Category: Economy

The speech made by Gordon Brown, the then Chancellor of the Exchequer, in Ottawa on 30 September 1998.

NEW GLOBAL STRUCTURES FOR THE NEW GLOBAL AGE

INTRODUCTION

Our meeting here in Ottawa reaffirms the partnership between our countries that is an indispensable foundation of international stability and prosperity.

Never in all of economic history have so many depended so much on genuine economic cooperation among all the nations of the world.

Our shared commitment to open trade and orderly progress has been a driving force for growth in all our countries – even in countries that not so long ago seemed likely to be permanently left behind.

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 the prospect of better lives for millions across the world. But there is still massive poverty in a world where millions are denied opportunity, and the new economy has brought greater risks of insecurity as well as new opportunities.

What began last year as a local and regional crises centred in a handful of Asian countries, with its effects most sharply felt in Asia, has spread from Asia to Europe and North and South America becoming what is now a global problem affecting us all.

No sensible policy-maker wants to turn the clock back to protectionism and insularity. But to move forward, we need vigilant and active governments, acting together through reformed international institutions, to ensure that the prosperity that has been achieved by some can be extended to all.

Today’s problems are problems of the modern age. They could not have happened in the way they have when finance was confined within sheltered and wholly national financial systems. So these are new global problems which will require new global solutions.

So it is particularly appropriate for me to set out a new agenda for reform at this meeting of Commonwealth nations, with finance ministers representing all regions of the world from developing,emerging markets and developed nations – and to do so the week before the meetings of the IMF and the World Bank in Washington.

The key challenge now is to devise procedures and institutions – nothing less than new international rules of the game – that help deliver greater stability, and prosperity for all our citizens in industrialised and industrialising economies alike.

THE CURRENT SITUATION

First the current situation.

With Japan and one quarter of the world in recession, growth in world output and trade will weaken over the next year.

Asia’s unprecedented slowdown is turning out to be deeper then expected, but in some of the affected countries progress in restoring economic stability is being made.

With some currency appreciation in both Thailand and Korea,interest rates have been reduced to below pre-crisis levels. And the latest trade data show that export volumes grew rapidly in the first quarter.

The continued pursuit of transparent and credible policies,through IMF programmes, has brought further signs of recovery.

But there is a long way to go and macro economics policy should now be focussed, on creating the right conditions to support domestic demand and export-led growth.

As the recent G7 statement has made clear, the G7 countries-North America, Europe and Japan – as well as the IMF and the World Bank, stand ready to support all emerging market countries which are prepared to embark on strong sound policies which will involve structural reform.

But when the balance of risks in the world economy has shifted from inflation to slower growth, the G7 countries must now assume greater responsibility.

The necessary improvement in trade balances in affected countries could either come from domestic stagnation or export-led growth. It is in our shared interests to achieve this export led growth , but this will only be possible if, by sustaining world demand, the industrialised world is the engine for that growth.

As I said in Japan recently, all industrialised countries must now bear their fair share of the burden of adjustment. No one country can either escape its responsibility or be required to bear the whole burden with all the risks in protectionist sentiment that this would entail.

I believe that from our respective continents each G7 member should now resolve to play our rightful role and take action to ensure that our economies can both sustain growth and remain open to trade:

in the UK we have taken the tough action on monetary and fiscal policy which allows us to steer the course of stability in an uncertain and unstable world and will continue to promote domestic demand growth, open trade, investment and employment opportunity for all; in Europe too, as the statement following last weekend’s meeting of Europe’s finance ministers and central bank governors demonstrated, we will be working to ensure that the euro promotes stability and growth. And the European contribution will include a commitment to employment creation within a policy of structural reform;

and the vigilant action of the US Federal Reserve yesterday is designed to sustain domestic demand growth. I know that the US government believes that maintaining free trade, free from protectionism, is an important element of its response. I know also that the administration is working very hard to ensure ratification of the NAB and the IMF quota increase. We should support and encourage them to step up their efforts in these areas;

I know too from my recent visit to Japan that my Japanese colleagues are focussed on their efforts to stimulate domestic demand through fiscal and monetary policy. And, to help restore market and consumer confidence, the Japanese government must lay out a clear timetable for action to restore health to the banking and financial sector. But vigilance today must be matched by a willingness to reform the international financial system to secure greater stability tomorrow.

