FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, members of the Committee, it is a pleasure to appear before this Committee, which focuses on the broad range of the nation's foreign policy concerns. We live in a new era of the global economy and global financial markets -- an era that creates enormous opportunities for American farmers, workers and businesses, but which also carries new risks. Strong and effective U.S. leadership on the issues of the global economy is essential if we are to realize the opportunities, and manage the risks; and whether or not we provide that leadership will profoundly affect our national economic and security interests in the years ahead. These issues of the global economy will be of enormous importance to this Committee in the years and decades ahead.

Against this background -- the imperative of U.S. leadership in the global economy because of our economic and national security interests -- today I would like to discuss the crisis in Asia; its potential impact on the United States; the international response to the crisis including the critical role of the International Monetary Fund; and our efforts to modernize the architecture of the international financial markets to better help prevent financial crises, or better manage them should they occur.

Let me start by placing the events in Asia in the context of the emergence of the global economy. I worked on Wall Street for 26 years before joining the Administration, and I saw how businesses over time became increasingly international in their operations, how economies around the globe became more and more interdependent, and how capital began flowing in previously unimaginable amounts to developing countries. These flows of capital helped provide investment in developing countries, which, in turn, fostered strong sustained economic growth, helping to lift millions out of poverty and creating new markets for U.S. goods and services. Forty percent of our exports are now purchased in developing countries. All of this has brought tremendous opportunities to the American people: greater exports, more high-paying jobs, higher standards of living and lower inflation. And our leadership in the World Bank, the IMF and the regional development banks has played a key role in this process that has contributed so much to our economic well being.

But with the opportunities have come risks. In recent months, these risks have been brought home as financial instability in Asia has shaken the region and affected economies around the world, including our own.

Financial instability, economic distress, and depreciating currencies all have direct effects on the pace of our exports to the region, the competitiveness of our goods and services in world markets, the growth of our economy and, ultimately, the well-being of American workers. Thirty percent of U.S. exports go to Asia, supporting millions of U.S. jobs, and we now export more to Asia than Europe. In states like California, Oregon and Washington, exports to Asia account for more than half of each state's total exports. Already major U.S. companies -- such as Boeing, Motorola, and Intel -- are reporting effects from the crisis, which impacts workers in these, as well as many smaller, companies.

If the crisis were to spread more broadly to other emerging markets throughout the globe -- which we are all working hard to avoid -- then American workers and businesses could be far more severely affected. By working to reestablish financial stability we help the countries in crisis become strong markets once again for American goods, with stronger currencies that will help the competitiveness of our goods in world market. When we support IMF-led reform programs, we help to protect and promote the interests of the American people.

The United States also has critical national security interests in seeing a restoration of financial stability in the region. We have 100,000 troops based in Asia, 37,000 on the Korean peninsula alone. A stable and prosperous Asia is more likely to be a peaceful Asia -- as was the case over the last decade when Asia was experiencing dynamic growth. And more generally, with respect to the broader concerns of this Committee, economic stability promotes political and social stability and economic instability threatens political and social stability.

Mr. Chairman, the United States has helped lead an international response to resolve this crisis. This response has focused on four key elements: enacting reform programs in individual nations; providing temporary financial assistance when needed; working with other major economic powers to promote growth in their countries; and finally, fostering policies in other developing and emerging economies to reduce the risk this crisis will spread and to prevent future crises. Let me say a few words about each of these.

First, these programs focus on economic reforms to address the specific causes of each nations' crisis and lay the basis for recovery by strengthening financial systems, improving transparency and supervision, eliminating the interrelationships between banks, the government, and commercial entities, opening capital markets, and instituting appropriate monetary and fiscal policies. These are not austerity programs, they focus largely on structural reforms.

Second, if necessary, we support these programs of reform with temporary financial assistance to provide breathing room for a nation to restore economic confidence, attract private capital and resume growth.

Mr. Chairman, let me stress that financial assistance, while critical for a short period, is not the key. Reform is the key. Only when nations purse sound policies will confidence -- and private capital -- return.

