The financial crisis which erupted a little over a year ago and continues today represents a substantial challenge to the global trade and financial system that has been built over the past 50 years. It is clear that the balance of risks has changed, creating new challenges for us. Our immediate challenge is to continue to do everything sensible to address the current crisis and help the affected countries return to stability and growth. It is essential to strengthen our response by improving implementation of sound policies and adopting additional reforms as needed. Also, this crisis has clearly demonstrated the need to build over the longer term a stronger system better suited for the challenges of the ever-changing modern global economy. The global economy cannot continue to thrive with the kinds of vast and systemic disruptions that have occurred over the last year; our ability to prevent such disruptions better, and to manage them better where, nevertheless, they occur, is critical to our ability to maintain and expand the free market system, which has benefitted so many people around the globe.

Strengthening the response to the crisis

The short-term challenge, strengthening as appropriate our immediate response to the crisis before us, requires all nations to meet their respective responsibilities. We need a strong, multifaceted program that takes into account the changing circumstances and needs as the crisis in emerging markets has spread, intensified and affected us all.

Industrial countries, for their part, must pursue policies that support growth. This will allow them to help lift those parts of the world that are beset by, or vulnerable to, financial instability.

Among industrial countries, the United States must continue on a path of fiscal discipline and other sound policies that have underpinned our strong economy. It is a matter of utmost urgency for us that we complete the procedures for consenting to the quota increase and to our participation in the New Arrangements to Borrow.

For its part, Japan must urgently implement effective measures that will stabilize its financial system and spur strong, sustained domestic demand-led growth. Europe must implement Economic and Monetary Union in a manner that contributes both to further improvement in domestic demand and a strong euro.

These steps are in the enlightened self interest of the industrial nations, for both the short term effort to address the crisis, and the long term needs of global growth and stability. At the same time, we must pursue the supporting objectives of improved governance, in both the public and private sector, the creation or maintenance of appropriate social safety nets and policies that can help strengthen the basis for strong economies, including the promotion of core labor standards. The forthcoming meeting of the Heads of the IMF, World Bank and ILO presents an opportunity to advance thinking in this area.

In the more adverse external environment we now face, emerging market and developing economies, for their part, must help strengthen their commitment to the macroeconomic policies and related reforms that are critical to growth and financial stability.

The international financial institutions have been and will continue to be at the center of our efforts to deal with the crisis, providing conditional assistance that is crucial for a nation to have the breathing room to focus on reform. To buttress the efforts of the international financial institutions, we must not only provide them with the financial backing they need to do their job, but also work with them to develop innovative ways to deal with events that are, in a number of ways, unprecedented.

With this in mind, the United States has put forward for consideration two initiatives. The first is a strengthened IMF financing mechanism to increase our ability to respond to difficult global financial conditions which are adversely affecting even those emerging market and developing countries which are pursuing sound policies. Such a strengthened capacity could take the form of a contingency line of credit for countries that are pursuing strong reform programs but, nevertheless, face the threat of destabilization, given the turbulence in today's global markets. The second proposal is for the World Bank and other MDBs to develop a new emergency capacity with particular focus on support for the most vulnerable groups in society and financial sector restructuring. This would involve using loan guarantees and other innovative means to leverage private sector involvement as a means of helping emerging market and developing countries attain better access to international capital markets, and to expand their own lending as much as possible for sound operations within their guidelines to countries now affected by the crisis.

Building a stronger architecture

The longer-term challenge is to reform the global financial architecture to better prevent financial instability, and to allow the system to manage such instability when it occurs with a minimum of damage and pain to all those affected. Beginning in 1994 at the Naples Leaders' Meeting, the international community embarked on this long-term effort. These are enormously complex issues, requiring great rigor and seriousness. While a great deal remain to be done, considerable progress has been made in diagnosing the problems, and a broad consensus is emerging on the basic elements of appropriate remedies. In the view of the United States, there is a need for action now in four, mutually reinforcing areas: (1) increased transparency and openness in the international financial system; (2) strengthened national financial systems, particularly in emerging market economies; (3) promotion in industrial nations of more soundly based capital flows; and (4) developing new ways to respond to crises, including greater participation by the private sector.

Transparency: More transparency, on what is happening in our economies and how policies are formulated, is essential for markets to function efficiently and price risks accurately, to encourage sound governmental policies that are supported by the public and to foster accountability by public and private institutions. The IMF has played a leading role in developing standards on the dissemination of data. The SDDS, to which 46 countries have now subscribed, represents a significant advance in promoting the publication of comprehensive, timely, high quality information. In cooperation with other international organizations, the Fund should complete the current review of the SDDS by the end of the year and broaden the coverage of required reserve data to include information on the range of reserve-related liabilities which may impair the availability of a country's reserves. The Fund should also expedite consideration of measures to monitor short-term capital flows and to include data on short-term external indebtedness in the SDDS.

The introduction of standards and codes of best practices on monetary and financial policies and fiscal transparency, which the Fund has developed or is developing, can help to promote good governance and accountability in the public sector. However, this effort needs to be complemented by mechanisms for monitoring implementation and compliance to prevent abuse and to promote improved transparency. The Fund should accord a high priority to putting such a monitoring mechanism in place at an early date and to publishing its results.

The Fund also has a role to play in promoting policy transparency by building on the favorable experience with Public Information Notices (PINs). We strongly believe that IMF policy should encourage all members to issue PINs following the conclusion of the annual IMF consultations on economic policies. All countries obtaining IMF loans should also be required to release their Letters of Intent and, if applicable, Policy Framework Papers, and to agree to issue PINs on the Executive Board's consideration of their programs.