THE UNDERLYING CAUSES OF THE EMERGING MARKETS CRISIS

Recent years have witnessed global capital flows on an unprecedented scale. Net private capital flows to emerging markets has risen from $31 billion in 1990 to $241 billion in 1996 (before falling back to $174 billion last year). Yet massive flows one way one year can become massive flows the other way the next. In Asia’s case net inflows of $40 billion in 1996 turning to net outflows of over $30 billion in 1997- a turnaround, which in contrast to the Mexican crisis years, has not been offset by a reallocation of flows to emerging markets elsewhere. Instead a general flight to quality and safe-haven buying has occurred. And as global investors have been radically changing their attitudes towards risk, borrowers in Latin America and the Caribbean have faced a steep rise in bond spreads. In many countries in the region these have now risen to rates not seen since the Mexican crisis in 1995. Stock markets have also fallen sharply, down 30 to 40 per cent in Brazil and Argentina since early August. But the emerging market contagion has been even wider than that – in South Africa the rand has fallen to record lows.

Better risk management in future will lead to more stable capital flows. But it is a matter of concern that many emerging market economies are now being been caught up in the turmoil, regardless of the strength of their macro-economic fundamentals.

What we are facing however is a temporary setback, to progress in global trade and investment, not a permanent retreat indeed I believe that the essential answer to the problems of the moment is not less globalization, but more. In other words 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.

But we must understand we are in a new world.

Trying to turn the clock back by re-erecting national financial barriers is neither realistic nor sensible.

International investment flows bring huge benefits to all countries.

And we must build new operational rules and the institutional architecture we need for the global financial system of the coming century.

First, we must tackle the weaknesses in economic and financial policy, and in corporate governance, which the crisis has exposed in many emerging markets.

In many cases, 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.

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 at the root of these problems was a destabilising lack of transparency in economic policy-making right across key economic and financial indicators which in turn led to confusion and undermined market confidence.

Second, this was compounded by weak financial supervision, poor corporate governance, and ineffective prudential regulation,which has led some to raise questions about the speed and desirability of capital liberalisation.

Recent events have demonstrated the dangers countries run when they open their capital markets in this new global economy if their financial systems are weak or vulnerable.

Third, recent months have exposed problems of transparency, poor risk assessment and inadequate supervision in developed countries’ financial markets too indeed in the past week we have witnessed.

The vulnerability and riskiness of some highly leveraged,secretive and speculative hedge funds. But we have also found some major household financial institutions, with ordinary household deposits backed up by implicit and explicit guarantees, risking and then losing substantial sums first in emerging markets and then through hedge funds , a combined exposure which, in some cases, was not known in advance.

So the difficulties are not just a problem for emerging markets. While all too many analyses of the current crisis focus exclusively on the problems in debtor countries, it is a fact that there have also been problems in creditor countries.

Fourth, the international community did not understand sufficiently early the true nature of Asia’s problems and how best to tackle them.

In most cases these were not traditional sovereign debt problems or fiscal problems but instead private sector debt and financial sector problems. We did not have in place procedures and mechanisms to identify problems before they become crises and to manage crises once they began.

Fifth, this crisis is about people and not just about economic statistics. Insufficient attention has been paid to the human side of the crisis and our common responsibilities to put in place help for the poor and the unemployed. We must never forget that behind the headlines and the numbers flickering on dealers’ screens are men and women whose jobs, incomes and futures are threatened by these events.

And when the response to the crisis will inevitably involve difficulties and obstacles which will have to be overcome, we have so far failed to build a shared understanding of the need for reforms, securing a social consensus behind them, just as we have failed to alleviate the impact of recession on the poor and the unemployed.

Five weaknesses – weaknesses in economic and financial policies,underdeveloped financial sectors in emerging markets, ineffective supervision, poor crisis management, unacceptable social protection – but together they expose an even more fundamental common problem. For fifty years we have had national policies for regulation,supervision and crisis management for what were essentially independent relatively sheltered national economies with discrete national capital markets and limited and slow moving international capital flows.

