EMBARGOED UNTIL 1:00 P.M. EDT
Text as Prepared for Delivery
September 16, 1998
TREASURY SECRETARY ROBERT E.
HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES
Mr. Chairman, members of this Committee, I appreciate this opportunity to discuss with you developments over the last year in the global economy, their impact on American workers, farmers and businesses, and Americas leadership in the effort toward restoring financial stability and promoting global growth. From the beginning of this crisis in Thailand a little over a year ago, we have been intensely focused on these issues of the global economy. Now, as throughout this crisis, American leadership is absolutely critical.
As you well know, the crisis, which began in Asia, has now affected countries around the globe. Although the situation in each country with difficulty has been different, there have been some common deep-seated problems, usually, but not always, centering on badly flawed financial systems. And over the last ten or fifteen years, there have been very large capital flows into these countries, part of which has been excessive due to inadequate analysis and under weighting of the risks involved. The combination of large excesses in capital flows and the problems in the developing countries was combustible.
Just as capital flowed into emerging markets indiscriminately, and that was a mistake, capital is now flowing out indiscriminately, likewise a mistake. Credit and investment decisions need to be made with careful analysis and judgment of the long term strengths and fundamentals of an economy, and unaffected by the prevailing mentality of the moment.
While the fundamentals of the U.S. economy remain strong, we too are experiencing the effects of this crisis. As a consequence of the crisis, weve seen U.S. exports to Asia particularly in agriculture, drop significantly. Corporate earnings in many sectors have also been adversely impacted. As the contagion strikes countries in Latin America, many of which have made great progress in the last few years in pursuing sound policy regimes, we run the risk of additional impact on our economy.
As this crisis so clearly demonstrates, the nations of the world are interdependent and our economic well-being is inextricably linked to the economic well being of the rest of the world. That is why we have been so intensely focused on this crisis since it began. And the rest of the world looks to the United States, as the worlds indispensable nation, to show global leadership at times like these. U.S. leadership is critical in the effort to resolve this crisis and it is in our interest to show that leadership.
U.S. efforts to restore financial stability and growth in the global economy begin with pursuing sound policies at home to keep our economy strong, such as maintaining fiscal discipline, investing in people, and engaging in the global economy. In addition, the other industrialized economies need to remain strong, and this is a subject of regular consultation in the G-7 process, particularly with respect to Japan.
Central to this crisis has been the fact that the second largest economy in the world and far and away the largest economy in Asia --Japan --in difficulty at the beginning of the crisis, has just entered its third quarter of negative growth, Japans worst economic performance since records began in 1955. Clearly, swift, strong fiscal action that will give a substantial and sustained stimulus to the economy and sufficient immediate measures to strengthen the financial system are urgently needed for Japan to resume strong domestic demand and growth, which is so crucially important to global growth and financial stability. We and the rest of the world have worked together to discuss these matters with Japan. Just as the world said to the United States in the late 1980s and early 1990s that we need to get our fiscal house in order because our budget deficits were harming the global economy, so has the rest of the world emphasized to Japan the need to address their problems.
Our approach to the crisis has also included encouraging and helping developing countries throughout the globe to implement reforms to limit their vulnerability to crises.
Throughout this situation, the United States has strongly supported the International Monetary Fund as the central institution in the effort to resolve the financial crises in Asia. The IMF programs have been focused on promoting reform in countries in crisis to address the problems that gave rise to the financial instability, combined with financial assistance if necessary. The IMF is the right institution to be at the center of this effort for three important reasons. First, it has the expertise to shape effective reform programs. Second, it can obtain reforms in crisis countries that no assisting nation could obtain. Finally, the IMF internationalizes the burden.
The IMF-led reform programs have been facing an unprecedented situation of enormous complexity. A number of countries have had great difficulties at the same time, and events in one country have greatly affected currencies, trade and investment flows and confidence in others. There have been enormous capital flows into countries with large amounts of private sector debt and badly flawed financial sectors. There are no simple answers and no guarantees, and in our view, the judgments made by the IMF during this crisis have been largely sensible with subsequent adjustments as circumstances warrants. It is important to remember that problems in these countries are not a function of the IMF, but of the underlying crisis.
Countries that have adhered to IMF-led reform programs --specifically the Philippines, Korea and Thailand-- have begun to see signs of a return to stability. Although there is clearly a great deal of work yet to do, in Korea and Thailand, currencies have appreciated and interest rates have come down below pre-crisis levels. I have no doubt the situation over the past year would have been much worse without the work of the IMF.
