FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure to speak with you today and I am delighted to be in Nairobi at the School for Monetary Studies, an institution that plays a key role in training Kenya's new generation of public officials and private professionals for finance and economic management. The U.S. government is looking forward to working with your institution, and we are beginning the process of engaging our private sector, including Citibank, to develop a technical assistance program with your institution. In all countries, including our own, a committed and professional civil service is key to economic performance and a healthy society. I can think of no better place to discuss my topic for today, the importance of good governance to economic performance in developing countries.

I've come to Kenya because Kenya is a regional economic center, the largest economy in East Africa and an important and historic ally of the United States. Kenya has played a vital role in working to resolve conflicts in Sudan and Somalia, in promoting the East African Cooperation group and in facilitating efforts by the U.S. government to give humanitarian assistance to the victims of conflicts in the region.

During my travels through Africa this past week I have met with business people from large and small enterprises, government officials, students and villagers. All of them have given me a deeper understanding of the opportunities and challenges facing the diverse nations of Sub-Saharan Africa. Part of the purpose of my trip has been to continue the process President Clinton began with his trip in March. First, to establish regular and ongoing dialogue between senior officials of our country and those of Africa to further improve our working together on the great array of issues of mutual concern very much including economic development. And second, to help convey to Americans an accurate and balanced view of Africa and its many countries. Too often in my country there is an unfair gap between the actual opportunities and problems and the perceived opportunities and problems in many African nations, to the detriment of investment and trade for those African nations. This gap is a consequence of not recognizing the differences amongst nations, and the tendency to see all nations through the prism created by the most troubled.

This is a pivotal time in the history of many African countries. Across the region, democracy has started to take root and 25 nations have held free elections since 1990. In many countries, market reforms have also begun to take hold, and, in response, average inflation for the region has fallen from 45 percent in 1994 to about 13 percent last year, and the region's annual average growth rate has risen from less than 2 percent over the period of 1990 to 1994, to 4 percent in the period from 1995 to 1997. Sixteen countries had growth rates of 5 percent or substantially greater during that period.

But even at those growth rates it will take many decades for African countries to achieve standards of living comparable to other emerging markets today. African nations must strive to attain even higher rates of growth on a sustained basis -- an achievable objective, although the path is certainly not easy. One of the keys to achieving those high levels of growth is attracting private investment. Although market reforms have caused portfolio and foreign direct investors to begin to take a new look at and invest in African nations -- a most promising contrast to the situation as recently as seven or eight years ago -- a great deal still needs to be done.

A successful strategy to generate higher rates of investment in Africa needs to focus on three areas. First is attracting foreign capital. Sub-Saharan Africa received just 2 percent of total long-term private capital flows to developing countries last year, and the region remains heavily dependent on concessional loans and grants from multilateral and bilateral donors. The relative importance of the foreign private sector in financing Africa's development has actually declined since 1970. Reversing those trends is critical for African nations.

Second is to successfully mobilize domestic savings. This requires effective capital markets, which intermediates to bring domestic savings into the mainstream economy and then allocates that savings to the best investment uses. And third is to keep capital at home. A major investment problem in Africa is that so many Africans themselves have taken their money out of the continent: One scholar has estimated that 39 percent of the private wealth of Africans is held overseas.

Kenya was on a good reform track for some time, had attracted capital and was starting to achieve strong growth. Following liberalization of its economy and economic reform, Kenya's inflation rate fell to ten percent in 1995 from nearly 100 percent two years earlier and its growth reached nearly 5 percent in 1995. That should have provided a base from which Kenya could have worked towards even higher rates of growth. But instead Kenya is now going in the opposite direction. Foreign direct investment has declined and growth has slowed. The challenge for Kenya is to get back on track towards strong growth and higher standards of living for its people.

There are many factors that need to be addressed for any country to attract private capital and foster growth -- sound macroeconomic policies, a strong financial system, openness to trade and investment, and an educated work force to name a few. In addition, good governance, which includes a well-managed public service and efficient implementation of policies, is central. Today, though, I want to focus on one aspect of governance that, despite its great importance, was considered a matter that could not be discussed as recently as a few years ago: corruption.

To start, corruption is very much a political issue. An accountable, responsive and honest government is central to a government's legitimacy and, ultimately, political and social stability. Conversely, there are many instances of governments that have lost public support in part because of corruption.

But corruption is also very much an economic issue. Corruption is a major impediment to economic activity, a cause of gross misallocation of scarce resources, and an additional cost to business that causes substantial inefficiency. Corruption is also a strong deterrent to foreign investment, especially in the global economy, where investors have so many options. Moreover -- and very importantly -- corruption in the public sector creates an environment conducive to crime and corruption in the private sector which exacerbates each of those problems.

To be sure, no region or nation -- developed or developing -- can claim purity in this area. Corruption exists everywhere, but corruption is especially troubling in developing countries, where it diverts the scarce resources needed so badly for health, education and housing. In short, corruption benefits the few and hurts the many. Finally, corruption, while increasing real risk for investors, also widens the gap between the perception and the reality of risk in African nations.

Against that backdrop, I would like to comment on six elements critical to effectively combating corruption.

