U.S. Department of the Treasury

But let us be clear: a liberalized financial system does notmean an unregulated one, either domestically or internationally. You only need to lookback at history -to the Great Depression -to understand the havoc that widespread failuresof financial institutions and collapse of markets can cause. More recently, people haveliterally died in Albania due to failed financial regulation.

Emerging markets’ growing importance to the global economy givesthe international community a particularly strong interest in strengthening theirfinancial systems to insure against financial sector crises like the one in Thailand. Aswe have seen, these crises can be very costly domestically, and can have contagion effectsin regional and international markets.

At Lyon the G-7 at Lyon initiated an effort to strengthen the globalfinancial system in general, and those of emerging markets in particular. The aimthroughout, as Secretary Rubin has said, has been to make our institutional framework fordealing with systemic risks as modern as the markets’. A working group was set up toforge a broad international consensus on a framework for action, whose strategy was thenendorsed by the G7 at Denver.

The initiative has already had a catalytic effect. For example, theBasle Committee, in consultation with a group of emerging economy supervisors, hasdeveloped a set of core principles for effective banking supervision that can serve as ablueprint for steps to improve supervision at the national level. IOSCO is working on asimilar project.

Looking ahead, we’ll be working actively through international andregional fora to deepen the global consensus on the strategy. I often say that it’sfar better to live in a country where money is clamoring to get in than one where it isclamoring to get out. But clearly, managing the domestic -and international -effects oflarge-scale capital inflows is a major macroeconomic challenge. This will be high on theG-7 agenda in the months ahead.

It is important to stress, however, that the success of the strategywill depend, in the end, on the actions of domestic authorities. They’re the ones whomust provide the strong macroeconomic framework, and effective regulation and supervisoryinfrastructure needed to enjoy the benefits of free, open and transparent financialmarkets -and handle the risks.

Every financial crisis holds valuable lessons for future policy-making-but it is important to draw the right ones. Some appear to believe that the lesson ofThailand is that emerging economies who liberalize their financial sectors are asking fortrouble from foreign speculators -who will bring down their economies at the flick of aswitch. The truth is very different.

Blaming foreign speculators for serious economic problems -while alwaystempting -is rarely, if ever justified. Careful studies by the G-10 and the InternationalMonetary Fund of recent currency crises in Europe and Mexico were able to attribute only asmall fraction of the capital flows involved to speculative trades. Strikingly, the IMFfound that the bulk of the funds which left Mexico during the crucial early days of thecrisis belonged to Mexican investors.

With hindsight, the lesson of Thailand is older: that relatively opencapital markets, independent monetary policy, a fixed exchange rate and a current accountdeficit of 8 per cent of GDP do not mix. The speculative activity we saw in the weeksleading to the crisis was the result -not the cause -of Thailand’s problems.

The unsustainable macroeconomic policy mix, combined with highlyinefficient domestic intermediation and a poorly equipped regulatory regime, had givenbanks the freedom -and incentive -to become heavily overextended. The lack of transparentand timely balance sheet and other information meant there was little early warning thiswas taking place. As it turned out, private estimates suggest that non-performing loans inthe Thai banking sector may be around 20 per cent of GDP. And Thai taxpayers have beenlanded with a multi-billion dollar tab for the government’s emergency actions tosafeguard the solvency of the domestic financial system.

Whether, and how fast, economies choose to liberalize their capitalaccount -and the domestic measures needed to underwrite this process -are all questionswhich are logically separable from the degree of domestic market access enjoyed by foreignfinancial institutions. A weak, poorly regulated financial system is a recipe for trouble-period. This is true, regardless of the degree of openness of domestic capital markets,and regardless of whether some of the banks being regulated are foreign-owned.

In that sense, the link some have been drawing between events inSoutheast Asia and the ongoing financial services negotiations is misconceived. As I havesaid, I do not believe the openness of Thai financial markets was responsible for thecrisis. But to the extent that countries individually decide to adopt short-term measuresto protect their economic stability in response to large-scale capital movements, thesewould be fully consistent with substantial liberalization of domestic financial services.

And yet, I would not suggest that the US sees no link at all betweenopening the capital account and permitting greater access to foreign firms. In the propersetting, we believe both can serve the end of a more efficient and stable domesticfinancial system.

Recent events have underscored the need to strengthen prudentialregulation and oversight in emerging markets -and confirmed the importance of the effortsof the G10 in this area which I outlined earlier. And we’re convinced that admittingstrong foreign institutions to these markets will play an important part in achieving thataim.

