FROM THE OFFICE OF PUBLIC AFFAIRS

This is a profoundly new era for all of us. With the rise of information technology, with the general spread of market forces, with the rise of emerging markets, with ever-greater global integration -- the world is being changed in fundamental ways. But ironically, for all that is new, in many ways the problems that are becoming paramount in the late 1990s are traditional ones: dealing effectively with financial crises and ensuring adequate global economic demand.

Against that backdrop I would like today to reflect on the economic situation in each of the major parts of the world economy, before bringing the pieces together to talk about what it means for global economic growth.

I. The World's Locomotive

The United States still stands out as a beacon of strength. The recovery is now the longest peacetime expansion in history. The things that should be up are up, and the things that should be down are down:

• almost 18 million new jobs have been created since President Clinton took office, and real wages are growing at their fastest rate in more than twenty years.

• inflation, unemployment, violent crime and the welfare rolls -- all are lower than they have been in a generation.

• and the burden of the deficit has at last been lifted. At the start of the first Clinton Administration the deficit for 1998 was projected to be $357 billion. Instead, we had a surplus of $70 billion. And the CBO and OMB are both predicting surpluses for years to come.

As a result of the deficit cuts 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.

That prudence will stand us in good stead as the 21st century approaches. But -- as Goethe once said, the time when the light is brightest is also when the shadows are darkest. On the other side of some of our successes it is possible to see important points of vulnerability:

• cutting the deficit has helped raise our rate of national saving -- from 3.4 percent of national income in 1992 to 7.5 percent in the first three quarters of last year. But this is still well below the rates we achieved in the 1950s and 1960s. And during this same period the rate of personal savings has fallen to a 55-year low.

• we are growing faster than any other country in the world -- accounting for more than two-thirds of industrial country growth last year and probably a similar proportion in the year to come. But that very success is taking its toll on our external position. Private sector forecasts suggest that the United States current account deficit rose more than $80 billion, to $235 billion in 1998, and predict it will rise further in the year to come.

• complacency is another potential source of vulnerability. Experience suggests that great mistakes of optimism -- whether they be in asset valuations, the creation of new capacity, or the acceptance of leverage -- come in good times.

All of these concerns bring out two points in sharp relief.

First, they confirm the importance of using today's good economic times to invest in the future. All the signs suggest that the recovery can and will continue -- albeit at a slower pace than we have seen in recent months. But experience teaches that the best kind of insurance is freedom to maneuver. By addressing the long-term problems facing Social Security and reducing the national debt we can leave the fiscal cannon well-loaded to face the future. With that fiscal prudence and today's low expectations of inflation the United States is well-positioned to respond on all fronts if trouble comes.

Second, they underline the United States' heightened stake in restoring strong sustainable growth abroad. And here, to be sure, there are now important reasons for concern.

II. The Risks Beyond Our Borders

1. Developing Asia

I have just returned from a five-nation trip through Asia and I must admit that the experience was a sobering one.

To be sure, there are important points of light. Several countries in the region worst hit by crisis -- notably the Philippines, Thailand, and Korea -- have made important strides toward stabilizing their economies and making the changes needed to revive confidence and growth over the long term. Visiting Korea -- a country that a little a over a year ago stood on the brink of a general default, and certainly faces a great many challenges in the future -- I was particularly impressed by the progress that a year's decisive leadership and strong policies had achieved.

However, casting a shadow over these countries' prospects are the continued problems of their neighbors. While Indonesia's recent success in implementing parts of its macroeconomic adjustment program has done much to stabilize the economy, political uncertainties are a major barrier to long-term renewal of confidence and growth. Malaysia, too, is in a state of flux.

China has been a major source of regional stability these past eighteen months. And talking once again with Zhu Rhongji, the Chinese Premier, in Beijing I was happy to hear him reaffirm his desire to see China play that role in future. But as the leadership recognize, recent events heighten the need to address China's long-term problems -- especially the problems of the state-owned-enterprise sector and mounting levels of financial sector debt. Those reforms, in turn, will pose an even greater challenge to policy makers in an environment of declining regional -- and global -- growth.

