FROM THE OFFICE OF PUBLIC AFFAIRS

Distinguished Governors, Mr. President, delegates and friends. It is great to be in this historic city of Cartagena. I am especially glad to be here at a time when in the world of finance -- the Latin American model is a model to emulate not a model to avoid.

That Latin America has not been a source of crisis -- financial, diplomatic or political -- in recent years cannot and will not blind us to the fact that it is a vast source of opportunity. President Clinton has spoken of a "quiet revolution bringing our hemisphere together around common values of democracy, free markets, mutual respect and cooperation". We celebrate the fact that we are now -- with one dogged exception -- a community of democracies. And we take note that each year the United States exports more to Chile than to India, more to Brazil than to China.

In so many ways, what we do together in the Americas these next years will form a model for what is probably the major global challenge we face at the dawn of a new century: forging the healthiest, sturdiest possible relationships between the mature economies and the emerging markets. Here at the IDB and everywhere else we seek the right kind of relationship: a relationship in which the United States cooperates always, leads when it can and follows when it should.

I remember well the first IDB meeting I attended, four years ago in Guadalajara, in the build-up to the first Summit of the Americas in Miami in December 1994. At that meeting, as we celebrated the Bank's Eighth Capital Replenishment, the themes of sustaining macroeconomic progress, continuing integration, and launching second generation reforms to cement democracy were very clear. Since then the IDB has continued to play a core role in regional development, in part by bringing home a vital lesson for all development banks: that intangible infrastructure, all the institutions, skills and cooperative arrangements that reside in a country, is as important, in many ways more important to development than tangible infrastructure.

Now we meet on the brink of another Summit of Americas next month in Santiago de Chile. And once again it is a time when it is appropriate to consider the role of the IDB in a fast changing hemisphere. But first let me reflect a little on what has happened these past four years.

I Latin America Today: Reform Continued

Almost immediately after the Miami Summit we were all surprised by events in Mexico. Many feared that that shock, like the 1982 debt crisis before it, would spur another inwards turn. In the event, as many have noted, the Tequila shock was a wake-up call. Economic collapse among the major reforming economies did not materialize. And important progress has been achieved in most of the areas that were uppermost in our minds in Guadalajara.

1. Macroeconomic reform sustained

Progress against inflation has continued, in some countries spectacularly so. Pedro Malan told President Clinton in October that inflation in Brazil was five percent -- much the same as it was a few years ago. The difference is that now it is five percent per year, not per week. The average inflation rate fell to less than 10 percent last year, compared with 61 percent in 1994, and more than 200 percent in 1990. Public borrowing, by and large, has also remained under control -- with governments working to lock in the fiscal consolidation of the early 1990s. And national savings rates last year averaged nearly 18 percent of GDP -- 20 percent higher than in 1990.

2. Integration Deepened

The integration we had achieved when we met in Mexico has accelerated and it has deepened. In 1994 I counted 23 trade agreements within the Americas. Today I count 30. And it is not merely goods that are crossing our many borders. Ever more services, capital, people and ideas are flowing across the hemisphere, with profound effects for our economies and our societies. By increasing cooperation, by working to harmonize standards and exchange ideas, the United States has played and will continue to play a full part in this transformation. We do not yet have Fast Track. But we are determined that the Free Trade Area for the Americas will remain on a fast track -- just as all the important work laying the groundwork for the Uruguay round proceeded in the first few years.

3. A Second Generation Begun

In 1994 we could see government by the people across the region. What we needed still to create was effective government for the people. Since then we have seen many countries continue the first important steps toward this -- by making it near the people, with efforts across the region to strengthen local democracy and decentralize power and resources to subnational authorities. And at the national level, ambitious growth-enhancing ideas for pensions, tax systems and financial sectors have been put to work. Not all countries are moving at the same pace. And in none is the job complete. But the change is palpable. And its direction is clear.

4. A Closer Look

But of course, the story of Latin America is the story of each Latin American country:

• in Mexico, we have seen a courageous turn to pluralism and a truly remarkable economic turnaround. The challenge in the years to come will be to entrench these gains by combating social divisions and building a prosperity which all can share;
• in Brazil, for the first time in a generation, company accounts are beginning to be kept in domestic currency rather than dollars, and the government has impressed the world by combating Asian flu at the first symptoms. Its priority now must be deeper public sector reform, not just to cut borrowing but to target resources on urgent social investments;
• years of fiscal reform and financial sector strengthening have left Argentina well insulated from Asia shockwaves. But high unemployment is a nagging reminder of the need to press ahead with the government's unfinished reform agenda: in the labor market especially.
• the news from the Caribbean has been a greater source of concern. Elected government has returned to Haiti since we met in Mexico, but has struggled to throw off the divisions of the past. There, as elsewhere, macroeconomic stability and growth remains all too elusive.
• yet in Central America we have seen, most recently in Guatemala, an end to more than a generation of civil strife and the beginnings of new future. But we know well that peace treaties need shared institutions and shared growth to bring them to life.

