Category: Economy

The speech made by Gordon Brown, the Chancellor of the Exchequer, in Tokyo on 16 September 1998.

1. Introduction

I want to begin by thanking you for the invitation to speak to this distinguished audience at this decisive time for the world economy. I am pleased to have the opportunity to share with you our analysis of the serious challenges we face, which we must urgently address both individually and collectively. We have  experienced the opportunities that flow from the new age of globalization.  We have benefited from the accelerating integration of the international economy.  Now we must manage it though more difficult times.

And I welcome this dialogue with key policy makers in Tokyo – because Japan has a key role to play not only in ensuring recovery from present difficulties, but in constructing permanent structures for stable long term global prosperity.

Japan is a highly valued economic partner across the world. In Asia, it is of course the largest economic force, accounting for 61 per cent of Asian GDP. In Europe too, we value highly the strong and successful trade, foreign direct investment and financial relationships that have grown so rapidly in recent decades to our mutual benefit. And Britain, in particular, has very good reason to value our strong relationship with Japan. Last year, Japanese direct investment in the UK stood at £2.6bn, nearly 40% of total Japanese investment in the EU.

My visit today, representing the British Government, the current chair of the G7, reaffirms the partnership between the G7 countries as an indisputable foundation for international stability and prosperity.  Our shared commitment to open trade and orderly progress among the G7 has been a driving force for growth – – even in countries that not so long before seemed likely to be permanently left behind.

Now the trend is stalled, and in some places even reversed – but I believe that is a temporary setback, not a permanent condition.  I believe that the essential answer to the problems of the moment is not less globalization – – not new national structures to separate and isolate economies, but stronger international structures to make globalization work in harder times as well as easy ones.  Our urgent need is closer co-operation, continuing dialogue, and an unwavering commitment to open commerce.  We must not let temporary instability put global progress at risk.

As the economic weather turns, as a storm in one region threatens to spread, there are easy but dangerous shelters – a return to protectionism, the breakdown of co-operation, the rise of beggar thy neighbour policies.  But this can only yield furtherdeterioration, not renewed growth.

Protectionism anywhere is a threat to prosperity everywhere.  Closing off national economies only increases national and international instability. And in Asia and across the world, it is the poorest, the most vulnerable members of society who suffer the most from financial crisis and stagnation.

So I come here today to affirm our common resolve  to pursue a strategy of international stability and renewed growth.  All countries must actively work together to sustain domestic demand and maintain open markets for investment and trade upon which our shared prosperity depends. What is necessary is closer international co-operation to achieve stability and sustained growth, open trade and strengthened financial systems.

That is a point upon which all G7 finance ministers have been agreed in our dialogue in recent weeks. And I am pleased to be here to discuss these issues in person with my colleague, Kiichi Miyazawa, as I will be in the coming weeks with other finance minister colleagues.

Recent events, coming after the onset of instability in Asia last year, also emphasise the importance of the work that is being done  in the G7, the IMF and World Bank and other international groups to consider how to promote sound domestic policy-making and strengthen the international financial system. The globalization of the economy and the expansion – and recent instability – of world capital markets present new challenges for both emerging markets economies and industrialised countries alike. The challenge of devising  procedures and institutions which establish internationally agreed rules of the game, recognising the proper role of government in delivering greater stability, prosperity and opportunity for all citizens within an open global economy, is the key challenge which faces us.

So today, I will explain what governments must do now to address the instability we currently face. And I will set out some of the key issues that need to be addressed at the annual meetings of the IMF and World Bank in Washington next month.

2. The world economic situation

Our starting point must be to recognise the strengths which explain developments in the world economy during the 1990s,  but also the weaknesses in national and international policy-making that have been exposed by recent events. The two driving forces for change have been technological change which made possible a global marketplace and the lowering of barriers to trade and capital flows as more and more countries wanted to be part of this global marketplace.

Since the establishment of the GATT in 1947 average industrial tariffs of developed countries have fallen from nearly 40% to less than 5% through eight rounds of multilateral trade liberalisation.  The most recent of these – the Uruguay Round promises to increase world incomes by some $500bn per year by the year 2005.  The Uruguay Round marked a major reduction in (non-tariff) trade barriers: agriculture and services were included in the GATT for the first time.  Since then we have seen Agreements to liberalise markets in Financial Services and Information Technology.  At Birmingham, the G8 pledged to resist protectionist pressures.  At the fiftieth anniversary  celebrations of the GATT in May, world leaders renewed their commitment to open markets in trade and investment.

At the same time, we witnessed global capital flows on an unprecedented scale as investors perceived new investment opportunities in markets which were previously not open to them or too risky to contemplate.  The Asian financial crisis was preceded by a period characterised by record private capital inflows into emerging markets and a substantial compression of spreads across a wide range of emerging market credit instruments.  Net capital flows to developing countries  roughly tripled over the last decade to more than $150 billion a year.

The terms of new bond issues by developing countries improved significantly in the early 1990s – the average spread at launch for US dollar denominated issues declined, in retrospect excessively, from over 400 basis points in 1991 to a low of less than 200 basis points by 1994 .

This irreversible global economic integration in capital and now also product markets has been accompanied by impressive growth in the world economy. During the 1990s, global output has expanded by on average of over 3 per cent each year, with developing countries growing at an average of 6% and countries in Asia by an average of 8%.

But in the last year, the trends which accompanied strong growth rates in emerging markets have been reversed.  The end of last year saw a collapse in private capital inflows to emerging markets, leading to dramatic falls in Asian exchange rates and  stock markets – of as much as 80 per cent in some cases.The Asian crisis countries themselves witnessed a turnaround of $70 billion in bank lending with net inflows of $40 billion in 1996 turning to net outflows of over $30 billion in 1997.  And unlike in the case of the Mexico crisis, the reduction in capital flows to the crisis countries was not offset by a reallocation of flows to emerging markets in other regions.

The growth performance of these countries has also gone sharply into reverse – on a scale unprecedented in contemporary economic history. After strong growth in previous years in Asian economies, the economic crisis has been a particularly jarring experience for the citizens of these countries as well as international policy-makers and investors. And with the growing realisation that recovery is taking longer to occur than had been hoped, there has been a significant reassessment of risks to international lending in emerging markets.

It is right for policy makers to admit that the causes of these complex events are not yet fully understood and will require continued  analysis.  Moreover, the factors explaining the onset of economic difficulties and loss of investor confidence in each of the countries affected are different, and it would be wrong to engage in misleading generalisations.

In Thailand, for example, the first country to be affected, the immediate cause of  the economic downturn was an unsustainable asset price boom, compounded by macroeconomic policy errors, which exacerbated the situation, rather than helping to solve it.

In Indonesia and South Korea by contrast, macroeconomic policy errors were not to blame for the loss of investor confidence, while recent events in Russia represent a particular combination of economic and political instability, leading to a loss of  investor confidence and, in turn, macroeconomic breakdown.

However, some common themes do emerge in all affected countries in Asia. Excessive short–term foreign currency borrowing occurred because of the perception of an absence of currency risk due to exchange rate pegs, implicit and explicit government guarantees and directed lending practices which compounded the inefficient allocation of capital, as well as weak supervision and prudential standards.

Borrowing was in many cases used to finance investment in economically unsound projects and governance in the corporate and financial sectors was often weak. In some cases, currencies became uncompetitive, resulting in large current account deficits. Moreover, when the financial crisis hit, fiscal policy was, in retrospect, kept too tight. However underlying all these factors and at their root, was a lack of transparency in economic statistics and policy making which led to confusion and dented market confidence.

In Asia, a period of adjustment was inevitable. What is striking is, first, that the scale of this adjustment should be so severe – as evidenced by the falls in equity and currency markets and in output in many Asian economies. Secondly, these  financial pressures have spread across emerging markets from Asia – to Eastern Europe and recently Latin America.

In hindsight it is clear that investors were not making fully prudent assessments of the risk associated with their lending decisions. Last year we witnessed the first decline in private capital flows to emerging markets this decade, and a general reassessment of risk. The widening of spreads in emerging markets has continued following the Russia crisis, rising from around 600 basis points to 1600 basis points.   Recently we have seen a general flight to quality and safe-haven buying by increasingly risk-averse global investors.

While some sharpening of risk management may bring benefits  in the medium term, it is concerning that even some of the best performers amongst emerging markets are now being been caught up in the fray.  Even those with sound macro-economic fundamentals, such as Hong Kong, have not been immune from short-term speculative attacks.

