FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you for giving me the opportunity to discuss these questions in such distinguished company. Given the particular salience of the issue, I hope you will forgive me for focusing my remarks on the role of the International Monetary Fund.

Since the early years of the first Clinton Administration the United States has been working to build with other nations a global economic system ready for the 21st century -- a system in which trade, capital and know-how can flow freely to where they can best create wealth; a system in which all can participate; a system that will rest, critically, on strong and stable finance.

The shape of this new system -- and the rules and institutions guiding it -- are not yet fixed. In a sense, they never will be. As long as the global economy changes, we will need to ensure that the international financial architecture changes with it. But one thing is absolutely certain: the IMF has and will continue to have a core role as the world's first and best line of defense against financial crises.

I would like to talk about why the IMF is an indispensable safeguard of international financial stability; the progress we have made in adapting the IMF to the demands of a changing world; and the long-term reform challenges for the IMF and the International Community going forward.

I. The Core Role of the IMF

When housewives in Sao Paulo are tuning in to the Asian business news every morning to get a sense of their next credit card bill -- we know we are living in a new time. In this new era events in markets far away can and will affect the United States. And so will the way we and the International Community as a whole respond to those events.

It is because of the United States' enormous stake in the stability of this new world that we have worked to respond to the crises in Asia and ensure growth and confidence is restored as soon as possible. That is why we have strongly supported the provision of temporary, conditioned outside assistance to countries committed to strong domestic reforms. And it is why we have been determined to look beyond these crises: to the kind of international financial system we would like to build for the future.

We have supported the IMF playing the central role in all these efforts -- quite simply, because it is the cheapest, most effective way for us to promote our core interest in preserving stability. There is -- and will always be -- room for improvement of the IMF. I will say a little in a few moments about the important progress the United States has made in pressing for change at the IMF, and the changes that will be needed in the future. But in light of recent events there is simply no room for doubting that the IMF is indispensable.

If there was no IMF in these circumstances:

• there would be no multilateral vehicle for conditioned reform, reform which has achieved more trade liberalization in Asia in the past few months than many years of trade negotiations in the region
• there would be no internationally recognized source of apolitical advice;
• there would be further devaluations and greater reductions in these countries' capacity to purchase foreign goods
• there would be more pressure on countries -- particularly the United States -- to act unilaterally with taxpayer resources without global leverage

Countries cannot be helped by the IMF if they are not willing to help themselves, with major domestic reforms to tackle the problem and prevent it recurring. But without the IMF, even those countries that are committed to reform might face default -- either at a government level or through the failure of the financial system as a whole -- which could have devastating effects on their own economies and significantly raise the risks of contagion in other markets.

In this decade alone, the IMF has brought Russia back from the brink of hyperinflation. It has brought Estonia and Poland from a state of near-economic collapse to the fastest growth rates in Europe. It has underwritten ten years of radical reform in Uganda that have reduced inflation from more than 250 percent to single figures and seen real growth of 6.5 percent a year. It has helped Argentina to break free of a century-long tradition of stop-go economics and vulnerability to outside shocks. And these are the cases the world knows about. It is of the nature of the institution that its major successes will be the crises that no-one knows about -- the crises that did not take place.

It has rightly been said, in this context, that if the IMF did not exist we would have to invent it. But of course, we do not need to imagine such a possibility -- we can simply turn to history. There was no IMF in 1931 when the failure of one Austrian bank threatened to have knock-on effects elsewhere. With no lender of last resort facility to quell the panic, creditors and institutions were left to resolve the problem among themselves. And the failure of a single major institution became a European, and global, financial catastrophe. That is why it was necessary to invent the IMF in 1944 -- and it is why it is vital to preserve its capacity to act today.

II. Making the IMF More Effective

In the past five years the United States has used its leadership role to achieve major improvements at the IMF. These have focused on three core areas:

First, we have worked to adapt the IMF's policies and practices to meet the needs of a more integrated and market-driven global economy -- to ensure that IMF will no longer stand for "It's Mostly Fiscal":

• by pressing for the creation of the new Emergency Financing Mechanism, to provide for more rapid agreement to extraordinary financing requests in return for more intense regular scrutiny.
• by pressing the IMF to take the lead in international efforts to promote greater disclosure of economic and financial data and improved banking supervision in emerging markets. More than 40 countries have already subscribed to the IMF's Special Data Dissemination Standard created in April 1996. And the IMF was closely involved in the development, by the Basel Committee, of Core Principles for supervision of emerging market financial systems that were formally approved by the G7 countries at last year's Denver Summit.
• most recently, by driving the creation of a new Supplementary Reserve Financing facility to let the IMF lend at premium rates in short-term liquidity crises and improve borrower incentives -- a mechanism that grew out of recent developments in Asia and has played a major role in the IMF's assistance to the region.

