FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. It is a pleasure to speak with you today. The first speech I gave as Treasury Secretary four and a half years ago was before the Bretton Woods Committee. It seems appropriate that one of the last speeches I will give as Treasury Secretary is also before you, because we have seen in recent years just how critically important the issues I discussed with you four years ago -- the imperative for our economic well being of strong U.S. leadership and engagement with respect to the issues of the global economy -- truly are.

The six and a half years of this Administration have been marked by an ever greater economic interdependence amongst the nations of the global economy, including the greatly increased globalization of financial markets.

The new reality created by the global economy has brought tremendous opportunities around the globe. When I first started in the investment banking business over thirty years ago, developing countries were largely irrelevant with respect to the U.S. economy, while in recent years they have been absorbing over 40 percent of our exports. The process of globalization has helped lift tens of millions of people out of poverty in the developing world even after allowing for the Asian financial crisis, although much certainly remains to be done. And I believe that these growing economic ties and open markets have contributed to the trend towards greater democracy across the globe, though here too there is much still to do.

Having said all that, global interdependence has also presented new risks. In 1995, we experienced what some have called the first financial crisis of the 21^st century in Mexico, a situation that could have spilled across our border without President Clinton's decision -- in the face of overwhelming public opposition -- to join with the IMF to help restore confidence and economic stability in Mexico. In the last two years, a financial crisis of unprecedented scope unfolded in Asia. It spread quickly within that region, affected other countries around the world and posed a very real risk to our economy. And the default of the Russian government on its domestic debt created havoc in financial markets around the world.

All of these events demonstrate that the basic principle that your organization has stood for -- that our economic well-being is inextricably linked to the rest of the world -- is even more true and more obvious today than it was six years ago, not to mention 50 years ago when the Bretton Woods Institutions were founded.

While some have said that the development of the global economy and the role and power of global markets has diminished the power of sovereign governments, in fact the opposite is true. But this role has changed. Instead of exercising economic control, the role of government now is to create the sound policies -- from fiscal discipline to good public education -- that will attract capital and promote investment, while at the same time pursuing social, environmental and other non-market objectives. And with increased global interdependence the importance of governments pursuing sound policies, is not only an issue of interest to them but to every other country as well; since failure in one country can now much more readily affect other countries.

To help our nation prosper in this environment, President Clinton has consistently pursued a strong international economic strategy of opening markets abroad while keeping our markets open; promoting growth and reform in developing countries; and dealing with financial crises when they occur. And I believe that strategy has been a major factor in the strong economic conditions our nation has enjoyed over the past six and a half years.

However, the turmoil in the global economy in the last few years has caused great controversy around globalization and around market-based economies. In other countries around the globe there is debate over whether nations should retreat from global integration and from market-based policies through measures such as capital controls and greater state direction of economic affairs. And in our country some argue that we should turn inward and retreat from the world. I believe, and your organization believes, just the opposite -- that we turn inward at our peril and that our national interest requires that we exercise leadership across the full panoply of international issues. Moreover, my experience in government has also reinforced for me my belief that the market-based system offers the best opportunities to promote growth and improve standards of living across the globe.

Yet the turmoil does underscore something long recognized and discussed: that there are risks in the global market-based system and that there are some purposes that markets by their nature cannot achieve. The challenge is to put in place measures that effectively deal with these issues, to create the conditions in which free flows of capital and market-based economies work best. Meeting this challenge, in my view, will include focusing on three key areas: strengthening the international financial institutions, reforming the international financial architecture and maintaining an open trading system.

First is to strengthen and reform the international financial institutions, which this organization was created to promote, so that they best meet the needs of today's rapidly changing world. For fifty years, these institutions have been at the center of the effort to create a stronger, more prosperous global economy, and on the whole, they have contributed much to these goals. One can look at any number of developing nations or countries making the transition from communism -- from Chile to Poland -- that have received advice and assistance from the IFIs over the years, and have made real progress. Most recently, of course, the IFIs have played a critical role in confronting the global financial crisis, where I believe, on balance, the IFIs have acted sensibly and made a great contribution in the face of enormously complex and, in many ways, unprecedented issues.