These developments illustrate why it is so important that we take extremely seriously the sort of correction we are currently witnessing. Industrialised economies have felt the impact of falling demand in emerging markets. The general increase in investor risk-aversion has also led to volatility in the major world markets.  In the US and Europe, stock markets have fallen significantly, while bond prices have been pushed higher. With inflation low or falling in many parts of the world and with the slowdown in demand in a number of economies, especially emerging markets, the balance of risk in the world economy has shifted, as the statement by G7 countries and central bank governors earlier this week made clear .

3. Stability in the world economy

My primary concern today is how international co-operation can help to deliver sustainable growth, open trade and the proper functioning of banking systems.

Economic stability

The first priority for Asia is to restore a platform of economic stability on which growth depends.  The economic situation in much of Asia remains difficult, as the slowdown is turning out  to be greater than expected. But progress has been made in restoring economic stability in some of the countries directly affected by the crisis, through full and timely implementation of the necessary reforms, in conjunction with the IMF.  In both Thailand and Korea, we have seen significant currency appreciation this year, and this has allowed interest rates to be reduced to below pre-crisis levels.  Moreover, the latest trade data show that export volumes grew rapidly in the first quarter. I also want to mention the vital contribution which  China is making to global financial stability.  Its policy of  maintaining a stable exchange rate is an important and  responsible one in difficult times.

With the continued pursuit of  transparent and credible  policies, we can see further signs of recovery.  Macroeconomic  policy should now be focussed, on creating the right conditions  to support domestic demand and export-led growth.   Structural  reforms, particularly in the financial sector, must also continue alongside action to put in place adequate social safety nets.  Since the beginning of the crisis, I have argued strongly that more emphasis needs to be placed on social spending to limit the impact on the most vulnerable in society.

As our recent statement made clear, G7 countries, as well as the IMF and the World Bank, stand ready to support countries in all emerging markets, which are prepared to embark on a course of strong and sound policy action. Of course, for the IMF to do this and be ready to help in times of crisis, it needs adequate resources now. I am glad to say that the British Government has taken action to play its part in doing this, and I urge others to do the same as a matter of urgency.

In Russia, economic progress can only be secured if there is political stability and a genuine commitment to both stabilisation and structural reform. As the G7 officials discussed at their meeting in London earlier this week, the international community remains ready to cooperate further with Russia in support of sustained efforts towards stabilisation and reform.

Inevitably, trade flows will change as the world adjusts to the recent swings in capital flows. In the Asian crisis countries, we have seen significant improvements in trade balances, with a combined annualised surplus of $80 billion in the first five months of 1998, compared with a deficit of around $40 billion  annualised in the same period last year.

But the necessary shift from trade deficit to surplus in emerging markets can either be achieved by domestic stagnation or export-led growth. It is in our shared interests to achieve the latter, but this is only possible if the industrialised world provides the engine for that growth by sustaining demand in the world economy. All industrialised countries – in Europe and Japan as well as North America- must bear their fair share of the adjustment. No one country can either escape its responsibility to play its part in sustaining global demand or be required to bear the whole burden and thereby encourage protectionist sentiment.

We must demonstrate both that we have learned the lessons of history, and that we have adapted our approach to the modern global economy of the late 1990s.  We are not going to bury our heads in the sand in the face of instability as policy-makers have done before.  Equally, we must guard against repeating the precipitate policy mistakes which, for example, the UK made following the 1987 stock market episode when policy was kept too loose despite domestic inflationary pressures.

This is a crucially important task, in particular for monetary policy makers.  I know from my conversations with Eddie George, the Governor of the Bank of England that central bank Governors in the industrialised world are fully focussed, as Monday’s statement by G7 Finance Ministers and Central Bank Governors demonstrated, on the need to maintain demand growth in the current global environment.

In the UK, as result of the decisive action the Government has taken over the past year in monetary and fiscal policy, the UK macroeconomic fundamentals are now sound and Britain is now back on track to achieve a return to stability as the platform for sustained growth. Recent evidence of reductions in inflation and earnings growth is encouraging.  But further progress is essential, if we are to maintain an economy which combines sustainable growth and low inflation.

Prospects for sustainable growth with low inflation continue to depend on responsible wage behaviour in both the private and public sectors, where pay must be related to what the economy can afford.  It would be the worst of short-termism to pay ourselves more today at the cost of higher interest rates tomorrow and the missed growth and job opportunities that would inevitably follow.

It is vital also that measures are taken to put the Japanese economy back on the path of sustainable growth.  Japan has a particularly important role to play as the second largest economy in the world,  by far the largest economy in the Asia region, and a key export market for the crisis economies.  Japan is clearly not responsible for the Asia crisis.  But Japan can be part of the solution.   That means using macroeconomic policy tools to boost domestic demand and restore business and consumer confidence.  The G7 has welcomed the efforts you have been making and the fiscal package you announced in August. The world economy needs an early return to growth in Japan and decisive  action to that end.

Trade policy

Vigilance is required not just in domestic macroeconomic policy but also in trade policy. We must guard against the risk that worries over cheap imports from Asia will encourage misguided calls for a retreat into protectionism.

The world that made this protectionist mistake earlier in the twentieth century, in the decades before the Bretton Woods institutions were created, must not make it again, on the eve of the twenty first century.

It is therefore critical that we resist these pressures and stand by the pledges we have made at Birmingham, ASEM2 and the OECD and WTO Ministerial meetings to maintain the liberalisation of international trade and investment.

The successful completion of the WTO financial services negotiations in December of last year was a tribute to all the participants. We must not allow current market difficulties to stand in the way of further trade liberalisation and opportunities for growth.

I want to give you three further examples of how the G7 and the UK can signal its commitment to promoting free trade and  resisting protection.

First, we need to move quickly to a new round of trade talks that will take multilateral liberalisation forward, not backwards. We are therefore fully committed to European Commission proposals for an early start to the Millennium Round of trade negotiations with a fully comprehensive liberalising agenda covering Agriculture, Services, Competition and Investment.  It is in the interests of everyone to work hard to make sure these talks deliver. These talks should start in the year 2000.  I propose that we work with the WTO to ensure that preparations for negotiations start now to ensure a prompt start to the Round. We should also consider whether there is any case for bringing that date forward.

Second, anti-dumping.  Arguably the misuse of anti-dumping measures as a way of protecting domestic markets is the biggest current threat to international competition. We need to be more watchful than ever in current circumstances. Recently, the UK has strongly opposed the imposition of measures against amongst others China and Indonesia in the case of unbleached cotton. And we will continue to do so in similar cases.

Third, we shall be looking critically at our own rules and measures. For example, The Voluntary Restraint Agreement on Japanese cars exports to the UK expire at the latest at the end of 1999. The UK is and will remain firmly committed to the liberalisation of the UK and  EU car markets.

Financial stability

The third area where vigilance is essential is in banking and other financial supervision and regulation.  The G7 can take the lead in maintaining the momentum of global domestic demand, and safeguarding the openness of the global trading system. But if we are rapidly to restore investor confidence, and emerge from the current turbulent period stronger than we entered, it is essential that countries facing financial pressures take the urgent and necessary  steps to strengthen their own national financial systems, in co-operation with the private sector and the international community. This will involve difficult decisions to tackle corporate and financial sector weaknesses,  and to develop better systems of supervision and regulation.

Of course it is not just emerging market economies that need to be vigilant when it comes to financial stability.  An equal responsibility lies with the G7 countries.  In London, the home of the world’s largest international financial centre, we take our responsibility to ensure open, transparent, orderly markets very seriously.  I know the governments and regulators of other major international financial centres do so too.

In London, market participants have absorbed the impact of recent instability without serious difficulty.  Of course we are not complacent.  The Financial Services Authority – the new universal regulator of banks, securities and insurance – is monitoring the situation closely.

Here in Japan, the restoration of financial stability is a top priority in order to ensure that efforts to stimulate the economy can be effective. I hope financial reform legislation can be passed quickly and look forward to the implementation of these measures in a speedy and decisive manner.

It is vital that a solution is found and that confidence is restored.  This is essential to put the economy on a sound footing.  Continuing financial sector instability will make  Japan’s economic recovery much more difficult by hampering efforts to stimulate domestic demand. A transparent, well-regulated and reinvigorated financial sector will play a large  role in putting the Japanese economy back on its upwards trajectory. The same applies throughout Asia.

