FROM THE OFFICE OF PUBLIC AFFAIRS

I want to talk today about a vision. A vision of a world that works better. By working better, I mean a world where people everywhere are enjoying a higher and rising standard of living -- rising incomes that come from good jobs for everyone who wants one.

Let me begin by telling you the perspective I bring to this vision. From 1977 to 2001, I worked in the private sector after working 15 years in the Federal Government. During those private sector years I worked in two large multinational companies.

From 1987 to 2001 I was the Chairman and CEO of Alcoa. When I joined Alcoa in 1987 we employed 55,000 people in 13 countries.

When I left at the end of the year 2000, 140,000 people worked for Alcoa at 350 locations in 36 countries. I mention this to establish the basis for my assertion that I know something about job creation, and about the ways of life and work in many places around the globe.

Traveling the world over the last quarter-century, I saw an important truth -- that human beings everywhere, with the proper education, training, and a stable social environment,

can and do perform value-adding work at world competitive levels. 

That means they can be paid compensation that gives them the capacity for independence and the self-determined pursuit of the good life for themselves and their families. I draw from this observation that human beings everywhere have in them the capacity to create a high standard of living.

That makes me an advocate for increasing the ties that bring our world closer together - a process too often labeled with the pejorative term "globalization." That's a term that seems to have several very different definitions. Is it simply the spread of production to all parts of the world?

Or do we mean with that term something sinister - a spread of foreign culture that overwhelms local tradition, exploits local resources and in the process damages the environment? In my view, when globalization means spreading the production system for goods and services around the world, it is a force for good, giving millions of people new opportunities to learn, to participate and to prosper.

Maybe we need a new word for this process of spreading opportunity.

When people in all corners of the world can participate in world-class production processes and learn the ideas of democracy, free speech, and entrepreneurship in the process, this spread of production is a force for good.

Of course, development in poor nations cannot rest on the presence of large international companies. It takes a thriving domestic market environment to make the leap to self-sustaining increases in prosperity. The presence of large companies can provide experiences that translate into domestic entrepreneurship, if the conditions set by the governments allow a thriving private sector.

Too often, those conditions for success do not exist - not because the multinational company isn't doing enough and not because the local people aren't smart enough, but because government policies prevent citizens from reaching their human potential.

Where competition and rule of law do not exist and corruption is rampant, living standards lag what is possible. The impact can't be overstated. Look across the globe today and the disparity of living standards among the world's people is so large as to be practically incomprehensible.

Why is it, if all people everywhere have the capacity to create a good life, that so many billions of people live today with little hope of the good life we know is possible? I believe this is the question for us and our time.

We in the wealthier nations of the world have been talking about development for a long time. We may not have all the answers, but we do know some basic things. The rule of law and enforceable contracts is crucial to the development of a healthy private sector. Competition is vital to creating vibrant growth. And corruption must be minimal.

Yet even as we know these things, and talk about them, we don't always act to do something about them. We must get the incentives right, to help developing nations see their way to implementing these policies that will allow their citizens to participate in the world of opportunities.

The spring meeting of the G-7 Finance Ministers and Central Bank Governors begins here in Washington tomorrow, so today is an excellent occasion to connect my philosophical framework with some of the key issues we are bound to discuss regarding globalization and development.

There are three main areas of discussion in development policy circles right now: (1) the role of free trade; (2) the best ways to reduce international financial crises, including through sovereign debt restructuring reform; and (3) the role of, and best practices for, external development aid. I know these are all issues for the Bush School panel today.

Let me discuss each of these.

Most of us agree, I suspect, with President Bush's strong belief that expanding trade is in the interest of all nations and provides a route out of poverty. We are firmly committed to advancing free trade. We hope that the Senate will pass Trade Promotion Authority for the President next week, so that we can move forward on our trade objectives.

As for how to move forward, we want to advance freer trade however we can, whenever we can. We prefer multilateralism, but not to the exclusion of regional and bilateral arrangements.

