FROM THE OFFICE OF PUBLIC AFFAIRS

Good afternoon. I am very pleased to join this esteemed group and to talk with you about the outlook for the global economy.

The global economic recovery has accelerated in the last six months. Economic stability is also improving, and risks have diminished. Consensus forecasts put G-7 growth at 3.3% for this year, more than double the 2002 rate.

In the United States, the recovery is strengthening. The President’s tax cuts have worked. They provided the stimulus that was necessary to turn the economy around, and they are now encouraging and allowing for the economic growth that is continuing into the future.

• Economic growth in the second half of 2003 was the fastest since 1984;
• New home construction in 2003 was the highest in 25 years;
• Homeownership levels are at historic highs;
• Manufacturing activity is increasing;
• Inflation and interest rates are low;
• Jobs are coming back;
• The unemployment rate is falling;
• There is more than three trillion dollars of growth in value in the markets last year.

These economic indicators all point to the same conclusion: We are on a path to sustained economic growth. However, there is more to do. We are not, by any means, satisfied. We will keep working until every American who wants work can find a job.

Beyond the United States, we are also seeing promising signs. Japanese performance provided a positive surprise in the fourth quarter, with growth hitting an annual rate of 7 percent. Recent Japanese recoveries, including this one, have been heavily dependent on export demand. It is important for domestic demand to play a greater role to bring about sustained growth in the Japanese economy.

In continental Europe, where growth is still lagging, the indicators are positive. German growth finally turned around in the second half of last year. Industrial production was up sharply in the fourth quarter of 2003, and business surveys look good. Nonetheless, overall growth in the Euro Area remained modest last year, especially in the biggest countries. It is important that the positive signs become growth achievements this year.

Many emerging market countries are also experiencing higher economic growth rates, along with reduced interest rate spreads and improved equity markets. This follows concerted efforts to reform the international financial system through steps such as inclusion of collective action clauses in emerging market debt, limits on exceptional access to IMF lending, measuring and accounting for results, and the use of grants to avoid heavy debt burdens.

Looking ahead, prospects also look positive. There is evidence that the momentum for growth continues to build. Financial markets have strengthened – in the U.S. and elsewhere. Inventories are low – suggesting the need to increase production to meet demand. And more investment is underway. More broadly, there is a more positive outlook, as geopolitical uncertainties have eased and forecasters see fewer downside risks.

Yet this is not enough. Stronger growth is in everyone’s interest. More work is needed to ensure growth that is broad-based and sustainable – and less reliant on a single engine. It is not in anyone’s interest that the United States consistently stand out as the fastest growing major economy.

Indeed, the need for stronger global growth was at the top of the agenda when I hosted my G-7 colleagues in Boca Raton earlier this month. We all place top priority on growth. And we agreed that structural reforms are vital to our long-term performance – even if they involve short term costs.

This is why I felt it was so important to move ahead with what we are calling the Agenda for Growth initiative, which was launched by the G-7 last September. This initiative focuses on supply-side reforms to boost productivity, raise growth and employment, and thereby increase living standards. In other words, while strong macroeconomic policies are vital, it is also essential that we update microeconomic frameworks in the major economies to enhance the potential for sustained and healthy growth.

We are now seeing progress as each G-7 country is taking concrete actions to advance these goals. For example:

• Canada has fully implemented a five-year, $100 billion tax reduction plan.
• France is undertaking pension reforms that will significantly strengthen its public finances.
• Germany has enacted key elements of its reform initiative – entitled Agenda 2010 – that includes measures to improve work incentives as well as to reduce taxes.
• Italy has seen its unemployment rate fall as labor market reforms entered fully into force in October.
• The United Kingdom announced new measures to help small business access capital and to improve access to tax credits for research and design.

In Boca Raton, we all committed to future steps that demonstrate the widespread commitment to going further to increase labor and product market flexibility, boost productivity and raise employment.

• The United Kingdom is establishing a long-term strategy for funding innovation and scientific research, extending skills training programs and is proposing a collaborative initiative on regulatory reform across the EU.
• Japan will work on further fiscal expenditure and revenue reforms, including in social security, and will continue to address financial sector reforms.
• Italy plans to advance pension and corporate tax reform, including tax exemptions on dividends and capital gains.
• Germany’s priorities include pension and tax code reform.
• France will continue its work to reduce labor market constraints, while also pursuing health care reform.
• Canada will provide tax incentives and explore other funding alternatives for infrastructure investment by municipalities.

As for the United States, our contributions will be through the President’s commitments to maximize growth and job creation. This includes: spurring saving through changes to the tax system; making health care more affordable; working to prevent frivolous lawsuits from diverting money from job creation; streamlining regulations; preparing American workers for the demands of the 21st century job market; and working to make tax relief permanent, so that families and businesses alike can plan for the future.

The Agenda for Growth marks a fundamental change in the G-7 approach. I am optimistic that the steps that each country is pursuing will make a real difference to our future prospects and those of the world economy as a whole. Combined with strong macroeconomic policies, including sound fiscal policies over the medium-term, this initiative is also an important step to addressing global current account imbalances.

Let me turn to trade. Opening markets and reducing barriers to trade is an important engine for domestic and global economic growth; trade leads to more jobs, higher wages and increased productivity, which in turn leads to greater prosperity. It is through free trade that all nations can benefit from each other’s prosperity. Free trade means new markets for exporters.

Multilateral trade liberalization is a global tax cut for all consumers and exporters and an engine for growth, in association with sound macroeconomic and structural policies. The IMF and World Bank estimate that the static global welfare gains from eliminating barriers to merchandise trade alone are broadly in the range of $250 billion to $550 billion per year. Another study estimates the gains from removing all trade barriers at $1.9 trillion.

The Cancun outcome represented a missed opportunity, but there are hopeful signs that we can get the Doha Development Agenda back on track again so that 2004 is not a lost year. The focus of the WTO negotiations should be the market access agenda – agriculture, industrial and consumer goods, and services. These areas have the greatest potential to promote economic growth. For developing countries to realize the benefits of trade, they too need to reduce their own trade barriers substantially. Developing countries collect most of their tariffs on trade with other developing countries. In particular, efficiency gains from trade liberalization in the financial services sector could be beneficial for many emerging markets.

But even as we ponder the next steps in the WTO, the United States continues to press an aggressive trade agenda to open markets regionally and bilaterally with willing partners. For example, we have recently concluded free trade agreements with Central America (CAFTA) and Australia, and are negotiating additional free trade agreements in Africa, Asia, Latin America, and the Middle East. By moving forward on multiple fronts, we can exert leverage for openness and create a new competition for trade liberalization.

Before closing, I want to mention briefly some of the other important initiatives we are pursuing as part of the drive for global growth. With the chairmanship of the G-7 this year, we have the opportunity to help lead change and bring results that facilitate growth.

In Boca Raton, we focused in particular on:

• Supporting the economic revival underway in Afghanistan and Iraq – as well as the importance of strengthening economic growth and raising living standards in the greater Middle East.
• Continuing the fight against terrorist financing – notably strengthening asset freezing regimes and combating abuse of the informal financial sector and non-profit organizations.
• Creating an environment that allows private businesses to flourish in the poorest countries.
• Reducing the roadblocks for people sending money back to their families – by identifying and removing the barriers that slow the flow of remittances, make transactions expensive or encourage money to flow through informal channels.

Looking to the Summit, I expect us to continue our work in these areas, as well as to explore ways to consolidate and build on reforms to the international financial system so that it is as modern and effective as possible.

Thank you so much for having me here today – I hope you have a wonderful meeting.

-30-