The IMF and other international financial institutions have a responsibility to make their activities open and transparent, not least as a means of enhancing accountability. The Executive Board should move expeditiously to finalize decisions to issue PINs on Executive Board discussions of IMF policy issues; substantially reduce the time period for access to the Fund's archival material; publish user-friendly information on the IMF's liquidity; and increase the scope, frequency and accessability of external evaluations.

Strengthened Financial Systems: The technologies which have permitted the emergence of a global financial market with a vast array of sophisticated new instruments have enabled investors to diversify risk and provided borrowers more ways to tap foreign savings to increase domestic investment and growth. But the resulting enormous expansion of cross-border capital flows has also proven to be extremely sensitive to changes in market sentiment. While the world has experienced financial crises in the past, including Europe in 1992 and Mexico in 1995, the current crisis is unprecedented in size, speed, and geographic scope.

A first priority in dealing with today's more volatile global financial markets is to have in place strong domestic financial systems and a legal and regulatory infrastructure that will enable the economy to realize the opportunities afforded by open capital markets while reducing the risks. This requires the further development and implementation of ?best practices@ for supervising financial institutions and developing a strong credit culture and risk management procedures. Countries also need to put in place comprehensive programs to repair and test institutions' computer codes to ensure that such systems can handle year 2000 dates.

A robust financial system and solid supervisory structure will take time to put in place. The international community can help by providing technical and financial assistance. More powerful incentives to encourage reform efforts will also be important. We support a stronger surveillance mechanism, anchored in the IMF, which would work with the World Bank and the international standard-setting bodies could monitor financial systems as a means of encouraging adoption of best practices and dealing with potential problems.

Care will also be required in establishing the pace, timing and sequence of measures to integrate economies into the global capital market. In particular, a country should seek to have in place the institutional structures and prudential capacity commensurate with its degree of integration to enable the system to respond effectively to the potential volatility associated with short-term capital flows, particularly interbank transaction. While the current crisis underscores the need for care in the process of integration, this should not be seen as a reason to reject integration, but rather as a motivation to accelerate steps to strengthen financial institutions and, particularly, prudential regulations and supervision.

Promoting more soundly based capital flows. Events of the last year highlight the importance of measures to more effectively encourage providers of portfolio capital and banks to analyze and weigh risks and rewards in a more disciplined fashion in both good times and bad. Market discipline --which is central to a market-based economy through the encouragement of sound policy and the efficient allocation of capital --only works if market participants act with discipline. Toward this end, we in the industrialized countries must provide better regulation and supervision --including more effective focus on risk management systems in financial institutions --and strong prudential standards that pay attention to the riskiness of different types of investment, through a broad range of financial institutions, not merely banks. In addition, improved transparency in the financial sectors of emerging markets can provide investors with information they need to weigh risks, and thereby facilitate market discipline.

Resolving crises: There is general recognition in the international community that we need to develop better ways to resolve financial crises. Looking forward, the IMF must continue to play the central role in resolving crises by supporting members' adjustment efforts, including through the provision of exceptional financing on a large scale in situations involving systemic risk. The international community also can play a part in facilitating an orderly resolution of crises through continued IMF support for the process. For this purpose, we welcome the IMF's intention to expand its lending into arrears policy as a means of providing continued financial support to a country's adjustment efforts as it seeks in good faith to negotiate an orderly resolution with its creditors.

However, in today's world it is neither practical nor desirable for the IMF and other official lenders to undertake the full financing responsibility. The private sector therefore must also do its share in forestalling and resolving crises. The manner in which private sector participation is achieved can have important consequences, both for the country involved and the system more generally. It is overwhelmingly important that such cooperation be obtained at an early stage and based on voluntary market-based approaches rather than unilateral restructurings or debt moratoria that could preclude future market access and increase the risk of contagion. Such an orderly resolution could be enhanced by encouraging a dialogue between debtors and creditors to exchange information before a crisis occurs and to facilitate negotiations after its onset. However, care would need to be taken to avoid the problem of insider information by undertaking a dialogue in ?full sunshine.@ We also support suggestions to modify the terms of bond contracts and loan agreements to facilitate collective action by creditors in a world characterized by much more complex relationships than in earlier, simpler times.

ESAF, HIPC and Post-Conflict Support

As we grapple with the current financial crisis, we must not lose sight of the needs of those countries which rely on official financing, have unsustainable debt burdens, and are dealing with the aftermath of war and civil strife. The ESAF has proven to be an effective IMF instrument for addressing the macroeconomic and structural problems of the poorest countries but must be strengthened by implementing the recommendations of the recent internal and external evaluations of its operations. There is a clear need to accelerate structural reforms in the poorest countries in ways that promote program ownership and provide adequate social safety nets for the most vulnerable groups. The Bank and the Fund must also improve their collaboration in dealing with the problems of the poorest countries, beginning with Management's proposals but also going farther, if necessary, to ensure a truly effective, cooperative approach. In this regard, it is critical that the Fund take an active and energetic role in promoting core labor standards in developing countries.

In addressing the needs of post-conflict countries, we are especially interested in a strategy that will provide significant positive net flows of resources to countries with appropriate policies and which have enabling political and economic environments. Special attention needs to be given to the problem of IFI arrears, with coordinated and equitable participation by all donors. With regard to implementation of the HIPC initiative, a considerable amount of progress has been made, though it is disappointing that the IFIs have not provided interim relief as urged by the G-7.

Conclusion

Strengthening the response to the current crisis and creating a modern framework for the global markets of the 21st century will not be easy or quick, but we must continue to move forward with care and seriousness. Our goal should be to create a strong market-based financial architecture which induces sound decision-making by investors, encourages capital to be used productively, and rewards governments that pursue sound policies. Such a system will be crucial towards building a global economy less prone to vast disruptions, less unstable when disruptions occur, and better able to benefit all people.