II Challenges For A New Century

The good news from this brief survey is that, by and large, Latin America is in better shape to withstand this recent shock than it was 4 years ago. The question is: where do we go from here? It is perhaps of the nature of "quiet" revolutions that they take longer to complete. The themes that were right in 1994 are right today. The abiding challenge is the same: to make government a constructive force in our economies and our societies, a force, above all, for inclusive growth.

The 1990s has been no lost decade. But the 3 percent average growth that has been achieved since 1991 has not been enough to make real inroads on poverty in many countries. And the poorest fifth of the population still receive a lower share of national income, and the richest fifth a higher share -- than in any other region in the world. Losing that dismal distinction will mean completing the first generation of reforms in those countries where inflation is still in double digits and poor macroeconomic policy still stifles investment and growth. But as we have learned these past few years, that is not all it will require.

Markets are important. But they are not enough. The strong enforcement of legitimate law remains a critical imperative for building a strong civil society -- the key to a vibrant democracy. Let me applaud, in this context, the IDB's increased emphasis on good governance and capacity building in its operations, particularly in helping countries build sound judiciaries.

From fair labor rights to effective policies against drug trafficking; from the protection of our environment to the vaccination of our children; from the empowerment of the indigenous to the punishment of the corrupt; there are many critical challenges we face in building effective government for the people. Let me focus today just on two areas that I expect will be at the center of discussions at Santiago and I believe will be profoundly important to Latin America's future, and with it the future of the IDB. These are: achieving strong and stable financial integration, and investing in our people.

III Promoting Strong and Open Regional Finance

Integration is about much more than trade. It is about companies investing in new markets and profit-making opportunities. It is about flows of capital -- and the knowledge that flows with that capital. And it is about safeguarding the stability of the systems into which that capital flows. Latin America's insulation from the recent Asian crisis is a reflection of the steps that nations have taken, both individually and collectively, to ensure stability since that first 21st century financial crisis in 1995. Indeed, in many ways the work of the Committee on Hemispheric Financial Issues (CHFI) since its first meeting of Finance Ministers in New Orleans in May 1996 is pointing the way toward the kinds of approaches that will be pursued globally in the months ahead.

Of particular importance will be the commitments reached at the most recent CHFI meeting in Santiago de Chile in December:

• to strengthen banking supervision and prudential regulation, with the universal adoption of the Basel Core Principles for Effective Banking Supervision and high quality training to ensure our supervisors are up to the challenges that modern financial markets present;
• to combat money laundering and other financial crime, by working -- as we now do at Treasury -- to find new ways to close the channels for moving illicit funds into the economy and put the launderers in the jails where they belong;
• to support the development of microfinance, which the IDB has long recognized as a uniquely effective way out of poverty for the marginalized and dispossessed. From its support for rural credit unions in Bolivia to women's banking in Colombia, the Multilateral Investment Fund has truly, here, been a world leader.

Going forward, this region which has far and away the greatest presence in global bond and equity markets of any emerging market region needs to set the pace in other crucial areas;

• let it show the way in transparency, with, not seven, but all of the countries in the region subscribing to the International Monetary Fund's Special Data Dissemination Standard;
• let borrowers and creditors work together to build a financial system that can handle failure, that has the strong bankruptcy laws, effective judicial systems, and reliable enforcement that can help ensure that the failure of one does not jeopardize the whole. Because until the system is safe for failure, we cannot count on its success;
• let us now, when the clouds have come here but have passed us by, promote effective regional surveillance, built on the principle that friends warn friends when trouble is near;
• and let us, at the center of this effort, think about the role of a multilateral bank when most of the borrowing is done by countries that have access to international capital markets most of the time. That ought to mean focusing on the kinds of programs and products that can ensure that capital access is maintained -- when surprises hit -- and charging market rates for providing that support. And it ought to mean focusing scarce official finance on the needs of countries to whom private capital is still denied.

