*EPF210 10/01/2002
Text: U.S. Economic Recovery on Track, Says Treasury's Taylor
(Outlines economic policies in developing, emerging economies) (3390)

The U.S. economic recovery remains on track, and annual economic growth should soon return to the 3 to 3.5 percent projected by the Bush administration, says John Taylor, Treasury under secretary for international affairs.

"With the right policies, there is no reason why the current U.S. economic expansion cannot be as long lasting, or even longer lasting, than the expansions of the 1990s and of the 1980s," Taylor told the National Association for Business Economics in a September 30 speech on U.S. global economic policy.

At the international level, the United States is seeking to promote economic growth and stability in the developing world by increasing development assistance and placing greater emphasis on countries that adopt sound economic policies and produce measurable results, Taylor said.

To that end, President Bush has proposed a 50-percent increase in U.S. assistance to developing countries by 2006 and channeling the $5,000 million in new aid to countries with governments that rule justly, invest in their citizens and encourage economic freedom, he said.

The United States has also been successful in winning World Bank approval of a plan that will increase the portion of Bank assistance provided as outright grants rather than loans for education, nutrition, health care and other basic needs, he added.

With respect to emerging markets, Taylor said the Bush administration is concentrating on areas -- such as improving crisis prevention and reforming the foreign debt restructuring process -- that will help revive private capital flows, which have fallen from the 1992-1997 average of $150,000 million per year to less than $50,000 million per year in 1998-2000.

Other U.S. global economic priorities mentioned by Taylor include working for trade liberalization at the multilateral, regional and bilateral levels; coordinating with the international community to curb terrorist financing networks; and helping Afghanistan make the transition from post-conflict recovery to reconstruction.

He also discussed the economic situation in other industrialized countries and said that growth Japan and Germany "leaves much to be desired."

Japan's economy has not recovered from its long period of slow growth, and Germany is "growing very slowly," Taylor said. He said changes in the Japanese banking sector could help spur bank credit growth, and that supply-side factors in Germany that are holding down rises in productivity "must be addressed" if the German economy is to grow faster.

"But as I refer to the need for pro-growth policies in many countries, let me stress the importance we place on country ownership," Taylor said. "It does little good for us to lecture or try to force other countries into the right economic policy."

"Rather, we feel it is important to use the many opportunities for bilateral and multilateral discussions to show the benefits of pro-growth policies and to give and take constructive advice," he said.

Following is the text of Taylor's remarks as prepared for delivery:

(Note: In the text "billion" means 1,000 million.)

(begin text)

U.S. Department of the Treasury
Office of Public Affairs

Strengthening the Global Economy: A Report on the Bush Administration Agenda
John B. Taylor, Under Secretary of the Treasury for International Affairs

Annual Meeting of the National Association for Business Economics Capital
Hilton Hotel, Washington, D.C.
September 30, 2002

It is a pleasure to be here tonight and to spend some time discussing economic policy issues with fellow economists. I would like to use the opportunity to discuss the international economic policy agenda of the Bush Administration -- to give a brief overview of key goals and to highlight some of the important accomplishments.

The Administration's international economic agenda was big when we came into office last year, and it has grown, especially since the September 11 terrorist attacks. But I believe that we have stuck to our overall strategy and have made good progress on implementing the strategy, even as we have added such items as terrorist financing and Afghanistan reconstruction to our agenda as I will tell you more about in a few minutes.

Two goals have guided our international economic agenda: (1) increasing economic growth, as measured by improvements in productivity and higher per capita income, and (2) improving economic stability, as measured by a reduction in the severity, length, and frequency of economic downturns and crises. These goals apply to the United States, to other industrialized nations, to emerging market countries, and to the developing world, as I will now try to make clear.

Economic Growth and Stability in the United States and Other Industrialized Countries

My economic research on models of the world economy taught me long ago that getting one's own economic policy right is 90 percent of getting international economic policy right. So I should start with a discussion with the U.S. economy.