2. Japan

By far the most important factor in determining how the next months play out in Asia will be what happens in Japan. All now recognize that there has recently been an important evolution in the Japanese authorities' response to the crisis. Moves to implement two large supplementary stimulus budgets and ambitious plans to strengthen the financial sector have been particularly welcome. But for all that, the uncertainties facing the economy have almost certainly increased since last fall and growth forecasts have been revised further downward.

We all agree on the importance of price stability -- but it is important to recognize that the goal of price stability means avoiding deflation as well as inflation. Considering the risks it faces, Japan's promised fiscal stimulus needs to be fully implemented and sustained over the next few years. Its boost to the economy should also be accommodated by monetary policy.

Going forward, it will be critical to the stability and growth of the entire region that the exchange rate does not become a substitute for policy -- and for Japan to think creatively about the best use of all the tools of fiscal and monetary policy to create an expectation of confidence and renewed growth.

3. Western Europe

In Europe, too, inflation and growth forecasts are being revised downwards. As the G7 reaffirmed last week, appropriate European macroeconomic policies and structural measures will both be important for promoting employment and investment and supporting global growth. It is a striking reflection of the weakness of domestic demand that, despite the Asian crisis, Europe's current account surplus -- at nearly 2 percent of GDP -- is expected to be little changed in 1998, at around $110 billion.

With the advent of the single currency, the members of "Euroland" no longer have the same capacity to respond to shocks with the traditional domestic monetary and exchange rate levers. Nor do they have much room to respond through fiscal policy. Thus, as an important complement to a supportive macroeconomic policy stance, success in pursuing structural reforms will be essential to give Europe's product and labor markets the flexibility and dynamism to grow rapidly and better adjust to shocks.

Here the European countries' own need to raise investment and employment coincides precisely with the global need for stronger growth. It is perhaps no accident that the countries in the Euro area that have made the deepest structural reforms -- such as the Netherlands, Ireland and Portugal -- have also recently enjoyed the most vigorous recoveries.

4. Latin America

For a while, it appeared that the storms of crisis might largely pass by Latin America. In Argentina and Mexico, especially, important steps were taken to respond to the market turbulence and tackle long-standing weaknesses. But more recently Brazil has faced mounting market pressures that the government -- supported by the IMF and the international community -- has not entirely been able to contain. These troubles, in turn, have posed risks to Brazil's neighbors.

Argentina, Mexico, and others will need to continue to buttress their defenses in the months ahead. But most important of all will be the actions taken by Brazil. The Brazilian authorities have taken important steps to reduce their fiscal deficit. In the context of a revised economic program supported by the IMF, the authorities must persevere with those fiscal efforts if they are to inspire confidence. Equally vital will be establishing a new, credible and transparent monetary regime that can preserve the financial stability that the real plan achieved. President Cardoso remains committed to these objectives. But given recent events it may take time and perseverance to convince investors that Brazil has turned the corner.

5. Russia and Eastern Europe

If there is a more pleasant surprise in recent events it has been among the Central and Eastern Europe economies. So far, at least, they have largely emerged unscathed from the crisis in Russia and general downturn in emerging market confidence, although larger-than-expected external imbalances have put downward pressure on exchange rates in recent weeks. Poland and Hungary stand out as star performers. But nearly all the countries in the region have made progress in the past eighteen months. This could provide some valuable protection against further shocks.

Yet the storm clouds to their East are still all too apparent, as Russia continues to face the consequences of the abandonment of its macroeconomic and exchange rate regime last August. With the government still unable to raise the revenues to pay its bills -- or service all of its debts -- and with inflation and political uncertainty both on the rise, it is far from clear that the period of danger in Russia has passed. As we have said throughout, the United States and the international community stand ready to support Russia in putting in place a credible strategy for resolving these issues. But the choice is for Russia and Russia alone to make.