We are now in the era of interdependent and instantaneous capital markets.

Individual economies can no longer shelter themselves from massive fast moving and sometimes destabilising global financial flows , and it is obvious that if we are to respond to this, we need reform at both national and global levels.

First, national policies for supervision regulation and crisis management will have to keep pace with the speed and scale of global financial markets.

And second, as British Prime Minister Tony Blair said in New York last week, a new global framework will have to offer, at an international level, new and more sophisticated regimes for transparency, supervision, crisis management and stability similar to those which we have been developing at the national level to deal with domestic instability.

So the challenge we face is not to weaken support for the IMF and World Bank and other international institutions at a time when the need for surveillance and coordination across the world is more pressing but to strengthen them by building the operational rules and institutional architecture for the new global financial system.

AN AGENDA FOR REFORM

So let me now therefore set out my specific proposals.

First, to tackle national weaknesses in economic and financial policy and governance in a global economy requires not only sound policies but also sound procedures and institutional arrangements.

So what are the “rules of the game” and what are the institutional changes we need?

There is in my view only one answer to the uncertainty and unpredictability of ever more rapid financial flows.

In today’s global economy, governments need to deliver stability by setting out clear objectives for fiscal and monetary policy and having the openness and transparency necessary to give credibility to the process.

Greater openness in procedures as well as in the dissemination of information will not only reduce the likelihood of market corrections by revealing potential weaknesses at an earlier stage but will generate a better understanding of the reasoning behind decisions and encourage better decisions and wider support for the policies.

The international financial institutions have a vital role to play in boosting the international credibility of national policymaking by setting standards for policy making, and monitoring or policing those standards through regular surveillance and endorsement of sound reforms. These new disciplines are the key building blocks of the new international financial architecture.

Last year we proposed at the annual meetings a code of good practice for fiscal policy to introduce greater transparency and new disciplines into the world financial system and ensure that countries undertaking good policies are properly recognized.

Already the IMF has published this Fiscal Code and is now preparing a guidance manual on how to implement the code.

The right next step for us to take is to extend the principle of transparency and openness into monetary and financial information and procedures. At the Spring Meetings in Washington this year,I asked the Fund to look at the case for extending these principles to develop a code of transparency on monetary and financial policy.

A code which requires countries to 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, with suggestions for improving and speeding up publication of data on international banking flows.

While I welcome the fact that the Fund board will be considering the code of transparency on monetary and financial policy later this year, I urge the Fund to take forward work on developing and implementing the code as quickly as possible, in consultation with the World Bank and the Bank for International Settlements.

There is a third set of procedures that should be formulated into a code of practice to improve transparency in the corporate sector since crises can arise as a result of private sectorim balances and poor corporate governance, as in Indonesia.

This suggests we need more work to establish more stringent international codes in areas like accounting standards,insolvency regimes, corporate governance, securities markets and other aspects of private sector behaviour.

Some of the work on developing a code of good practices on corporate governance is already underway. For example, the OECD is producing a report on standards and guidelines on corporate governance which should be ready by spring of next year. But again we need to develop and implement the code, as soon as possible and put in place the procedures to ensure effective implementation. This will require close collaboration with the IMF, World Bank and the OECD.

These codes will help produce an environment in which financial markets can operate better. They should reduce the risk of future failures, and mean that when failures do occur the financial system is robust enough to withstand them. But they will also, I believe, do something more profound, but also vital to success.

By improving public understanding of why and how decisions are made, by improving the accountability of governments, companies and international institutions. They will help build public understanding and support for the policies that deliver economic growth and prosperity. And as we all know, the existence of that public support can be an essential ingredient in building the market confidence needed for success.

But for these three codes to be effective we must ensure that institutions are equipped to monitor and implement the new rules of the game. As I have set out, this means an enhanced role for the international financial institutions in implementing and promoting the codes for fiscal transparency, and for monetary and financial policy. Monitoring these codes is an essential part of the Fund’s surveillance work.

