FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure to speak at this University which has produced so many of Chile's leaders in economic affairs, including Minister of Finance Aninat. We meet at a time when recent events in global financial markets have raised a number of important issues -- for Asia, for Latin America, for all countries. In this context, I'd like to make some observations about the remarkable progress made by emerging markets and about the lessons to be learned from recent developments.

Much has changed since I studied economics at Harvard University. When I was a student and a young man learning the ways of Wall Street, U.S. businesses focused largely on the American market and many governments were committed to protectionism, state enterprise, and closed financial systems. Now a global economy has emerged, and trillions of dollars of goods and capital flow around the globe every year. Today, almost all large businesses function internationally and there is broad-based agreement among governments on the importance of strong free market fundamentals.

Emerging markets around the world have benefitted enormously from these changes. Although much remains to be done, market-based policies and dramatically increased international flows of private capital have lifted millions out of poverty. Thirty years ago, most developing countries were extremely poor and were seen only as the recipients of foreign aid. Now many nations in Asia and Latin America have established a record of economic success -- some over decades and some over more recent years -- based in large measure on forward looking economic policies -- sound macroeconomic policies, structural reforms and openness to trade and investment. In many respects, Chile has had a long record of effective reform, and it has reaped the benefits -- its growth has been three times the Latin American average over the past decade.

Sustained growth in emerging markets is enormously important to the economic interest of the United States, as well, obviously, to the emerging market countries, since forty percent of U.S. trade is with developing countries. Our national security is also greatly enhanced by economic success in emerging market countries. And, ever since World War II, we have been very active -- both bilaterally and through multilateral institutions such as the World Bank, the IMF, the IDB and the WTO, promoting growth and reform in emerging and transition economies. I had originally intended to discuss reform and its challenges in the years ahead as the students here take their place in the world, but in view of the financial instability of recent months and its great importance to the global economy, especially the emerging economies, I decided instead to discuss some observations we draw from the recent developments.

This financial instability is obviously an event of immense, immediate importance to the global economy. Depending on our reactions, however, it can lead to long term problems, or it can lead to healthy adjustments in the global economy and, after a pause in growth in some emerging countries, a continuation of sustained growth and improved standards of living in the emerging world. With that, let me make several observations.

First, it's important to draw the right, not the wrong lessons, from recent developments. This is no time to turn one's back on the strategies for economic success that has been so crucial to emerging markets worldwide. If there is an overarching lesson to draw from recent events, it is the following: While the reforms pursued by many emerging market economies in Asia and Latin America have led to significant economic progress, no country can afford to let that progress deter them from dealing with unresolved issues. Some countries have followed the sound market-based policies in a number of respects, but left critical problems in some areas. The countries in Asia, for example, have great underlying strengths, such as high savings rates, firm commitments to education and strong work ethics. And they in critical ways also have had market based economies and sound policies -- all of which make them well-positioned to sustain high rates of economic growth going forward. But where weak financial sectors or other policy weaknesses remained unaddressed, these problems took the inevitable toll we see today. This financial instability should cause all of us -- in emerging and industrial countries -- to redouble our focus on sound policy and in meeting the remaining challenges all of us have -- that Brazil, for example, has done with measures recently announced to deal with certain of its issues.

Second, at this time of turmoil it is important to remember that one of the major reasons for the economic success of developing nations in Asia, as in Latin America, has been the development of global financial markets. These markets have produced a vast increase in private sector capital flowing to developing countries around the world, financing investment and growth in amounts that were unimaginable twenty-five years ago. And I believe that continued openness to global capital flows will be just as important to the emerging economies over the next twenty-five years.

Third, even taking into account the current difficult period, emerging market economies -- in some cases for decades and in other cases for years -- have greatly increased their per capita income. It is worth recalling that per capita income in Korea was on a par with the average income in sub-Sahara Africa in the 1960s. Now, despite the depreciation of the won in recent weeks, Korea's per capita income is more than twenty times higher. I might add that one conclusion is to greatly increase the focus of the international community on promoting growth in Africa. Here is Latin America, per capita income growth over the same period has been lower, due in part to the stagnation of the 1980s, but in recent years the region has been on a strong economic track -- grounded in good policy. Chile's record over the past ten years -- with per capita income rising 70 percent -- is impressive by any standard.

Fourth, those countries that hold firm to a sound policy path are likely to be less affected by financial instability and to recover more quickly. This isn't to say that countries will be immune to contagion -- pull backs from emerging markets are likely to have effects pretty much across the board -- but sound economies will be affected least and recover more rapidly, as evidenced by the relatively better performance of a number of emerging country markets over recent weeks.