We emphasize financial stability because we know all too well the human cost that financial instability inflicts. Stabilizing capital flows is a means to a more ultimate end: of maximizing growth and opportunities for all our people. It is not an end in itself. In promoting free flows of capital we must not neglect the broader risks they pose to our society and environment. As capital finds it can move ever more readily than labor, there are legitimate concerns that it will exploit that mobility in playing off competing jurisdictions against each other. The fear is that we will be caught in a race to the bottom -- a bottom in which governments cannot promote fair taxes, uphold fair labor standards or protect the environment. That is not the world that we want to build. Let all Americans -- North and South -- affirm that we will not let it be the future of our Hemisphere.

IV Investing in All of Our People

At Santiago our heads of government will declare where our future lies -- it lies with education. If achieving financial stability was the challenge of the latter years of this century, then investing in our people is our challenge of the next.

In a global economy, education is the only route to lasting, inclusive growth. Because it is the only way to maximize every nation's most unique and precious asset: its people. That is why President Clinton has been the education President. And that is why, in President Zedillo --- a former education minister -- and President Cardoso -- a former educator -- he has found such common cause, together with the host, President Frei, in making education the centerpiece at Santiago.

Our children should be stimulated by books, not drugs. Teenagers should learn how to read -- not how to hotwire a car.

Education is too important to do poorly. If the International Financial Institutions (IFIs) and the interactions between national governments are essential to ensuring that our banking systems remain stable, if they are essential to ensuring that our telephone systems work, then they are essential to ensuring that our education systems work.

In an increasingly interconnected hemisphere, we all have a common stake in the citizens of all our countries. We call on the IFIs to monitor carefully governments' efforts here: as they monitor the operation of fiscal policies, to monitor the allocation of resources for education; as they monitor the state of the tax system, to monitor the state of the education system.

Doing better will sometimes be a matter of resources. Without adequate resources, there cannot be adequate investments in people. But equally, if not more, important will be spending more wisely the resources we have now. In too many Latin American countries, too much of the education budget gets spent on higher education for the few. We need to spend those resources on better education for the many.

Study after study confirms what common sense would suggest, that investing in broad-based primary education offers countries by far the larger return. In Miami we committed ourselves to ensure, by the year 2010, universal access to and completion of quality primary education, and access to secondary education for at least 75 percent. We ought to honor that commitment.

That must mean targeted policies to reach the marginalized. And it must mean rigorous and effective evaluation of teaching quality. High repetition rates and widespread functional illiteracy tell us that a large amount of the teaching in this region is not worthy of the name. Our emphasis must be on education in substance and not just in form.

This is a task that should be and must be a task for individual nations to finance. But a Hemispheric effort can make a big difference. As we move to the Summit we need to re-examine our priorities. And we need to put education at the very top -- as the leaders will in five short weeks.

In the past three years the IDB has approved more than $1.5 billion in loans for education -- around 7 percent of its new lending. The Banks needs to do more. We call on the IDB to more than double the share of new lending to primary and secondary education in the next three years -- to more than $3 billion.

But we cannot and must not stop there. We believe there is a pressing need for an innovative vehicle to meet the special challenges which educating our continent will present. To meet that need we believe the IDB should establish a Special Fund for Hemispheric Education. This could:

• provide loans and grants to plug the gaps in well-intentioned reforms -- the times when teachers are trained but have no books, when schools are built but have no teachers; when parents seek involvement but need mechanisms to organize themselves;
• bring new resources to bear on steps that can help us integrate as we educate -- such as developing more systematic testing systems and uniform performance standards across countries;
• channel funds into finding more innovative ways to reach those who have most often been forgotten: the very poor, the rural and isolated, minorities, and the young adults who want a new chance to complete an "equivalency" at the secondary level and to upgrade their skills to be more productive members of society;
• look creatively for special initiatives to advance our shared goals -- for example, using regional exchange to improve teaching quality.

Assuredly the Fund will need simplified procedures for rapid response. Just as assuredly, it will need the mobilization of a wide range of Bank resources to make a difference. Educating our people is the central challenge of our time. If we are serious about meeting that challenge we must be serious about marshaling Bank resources to meet it. The Bank will have to utilize the full range of its resources, including scarce concessional funds and local currency balances, in a way that is more just and more sustainable.

The desirability of the goals is not in question. What will be in question is the depth of our commitment to them. We must invest in all Americans -- North and South. Because if the 20th century was the American century, the 21st century must be the century of the Americas.