The UK fully supports the efforts which you are making, and  recognises the importance of co-operation amongst supervisory authorities. For many years there were close links between banking supervisors in the Bank of England and their colleagues in the Japanese Ministry of Finance and the Bank of Japan. Both in Japan and in the UK, this year has seen the establishment of new universal financial regulators: the Japanese Financial Supervisory Agency and the UK Financial Services Authority. In the months since our two FSAs were created they have already built up strong links, reflected in day to day contact on individual issues.

But I believe we can and should do more to enhance mutual understanding and co-operation. One of the best ways of doing this is for supervisors from one organisation to spend time at the other. As a first step, I can announce that next month
supervisors from the Japanese FSA will go to the UK FSA for an intensive exposure to the way that UK undertakes supervision. And we are planning a similar visit to Japan by UK supervisors as well as longer secondments in both directions.

We also need enhanced and targeted surveillance of financial sector stability by the IMF and the World Bank working in close co-operation.   And greater co-operation between the IFIs and the international regulatory organisations (Basle, IOSCO, IAIS)  is also important.  The Basle liaison committee, which combines representatives of developed and emerging markets and of the IMF and World Bank, is a good example of this sort of co-operation.

The G7 is also considering with the IMF and World Bank how to improve co-operation between the two institutions in the areas of financial stability and surveillance including transparency in both public and private sectors, and will come forward with proposals.

4. Strengthening the financial architecture

I have set out the action which the G7 together must take to counter the threat to prosperity and jobs posed by this short- term instability. But this instability should not prevent consideration of the long-term implications of the recent crisis for both domestic policy-making and the institutions of the global economic system – sometimes referred to as the financial architecture.

We start by recognising that the global economy has changed the environment for domestic policy making. In the global market place national governments, dependent for investment funds on the day to day confidence of international investors, must pursue consistent and credible policies that guarantee stability. Rewards for doing well have been substantial. But punishment for those countries who perform badly is now more instantaneous and more severe than in the past, with the risk of contagion as investors become more risk averse.

This can be seen from the way in which the Asian crisis, and now the Russian crisis, came unexpectedly – the speed with which the capital markets have moved, with sentiment swinging from excessive optimism about prospects to a deep pessimism, the accompanying volatility of exchange rates and the way in which deep-seated flaws in financial systems in emerging markets have been exposed.

Despite these changes, we are still operating with essentially the same institutional structure that was set up over 50 years ago when the world was facing a very different set of problems. The Bretton Woods twins, the IMF and the World Bank, were designed to help the world recover from a devastating World War.

The World Bank was given the task of reconstruction and development, the IMF was to look after payments imbalances, and particularly prevent the beggar-my-neighbour devaluations.  Later the Bank for International Settlements  was formed and developed a limited role in bringing together the Central Banks of different parts of the world.

We need to examine how we can reform this architecture to improve the workings of the global economy and facilitate both trade and capital flows. We must learn from what we have done right over the last 50 years but also from the problems that have emerged most recently in the current crisis.  So let me start by setting out the key issues that need to be on the agenda of the meetings in Washington early in October.

There are those who argue that instability is the inevitable result of free capital movements across national boundaries, while others blame speculators who exploit  capital mobility for short-term profit. What is clear is that short-term capital flows can be destabilising and can disrupt markets when investors are insufficiently informed and educated and institutions lack credibility.

So one part of the  answer to the uncertainty and unpredictability of ever more rapid financial flows is to introduce new disciplines in economic policymaking: clear long- term policy objectives, the certainty and predictability of well-understood procedural rules for monetary and fiscal policy, and an openness that keeps markets properly informed and ensures that objectives and institutions are seen to be credible.

Greater openness in procedures as well as in the dissemination of information will provide markets with a better understanding of fiscal and monetary policy, reduce the likelihood of market corrections by revealing potential weaknesses at an early stage, and encourage governments to develop more open policy making processes and internationally recognized yardsticks for assessing fiscal policy.

I welcome the progress made in agreeing the Code of Good Practice on fiscal transparency that the UK originally proposed a year ago in Hong Kong. The Fiscal code has now been agreed. The IMF already plans to issue a manual to provide more guidance on how to construct and present fiscal policies.

The issue now is how the Code should be used in practice.  I believe that it should be disseminated widely to extend good fiscal practice throughout the world, and that countries should be required to report on how they are applying it. The IMF should report on its implementation as part of Article IV consultations and that it should become a key component of programme conditionality.

But the fact that, in some Asian countries the difficulties began not in macroeconomic policy but in inadequate financial regulation shows why it is right for us to extend the principle of transparency and new discipline in policy making from fiscal policy into monetary and financial information and procedures and corporate governance. That is why I have proposed that we supplement the code on fiscal transparency by asking the IMF to prepare a code of good practice on financial and monetary policy, in consultation with the world bank and the BIS and asking the OECD to draw up a Code of Good practice in corporate governance.

The monetary and financial code will need to ensure that countries provide a complete picture of usable central bank reserves, including any forward liabilities, foreign currency liabilities of the commercial banks and indicators of the health of the financial sectors. We must also find ways of improving and speeding up publication of data on international banking flows.

These Codes of Conduct, policed by the IMF, can help private sector lenders and investors when they make country risk assessments, enable them to make sound lending decisions country by country and so reduce the tendency to brand all emerging economies  in the same way. We also need to do more to encourage – or even require – prompt publication of IMF Press information notices and the conclusions of Article IV missions.

Sound macroeconomic policy, open and credible institutions and procedures and a healthy financial sector are essential pre- conditions for orderly capital account liberalisation.  The recent turbulence in global financial markets has demonstrated the importance of ensuring that all the necessary pre-conditions have been met, sequenced in the appropriate way.

I continue to favour an approach to capital account liberalisation which is bold in concept, but cautious in implementation.  Bold in concept because open capital markets allow efficient use of capital and the transfer of technology and expertise, and have brought substantial benefits to industrial and developing economies alike in recent decades.

But the need for caution in implementation is now clearer, and more important, than ever.  Orderly liberalisation will require sound banking and financial systems and appropriate macroeconomic policies.  Without these important pre-conditions being in place, countries will remain vulnerable to capital market volatility. I believe that this work must also be extended, working with the IMF, to deepen our understanding of  the pre-conditions for a successful capital market liberalisation by emerging market economies. We need to make clear the risks of moving too fast if these pre-conditions are not in place. Equally, countries that seize upon unilateral actions as a substitute for necessary reform and co-operation damage the prospects for their own economies and the world system.

Finally, given the key role that IMF plays and continues to play, we must now find ways to improve the IMF’s own accountability to ensure that it performs its responsibilities in an open and transparent way that enhances public confidence. We need a systematic approach to internal and external evaluation of the Fund’s own activities, including a new full- time evaluation unit, inside the IMF but reporting directly to the IMF’s shareholders, and in public, on its performance.

We will return to these and other long-term issues of crisis prevention and alleviation in Washington in three weeks time.

5. Conclusion

Let me say in conclusion that in the new global economy, neither the United Kingdom, Japan nor any other country can afford the easy illusion of isolationism.  We are all part and ultimately product of events happening in our global economy.  Never in all of economic history have so many depended so much on genuine economic co-operation among the leading industrialized nations.

We must never forget that the path of open trade and open capital markets that we have travelled in the last 30 or 40 years has brought unprecedented growth, greater opportunity and a better life for people across the world.  No sensible policy- maker wants to turn the clock back to protectionism and insularity.  But to move forward, we need active governments, acting together through reformed international institutions.

The questions are sophisticated and technical.  But we must never forget that they are also human questions.  They involve the living standards of people as well as the level of finanacial transactions.  They involve not only the value of capital or trade or investment, but the deepest values of our societies.

We must make markets work – – in tough times as well as easy ones.  That is the burden and honour of all of us who lead in the era of globalization.  I believe we can meet the authentic problems of our times with a vision, an intelligence, and an energy which will make the world economy stronger, more stable, and more prosperous – – ultimately more open not just to the free flow of goods, but to the rising tide of people’s aspirations everywhere.

The speech made by Gordon Brown, the then Chancellor of the Exchequer, on 13 October 1998.

Just as we must work with our international partners to secure global stability and growth, so we have been taking action at home to set in place a long-term and credible  platform to achieve the stability that is an essential  pre condition for long-term investment, growth and jobs.

It is in pursuit of our long-term goals – high and stable levels of growth and employment- and the rejection of the short-termism and stop-go polices that have undermined the UK economy in the past- that we have taken tough decisions.