As nations open to the idea of freer trade, regionally and bilaterally, they become more amenable to the global approach as well. They warm to the idea of freer trade as they see the benefits from more limited arrangements.

I believe our open borders are what forced the US economy in the late 1970s and 1980s to transform from sluggish and inefficient to world-leading. We saw the success of the Japanese, and we were shaken out of our comfortable lives. We had to become more productive and innovative, just to keep up. But we didn't just keep up - we responded to the challenge of global competition and became the world's most productive, vibrant economy - the envy of the world.

Opening markets in emerging and developing economies to trade will have the same stimulating effect on them, giving entrepreneurs the incentive of competition and the opportunity of world markets to push them to try new ideas and succeed.

Regional and bilateral trade agreements induce growth stimulating changes in developing economies that may in themselves outweigh even the benefits of trade creation, as private investment accumulates and as governments realize greater incentives to pursue market-friendly macroeconomic policies.

The Mexican economy since NAFTA is a wonderful example of this effect. Since 1993, annual trade with Mexico has increased from $81.5 billion to $232.9 billion in 2001, helping fuel economic growth. Mexico is now an investment-grade country with record inflows of foreign investment. NAFTA helped to make Mexico a capital-friendly place, and capital responded.

On a microeconomic level, freer trade in each sector of the economy creates just the kind of competitive pressure that encourage managers to optimize productivity.

The innovations that managers make under competition also directly benefit consumers through better products and services at lower costs. This increased productivity means higher wages, better living standards and higher economic growth.

For instance, in 1993 the Indian government removed licensing requirements for the automotive assembly industry and lifted a ban on foreign direct investment, which led many foreign firms to enter the market. As a result, labor productivity soared 256% and output increased by 280%. The increased demand by Indian consumers in response to these efficiency gains was so strong that employment in the sector grew by 11%.

These are success stories. The best prescription for crisis prevention is for every nation to set and move toward the right objective - investment grade sovereign debt.

But those of us who believe in the promise of freer trade and private investment for economic growth understand that crises can happen along the way.

We are working closely with our counterparts in the international community to enhance our ability to prevent financial crises. This includes promoting higher quality, more transparent economic data to help markets make better decisions, as well as strengthening International Monetary Fund analysis of economic vulnerabilities that could lead to future crises. It also means continuing to increase transparency at the IMF itself.

We also need to be clear that official resources are limited and that multiple, large-scale official financing packages will not be feasible or desirable in the future. It is important in this context to limit the extent of official sector lending, and to be wary of exceptions.

At the same time, we need to be better prepared when crises do occur. The uncertainty surrounding prospective defaults has substantially reduced private capital flows in recent years.

The uncertainty of the sovereign debt restructuring process today makes crises more likely than they should be. With less capital pursuing these opportunities, the available capital is more expensive. We need to improve predictability in the emerging markets.

We need to find mechanisms to help restore private capital flows on the most competitive possible terms to emerging market countries in order to unleash their private sector

development potential, and their ability to take advantage of globalization.

That is why we have called for long-overdue reform of the sovereign debt restructuring process.

We would like to begin with a decentralized, market-oriented approach. This approach advocates that creditors and borrowers incorporate new clauses into their sovereign debt contracts, such as a majority action clause, an engagement clause, and an initiation clause. These provisions would provide the basis for collective action and create a roadmap for restructuring the debt, if it became necessary.

We can begin to implement this approach right away, and it could immediately improve predictability. While approaches similar to this have been discussed in the past, I am sure that this time there will be results; in part because we are exploring ways the official sector can support its implementation in the markets, and also because we've never been more committed to making something happen.

I support work by the IMF on approaches to sovereign debt restructuring that may require changes in legislation. Since these changes would take time, this work should not delay the expeditious implementation of the market-based approach.

Regardless of the exact balance of private sector and official sector measures in a sovereign debt restructuring framework, we need to make sure we include creditors and debtors themselves in the dialogue. We need all involved parties to buy into the new system, if it is to succeed. I am confident that it will.

Finally, let me discuss what we are doing with international development aid.