6. The Poorest Countries

Nor can we afford to forget -- in these fast-moving times -- the parts of the world where the story cannot change fast enough. The 1990s have shown that market economics works in Sub-Saharan Africa, just as it does anywhere else. In several countries, we have seen 7 percent growth rates after years of stagnation and decline, and rising capital inflows from the lowest of low bases. But there is a long way to go yet.

Even committed reformers can find that a legacy of bad policy and aid dependence is a heavy burden to shake off. That is why the budget presented last month to Congress proposes significant additional funding for debt relief for poor, highly-indebted nations who are making strides toward reform. We hope that the international financial institutions will also play their part. But by far the most important contribution that the world community can make to these countries' prospects will be to create the conditions for strong and sustainable global growth.

III. The Big Picture -- Key Challenges

In this disturbing global picture two major challenges stand out.

First, there is too little growth in the global economy. The risks around the world are still very much tilted toward lack of growth, spare capacity, and slowdown -- rather than toward economic overheating. Concerns are about excess supply not excess demand. And in many places worries about rising prices have given way to concern about falling prices.

Second, there is too little balance in global growth. As I have said, growth in the United States has accounted for the bulk of industrial country growth -- but at 4 percent, it is very likely above what would be considered a long run sustainable trend and is giving rise to very substantial imbalances.

An effective strategy for addressing these challenges will have three components.

First, strengthened policy in the industrial countries centered around the need for faster global growth. We in the United States will do everything we can to keep our economy growing strongly. But we cannot assume that the global economy will be able to fly permanently on a single engine. As the G7 affirmed in Bonn, the shift in the balance of global risks puts the burden of responsibility on all of the industrial economies to pursue policies aimed at creating strong domestically generated growth. The fragile state of confidence and recovery in Asian markets makes this an especially important priority for Japan.

Second, effective policies to build confidence and growth in the emerging market economies. While a strong case can be made that excessive capital inflows may have contributed importantly to the crises, it seems clear that the problem for the next few years will be increasing confidence in these countries and ensuring that flows to these continue. It is the irony of financial crises that while they are usually caused by there being too much lending, they are prolonged by there being too little.

As long as confidence -- and the lending that it engenders -- remains weak, so too will the prospects for achieving a rapid recovery across the developing world and further costly adjustments being avoided. Economies with greater systemic significance -- notably Brazil and Russia -- bear a particular responsibility here to put in place policies and reforms that will stick.

Third, concerted action to raise long-term confidence in the international financial system as a whole. The history of past financial crises -- indeed, the United States' own Savings and Loan crises -- suggests strongly that the global market system has the capacity to emerge stronger out of the events of the past eighteen months. But only if the experience is truly taken to heart.

The United States and the rest of the G7, key emerging market economies, the international financial institutions and the international community are all now involved in a major effort to limit and better contain financial crises such as those we have seen in Asia and elsewhere.

• we need to find ways to help countries build the intangible infrastructure of a modern financial system -- a system built on high levels of transparency and disclosure, a true private sector credit culture, and effective supervision and regulation. And we need to find ways to monitor that progress and drive it forward.

• we need to help emerging market economies pace their entry into the global capital market with the development of their domestic financial systems -- and we need, in this context, to have more effective means of international surveillance to discourage them from taking excessive risks.

• and we need more effective ways to respond to modern crises: first, by having an improved capacity to respond quickly, with large volumes of very short-term conditioned finance, and second, by devising better mechanisms for ensuring that private sector creditors bear their share of the burden.

None of these "architectural" challenges poses easy simple answers. And several involve solutions that it would not be wise or appropriate to implement immediately. But in the significant recent strengthening of the IMF's data disclosure standards for countries; in the agreement in Bonn to create a new Financial Stability Forum for improving global coordination of national and international financial regulatory bodies; and in the creation of the IMF's new fast-disbursing, higher-interest contingent credit line for countries suffering from contagion -- in these and other changes, very important progress has been made.

Much has been done. Much remains to be done. As we go forward we can and must continue this work. Most important of all, we must work to ensure that it takes place in a climate of strengthened, truly global, growth. Thank you.