All three codes should be used by Fund and Bank staff during Article IV consultations and Country Assistance Strategies. I believe that the IMF and the World Bank should publish assessments of how well all countries, both developed and developing, are implementing the codes.

So far our approach has been a voluntary one. But countries that want to be part of the global economic system cannot pick and mix which good and bad policies they want to pursue. That is why we should consider whether all countries should accept regular surveillance of how they are meeting the codes.

Where possible the results of this surveillance should be made public. We should consider the case for publishing in a timely and systematic way all the key surveillance and programme documents, Press Information Notices, Article IV reports, and country assistance strategies should all be made public. In most cases there is a strong argument for publishing letters of intent thereby making it clear to the public what has been agreed between the authorities and the IMF.

But the IMF and World Bank’s surveillance will at times involve confidential discussions, particularly when a country is heading in a dangerous direction. In such circumstances it may well be best for the Fund to give a private warning to the government.

But if the Fund is ignored and the situation gets worse the Fund should make use of “tiered responses”. For example the Fund could warn a country that it would give it a public ‘yellow card”if policies were not changed within a reasonable time limit.

That is also why I believe proper implementation should be a condition of IMF and World Bank support and why immediate action to promote transparency in policy making, financial sector reform and corporate governance should be key components in any reform programme which the IMF and World Bank agree in the coming months. And that is also why a soundly-based IMF programme along these lines should be pre-condition for a any G7 national support. Because through the effective implementation of the codes we can extend good fiscal policy, monetary policy and corporate governance throughout the world and help prevent crises occurring.

We must also 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 Fund’s shareholders,and in public, on its performance.

Financial sector reform in emerging markets

Second, the problem of weak supervision and lack of prudential standards in supervision in emerging markets.

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.

I do not believe that a permanent retreat to capital controls, as an alternative to reform, is the answer. Doing so simply damages the prospects for stability and growth.

I continue to favour an approach to capital account liberalisation which is bold in concept, but cautious in implementation.

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, consistent with our monetary and financial policy code. Without these important pre-conditions being in place, countries will remain vulnerable to capital market volatility.

The IMF and World Bank must deepen our understanding of the pre-conditions for 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.

One useful contribution to this process is the Commonwealth code of good practice for promoting private capital flows and coping with capital market volatility, agreed last year and based on an exchange of experiences amongst Commonwealth partners. The code is based on sound principles of openness and transparency, good governance and strong policy credibility, and the need for a co-operative international approach between the official community and private investors. It recognises both the potential benefits and the potential risks associated with private capital flows, and describes a range of policy options which countries might use depending on their particular circumstances.

But neither the IMF nor the World Bank alone are currently equipped to carry out the surveillance and assist in the development of emerging countries’ financial systems to help them build the capability for capital liberalisation, pointing out the regulatory weaknesses and vulnerabilities which must first be addressed.

That is why I proposed at the spring meetings an institutional innovation, creating a joint department of the IMF and World Bank to carry out this work. I know that some tentative steps in this direction have already been agreed. But I remain convinced that the bolder option is worth serious consideration. It could be implemented quickly, and with goodwill from both institutions could be made to work to improve advice and help to emerging market countries pursuing reform.

Supervision of global financial markets

But there is a second, broader, role which a joint department could play in co-operation with other international regulators.

The events of recent months have pointed out inadequacies in our understanding of the interrelationships between financial markets between countries, particularly between developed and emerging market economies, inadequacies in the quality of risk assessment and gaps in the international regulatory system.

Events in Asia have demonstrated the dangers emerging market countries run in this new global economy when their financial systems are weak or vulnerable. But they have also demonstrated that the stability of financial centres in developed countries are also threatened by instability and speculation and have also demonstrated the importance of better risk assessment.

Developing better standards and systems for financial supervision and regulation within each country will help to combat this but the international financial institutions have a vital role to play.

There are important jobs being done by the international regulatory organisations in setting standards for financial supervision and regulation within each country. The Basle committee has published a comprehensive set of core principles for banking supervision. Implementation of these will strengthen banking systems and is essential for promoting stability in the global financial system.