It should be clear to any economist that fiscal and monetary policy in the United States responded remarkably quickly and decisively to last year's recession. The President's tax cut was well timed, and along with the automatic stabilizers, helped mitigate the recession. The Federal Reserve moved early and aggressively to lower the federal funds rate; low interest rates are still a factor supporting the economic recovery.

Tonight we are already completing one full year of economic recovery -- a recovery that is close to what we forecast last year and about what one should expect following a shallow recession. It is very good news that productivity growth has held up so well during the recession and that inflation remains low as the recovery proceeds. We expect economic growth to return soon to the long run potential of between 3 and 3.5 percent.

With the right policies there is no reason why the current U.S. economic expansion cannot be as long lasting, or even longer lasting, than the expansions of the 1990s and of the 1980s, which were the first and second longest peacetime expansions in American history. As the economy recovers, it is essential that we make the tax cuts permanent, control the growth of government spending, reduce the deficit, continue to remove barriers to job creation, and insist on corporate responsibility.

Economic growth for the other G-3 countries [the United States, Japan and Germany] still leaves much to be desired, however. Japan has not yet recovered from its long period of slow growth, deflation, and instability. The higher rate of growth of the monetary base by the Bank of Japan since last year should be maintained and accompanied by changes in the banking sector that will allow the growth rate of bank credit and M2 + CD [broad measure of money supply] to increase as well. Germany is also growing very slowly. I believe that supply side factors, which are holding down the growth rate of productivity and of potential GDP [gross domestic product], must be addressed if real GDP in Germany is to grow more rapidly. Productivity growth should be higher, not lower, in Germany and Japan than in the United States. Fortunately economic growth is better in other industrialized countries, especially our close friends to the north in Canada. But as I refer to the need for pro-growth policies in many countries let me stress the importance we place on country ownership. It does little good for us to lecture or to try to force other countries into the right economic policy. Rather we feel it is important to use the many opportunities for bilateral and multilateral discussions to show the benefits of pro-growth policies and to give and take constructive advice.

Economic Growth and Stability in the Developing World

A major thrust of our overall international economic agenda has been the adoption of policies designed to promote economic growth and stability in the developing countries. Over one billion people live on less than a dollar a day. Why? I do not need to tell an audience of business economists that the answer is productivity. Wealthy countries are those where productivity is high. Poor countries are those where productivity is low. If we want to reduce poverty in the world, we need to pursue policies that promote productivity growth in the poorest countries.

Economic theory tells us that -- holding other things constant -- the poorest countries where the productivity level is lowest should have the highest rates of productivity growth. It is in these parts of the world where there should be the greatest return for adding capital and applying ideas to raise productivity. You see this kind of "catch-up" in productivity growth if you look at the United States since the 19th century or at the original members of the OECD since 1960. But if you look around the whole world, you don't see this. The reasons for this lack of catch-up are related to bad policies that have inhibited, distorted, and restricted the flow of capital and ideas. The Administration's development strategy endeavors to deal with these impediments to catch-up.

The strategy has two parts: (1) it provides for substantial increases in development assistance and (2) it aims this assistance at countries that have good policies and where results can be measured.

How are we implementing this strategy? President Bush has already made several significant proposals for increasing development assistance. In July of last year, the President called upon the World Bank and the other multilateral development banks to increase the portion of their assistance provided as outright grants rather than loans for education, health, nutrition, water and sanitation in the poorest countries. One year later, we succeeded in finalizing agreement on a substantial increase in grants within the International Development Association (IDA) -- the arm of the World Bank that provides assistance to the poorest countries. As a result of this agreement, nearly 100 percent of IDA assistance will be provided on grant terms for education, health, nutrition, potable water and sanitation in countries whose people live on less than a dollar a day. On top of this, the Administration proposed increasing the U.S. contribution to IDA -- as well as to the African Development Fund -- by 18 percent, reversing the downward trend of U.S. contributions during the 1990s.

On top of all this, the President has proposed that the United States increase its core assistance to developing countries by 50 percent over the next three years -- resulting in a $5 billion increase over current levels in FY [fiscal year] 2006. The increased assistance will be put into a new account called the Millennium Challenge Account (MCA).