Development aid is a crucial tool for helping poor nations achieve self-sustaining growth and gains in living standards. And yet, it has not been used with great success in the past. We've spent billions and billions of dollars, yet some poor nations are actually worse off than they were 50 years ago.

Over the last 50 years, bilateral and multilateral aid have delivered relief and disappointment. Relief as we provide food or vaccines where there are none. But also disappointment, because so many poor countries stay that way, and we too rarely ask why. Wealthy nations such as the United States have a responsibility to see that their contributions produce real improvements in the daily lives of people in the poorest countries.

President Bush has made it a priority to get the incentives right in our development assistance programs. His budget calls for an 18 percent increase in the U.S. contribution to IDA linked to improvements in IDA's performance.

He has also called for an 18 percent increase in the U.S. contribution to the African Development Fund. Our goal is to make aid dollars more effective, so that they contribute to economic growth.

Last summer, the President called on the World Bank and other multilateral development banks to increase the use of grants rather than loans for crucial social sector projects like health, education, and clean water in the poorest nations in the world. Grants support these basic investments without burying developing nations in new debt they may not be able to service.

We are, today, forgiving debt in many of the poorest nations. Why would we turn around and build up their debt all over again? These nations have to pay back loans by taking resources from citizens who earn less than a dollar a day.

It's far more humane to provide grants for specific projects, and then hold grant recipients accountable for using the money to achieve results.

Now, regarding the grants versus loans debate in the IDA-13 and African Development Fund negotiations, progress has been disappointing thus far. Although the United States has shown a high degree of flexibility on the overall proportion of aid that should go as grants, there remain staunch advocates for preserving the practices of the past fifty years, who continue to encourage developing nations to take on loans from the multilateral development banks.

I think the grant opponents do not understand the first principles of capital markets. They certainly have not learned a lesson from the current experience of having to write off loans for the heavily indebted poor countries.

We have said that we are open to an income approach and a sector-based approach for setting overall grant amounts, both of which are considerable compromises from the President's original proposal to make grants half of all new aid. This issue should be closed.

Last month, the President expanded our vision for international development with the "New Compact for Development," which increases core US development assistance by 50 percent over the next three years, and directs our aid to nations that have established a foundation of good governance and sound economic policies, where aid is more likely to translate into real improvement in people's lives.

We have an obligation to plant our resources where they will yield growth, rather than squandering precious seeds in unfertile soil.

By tying our aid flows to sound government policies, we increase the incentives for governments to pursue the policies that are good for their people's economic future - governing justly, expanding economic freedom and investing in people. And if a government makes changes in order to qualify for our assistance, those changes will improve the returns on all the other aid the nation is already receiving.

We know that successful developing countries have several characteristics in common:

• They encourage private enterprise through market-oriented mechanisms.
• They fight corruption and ensure competent public administration and rule of law.
• They open their economies to trade and investment.
• They invest in human capital such as education and health care.
• And they observe and adopt best practices in business and government from around the world.

Our aid has to encourage these kinds of policies.

The next step in this new initiative is to develop the right standards for measuring the impact of our development assistance dollars. We intend to work with our partners in the international community to do this.

We believe we can make a difference, if we work in partnership with the developing world, and if both sides take responsibility for results.

If you examine the economic history of the last 300 years it is easy to conclude that there is no absolute limit on world economic product. That is to say, economic prosperity is not rooted in some people getting more by taking someone else's share.

In fact, it appears that the world economic pie is limited only by our imagination -- when we back up our imagination with the necessary social institutions and structures, and human beings and resources are organized to create value.

This is an exciting time for those of us who relish the challenge of unleashing human potential around the world. We are making progress on many fronts - expanding trade, improving the predictability of international capital markets, and using development assistance to improve the policy environment in the poorest nations.

With the right government policies, we can accelerate the spread of private sector production around the world. We can create vibrant, self-sustaining local economies and a rising standard of living for people everywhere. We can unleash the human potential -- and we will not be satisfied with anything less.