First, a nation must have good, clear laws that can be easily and reliably enforced. Clarity of law and regulations and fairness of application and enforcement are issues raised repeatedly by the American and foreign businessmen with whom I have discussed investment in Africa. That requires courts that are adequately funded and independent of political pressure, as well as the appointment of honest and well-trained regulators and judges. Second is to establish strong, independent anti-corruption units with real authority and power.

Third is to privatize state-owned enterprises and eliminate unnecessary controls on the economy. Both reducing the scope and the administrative discretion of government reduce the potential for corruption. For example, the fewer licenses that need to be granted and the fewer approvals that need to be obtained, the fewer opportunities there are for corruption. In many countries in Eastern Europe, for example, corruption has decreased significantly since the end of communism and the privatization and liberalization of much of the economy.

Fourth is to create a well-supervised, well-regulated, and competitive financial system that operates on a commercial basis and is not subject to the misallocation of credit based on personal or political connections. In addition, good supervision and regulation are the best antidote to a financial system being used to siphon or launder money. I look forward to working with the government of Kenya and other African countries to develop an effective anti-money laundering strategy for this region.

Fifth is to improve the operation of the public administration itself. Creating a sound civil service system entails strict conflict of interest rules, appropriate sanctions for malfeasance, and adequate compensation for employees. This may require civil service reform so the government functions more efficiently.

Sixth is greater transparency. Shining light on the activities of government by publishing information about its operations and decision making is a powerful deterrent to corruption. In that regard, the International Monetary Fund has developed a code of fiscal transparency for governments which should be adopted. This code calls for governments to accurately disclose expenditures and thereby helps to hold governments accountable for their spending decisions. And a free press, acting as watchdog and critic, can contribute greatly to this effort.

More broadly, with better economic and statistical information, savers, investors and the public have a better sense of what the government is doing and that, through the market or otherwise, can have a disciplining effect on government. The IMF has developed systems of statistical reporting to help governments improve their economic reporting. In my view Kenya could benefit by adopting one of these systems.

There are also a number of other steps the international financial institutions -- including the IMF, World Bank, and the African Development Fund -- can take to help nations combat corruption. In my opinion, it is greatly in the interest of the people of the developing nations for the international community to focus on this issue because it is so central to economic development. I also believe it is important for the IFIs to withhold assistance when corruption undermines the viability and effectiveness of their reform programs, as they have done and should continue to do. But it is also important for the international financial and development institutions to provide technical assistance and other forms of support to help countries take the steps I've laid out above.

Developed countries have an important role to play in addressing corruption as well. After all, corruption is a two-way street. In 1976, the United States passed the Foreign Corrupt Practices Act, which outlaws bribery by our businesses and investors in other countries. For the last several years, we have been urging the OECD countries to get forceful to discourage bribery. The OECD Bribery Convention was a critical step in recognizing the responsibility of industrial countries to discourage the giving of bribes by ending their tax deductibility and criminalizing them.

Having said that, the largest burden in this effort falls on the shoulders of African governments and the citizens of their countries. In fact, African governments are focusing on this problem. In November 1997 in Maputo and just last month in Accra, senior African leaders have come together to discuss openly anti-corruption strategies. Several nations, including Guinea, Benin, Ethiopia, Cameroon and others have taken specific legal or administrative actions to assert, or reassert, their commitment to good governance.

The key to success is concrete action. In that spirit, I think it is very constructive that the government of Kenya and the World Bank have agreed to new procedures for the transparent and accountable administration of the El Nino Emergency Credit approved earlier this week.

Pursuing policies designed to combat corruption is politically difficult -- as are almost all economic policies that are critical to economic growth and development. In the United States, we certainly have had throughout our history -- and continue to have -- real political struggle around important economic policy decisions. But we can't and you can't turn away from these difficult political challenges. The politics of reform must keep pace with the policies of reform.

Over the last week, as I have traveled through Africa, I have learned first-hand about the difficulties that nations across the continent are confronting in achieving economic growth and political stability. But in this brief time I have also gained a sense of the enormous potential of the leaders, the peoples and the economies of these countries. In this pivotal period, many nations throughout Sub-Saharan Africa are focusing and moving forward on the key challenges to improving the economic well-being of their peoples -- sound macroeconomic policies including fiscal discipline; building human capacity by improving education and health; integrating regionally to create new markets and more efficient use of regional resources; and building accountable, transparent governments. And all of this is critical to attracting the private investment that African nations need to bring all their citizens into the economic mainstream and realize the opportunities in the global economy.

Our government is committed to supporting the nations of Africa in the difficult process of economic transformation. And, in the last few years, the American private sector has begun portfolio investment in Africa and focus on foreign direct investment has increased substantially. In both the public and the private sectors, our nation is working to build a partnership that will forge stronger links between the United States and the nations of Africa, particularly those in the process of reform. And all of that will be to our mutual benefit.

Across this continent, there are people like you who are developing the skills and talents to help transform their nations. All of you here will bear the responsibility of creating a strong, prosperous and democratic Kenya, with an economic and political system that works to the benefit of all. I wish you the best as you take on the enormous challenges that lie before you, and we are committed to helping you achieve your goals. Thank you very much.