Now, where are the examples of performance and measurable results? One is that the funds from the MCA will be provided only to countries that are -- to use the President's terms -- ruling justly, investing in people, and encouraging economic freedom. In other words, countries that have demonstrated the right leadership in pursuing sound policies for economic growth will be eligible for the increased U.S. development assistance. Another example is that the recent replenishment agreement for IDA provides for the development of a system to measure and evaluate results in the areas of education, health, and private sector development. For the first time, this enables donors to link their contributions to the World Bank to the achievement of measurable results of the ground. The U.S. contribution is linked in this way. This helps direct scarce donor dollars toward the activities and projects that are actually improving people's lives.

Economic Growth and Stability in the Emerging Markets

An important part of our growth strategy is to create the conditions for private capital flows to emerging markets to increase from the low levels observed in recent years. Averaging nearly $150 billion per year from 1992-1997, private capital flows fell off to less than $50 billion per year in 1998-2000, as the frequency of financial crises has discouraged investment and damaged expected profitability in affected economies. The United States has a critical interest in seeing a restoration of strong private investment flows at lower interest rates into emerging market countries, so that these countries can invest in the productive base of their economies and raise the living standards of their people.

The core principles of our emerging markets strategy are these. First, emphasis on crisis prevention, which refers both to early detection of potential crises and to action to address sources of vulnerability. Improved crisis prevention requires that the IMF focus on issues that are central to its expertise -- monetary, fiscal, exchange rate, financial sector, and debt management policies. Second, efforts to reduce contagion. In recent years, investors have become much more skilled at differentiating between countries and markets based on fundamental economic assessments, with the result that contagion has fallen dramatically. We have sought to promote a further evolution in this direction by emphasizing that policy decisions will not be based on unfounded claims of contagion. Third, limits on official finance, which is needed to increase predictability in the market. The policy challenge is to move gradually in the direction of less reliance on large official packages, so that investor expectations can adjust smoothly to new official sector policies. Fourth, improved predictability in the process by which sovereign debt is restructured. This does not mean lowering the cost of debt restructuring or increasing the likelihood of default. The introduction of new collective action clauses into debt contracts will facilitate a more predictable and transparent resolution of sovereign defaults when they occur, while further development of a statutory approach could provide an additional tool to address this issue. Fifth, avoidance of coercion of the private sector, since ad hoc interventions that affect private contracts increase uncertainty in the markets and can accelerate crises.

The Administration has made significant progress in implementing and applying the key elements of its emerging markets strategy. Months of discussion among the G-7 Finance Ministers and Deputies culminated in agreement on an historic G-7 Action Plan for emerging markets last April [Group of Seven (G-7) leading industrial countries: Canada, France, Germany, Italy, Japan, United Kingdom, United States]. It calls for improved IMF crisis prevention and surveillance, limits on IMF lending, introduction of collective action clauses into sovereign debt contracts, and further development of a sovereign debt restructuring mechanism.

Progress has been made on all these fronts since April. The IMF [International Monetary Fund] has introduced a new analytical framework for debt sustainability analysis, which should help strengthen early identification of unsustainable situations and aid crisis prevention. With respect to limits on official finance, the United States has indicated that it does not support an IMF quota increase. As Secretary O'Neill [Treasury Secretary Paul O'Neill] has said, "Limiting official resources is a key tool for increasing discipline over lending decisions."

In June, key representatives from the private sector stated their support for the introduction of collective action clauses, and work over the summer months helped further refine the specific form that these clauses would take. A meeting last week between the representatives of the private sector and senior officials from the G-7 and some key emerging markets reinforced the consensus on key aspects of this approach. Finally, the [IMF's] International Monetary and Financial Committee welcomed the progress made on collective action clauses and called for further work on how a statutory sovereign debt restructuring mechanism might function before its next meeting in the spring.