In the face of rising inflationary pressure and the large structural deficit we inherited, we made the bank of England independent, the MPC raised interest rates and we tightened fiscal policy by 20 billion pounds last year, amounting to 3.5 per cent of GDP from financial year 1996-97 to financial year 1999-2000.

There must be no return to the boom-bust we saw in the late 1980s and early 90s, when interest rates reached 15 per cent, 1 million manufacturing jobs were lost, nearly 170,000 businesses went under and thousands who faced mortgage misery and negative equity are even now not yet recovered from it.

We are committed to steering a path of stability based on a stable monetary framework and sound public finances.

And it is because of the reduction in borrowing and tough action on inflation, which has today seen us meet our inflation target for the second month in succession, that Britain is now better placed to steer a path of stability in these troubled times for the global economy.

We have consistently taken a prudent and cautious approach to managing the public finances and we will continue to do so. Our projections have been based on cautious assumptions which have been audited by the independent national audit office and our plans have built in margins to cover uncertainties, including the risk of slower growth.  We have worked within the previous government’s spending plans for the first two years and our careful plans mean that current spending is now  set to grow in real terms by less over this parliament than the last.

As I have said, slower world growth makes it inevitable that growth in Britain next year will be more moderate than previously expected.

But because of the prudent approach we have followed, even with more moderate growth next year we remain on track to meet our strict fiscal rules over the economic cycle while maintaining our commitment to an additional 40 billion pounds for improvements in health and education.

The speech made by Gordon Brown, the then Chancellor of the Exchequer, to the CBI Conference in Birmingham on 2 November 1998.

Introduction

I am delighted to join you once again here in Birmingham on the first full day of your Conference, grateful for the opportunity to address business leaders, to pay tribute to the contribution you and your companies make to the prosperity of Britain.

One look at your agenda and the speakers you have invited to address you – last night President Menem of Argentina, today Prime Minister Aznar of Spain, tonight Chancellor Gerhard Schroeder of Germany – I am grateful to have a look in. But the fact that you have speakers from all over the world tells us much about the global economy in which business now operates and the international and European nature of all our interests and concerns.

And so I am pleased to take this opportunity to talk to you about the forces at work in the global economy, which we must meet and master; to outline with you the steps we are taking at home and through our work in the international and European communities that will help Britain – and your businesses – steer a course of stability in this uncertain world, and discuss with you the reforms in labour markets, capital markets and product markets that we need in Britain and Europe if we are to be equal to any and every challenge this uncertain global economy brings.

Globalisation

The global turmoil we are witnessing could not have happened in the same way in the old sheltered economies of the past, with their national barriers and their limited capital markets. The challenges that we have to confront today arise from us being part of a global marketplace – with its ever more rapid waves of innovation and its fast-moving and often destabilising capital markets.

When the world’s second largest economy, Japan, is likely to contract by 2.5 per cent in one year, when countries hitherto the growth areas of the world economy now face unprecedented declines and when world trade growth falls by two thirds in one year then, it is everyone’s business – not only because we are dependent on each other’s goods and services but also because – as we have seen – a weak financial system in one country can threaten another country’s financial system.

This afternoon I will make a Statement to the House of Commons detailing a number of reforms which the G7 Ministers and Central Bank Governors have now agreed to strengthen the international financial system.

Our challenge is to create the best conditions for stability and growth in the world economy. Firstly, by recognising that the balance of risks in the global economy has changed and therefore being vigilant in our monetary policies. Secondly, by avoiding protectionist tendencies when trade imbalances begin to appear. And finally ensuring that our policies for transparency, supervision and financial stability are as sophisticated as the markets they have to deal with. Hence our proposals for a new mechanism for crisis prevention, improvements in global financial regulation and codes of conduct that require all countries to pursue transparent procedures in their monetary, financial and fiscal policies.

Stability in the domestic economy

Monetary and fiscal stability is a precondition of economic success. And just as we must work with our international and European partners to create the best conditions for global stability and growth, so we must work together to steer a course of stability for Britain.

In the 1970s British inflation averaged 12 1/2 per cent, and went as high as 27 per cent. In the 1980s it averaged 7 per cent. And having reached a high of 21 per cent. Even a few years ago in the early 1990s it stood as high as 10 per cent, revealing a still inflation-prone economy not capable of sustaining non-inflationary growth without a resort to boom and bust.

That is why on coming to government we took immediate action to set in place a credible and long term monetary policy framework, making the Bank of England independent. By tackling inflation head on, inflation is now at our target of 2.5 per cent and expected to stay close to there for the period to come. And as a result long term interest rates have fallen from over 7 to 5 per cent, the differential with Germany narrowed by almost 1 per cent, the lowest long term rates in Britain for 35 years, the lowest since the boom-bust cycle in Britain became entrenched.

It is also because alongside our monetary framework we have created a new framework for fiscal stability – with similar rules, similar disciplines and a similar transparency – that we are eliminating the current structural deficit while maintaining our commitments to health, education and infrastructure investment.

Having kept within rigorous spending ceilings in our first two years, we reduced the deficit by 20 billion pounds, tightening fiscal policy by 3 per cent.

We have consistently taken a prudent and cautious approach to managing the public finances and we will continue to do so. Our projections have been based on cautious assumptions which have been audited by the independent national audit office and our plans have built in margins to cover uncertainties, including the risk of slower growth.

And it is because Britain now has an explicitly long term fiscal as well as monetary framework and policy from which we will not be diverted that, as world growth has weakened, monetary and fiscal policy can now work together. Let us not forget that in the last downturn the inflationary problems of our economy were such that even after the economy turned downward interest rates remained at 15 per cent for a whole year and in double figures for 4 years. In contrast, the Bank of England has now been able to reduce interest rates, to respond to a changed international environment – able to respond more quickly and in a more forward looking way than in past British economic cycles.

I know your concerns about the pound and I have heard them.

Set against the deutschmark the pound is now 10 per cent lower than at its peak, lower than May 1997, and I think everyone here would agree that the greater danger for our economy would have come if we had taken the wrong action and returned to the double-digit interest rates of the past.

We are conscious, of course, that there is a balance of risks: the risk on the one hand of a sharper slowdown in the world economy, the risk on the other that inflationary pressures might persist.

But because we have a long-term framework within which we are eliminating the current structural deficit and because we will continue to meet our inflation target Britain is now better placed to steer a path of stability in these troubled times for the global economy.

If the country’s wage responsibility matches the Government’s inflation resolve – and this is as relevant to the public sector as to the private sector – then Britain can have a low inflation environment for many years to come that will end the violence of stop-go economics in our country.

It is my objective to start a virtuous circle of low inflation, low long term interest rates and rising long term investment that will become the platform for driving our economy forward. And that in the face of the current international difficulties is a prize for Britain, one that has eluded us for too long. Higher productivity

But in the global economy every country has to face ever intensified competition. For all the changes that brought liberalisation and flexibility in the 1980s, no one can doubt that Britain in the 1990s had two great economic challenges to resolve – the stop-go instability I have referred to, and a productivity gap with our competitors, which we must bridge if we are to rise to the challenge of more intensified competition in the global economy.

So as you know over the past six months the Secretary of State for Trade and Industry and I have been holding a series of seminars with many of you, examining together some of the barriers to high productivity in our country.

Because we believe it is businesses and companies not governments that create prosperity and jobs, we have already cut the main rate of corporation tax to its lowest level ever, first to 31p and from April to 30p. And we have cut the rate to 21p and from April to 20p for small businesses. This is the lowest of any major industrialised. And to encourage long term investment, we have also cut the long term rate of capital gains tax from 40 pence to 10 pence.

But we can do more. Tomorrow I will present to Parliament our Pre-Budget Report. It will set out for the coming year the next steps that we must take to increase competition, cut red tape, increase investment and to equip the British economy for all the challenges ahead. And this will inform the Competitiveness White Paper Peter Mandelson is preparing.

The Pre Budget Report on raising productivity will be the start of a process of discussion and debate leading up to the Budget in which I hope every part of the business community will be involved.

This is not a theoretical exercise it is entirely practical because as I will say tomorrow, in preparing this Budget and the next the Government is ready to consider all tax, spending and regulatory changes that will help us bridge the productivity gap with our competitors and equip us to succeed in the future.

Part of the solution to bridging the productivity gap is through a modern employment policy. And I want to say how grateful I am to hundreds of you for joining more than 29,000 employers in supporting our Welfare to Work Programme.