Design of the reform programs and the provision of assistance is centered around the IMF. Today we ask you to support two critical requests: a commitment for our IMF quota subscription, and an augmented back-up facility, the New Arrangements to Borrow, to supplement the IMF's resources, if needed, to deal with crises such as this one. These IMF resources need to be put in place as quickly as possible to enable the international system to respond to a worsening and spreading of this crisis, or to deal with future crises, either of which could dramatically affect the interests of the American people. The likelihood of such developments may be small, but let me emphasize, the consequences could be immense. We cannot afford to take that risk. Moreover, failure to provide these resources could shake confidence in American leadership in the global economy just at a time when confidence and American leadership are so important in re-establishing stability in Asia.

Our contribution to the IMF does not result in a budget outlay. When the IMF draws on our commitments, we receive a liquid, interest bearing offsetting claim on the IMF of equal value. Our contribution does not increase the deficit, or divert resources from other spending priorities and our contributions over fifty years have not cost the taxpayers a single dime.

The third element of our approach is to encourage the major industrial countries to act to strengthen their own economies, which can contribute to resolving the crisis in Asia. Japan, the second largest economy in the world, has an especially crucial role to play. If Japan were on a strong economic track led by domestic demand led growth, it would be a larger market for Asian goods, a source of greater bank credit and other capital flows, and a radiator of confidence for the region.

Fourth, and finally, we have worked closely with the IMF to help other emerging markets in Asia, Latin America, Russia and other transitional economies to make policy adjustments to reduce their vulnerability to contagion from the countries now in crisis.

Thus far, strong U.S. leadership and the rapid efforts of the international community to re-establish financial stability in Asia, as well as reform measures in many developing countries elsewhere, have succeeded in limiting the contagion effect of the crisis.

Looking forward, while nobody can say for certain what will happen in the current situation, the countries in Asia have great underlying strengths, such as high savings rates, firm commitments to education, and strong work ethics. With a sustained commitment to the necessary reforms, they are well-positioned over time to re-establish strong economic growth and sound currencies -- although there are certainly enormous challenges ahead to restore economic well-being.

Let me take a moment to address a couple of concerns that have been raised with respect to these programs.

Some have said that providing financial assistance to investors shields them from the consequences of bad decisions and sows the seeds of futures crises. In fact, vast numbers of creditors and investors, have taken large losses in Asia -- for example Deutsche Bank, the largest German bank, announced last week a $777 million dollar reserve for possible loan losses in Asia. And investors and creditors should bear the full consequences of their decisions. However, a byproduct of programs designed to restore stability and growth may be that some creditors will be protected from the full consequences of their actions. But any action to force investors and creditors involuntarily to take losses, however appropriate that might seem, could cause banks to pull their money out of the country involved, and, perhaps from other emerging markets, which, in turn, could cause serious global economic disruptions.

Having said this, it is critically important that we work toward changing the global financial architecture so that creditors and investors bear the consequences of their decisions as fully as possible, an effort that we have already begun in conjunction with the Federal Reserve Board. But devising such architectural changes is difficult and complex. We cannot wait until that work is complete to take the steps necessary now to put in place the capacity to protect ourselves against the crisis.

Others have said that these programs do not require nations to take specific steps to protect the environment, promote core labor standards and ensure human rights. We are committed to addressing these enormously important values, both as social and moral issues, and as essential underpinnings for a successful global economy. But there are a lot of practical limits on the feasibility of addressing them in the context of a program to restore financial stability under crisis conditions. Moreover, restoring financial stability, growth and prosperity provides the best circumstances to advance these objectives and benefit the workers of these countries as well as our own workers.

Others say that doing nothing would be best, because markets would ultimately solve the problem on their own. Let me say as someone who has an enormous belief in markets, that there is simply too much risk that markets alone will not resolve these problems of financial instability, and given the enormity of our stakes in Asia we must act.

Mr. Chairman, as I said earlier, we live in an era of global financial markets and a global economy which presents both opportunities and risks for American workers, farmers and businessmen. Making the most of those opportunities, while minimizing the risks, will be a central issue for this Committee, and the nation, in the years ahead. U.S. leadership in these matters will be indispensable for fostering growth and stability around the world -- and protecting and promoting the interests of the American people. Thank you very much.