Free Trade

President Bush is a strong advocate of free trade as an essential part of his Administration's pro-growth international economic agenda. It is no secret that both the Administration and the Congress have received criticism for certain decisions in the international trade area during the last year, but passage this summer of trade promotion authority deserves strong praise. For the first time since 1994 the President now has the authority to negotiate substantial trade agreements, including the new round of multilateral negotiations begun at Doha. We are now planning to move quickly on free trade agreements with Chile and Singapore. The Central American countries and Morocco are next. Australia and South Africa are interested in exploring free trade agreements. By 2005 we hope to have a free trade agreement for the whole hemisphere-the Free Trade Area of the Americas will create the largest free trade zone in history.

Since the agreement in Doha last November to launch multilateral trade negotiations, the United States has proposed the elimination of all agricultural export subsidies, the reduction of average agricultural tariffs from 62 to 15 percent, and a cap on domestic subsidies at 5 percent of domestic agricultural production. We have similarly advanced a proposal for the global liberalization of trade in services.

In addition, recently passed legislation renews for five years the Generalized System of Preferences that lowers tariffs on 3,500 products and expands the Andean Trade Preference Act to benefit Colombia, Peru, Bolivia, and Ecuador. Finally, domestic safeguards on steel imports have helped to solidify domestic support for further trade liberalization, while the Administration has eased the impact on U.S. steel consuming industries through exclusions covering 25 percent of steel imports.

Terrorist Financing

When I was sworn in as Under Secretary in June of last year, I never dreamed I would be spending a large amount of time chasing down terrorist assets around the world. Yet, since President Bush placed combating terrorist assets high on his list of actions to fight terrorism, this is exactly what I have been doing. About one year ago we set up a "War Room" in Treasury to coordinate the international aspects of this fight. To be effective all countries have to participate in freezing the assets of terrorists. And we have seen an extraordinary amount of cooperation.

Since September 11, over 160 nations and jurisdictions have joined the U.S. in issuing orders freezing the funds of terrorists and terrorist organizations. This effort has frozen over $112 million in existing accounts and more than 2,400 people have been arrested on terrorist charges. Our information is that these actions have disrupted the pipelines of terrorist finance and forced terrorists to use riskier and more unwieldy means for raising and transferring funds. We are now continuing our work to stop flows of terrorist money through alternative remittance systems known as "hawalas" and to protect charitable organizations from abuse by terrorists.

Afghanistan

Our international economic agenda involves close interactions with many individual countries, and it is, of course, impossible to summarize all these operations. But, but by way of example, I would like to spend a few minutes on Afghanistan.

It is hard to believe that one year ago Afghanistan remained under the control of the repressive regime of the Taliban. The U.S. military campaign and the establishment of a new Afghan government have provided the hope of a better future for the Afghan people. I saw this during a visit to Afghanistan last week. While the economic challenges to building that better future are enormous, the United States and other international donors are committed to helping the Afghan people succeed. These efforts, combined with the creativity and determination of the Afghan people, give me reason to be optimistic.

At the donor pledging conference held in Tokyo in January, donors from 60 countries and 15 international organizations pledged a total of over $4.5 billion in reconstruction assistance. Of this amount, $900 million has been disbursed.

The challenge now is to make the transition from humanitarian relief to reconstruction assistance, and to ensure that this reconstruction assistance is delivering measurable, visible results on the ground. The $180 million in road assistance recently announced by the United States, Japan and Saudi Arabia is an example of the kinds of projects that are needed to lay the foundation for economic recovery.

The Afghan government has made accountability and transparency among its top priorities. We have an advisor to the Afghan Finance Ministry working in Kabul to help put in place the financial systems needed to monitor aid donations and expenditures by the Afghan Finance Ministry. The Afghan government is firmly committed to the private sector. The cabinet ratified a new investment law that allows for full repatriation of profits. The Central Bank and the Finance Ministry have laid out plans for a new currency that will be introduced on October 7. The new Afghani will unify three different currencies now in circulation and increase confidence and monetary stability.

As the Afghan government does its part, the international community must follow through on its role by providing the government with aid for infrastructure as well as essential health and education services to facilitate economic recovery. Providing tangible results is crucial in demonstrating to the Afghan people the international community's commitment to Afghan reconstruction.

(end text)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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