I welcome its establishment of a liaison group and consultation group to monitor their implementation within Basle participants. This process needs to be strengthened and broadened. I encourage all countries who have not yet adopted Basle minimum standards to do so as a matter of urgency.

I urge the Fund and Bank to work closely together with the Basle committee and other international financial regulators to exchange information, ideas and experience – and to include supervisors in Fund and Bank missions. They should also look at setting target dates for implementation of Basle minimum standards. And should consider asking each country to provide an annual assessment of how far it meets the Basle principles.

I also welcome the Basle committee’s work on improving transparency and risk assessment. Events in the banking sector in the last few weeks have emphasised in particular the importance of its work on an improved supervisory framework for banks’ derivatives and trading activities, and on developing codes for the management of credit and operational risks. I hope these codes can be implemented as soon as possible.

Out of these developments comes the recognition that our institutional response will need to go beyond the existing surveillance role of the IMF and the necessary provision of technical assistance and financial support by the Fund and Bankto help countries restructure their financial systems.

We need regular and timely international surveillance of all countries’ financial systems and of international capital flows,not just to point out weaknesses, but to ensure these weaknesses are addressed and to identify systemic risks to the global financial system. We need to incorporate the expertise of national and international supervisors and regulators, who can bring to the international system their experience of strengthening financial sectors and dealing with systemic risk atthe national level.

This means developing a new international framework to bring together the IMF, the World Bank, the Basle committee, and other international regulatory groupings to focus on global financial stability and supervision. I believe we need to consider far-reaching reforms.

While there is no need for a wholly new and self-standing institution, there is a clear need for much closer co- ordination and coherence between, and reform of, existing institutions. That is why we must urgently examine the scope for a new and permanent Standing Committee for Global Financial Regulation, bringing together not only the Fund and Bank, but also Basle and other regulatory groupings on a regular – perhaps monthly – basis. This would recognise that the key challenge facing the global economy occurs in areas where all these organisations have responsibility and expertise. It would be charged with developing and implementing a mechanism to ensure that the “rules of the game” – the necessary international standards for financial regulation and supervision – are put in place and properly co-ordinated.

This Standing Committee for Global Financial Regulation could also play an important role in strengthening the incentives on the private sector to improve its risk assessment. It could act as the focal point for better information sharing between the international financial institutions, governments, and the private sector – so that the risks are fully revealed. Recent events have shown that it is particularly important that we have greater transparency of hedge funds, which wherever they are formally registered can have an impact on global financial markets. But recent events have also suggested that better information may not be enough. We also need to consider strengthening prudential regulation in both emerging and industrialised countries and particularly for cross-border activities. The Basle committee is looking at the scope for revising its capital ratios as they apply to short-term lending, and I encourage it to put forward proposals as a matter of urgency.

The Standing Committee for Global Financial Regulation could also help to find better ways to identify systemic risk. In the UK, we published last year a Memorandum Of Understanding, setting clear divisions of responsibilities and establishing a regular system of meetings and surveillance to ensure cooperation between our national financial institutions to identify and address systemic risk at an early stage. This sets out a clear framework for regular cooperation between the Treasury – which is responsible for ensuring the whole system works in the public interest protecting the interests of taxpayers, the Bank of England – which is responsible for the stability of the system as a whole – and the new Financial Services Authority – which is responsible for supervising and monitoring financial institutions. But systemic risk is not confined to national boundaries. What we need is an international memorandum of understanding which would establish the proper division or responsibility at the international level. We need to explore how this could be done to reduce the chance of crises occurring.

Dealing with crises

Just as we need new international machinery for crisis prevention,so we also need a better, more systematic approach – involving public and private sectors – to dealing with crises when they do occur. We need to ensure that the international community is able to respond to short -term liquidity crises in countries that are committed to reform, and to help such countries maintain access to the capital markets.

In a crisis, the first need is always to act quickly to stabilise the situation. But we have to find ways to do this without bailing out private investors. We need private companies to take risks, but with a proper assessment of those risks and to take responsibility when things go wrong. And we need public institutions that help to make clear what the risks are, and provide a framework when things go wrong – a framework to which the private sector contributes as well as the public sector.