Even before this crisis, the IFIs recognized the need to improve their own operations and broaden their scope to adapt to the new issues surrounding the global economy. We have worked forcefully with these institutions to reduce overhead, become more open, promote private sector development, focus on health care, education, and the issues of women, and become more sensitive to environmental concerns, core labor standards and human rights. Over the last two or three years, the IMF and the World Bank have provided an intense focus on corruption, which is now recognized as a major economic issue -- and in some cases probably is the greatest impediment to success -- in many developing countries. And, more recently, the IFIs have developed new mechanisms for dealing with financial crisis. Going forward, the IFIs must continue on the path of change and reform -- even when the spotlight of attention caused by the crises dims.

Second, we must carry forward the reforms of the international financial architecture that were initiated earlier in this Administration. We have formulated a comprehensive approach -- not a dramatic single initiative of some sort, but a powerful program of measures to be implemented and improved upon over time -- and we are working to coalesce international support for it, including the G-7 Leaders Cologne Summit later this month.

One of our aims is to work with developing countries to identify best practices for developing countries across a broad range of economic policy areas, and then create inducements for developing countries to adopt such practices. Another is to find ways to encourage better risk management in industrial country financial institutions, whose inadequate focus on risk that led to excess capital flows played a major role in the Asian financial crisis. Both of these aims are preventive. In addition, we seek to find better means of responding to crisis, an effort which must include developing an appropriate private sector role in crisis response.

The third area that is critical to a successful international economic strategy is to continue to press for an open trading system. I think we should all be deeply troubled by the calls for restricting access to our markets here and at home. For example, the House of Representatives, by a vote of two to one, recently passed a bill imposing quotas on steel imports -- a bill that is inconsistent with WTO standards and antithetical to open, market-based economic growth. That bill could well pass the Senate, and such action in the strongest major economy in the world creates a real risk of strengthening the already increased protectionist pressure being felt around the world. It is no exaggeration to say that this could get off a wave of market access restrictions, but the voices of free trade have been silent.

It is, I might add, worth noting that the United States, which has the most open markets of any major economy in the world, has 4.3 percent unemployment, and massive new job creation in recent years, while continental Europe, whose markets are far less open, has 10 to 12 percent unemployment and virtually no job growth.

At the same time, we must recognize that trade -- just like technology to a far greater degree -- does have dislocating effects on some. A forward-looking international policy must be coupled with a forward-looking domestic policy, which provides our people with the tools to succeed in the global economy, and helps those that are dislocated successfully reenter the economy as quickly as possible.

The issues I have discussed today -- reforming the IFIs, strengthening the international financial architecture, and maintaining open markets -- are not simply questions of economics, but politics. As I prepare to step down as Treasury Secretary, I think one of the key lessons reinforced during the past few years is that the politics of international economic policy are just as important as the policy. Good policy will not be put in place and maintained unless there is adequate political support. In that respect, we must focus on working to broadly share the benefits of growth and globalization, including through bilateral and multilateral aid, targeting resources to the most vulnerable and offering debt relief to the poorest nations that are committed to reform. Measures such as these are not only good economic policy, they are critical to building support for that policy.

At the same time, in our own country, we must broaden understanding of our stake in the global economy. That understanding is not broadly shared among the American people, and, as I said at the beginning of my remarks, the voices of those advocating that we turn inward are growing more numerous and getting stronger.

I believe we may be at a crossroads, both at home and abroad. People all over the world have benefited enormously from globalization, and open markets and market-based systems have proliferated across the globe. Yet their basic precepts are being challenged by leaders in key nations, including our own.

In this context, all of us now must do far more here and abroad, to build public support for the policies that your organization has done so much to foster. I'd like to thank you for your help and support during my tenure in government and I know that Larry Summers looks forward to your help and support during his tenure. I might add that while many of you know Larry, for those who don't, you will find that he brings to this job an extraordinary combination of great intellectual prowess, practicality, experience with the issues, and seriousness of purpose. He is equipped to be, as I have no doubt he will be, a truly outstanding Secretary. Let me conclude by saying, as I step down as Secretary, that I firmly believe that the decades ahead can be very good for our economy, our country and the global economy at large, but that to realize that potential we must all work together on both the substantive and the political challenges to achieving sound economic policy in the new century.