Europe

But there is a further area in which Government and business must work together to equip ourselves for the future – that is in moving forward our relationship with Europe, where we do half our trade, and being ready for the euro in little more than eight weeks time.

My view of Europe is of a continent that has to accelerate change and modernise through pushing ahead with reforms in labour markets, capital markets and product markets for more competition, more flexibility, more investment and more employment.

So we need a pro-business, pro-opportunity Europe that must not turn its back on necessary reform.

The Single Market must not remain just an aspiration, in all areas it must become a reality.

European-wide competition must not just be talked about. Markets must be opened up not least in telecommunications, energy, the utilities and public contracts.

Budget reform must reduce wasteful expenditure in favour of a rigorous selection of priorities.

The adaptability and flexibility which modern economies need, free of burdensome regulations, must become a reality across the continent.

And this does not require the people of Europe to reject the strong desire for social cohesion. For by committing ourselves in this new Europe to maximising opportunity for all, and to getting the best out of people and their potential, Europe can be both enterprising and socially cohesive.

This Government has decisively and unambiguously put this country on a new road of constructive engagement with Europe.

Our position on the euro is as we set out last year, that we have committed our country to active preparations that will allow us to make a decision, subject to a Referendum, early in the next Parliament and our strategy is to prepare and then decide.

When I spoke to you last November, I set out the challenges that economic and monetary union would mean to British businesses. How EMU would lead to fiercer competition for trade and for future investment across Europe and what we in Government would do to help you take advantage of the new opportunities.

I can now report back to you on the results of our work.

First, when we found that only 30 per cent of firms thought they needed to prepare for the euro and only 5 per cent had done anything, we decided to tackle this directly under Lord Simon’s leadership – through direct mailing of 1.6 million firms and a series of television adverts.

Twice as many businesses are now making preparations.

Second, we have brought together firms, business advisers, trades unions, and Government through 12 new Euro Forums in every region of the country, led by local business people.

Over 500 personal advisers from business links, Chambers of Commerce and local authorities have been on training courses organised by the Treasury’s Euro Preparations Unit.

Third, we have put in place arrangements to enable firms to pay taxes, file accounts and issue shares in euros. The tax authorities have issued guidance and the DTI will legislate next year to make redenomination of company shares into euros even easier.

By the end of this year, over 10,000 of Customs and Excise staff will have been trained to deal with enquiries or deliver services in euros to the business community.

The next stage is that in January, we will publish an Outline National Changeover Plan which will set out the practical steps which would be needed for the UK to join the euro.

We will set out the stage-by-stage procedures that will need to be followed, we will spell out the practical implications of changing to the euro and we will give new advice to companies on the way to take forward their preparations.

Finally, I am conscious that a test that business will apply is whether the public sector is prepared to take a lead in making preparations. And I can tell you today that every Government Department is playing its part, that we are investing in what is necessary to keep preparations on track and that as a further step a cross-party group of Members of Parliament on euro preparations will be set up to discuss euro preparations.

Conclusion

My themes therefore: our economy founded on a platform of monetary stability equipped to steer a course of stability in an uncertain and unstable world. Sound finances through prudence and investment in reform. A national drive for higher productivity through economic reform, and a new purpose in Europe. The great British qualities – our commitment to the virtues of enterprise, creativity, of hard work, fair play and being open and outward looking – put to work for a new era of global competition.

A modern Britain, founded on lasting British values, the values of the British people.

An economy that, because our commitment to opportunity for all means getting the best out of people and their potential, is both enterprising and fair.

And a Britain where there is a mature patriotism that is outward looking and internationalist – giving us a renewed sense of national purpose and a long term direction as a country.

A Britain ready to fulfil its role in the new world, and to realise the potential of all its people.

The speech made by Gordon Brown, the then Chancellor of the Exchequer, at Harvard University, the United States, on 15 December 1998.

Introduction

There can be no more appropriate country to discuss the challenges facing the new global economy than the United States of America: the pre-eminent architect of the post-war global system.

There can be no forum more appropriate than the Kennedy School, named after the President, who on July 4th more than a third of a century ago, matched the Declaration of Independence of 1776 with a new declaration of economic interdependence for our time.

And there can be no more appropriate institution than Harvard where 50 years ago, the Marshall plan, the most ambitious multi-national effort for economic reconstruction the world has seen, was first launched.

More than half a century ago, leaders who were still engaged in war took the time to prepare for peace. In a breathtaking leap into a new era, the world created not just new international institutions – the IMF, the World Bank, the GATT as well as the UN- and a whole set of new rules for a new international economy, but gave expression to a new public purpose based on high ideals.

A generation of leaders who had known the greatest of depressions and the greatest of wars knew also that just as peace could not be preserved in isolation, prosperity could not be maximized in isolation.

What they did for their day and generation was so dramatic that Dean Acheson spoke of that period as akin to being present at the creation.

One of the signal events was the Bretton Woods conference – and I ask myself why it was held not in Washington, or New York, or Boston, but in the white mountains of New Hampshire. In fact the location was the price the Roosevelt administration had to pay to persuade a New Hampshire senator to abandon isolationism. As Tip O’neill used to say, “all politics is local” … Even global politics. If Massachusetts and not New Hampshire had threatened to be isolationist we might be talking today of the Cambridge Agreement. Nothing could more vividly show the practical nature of the visionaries who created the new world than their choice of Bretton Woods.

But as practical as it was, Bretton Woods also defined a new public purpose characterised by high ideals. The conference was about more than exchange rates, the mechanics of financial arrangements or even new institutions. As the American secretary of the treasury said at the very start of the opening session:

“prosperity has no fixed limits it is not a finite substance to be diminished by division. On the contrary the more of it that other nations enjoy the more each nation will have for itself.

“prosperity like peace is indivisible. We cannot afford to have it scattered here or there amongst the fortunate or enjoy it at the expense of others…..”

in short, prosperity to be sustained had to be shared. Practicality and morality went hand in hand.

George Marshall reaffirmed this in his own historic speech here at Harvard. We must fight against “hunger, poverty, desperation and chaos”, he insisted, to secure “the revival of a working economy in the world [that would] permit the emergence of political and social conditions in which free institutions can exist”.

So the post-war arrangements were founded on the belief that public action on a new and wider stage could advance a new and worldwide public purpose of high ideals rooted in social justice:

• to achieve prosperity for all by each co-operating with every other:
• new international rules of the game that involved a commitment to high levels of growth and employment.

In short, the job of every economy was to create jobs for all.

The founders of Bretton Woods resolved that the failed policies of laissez-faire which resulted in vast inequities and recurring depression from the 1870s to the 1930s would not be repeated. Untrammelled, unregulated market forces had brought great instability and even greater injustice. In the post-war era governments had to work collectively if they were to achieve either justice or stability.

The initiatives and institutions of that era were shaped to the conditions of the time – a world economy of protected national markets, limited capital flows, and fixed exchange rates. And for nearly thirty years the system worked, for hundreds of millions who enjoyed unparalleled prosperity Bretton Woods took us a long way. Yet even in the 70s with hundreds of millions still in poverty we had still a long way to go.

In the first historic phase of international economic management, nation states spoke unto nation states, with an unprecedented degree of co-operation between separated and still largely insulated economies. The international rules of the game then largely consisted of open current accounts, fixed exchange rates and closed capital accounts and of collective support when countries ran into balance of payments problems.

But over the next generation, that new world, too, became old, as the existing order of nation states and collective international action was increasingly bypassed by the growth and eventually the sheer force of international financial flows, successively ending dollar convertibility into gold, the fixed exchange rate system, and post-war keynesian certainties, bringing in its wake an outbreak of inflation and then stagflation that spread across the western world.

The 1980s saw a new consensus emerge, essentially an attempt to return to laissez-faire. It focussed not on what governments should do, but on what governments should not do, emphasising private pursuits almost to the exclusion of public purpose. Enlightened self-interest gave way to sheer self-interest. Instead of rising to the challenge of applying the high ideals of the post war world to a new world, instead of aiming for high levels of employment and prosperity for all, sights were lowered, the vision was narrowed. The new right consensus focussed almost entirely on inflation and minimal government.

Of course it was and is right to say that inflation is costly, and once out of control, it is even more costly to reverse. Macroeconomic stability, based on low inflation and sound public finances, is an absolute precondition of economic success. Indeed there is a new premium on economic stability in the global economy. A nation state relying on investment flows from round the world – and also vulnerable to them – now knows that retribution for getting things wrong is swift and terrible.