Mr. Chairman, as you well know, Russia, where the IMF has played an active role in trying to promote financial stability, is in great difficulty. A democratic and prosperous Russia is obviously very much in our economic and national security interest; that is why we supported the IMFs reform programs in Russia, which we believed offered a sound prospect for stabilization in Russia. Russia made significant progress in reforming its economy over the last several years, particularly in privatization and trade liberalization. However, the Russian government this summer proved unable to adequately carry forward the necessary reforms. We all knew there was a real risk this wouldnt work, but it was a risk well worth taking, given the enormous stakes to us. Russia needs to build political consensus behind policies of reform. When Russia is prepared to move down that path, the United States and the international community are prepared to support it.
Indonesia is another example of a country that simply did not take ownership of reform. In all countries in crisis, and this has been demonstrated throughout the past year, the politics of reform must keep pace with the policies of reform.
Mr. Chairman, the Administration has been focused for some time now on the need for reforms at the IMF and we are actively promoting a broad range of reforms within the IMF. This Committee has been at the forefront on this effort and we look forward to continuing to work with the members of this Committee and with many members of Congress on this matter.
At this critical juncture, resources at the IMF are at historic lows. Every day that Congress does not approve the Presidents request for IMF funding increases our vulnerability to a crisis, and decreases confidence in global markets, which is critically important. The Senate has now approved full IMF funding by large bi-partisan majorities twice, but there is a serious bottleneck in the House. At a time when the markets are looking to see if the international community has the capacity to deal with these crises, passage of IMF funding is critically important. Never has the importance of an adequately funded IMF been more clear, and the Congress needs to act immediately.
Mr. Chairman, as the crisis has spread and world economic conditions have deteriorated, we have been expanding our response, working with our G-7 partners. The expansion of our approach has centered on five key areas.
First, recognizing that with inflation low or falling in most parts of the world, and with consequent shift in the balance of risk in the global economy, we are cooperating with our G-7 partners in an enhanced emphasis on implementing policies to promote sustainable global growth.
Second, we are focused on reinforcing the capacity of the international community to provide financing to countries that are pursuing sound policies and are nonetheless affected by contagion. Of course, the critical element in this is IMF funding, and, again, let me emphasize the importance of Congress approving IMF funding. We also remain committed to working with other countries to make short term bilateral financing when appropriate.
Third, we are looking at ways to accelerate corporate debt restructuring in countries where there is a systematic problem, predominantly in Asia.
Fourth, we are also working with the Multilateral Development Banks to provide increased social safety nets in the countries in crisis to help the least advantaged citizens in those countries who are experiencing hardship.
Mr. Chairman, the experiences of the past year underscore the challenges for all nations with respect to the global financial system. This crisis has presented unprecedented and enormously complex challenges to the international community. In order to maintain the interdependent global economy, which has benefitted so many people around the globe, we need to find better preventive measures to reduce the frequency and severity of those problems and better ways to deal with those problems when they occur. Under President Clintons leadership activity began in the G-7 about three years ago to strengthen the international financial architecture. Last year, the President intensified this effort by asking us to convene a meeting of a broader group of 22 countries, including key developing and emerging economies. On Monday, he asked that within thirty days, Chairman Greenspan and I chair a meeting of finance ministers and central bankers to continue the work undertaken by this group of 22 countries and to expand the reach of our efforts to strengthen the international financial architecture.
Although this reform effort confronts enormously complex issues that will in their entirety only be worked through over a period of years, already there has been a great deal of work done. So far we have focused on three areas: strengthening financial systems; increasing transparency and disclosure; and involving private investors in the resolution of these crises. It is very important that countries not embrace unilateral actions on debt as a substitute for reform and cooperation.
Mr. Chairman, as I said at the beginning, we are in a new period of enormous pressures, complexities and challenges in the global economy. Many of these countries in crisis have deep underlying strengths, and the key for these countries is to draw on those strengths to get back on the path of growth and stability. There is no single, easy answer to these problems, and it will require a tremendous amount of political will and cooperation in affected nations and the industrial nations. But I do know this for certain: U.S. leadership has been absolutely critical during this crisis and will continue to be, and our economic well being and national security are critically at stake. We have pursued a sound and coherent strategy, in concert with the IMF and our economic partners, while adjusting judgments and programs when circumstances warranted. Looking forward, the key is for all countries to work together and meet our respective challenges. For the countries in crisis, that means sustained adherence to sound reform programs. For the major industrialized nations that means cooperating to spur global growth. In particular, in Japan, the worlds second largest economy, it means implementing the policies needed to achieve sustained domestic demand-led growth. And for the United States it means continuing to pursue sound policies at home to maintain our strong economy. More immediately, it means the imperative of approving full funding for the IMF, which is now needed urgently for our own prosperity as well as for the rest of the worlds.
Thank you very much.