Hungary, for example, which has been a leader in the liberalization offinancial markets since it adopted the national treatment approach in 1989, now has alarge number of top performing foreign financial institutions participating in its market.The result -a modernization of the banking, insurance and social security systems anddeeper, more diversified financial markets.

The Clinton Administration wants a strong global agreement here becausewe believe the whole world stands to gain from a global, efficient capital market -andbecause that potential will only fully be realized when domestic and foreign providers areable to compete with one another in important markets -wherever they are.

The American financial sector is the largest -and most successful-financial sector in the world. It goes without saying that we believe that countries willonly enjoy the benefits of a truly global capital market if our firms are given greateraccess to their markets -and they in turn, gain access to US lowest-cost services and highquality expertise. But our strong national interest in seeing them acquire this accessneeds to be seen within that broader global picture.

The global financial services agreement we are looking for wouldincorporate four core principles, giving foreign firms:

· the right to establish and operate in the form of their choice, including branches.

· the right to full majority ownership, which is crucial for effective firm management

· assurance of their existing rights in these markets;

· the right to participate fully throughout the market, on the basis of substantially full national treatment.

 

The agreement we are looking for would not involve emerging economies committing themselves to liberalizing or deregulating their financial systems in a way that would jeopardize their economic stability. It is just not plausible to assert that granting US companies the opportunity to sell life, health and auto insurance somehow undermines national financial stability. The opposition to liberalization of the home insurance market -seen, most recently, in India last week - is not safeguarding the country’s financial stability. It is preserving the ability of a small group of protected local interests to inflict poor services and high prices on a captive domestic market.

The General Agreement on Trade in Services was structured precisely so as to recognize the need for all countries to develop and maintain a strong supervisory regime and regulatory infrastructure to let them respond effectively to developments that could threaten their economic stability. In our view, the prudential carve out and balance of payments safeguard provisions of the agreement provide all the flexibility needed for governments to do this.

 

That said, we understand that the countries which are standing in the way of a successful agreement do not think these provisions are sufficient. And I hope the US financial community will support us in our honest attempt to accommodate these concerns and thereby win an agreement. We would be willing to consider:

 

· phased commitments over some agreed time frame and othermeasures which could smooth the transition to a more open environment. Our own NAFTA includes progressive market cap arrangements which can modulate the growth of foreign participation in the sector in the event of overly rapid foreign penetration.

 

· other mechanisms, perhaps similar to those which have been built into certain WTO accession agreements, which allow temporary suspension of commitmentsin the event of pronounced economic imbalances.

 

I should stress, however, that we would entertain these proposals only against the backdrop of a rock-solid commitment to the end-goal of liberalization. They are meant to facilitate such a commitment on the part of the governments concerned -not substitute for it.

 

We are not prepared to compromise on the basic aim of substantialmarket access and national treatment of US companies in increasingly important Asian andLatin American markets -because this would be to compromise our very reason for seeking anagreement in the first place. In these and other WTO negotiations we are looking to laythe ground for a free and fair global marketplace to take us into the next century. Itmatters that the final agreement rests on the bedrock of national treatment for allforeign providers in these economies -because it matters that the foundations of this newglobal economy are built on fairness and mutual respect.

We want -and are actively and constructively seeking -an agreementwhich builds such a foundation. But the principle at stake is too important to compromisefor the sake of an arbitrary negotiating timetable. If the agreement on the table is notgood enough -we will not sign it.

The long-term viability of the WTO will depend on it grapplingsuccessfully with growing sectors of the global economy which earlier trade agreementsleft behind -notably services. Our recent success in opening the global telecommunicationsservices market established a firm basis for moving forward in these areas. An agreementin the financial sector would send a powerful message that this progress would continue.And it would take us an important step forward to the strong and transparent globalfinancial system on which the world’s future prosperity will depend.

Recent events in Southeast Asia have only increased our desire to workto strengthen the world’s financial systems -and make them more open. We believethese to be complementary, not conflicting goals -and we will go the extra mile toconvince doubtful emerging economies this is the case. But in return we will be lookingfor them to commit themselves to substantially full market access and national treatmentfor financial service providers.

We will not pursue an agreement for its own sake. If we do not obtainimproved commitments to liberalization from the handful of major emerging economiespresently blocking an agreement, we are perfectly prepared to stick with the status quo.

That is not what we want. We want a stronger, freer and more trulyglobal financial services sector. But the alternative, of an agreement which does notprovide for substantial liberalization of these markets, would be worse. The century isending to the collapse of old distinctions -between East and West, between North andSouth, and between first and third worlds. We should not and will not resurrect them inbuilding a global market to carry us into the next.