The 1980s consensus did understand the importance of liberalizing economies from excessive regulation and bad government. But they confused means with ends and said in effect that inflation alone, not jobs and growth also, were exclusive concerns. And they said that all government was bad: that government can’t make a difference, at least a positive one, in jobs and growth, and that global markets have to be left entirely to market dogmas, which have no place for the public pursuit of high ideals. But this 1980s consensus failed even in its own stated purpose – bringing the largest fiscal deficit in American history and reducing britain to inflationary boom-and-bust.

And by 1997, an increasingly turbulent and inadequately supervised international financial system threatened to create boom and bust on a global scale. Now both of the Bretton Woods objectives – not only prosperity for all but stability for all – were at risk. The post-war hope for an indivisible prosperity was replaced by the sudden fear of indivisible instability. The 1980s consensus could not endure.

As the downturn in Asia reverberated around the globe, President Clinton said that ‘the world faces perhaps its most serious crisis in half a century’.

In recent months as interest rates have come down, and the G7 group of leading industrialised nations have set a timetable for reform, financial markets have become less unstable.

But this is no time for complacency. We must recognise how far we have come – in purpose as well as time – from 1945 and how, without public purpose in this new global economy, one set of events in one continent could inflict so much damage on so many people.

This year we have experienced events that were unthinkable just two or three years ago:

• free enterprise Hong Kong taking publicly owned stakes in all its private companies;
• japan nationalising its banks;
• russia going into default;
• in America the mounting of one of the biggest ever emergency refinancings not for a bank, but for a hedge fund;
• most damaging of all, the biggest growth economies of the last decade in east asia suffering larger contractions in output even than experienced in the great depression of the 1930s.

The political dimension as George Marshall foresaw, is equally far-reaching: in only one year, revolution in Indonesia; civil strife in Malaysia; the loss of authority in Russia; and as unemployment rises, unrest in South America, typified by the outcome of last week’s Venezuelan election. It is a sign of the times that only one of the Asian finance ministers I met with in Bangkok last September is still in office today.

The ultimate price of all this is profound human suffering. In Korea unemployment has trebled in one year. In Indonesia ten years of growth have been wiped out; and in the Asian crisis countries as a whole the number of people in poverty is set to double by 2000. We can’t simply declare whenever the stock market bounces back that the crisis is over and we can return to the status quo. We must act – both because it is in our self-interest – to safeguard our own prospects and prosperity – and because it is right.

So now the responsibility falls on this generation to be present at a new creation – of new rules that break with the past and both effectively and fairly meet the demands of the new global economy. We must reject the false choice between clinging to laissez faire and retreating to 1930s protectionism or the tightly-controlled, restricted capital markets of the 1940s. We must meet the new challenge but we must remember that while times and circumstances change, ideals endure.

Our aim must be an international financial system for the twenty first century that recognises the new realities – open not sheltered economies, international not national capital markets, global not local competition. It must be one that captures the full benefits of global markets and capital flows, minimises the risk of disruption, maximises opportunity for all and lifts up the most vulnerable, in short, the restoration in the international economy of public purpose and high ideals.

Our predecessors did this for the post-war world of distinct national economies drawing closer together. Now we must do it for the post-national economy – where economically no nation is an island.

The consensus of the 1980s with its narrow focus on inflation, privatisation and deregulation must evolve into a new 1990s consensus with a new and broader emphasis on competition, supervision and the right conditions for growth and employment.

Before I describe the specific reforms we need, let me be clear that this new public purpose will require public endeavour.

In the international economy the era of absentee government is over.

We need that middle way between government doing everything and government doing nothing.

It was here in your country that Franklin Roosevelt in the 30s found a third way for a national economy – securing the benefits of the market while taming its excesses.

And I believe that the third way initiated and developed by Tony Blair has profound relevance for the challenge we now confront on the global stage. The issue is not one of either markets or government, but how markets and government can best work together. And the way forward for the new global economy is not to retreat from globalisation – into either protectionism or old national controls – or to retreat into a failed laissez faire. It is to ensure global markets can work in the public interest. And transparency in policy-making is one way to develop the informed and educated markets we need.

In a world where the new frontier is no frontiers, we must rediscover the public purpose and high ideals of 1945 with four major reforms that add up to a transformation of the international financial system – a new economic constitution for the new global economy.

New rules of the game for the global economy

First, internationally agreed codes of conduct for transparency and proper procedures that ensure educated markets. These would cover monetary, financial and fiscal policy and corporate governance and would be applied by all countries, rich and poor, as a condition for participation in the international financial system.

Recall that the first constitutional settlement of the world economy in 1945 was not simply about institutions but about rules of the game. And we must now return the international financial system to this idea of rules of the game. While the founders of Bretton Woods devised rules for a world of limited capital flows, we must devise new rules for a world of global capital flows. But our guiding principle remains the same – the promotion of global economic stability and international cooperation to promote growth and employment.

The codes will require accurate reporting to the international community, by each national economy, of all relevant information – for example the size of a budget deficit, the state of bank reserves and the level of currency liabilities.

And the codes will require not only this flow of information but the adherence to specific timetables and proper standards for transparency and disclosure.

The new disciplines involve both the private and the public sector. We need new standards of corporate governance – including an international standard of best practice for financial institutions and their regulators.

We used to think that all that industrialising countries required was raw materials, good communications, a supply of labour and the funds and ability to tap commercial inventions. But we now know that all nations also require a sound robust financial system: no nation can afford – and the international community cannot condone – national financial systems that are reckless, disordered and dishonest. Lack of transparency anywhere can create lack of credibility everywhere.

By requiring exposure of deteriorating conditions, the codes would prevent the temptation for countries to deliberately mask problems, which is what happened in Thailand and Korea with consequences felt across Asia and then the world.

And we should not be so complacent as to assume that codes of conduct are needed only in other countries and not our own. Given that the most recent threat to global stability came from lack of transparency in hedge funds in both the United States and Britain, we need tougher standards and requirements for disclosure all round.

The codes I propose will mean radical changes in the way governments and financial markets operate.

These new rules of the game are not incidental to the financial architecture for the new global economy: they are the financial architecture for the new global economy. They require countries to pursue self discipline with the prospect, if they do not, of imposed discipline. So the right to participate fully in the system should thus be conditional on meeting explicit responsibilities. In this way the codes will reduce the risk of future failures. And if failures do occur, a stronger financial system will be better able to deal with them.

The codes are as relevant for underdeveloped Africa as they are for industrialising Asia and Latin America and industrialised America and Europe. They help us to lay down a route map for sequencing capital account liberalisation. By making sure that economic facts can’t be manipulated and underlying problems can’t be hidden, citizens will know their country’s real problems and prospects, the codes will deter corruption, restore public confidence and build public support for the sometimes painful reforms that are essential to long-term economic growth and prosperity. And this is critical for investor confidence in the wake of the Asian crisis. Without transparency and the proper procedures that the codes of conduct will require, investors may not reinvest on the long term scale that is necessary for jobs, growth and social progress.

National governments should not pick and mix which standards they choose to meet and which standards they choose to ignore. So proper implementation of the codes should be a condition of any IMF and World Bank support. In the global economy national governments have rights but they also have responsibilities they must meet.

Global financial regulation

And because today’s financial markets are global, we need not only proper national supervision but also a second fundamental reform – global financial regulation. That is why Britain has proposed bringing together the IMF, the World Bank and key regulatory authorities: a new permanent standing committee for global financial regulation charged with delivering the global objective of a stable financial system.

The G7 have now agreed on the urgent need for this kind of coordination, and we are grateful to the president of the Bundesbank, Hans Tietmeyer, who has undertaken the critical task of preparing detailed recommendations.

I see the standing committee not as an additional institution but as process of monitoring developments in global finance, ensuring that necessary worldwide standards are put in place, and providing timely surveillance of financial conditions and international capital flows.

The standing committee’s work would make co-operation between international institutions and national regulators a fact of international economic life. In short, the standing committee would be the world’s early warning system for regional and global economic risk.

Global crisis prevention and resolution

Our aim must be crisis prevention where possible crisis resolution where necessary.

So in place of the old approach whereby crisis-triggered intervention, we need, thirdly, a modern mechanism, rooted in transparency and reliable surveillance, and built on public and private sectors both accepting their responsibilities, which can identify potential problems at a stage where preventative action can be effective.