Second, we have worked to ensure that the IMF is keenly focused on its primary goal of promoting growth and prosperity;

• by paying closer attention to the needs of the poor in designing adjustment programs, encouraging governments to cut unproductive expenditures such as military spending and shift more resources to primary education, health care and essential capital investment. Since 1990 military spending has declined from 5.5 percent to 2.2 percent of GDP in program countries, and has declined as a share of government spending while social spending has increased.
• by playing its part in a new United States-supported multilateral debt initiative (HIPC) to enable the international community for the first time to include IFI debt in the cooperative effort to relieve countries of unsustainable debt burdens which impede integration and thwart reform.
• by instituting a policy dialogue with the ILO and undertaking a pilot program of in-country consultations on labor market issues and worker rights. These efforts took another step forward in Korea, where Michel Camdessus has met with Korean labor leaders and the IMF strongly encouraged the government in its official negotiations to involve labor unions directly in plans for restructuring the chaebol.

Third, we have made important steps toward raising IMF transparency and accountability:

• through much wider publication of IMF internal data, including the new Public Information Notices and Recent Economic Development papers on member countries
• with the institution, for the first time, of external evaluations of key IMF policies, the first of which is expected to be published this spring.
• through the publication of Letters of Intent outlining the details of IMF agreements with countries -- including those for all three of the most recent IMF programs in Asia.

In short, with the United States behind it, the IMF has been taking on new roles -- and adapting its old roles to new circumstances. Much has been achieved. And much remains to be achieved - not merely to improve the IMF's effectiveness and responsiveness but to modernize the entire global financial architecture of which it is a part.

III. The Long-Term Reform Agenda: Making Institutions out of Instances

These past months in Asia, like the Mexican experience before it, have yielded important new lessons -- and new tools and mechanisms for the International Community to respond to these kinds of crises. But individual cases do not make institutions. The challenge is to build a fully functioning set of rules and institutions for safeguarding international financial stability that is -- as Secretary Rubin likes to say -- as modern as the markets.

As you know, President Clinton began this ambitious agenda four years ago at a G-7 meeting in Naples. At the summit that followed in Halifax in 1995, we launched a broad international effort to strengthen safeguards in the global financial system. These efforts have already brought concrete results -- the Basel Principles and the new IMF data dissemination standards being just two examples. But the Asian crises have underscored that plenty more needs to be done. At President Clinton's initiative, the United States will convene a meeting later this spring of finance ministers from around the world to continue these efforts and start developing a consensus on policies to deal with the new challenges we face.

The crucial imperatives of this agenda include:

• promoting measures to make global markets function more efficiently, for example through increased surveillance and enhanced national supervision and regulation. The important contagion effects we have seen in Asia and other emerging markets well illustrate the importance of this kind of ongoing prevention;
• increasing transparency and disclosure, for example by strengthening the SDDS to include net reserves, short-term debt accumulation and data on the financial sector.
• strengthening financial systems, both globally and at the level of individual countries, through improved prudential standards and the promotion of effective financial infrastructure;.
• improving domestic policy management, exploring ways to manage policy to help avoid crises and respond early to problems;
• strengthening the role of the international financial institutions in financial crises to ensure that the international community can respond quickly and appropriately to problems and act to prevent their recurrence;
• and ensuring appropriate burden-sharing by the private sector in the resolution of crises.

This is an ambitious agenda -- as ambitious as it is important. There will be many difficult questions and trade-offs to overcome in seeking to ensure that the international financial system is equipped to prevent crises, and equipped to deal with crises that will still, inevitably, occur. Let me make a special mention of the final issue on the list -- the question of investor responsibility -- since it has recently aroused such debate here in Washington

There is no doubt that this is a major issue we will need to address. By involving the foreign creditor banks in the resolution of the Korean crisis, we have supported an important innovation in the international community's approach to crises of this kind and helped catalyze a major private sector effort on behalf of restoring stability.

It will be important, going forward, to explore whether their are lessons to be drawn from this experience that might provide for more widely applicable mechanisms for appropriate burden-sharing. For world capital markets to function properly, investors must make investments based on national economies and their components, and not the likelihood of international rescues. We must not fail to plan, but nor must we plan to fail.

IV. The Challenge Today: Investing in the IMF

In building an international financial architecture for a new century we must work to create the best possible safeguards against crisis -- and we have also to accept that crises will inevitably take place. That is why the United States needs urgently to follow through on its commitment to support the increase in IMF quotas that was agreed last year, and contribute to a major new emergency facility, the New Arrangements to Borrow, to supplement the IMF's resources in these types if situations.

We can and must work to promote investor responsibility in this new global economy. But we must do this in a way that supports rather than threatens the long-term financial stability in which American workers and businesses have such an enormous stake. Not to support the IMF at this critical time would be a little like canceling one's life insurance when one has already gotten sick. This is simply not a risk we should take. And it is not a risk the American taxpayer would want us to take -- when we can invest in the protection of the IMF at zero cost to our budget.

At this critical time we have a responsibility to do all we can to protect America's core economic and security interests. That means protecting the IMF's capacity to respond, not just to today's challenges, but to the challenging new century to come.