decisions, including in periods of crisis. In today's world, where trillions of dollars flow through international markets every day, there is simply not going to be enough international assistance for the crises that could take place. There is also a risk associated with official financing which economists call "moral hazard:" that providing such assistance shields creditors and investors from the consequences of their actions and sows the seeds of futures crises. Some protection of creditors may result as a by-product of the overarching objective of restoring financial stability, but this protection should be kept to the minimum possible.

While we are focusing on strengthening the architecture for the longer term, it is absolutely imperative that IMF resources now be sufficient to deal with new crises should they occur. In fact, IMF resources are at historic lows. While the probability of the crisis worsening or spreading or of a new major crisis is low, the potential impact on our economy of any significant crisis is simply too great to risk not having the capacity to respond effectively. It is critical that Congress approve the President's request for IMF funding as quickly as possible.

The third and final challenge we face is to rebuild the consensus about the critical importance of U.S. leadership and engagement in the world to the national security and the economic well-being of the American people. This challenge has not been met.

In 1947, George Marshall gave a speech at Harvard proposing the plan that would bear his name to help rebuild Europe. He said, "An essential part of any successful action on the part of the United States is an understanding on the part of the people of America of the character of the problem and the remedies to be applied. Political passion and prejudice should have no part." Afterwards, President Truman, Senator Arthur Vandenberg and members of both parties launched a campaign to educate the public about the Plan and build support for it. The Marshall Plan, which was initially met with skepticism and opposition, eventually passed overwhelmingly in both houses of Congress.

We need a similar focus today. There needs to be a redoubled effort by all of us -- public sector officials, the business community, foreign policy experts -- to communicate with the American public about the dynamics of the new global economy and the importance of U.S. leadership in the global economy to the economic well being of the American people.

A poll once showed that Americans, when asked what we spend on foreign aid, said fifteen percent of the budget. When asked what we should spend, they said five percent. We actually spend a little over one percent of our budget on these aid programs, including our contributions to the international financial institutions and the UN. Unless there is broad based public understanding of the importance to U.S. interests of strong U.S. leadership in the global economy, we will fail to support the UN and we will lose our vote; we will fail to support the IMF, and be more vulnerable to economic crises; and without fast track, we will stand by as the rest of the world moves forward and liberalizes trade, with us on the outside of the tent, rather than the inside. All of this has enormous consequences to our economic well-being and our national security. That's why it's so critical to develop broad public understanding of global interdependence and the importance of U.S. leadership to our interests-- and that is where all of you -- individually and institutionally -- have a critical role to play.

The members of the Foreign Policy Association have contributed enormously to the conduct of American foreign policy by the focus, thought and seriousness it has brought to the subject. But in the world today, your role has never been more important -- as individuals, in the businesses and firms for which you work, and as an organization -- in developing public support for forward looking foreign policy.

Our success in meeting the challenges I've discussed this evening -- and again, let me emphasize, the overarching challenge is to promote public support for global leadership -- is critical to our country's economic well-being for years and decades to come. As this century draws to a close, it offers a very clear lesson. Withdrawal from international affairs cannot work and engagement in international affairs leads to prosperity. Thank you very much.