The mechanism they agreed in 1945 for crisis prevention dealt with imbalances in current account flows in a world of restricted capital flows and fixed exchange rates: to tackle public sector deficits and balance of payments crises, it offered temporary financial support or permanent exchange rate adjustment.

The new mechanism for crisis prevention must deal with imbalances as a result of global capital flows.

We need a process of active and transparent surveillance that is a matter of course for all countries, operating in normal times, all the time: not one triggered only by the warning signs or onset of crisis in a particular region or country.

And all main participants, public and private, must accept their responsibilities.

So emerging market economies in particular must not only be transparent in their activities: they must now also forge regular contacts and lasting relationships with their private investors. An open and honest dialogue, in which investors can ask hard questions and then advise, will make it more difficult to cover up bad news, and make it easier to assess what policies will increase or reduce market confidence, thus making it more likely that we can prevent today’s problems from deepening into tomorrow’s crisis.

The short-hand phrase for these creditor-to-country arrangements is country clubs, but these are not exclusive clubs, old boy networks, an informal means of defending privilege. These are modern investor networks that can bring real benefits in return for real responsibilities: networks that every country should form and every creditor should join.

To make these work there should, be a new presumption across the board, in favour of the release of information wherever possible.

The G7 have proposed greater openness from the World Bank, the IMF and other international financial institutions. Their monitoring tells them much of what is happening in every national economy. Clearly in exceptional cases some policy discussions will have to be kept confidential but I strongly support the publication of the IMF’s country surveillance reports under Article IV. The case for an exception must be made and justified, while openness should be the norm.

Put simply we should establish an international right to know that is not occasional or voluntary but ongoing and mandatory.

This will work best if the IMFand other international institutions are more open about themselves. They should do more to explain their practices and procedures to the public. And they too should join in a new partnership with the private sector – ongoing discussions about broader and more systemic issues facing the world economy.

With a right to a greater flow of information comes greater private sector responsibility. We need a system of debtor-creditor agreements – crisis resolution procedures signed up to in normal times with private sector responsibility clauses, such as agreement on collective representation and majority voting when creditor decisions are being made. When trouble hits an economy, the private sector must be prepared to do more than simply pull money out and accelerate the panic. On an ad-hoc basis investors did the opposite in Korea and Brazil and their decisions were essential in halting the flight of capital.

With these three changes – transparency, enhanced surveillance and investor networks we can establish a markedly lower threshold for effective response than the old ad-hoc crisis-triggered system.

Detailed discussion should now take place on the right mechanisms for private sector involvement in crisis resolution. Of course more information and more participation must not become a licence for reckless investment or insider dealing instead, by universalising reliable information and creating orderly consultation procedures open to all, we can minimise the risks arising from insider information on the one hand and moral hazard on the other.

In the new framework it should be the duty of the public sector to inform, the duty of the international financial institutions to monitor and the duty of the private sector to engage.

And because of the new disciplines we propose the public sector can now justify a system of mutual financial support, assistance to countries pursuing sound policies and to contain the spread of financial contagion.

In the last few weeks the international community has proposed a temporary preventative facility, with short-term lines of credit for sound economies that are the victims of contagion. Once transparency, surveillance and agreed private sector responsibility clauses are embedded in the new system of crisis prevention, this facility should be made permanent, and be properly funded.

Of course countries that do not follow these procedures or act on advice cannot expect that they and their private sectors will secure crisis support, the moral hazard would be to guarantee such support independent of whether they do the right things.

With the reforms we propose, we have a real opportunity to move the emphasis of international financial governance from one of crisis resolution to one of crisis prevention and crisis containment.

A global social code

There is a fourth reform: we propose a code of global best practice in social policy which will apply for every country, will set minimum standards and will ensure that when the IMF and World Bank help a country in trouble the agreed programme of reform will preserve investment in the social, education and employment programmes which are essential for growth. This should be an indispensable goal for government in the new global economy: not guaranteeing that nothing will change, but equipping people to turn change into new opportunity.

International economics is not just about numbers in a ledger, but about the lives of people. For too long it has been assumed that the cost of crises will inevitably be paid by putting more burdens on the poor – by cutting health, education and basic social services.

This is wrong in the short term and it will not work in the long term because it erodes both the economic and the political foundations of a society. For reasons of self-interest as well as conscience, we cannot accept a worldwide regime of the well-off in the castle, and the vast majority at the gate. Creating national support for needed reform depends on sharing gains, and helping those who are hurt by economic crises. As Jim Wolfensohn, President of the World Bank, has so vividly put it “social and economic issues are inseparable, they are like breathing in and out”.

In their October statement the G7 recognised the urgent need for a code for good social practice and asked the World Bank to work countries and with the United Nations and others to develop the principles and provisions of such a code.

This is an historic opportunity to realise the enduring public purpose, the high ideals of 1945. And we should not see this code in narrow terms as merely creating social safety nets. We should see it as creating opportunities for all by investing more not less in education, employment and vital public services.

The way forward is not leaving people defenceless – and tolerating a culture of poverty; not repeating past mistakes which have created a culture of dependency; it is equipping people to cope with change, through a new culture of opportunity.

The first building block is, of course, minimum social provision such as safe water supplies; universally available vaccinations and basic health care; and in every society- universal access to schooling for girls as well as boys.

The second building block is the chance to work and the assurance that work will pay, a commitment that we must, stage by stage, year by year, fulfill in developing countries as well as developed ones. The code would set out best practice that can help people find and remain in paid employment: programmes to move them from poverty or welfare to work; life-time learning so that people can move themselves up a ladder of opportunity; and pension systems that mean a lifetime of work will be followed by a decent retirement.

We should forge new partnerships between the public and private sectors – and the ngos. But of course the existence of a programme today should never be the excuse for its perpetuation tomorrow. And the reforms the IMFand other international authorities require must be consistent with the social principles and make a virtue of preserving necessary social investment.

For the poorest highly indebted countries of the world we must create a virtuous circle of debt relief, poverty reduction and economic development. We should never leave countries with an impossible choice between paying or defaulting on unsustainable levels of debt. Immovable mountains of debt run up in the 1980s have become impassable barriers to progress for poor countries in the 1990s. It should now be our ambition that every highly indebted poor country will be in the process of debt relief by the millennium.

And for countries like hurricane-hit Nicaragua and Honduras, weighed down by the burden of debt and devastation, it is right to create a new World Bank trust fund – now with over 130 million dollars pledged – to alleviate their debt payments. It is also right to devise the new post-disaster facility that will give faster relief from debt, to all countries in this position. I believe 1999 must bring a new urgency to relieving third world debt.

Conclusion

So what we must together create is a new economic constitution for a global economy, born out of new realities, grounded in new rights and responsibilities, enshrined in codes of conduct that are agreed nationally and applied internationally, rediscovering public purpose in the international economy and bringing to life again the high ideals of 1945.

We need to build quickly, not debate indefinitely.

Agreement on the codes of conduct should be reached at the IMF meetings in April.

A new system of global financial regulation should be in place by the summer.

The new mechanism for crisis prevention and crisis resolution should be agreed in principle this summer and the detail should be the subject of intensive discussions between the private sector and national and international institutions to reach agreement by the end of 1999.

• and the code for best practice in social policy social code should be agreed at the next world bank meetings in the spring.

This is a programme of reform for our generation. It is more than simply a collection of proposals. It rests on a modern vision of government, doing the right thing, but not everything; of markets working, but not always perfectly; of principles of economic and social justice that reflect our best values and ultimately determine world stability and growth.

This project is indivisible; each element is essential to the success of the whole. And all of it is built on the understanding that increasingly we are part of both one global economy and one moral universe. Now more than ever, in the phrase of the Scottish author, William Mcilvanney, we must understand that ”the economy should be there to serve the people, not the people to serve the economy.”

Ours is an age of great challenges but also great possibilities. What Franklin Roosevelt said to the citizens of his nation in 1933 is now powerfully relevant to the citizens and governments of all nations.

If I read the temper of our people correctly we now realise – as we have never realised before – our interdependence on each other, that we must be willing to sacrifice for the good of a common discipline – because without such discipline no progress is made.

Today I believe that we in our generation have the vision, the values and the will – as the generation which preceded us – to make the world economy anew; the public purpose and high ideals to make a better world economy in every sense of that word.

The speech made by Gordon Brown, the then Chancellor of the Exchequer, in London on 28 April 1998.