There is action to be taken here at the national level. For example, the avoidance of misconceived implicit or explicit government guarantees of private liabilities, and the improvement of national bankruptcy laws. Action on both is now underway in several Asian countries.

At the international level, I would like to see the IMF indicate that in the event of a crisis, and where a country adopts good policies, it may be prepared to sanction temporary debt standstills, by lending into arrears, in order to enable countries to reach agreements with creditors on debt rescheduling. By making this clear in advance, private lenders would know that in future crises they would be expected to contribute to the solution as part of any IMF-led rescue.

And there needs to be a mechanism for the Fund to liaise with private sector creditors and national authorities to discuss the handling of debt problems at times of potential crisis.

The IMF should remain at the centre of this framework, which should include the new standing committee for global financial regulation to co-ordinate the identification of systemic risk. We need to have clearly defined procedures for deciding when and how to provide liquidity support. And we will need to address many difficult and complicated issues as a mater of urgency, not least the future funding of the IMF.

A code of good practice on social policy

Fifth, we need to respond to the human dimension of the crisis. I want today to set out my proposal for a code of good practice no social policy. A proposal I will be putting to my colleagues in Washington next week.

We need to set out guidelines for dealing with the social consequences of the global economic problems. And we should not see this just in narrow terms of creating social safety nets.

Rather we should be trying to create opportunities for all to contribute as well as benefit, through training, education and in other ways – in other words modern, active welfare systems.

Good economies, as many now acknowledge, depend on good social relationships and therefore on the building of trust. And countries and companies engaging in reform need a shared understanding of the challenges they have to meet, whether it is by dialogue, social partnership, policies that lead to a sense of fairness because there is equality of opportunity or by other means by which democratic participation is improved.

Creating national support for the policies needed for economic growth depends on there being adequate systems for helping people who are victims of economic crises. This is indeed a clear role for government in the new fast changing global economy: not guaranteeing that nothing will change, or leaving people defenceless against change, but helping equip people to adapt to and master change.

So we should aim to create decent working conditions everywhere. All the international institutions should share in the task of promoting core labour standards in all countries and decent levels of social welfare and protection.

We need to promote the international development targets on universal primary education and on reduction in infant and maternal mortality rates, as well as provision of clean water and sanitary conditions for all.

The World Bank should help governments in all affected countries in Asia to get social support systems in place as soon as possible.

It is the poor and the unemployed who have most to lose if reform fails, and it is because we are committed to putting their interests at the heart of our response that we need this code of good practice on social policy.

And the World Bank has a key role to play in developing and promoting a social code, to ensure that governments have in place policies to strengthen social systems and tackle the social impact of sudden shocks to the financial system.

In the design of IMF programmes to help countries in crisis the IMF and the World Bank must also ensure that the reforms they demand are consistent with the code of good practice and, as far as possible, preserve investment in the social, education and employment programmes which are the foundation for growth. I hope that, with the support of the development committee, the World Bank working closely with the IMF will draw up such a code of good practice on social policy as soon as possible.

CONCLUSION

Let me say in conclusion that in the new global economy, neither the United Kingdom, you – our Commonwealth partners, nor any other country can afford the easy illusion of isolationism. We are all shaped by and must work together to shape the forces at work in our global economy.

These four codes of good conduct for policy-making, codes agreed by the international institutions, but accepted by national governments and the radical institutional changes I have set out today would, in my view, offer a new framework for economic development.

This will give new hope to the poorest and most vulnerable countries. But it needs to be combined with measures to reduce unsustainable debt. I shall have more to say on this later today. The HIPC process must be accelerated and we must do more beyond HIPC for those countries facing unsustainable domestic debt. By increasing the number of countries in the HIPC process to reach decision point before 2000, speeding up debt relief to post-conflict countries especially those with arrears to the international financial institutions, and securing a wide-ranging review of the HIPC initiative by the middle of 1999 to include consideration of debt sustain ability criteria. We are determined to secure maximum progress by the millennium.

The questions I have dealt with today 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 financial transactions. They involve not only the value of capital or trade or investment, but the deepest values of our societies.

The responsibility of all of us who lead in the era of globalization is to 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 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.