Fifth, one of the lessons of financial crises that have occurred over the last several years -- in Asia and elsewhere -- is that when there are financial crises, they tend to be either precipitated by or exacerbated by problems in the financial system. In a global capital market, a country's financial system can be its most valuable asset, or its greatest liability. Establishing a strong framework of regulatory policies and institutions to underpin the financial sector -- as well as improving the management and expertise inside financial institutions -- is key to maintaining stability. Banks need to operate with transparency and on a truly commercial basis, maintaining independence both from the dictates of government policy and from those to which they lend.

Many countries have had financial sector problems, as did the United States in the 1980's and early 1990's. But throughout the hemisphere we have seen good progress in making banks stronger, in strengthening regulatory policies and institutions, and in integrating our financial sectors through increased cross-border investment. That has been strongly supported by the work of the Committee on Hemispheric Financial Issues, hosted by Chile.

Sixth, money is not the answer. Sound policy is, though international support may be necessary to get through a difficult period. In that regard, I believe that Mexico is a good example. After Mexico experienced the peso crisis in 1995, the international community took action with a financial package to give Mexico the breathing room it needed to stabilize. That support helped, but the indispensable key were the sound economic policies pursued by President Zedillo and Finance Minister Ortiz. And now Mexico is expected to grow by 7 percent in 1997. Following the right policy path is not easy. Countries will have a difficult time, politically and socially, as they go through the needed adjustments. This can often be very painful, as it was in Mexico, before the recovery based on sound policy takes hold. To implement a successful reform program requires countries to take ownership of the adjustment measures and to make a commitment to sustain them. But when sound policies are pursued, confidence -- and capital -- return.

Seventh and final, the international community must redouble its focus on improving measures to prevent financial crises and, when they occur, to deal with them effectively and with minimum contagion. In effect, our international mechanisms must be as modern as the market place. We made a start with the initiatives launch at the G-7 Summit in Halifax in 1995, and now we have to see what can be learned from the current financial instability to carry this process forward.

Some critics would argue that if you insulate countries from the consequences of unsound policy decisions by offering financial support during economic crises, then you encourage countries to make bad policy decisions -- often referred to as the moral hazard issue. But as I just mentioned, countries that develop problems -- as did Mexico -- inevitably pay a heavy economic price even as they have recovered with the aid of international financial support. So I do not believe that as to countries, that there is a moral hazard issue. Investors, too, should be subject to the discipline of risk, and that's an issue the international financial community together must continue to address.

These lessons are important to consider as we work together in this hemisphere to promote stability and growth. While the financial instability in Asia has affected Latin American markets, the effect has been less here than elsewhere. No one can predict the future, and no one can say with certainty how the Asian economic and financial situation is going to evolve or what effect it might have on Latin America. But I believe that the progress this region has made in pursuing a sound policy path and in strengthening financial markets has better positioned it to withstand financial turbulence and to sustain economic growth.

Chile is in a particularly strong position to continue to grow and prosper -- in part because of its long history of sound policy -- and it continues to be a true leader in Latin America in economic reforms. The results demonstrate how impressive Chile's progress has been: Economic growth has averaged 7 percent over the past ten years; inflation has fallen steadily to single digits; the poverty rate has fallen by half since 1987; and the government has run fiscal surpluses every year this decade. In addition, Chile has many strengths that will contribute to long term growth such as a national savings rate which has nearly tripled in the last ten years to 29 percent of GDP, a commitment to education reform, and pension reform, which has restored financial solvency to the retirement system while deepening domestic capital markets.

As much as Chile has accomplished, there are of course challenges your nation and, in particular, future policymakers face. Chief among these, it would seem is too large income inequality, even though the poverty rate has fallen substantially in recent years. This is a problem that the United States shares in some fair measure. A strong economy and social cohesion are related, and both would benefit from bringing all members of our society into the economic mainstream. That's obviously a strong challenge in Latin America, where the poorest fifth of the population receives a lower share of national income -- 4.5 percent -- than any other region in the world.

A challenge we face in the United States is building political support for forward looking economic policies. We've recently experienced a setback in this area in our efforts to secure fast track trade negotiating authority. I think there is no question that trade liberalization benefits the vast majority of Americans, but we need to help those who are adversely affected by trade and, more generally, build greater popular support for the benefits of trade. When trade has a negative impact, that impact is often highly visible. But the far greater positive impact of trade is often more widely dispersed and much less visible.

Our administration is committed to working with our Congress to devise an acceptable fast track authority early next year. We remain committed to trade liberalization in this hemisphere, and globally, and we believe strongly that it and other market opening measures are critical for long term growth and prosperity.

The United States, Chile and the whole of the hemisphere have tremendous opportunities in today's economy -- if we all meet our challenges. Prosperity in each of our markets provides better opportunities for our trading partners, and instability in any one of our economies creates uncertainty with respect to all of the other economies. In an interdependent world, each country helps itself by getting its own economic house in order and in helping other countries to do the same. That's the key to sustaining global growth and to facilitating the integration of our economies. And that is the path to prosperity into the next century. Thank you very much.