I am delighted to be here at the Park Lane Hotel today at this the first conference of the British-American Business Council to be held in the United Kingdom.

I am pleased that so many distinguished businesses are represented here today and indeed also the American Ambassador to London, Philip Lader, whose work here is much valued.

And as someone who already knows a great deal of your work, not least from addressing the British American Chamber of Commerce in New York in December, I want to congratulate all of you, from the 27 member organisations representing 3,000 companies and billions in trade between our two countries who are making the British-American Business Council one of the strongest voices for transatlantic cooperation. And at the start of a week that will be decisive for European economic history, as we prepare to inaugurate a single currency, I want, in the context of a new Europe, to talk not just about relations between Britain and America but about the development of relations between Europe and America.

But first, I want to thank someone who has, as an individual, done more in recent years than perhaps any other to cement the strength of the links between America and Britain. Sir Colin Marshall has combined a distinguished career in international business with a broader commitment to the success of British business and in particular to business links between the US and Britain. He has been a driving force behind the creation and growth of the British-American Business Council. As chairman of the international advisory board from 1994 to 1996 he mobilised the key players in British and American business in support of the council at a key stage in its development.

So we honour Sir Colin today for helping to make the British American Business Council a success. We are all grateful for his commitment to this important network of over 3000 corporations, that helps strengthen your organisations and businesses and helps maintain and develop business relations between Britain and the United States, working with the US and British governments to strengthen these relations.

Today Britain and north America enjoy trade flows of 60 billion pounds and have a total of around 150 billion pounds of investment in each other’s countries. We are the largest single investors in each other’s countries.

Now I believe, as I think Sir Colin’s career shows, that the connections between Britain and the USA, are stronger today, not just because a shared history links our countries but because of our shared values that bind us even more closely together.

A commitment to liberty and to our countries as lands of opportunity for all. A belief in hard work and enterprise, and a dedication to an openness that is outward-looking and internationalist, not least in our shared commitment to free trade.

These are values that brought America to the defence of Europe twice this century and values that allow America to rely on Britain as a bridge to Europe. Values that become ever more important as the world economy is transformed from the relatively sheltered national economies to a global market place, and when, as the insecurities that come with change affect us all, protectionist tendencies must be tackled.

Values that represent, in my view, a partnership for progress. And it is this partnership for progress between our two countries that has been so important in securing the basis of a peace settlement in Northern Ireland. And I pay tribute on behalf of the British government to the work of the American government.

It is this partnership for progress that has led us to work together in Bosnia, in the Middle East and now in Africa.It is this idea of a continuing partnership for progress that lies behind the transatlantic agenda launched in 1995 that has achieved much progress in lowering barriers to trade and investment in our two countries and which we must build on John Kennedy, who quoted Alexander Hamilton urging Americans in the late eighteenth century to think continentally and said the task now was to think inter- continentally, and who said that the declaration of independence should be followed by a declaration of inter- dependence – a concrete Atlantic partnership between the new union emerging in Europe and America – said he regarded a strong and united Europe as essential to the free world.

A strong and united Europe is not a rival to America but its best partner and I believe that for America, Britain is a bridge to Europe and it is this idea of a partnership for progress that most certainly lies behind the proposals for a reform of the international institutions which the G7 heads of government will look closely at when they meet in Birmingham in two weeks time: that the USA and Britain which, more than any other two countries in the world, were the inspirational forces in the creation over fifty years ago of the international financial institutions – the IMF, World Bank, GATT – institutions born in the days of essentially national economies, often sheltered, with very limited capital markets, should now lead the way in reshaping international rules and build international institutions that are more appropriate for the new world of global markets, massive international trade flows and the need for greater international cooperation and for greater openness and transparency to secure stability

Now, today, I want to highlight how our shared values have led us as countries to a set of conclusions about the two priorities for national government in the new era of more open, more competitive, global markets.

First, to succeed, the need to create a platform of macro- economic stability which rejects false trade offs between inflation and growth and is based on clear long term objectives, on well understood procedural rules and on openness and transparency.

And, second, that our economies must pursue continuous and far-reaching structural economic reform to promote productivity and employment.

And I want to tell you that in our first year in government we have begun to tackle these tasks. And as president of the European Union we have sought to drive forward work on these objectives throughout Europe.

Now it is true to say in Britain that the last forty years has been characterised by stop go, boom bust, instability in economic policy. And so I can tell you that the first objective of the new government has been the determination to ensure monetary and fiscal stability, in place of stop go, and to do so in an economy far more open than the sheltered national economics of the past. And here we have learned a great deal from America, and the Federal Reserve Bank.

In any modern economy it seems to me that monetary and fiscal policy , which can no longer be based on the so called fine-tuning of the 1945-1975 period nor on the crude application of rigid intermediate monetary targets that we saw in the years that followed should be based on three central decisions.

First, clear long-term objectives by which governments will be judged – in Britain our inflation target of 2.5 per cent and our five year deficit reduction plan to bring prudent and sustainable public finances.

Second, orderly procedural rules for monetary and fiscal decision making – making the Bank of England independent and legislating for a code for fiscal stability which guarantees certainty and therefore credibility in decision-making.

And third, an open and transparent decision-making process which allows proper scrutiny and which, as a result, offers a confidence that a long term view is being pursued. Our budget deficit reduced from 23 billion pounds to only 3 billion pounds in a year and indeed I believe that it is because people are now coming to believe that for the first time in Britain’s post-war economic history the inflation target will actually be met that long term interest rates have come down to below 6 per cent, the lowest for 33 years.

And it is the same search for stability in a global economy that has led our European neighbours to agree on monetary union.

Again clear long term objectives. First of all at the heart of the project – price stability and sustainable public finances as the key to growth and jobs; secondly orderly procedural rules – the new European Central Bank and the growth and stability pact of the European Union; and third, a system of multilateral surveillance that allows for proper scrutiny of each member’s position and offers confidence that stability can be achieved.

As I reiterated in a speech in New York a couple of weeks ago, as far as Britain is concerned, we have committed ourselves, in principle, to monetary union. To make our economic assessment of the advantages the decisive test as to whether we will enter and to begin preparations that will allow us to make a decision, subject to a referendum, early in the next parliament. Our strategy is to prepare and then decide.

Meanwhile, we are working closely with all sectors of business to ensure that when the euro arrives elsewhere in Europe – as it will in 1999 – British businesses benefit from it.

The Bank of England is leading Euro preparations in the City of London. So inside or outside the euro zone, British economic policies will go on being right for business. Britain will continue to be the most profitable place in Europe from which to exploit the new business opportunities after 1999. And Britain will continue to lead Europe towards ever freer trade and more open markets.

But although macroeconomic stability is a necessary pre-condition for growth it is not sufficient on its own to achieve the high levels of growth and employment we need. This requires far-reaching reform of our labour, capital and product markets. And I want to say that learning from each other, the United Kingdom is now, as president of the European union, leading the debate about economic reform.

As many here will know, in the UK we have embarked on a radical programme of labour market reform, through welfare reform to move people back into work, tax reform to create jobs and improve work incentives, changes in labour market rules to ensure the adaptability we need, and educational reform to ensure the standards and skills a modern economy needs. But we have also embarked on a programme of reform in our product markets – with a new competition policy – and our capital markets – with new measures, for example, not least cutting corporation tax to 30p, the lowest of any major economy, to encourage the flow of funds to small business, to hi tech business and to risk capital. But there is more to be done in Britain and in Europe.

We need a new approach in Europe to risk taking, we need to increase the number of entrepreneurs and to raise the survival rate of small businesses. So we must remove the barriers that exist – fiscal, regulatory, economic, cultural – as a matter of urgency. Let me give one example of where Europe’s agenda is changing, learning from the USA – venture capital.

In the UK, only 5 per cent of venture capital funds go to start ups and early stage companies. In the USA, nearly 25-30 per cent goes to these companies. The amount of hi-tech in venture capital is 50 per cent in the USA, but only around 20 per cent in the UK.

The challenge for Europe is to create a strong venture capital industry and to orientate venture capital to hi-tech risk, early stage and start-up companies.In June here in London we are holding an EU conference to promote venture capital in Europe.

So, just as the new government in Britain has begun to create a new Britain, we are also working with our European partners to create a new Europe – one that combines enterprise with social cohesion, more dynamic, more competitive, more open and thus learning from the entrepreneurial and flexible labour markets of the American economy.