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ADOPTION OF MEASURES TO REFORM THEINTERNATIONAL FINANCIAL ARCHITECTUREThe release of the G-22 reports was followed by detailed discussionsamong the G-7 finance ministers and central bank governors and withofficials from other industrial and emerging market economies. TheG-7 ministers and governors agreed, in a statement issued on October30, 1998, on specific reforms to strengthen the international financialsystem. In the words of their communiqué, they:agreed to carry these forward through our own actions and in theappropriate international financial institutions and forums.These reforms are designed to: increase the transparency andopenness of the international financial system; identify and disseminateinternational principles, standards and codes of bestpractice; strengthen incentives to meet these international standards;and strengthen official assistance to help developing countriesreinforce their economic and financial infrastructures. Theyalso include policies and processes to ensure the stability andimprove the surveillance of the international financial system.Finally, they aim at reforming the International Financial Institutions,such as the IMF, while deepening cooperation amongindustrialized and developing countries.FURTHER STEPS TO STRENGTHEN THEINTERNATIONAL FINANCIAL ARCHITECTUREIn their October 30 statement, the G-7 countries committed themselvesto a number of reforms consistent with the recommendations ofthe G-22 working groups, as well as a great deal of additional analysisand research. The G-7 also stressed the need for the internationalcommunity to widen its efforts to strengthen the international financialsystem. The G-7 thus committed themselves to initiate furtherwork in a number of other important areas to identify additional,concrete steps to strengthen the international financial architecture.These include:• examining the additional scope for strengthened prudentialregulation in industrial countries• further strengthening prudential regulation and financial systemsin emerging markets• developing new ways to respond to crises, including new structuresfor official finance and new procedures for greater private sectorinvolvement in crisis resolution• assessing proposals for further strengthening of the IMF276
• seeking to minimize the human cost of financial crises andencouraging the adoption of policies that better protect the mostvulnerable in society• consideration of the elements necessary for the maintenance ofsustainable exchange rate regimes in emerging markets.Each of these steps poses a number of issues and challenges. Manyare interrelated. Some of these issues that the international communitywill be examining in the future are addressed below.STRENGTHENED PRUDENTIAL REGULATION ANDSUPERVISION IN INDUSTRIAL COUNTRIESThe crises of the past year have revealed the importance of strengtheningprudential regulation to promote international financial stability.Global financial integration has led to a proliferation of financial institutionsmaking cross-border transactions, to the growth of offshorefinancial centers and hedge funds, and to the development of a widerange of derivative instruments. In this new environment, investorsmay underestimate the risks they are assuming during periods ofmarket euphoria, and thus contribute to an excessive buildup ofexposures during the upswing.Such developments pose significant challenges to financial regulatorsand supervisors. Regulatory incentives may be needed to encouragecreditors and investors to act with greater discipline, that is, to analyzeand weigh risks and rewards appropriately in their lending and investmentdecisions. Thus, it will be useful to examine the scope for strengthenedprudential regulation and supervision in industrial countries. Herewe explore some aspects of these regulatory challenges.Enhanced International Financial Supervision and SurveillanceTraditionally, supervision and regulation of financial systems havebeen domestically based. But the increased global integration of financialmarkets and the proliferation of institutions doing cross-bordertransactions suggest the desirability of enhanced international financialsupervision and surveillance. Better national and internationalprocedures to monitor and promote stability in the global financialsystem might prove useful.Although good financial supervision still must begin at the domesticlevel, international institutions and national authorities involved inmaintaining financial sector stability must work jointly to foster stabilityand reduce systemic risk. They will also benefit from exchanginginformation more systematically about the risks prevailing in theinternational financial system. A useful contribution in this regardmight be a policy-oriented forum including financial authorities fromthe G-7 countries, key emerging markets, the IFIs, and other relevantinternational organizations.277
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EconomicReportof thePresidentTransm
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C O N T E N T SPageECONOMIC REPORT
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ECONOMIC REPORT OF THE PRESIDENTTo
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Once we have saved Social Security,
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THE ANNUAL REPORTOF THECOUNCIL OF E
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C O N T E N T SPageCHAPTER 1. MEETI
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PageCHAPTER 5. REGULATION AND INNOV
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Page2-3. Accounting for Growth in R
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Page6-5. Terms of Trade ...........
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CHAPTER 1Meeting Challenges and Bui
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Box 1-1.—The Dating of Business C
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Chart 1-1 Core Inflation and Unempl
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expansion prematurely. In fact, the
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the duration of the typical unemplo
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throughout that decade of peace and
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all individuals aged 65 and older r
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extent that it would reduce Social
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the vulnerability of the internatio
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access. Even so, international agre
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eliminated entirely, because the go
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Nevertheless, adjustment assistance
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CHAPTER 2Macroeconomic Policyand Pe
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Then the chapter explores two other
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target Federal funds rate brought t
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high of 66.8 percent in the third q
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the third-quarter deceleration and
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(that is, excluding food and energy
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probably would have increased by ab
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Equities clearly involve risk as we
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highest level in at least 40 years
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attributed to the lesser liquidity
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971231 980106 980112 980116 980122
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about the potential impact of large
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With respect to leverage, the degre
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noted earlier, investment-grade bor
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Chart 2-8 Corporate Profits and Net
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is attributable to the strong econo
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productivity; the latter is in turn
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the year 2000, mistaking it instead
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Box 2-2.—continuedare not expecte
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construct an accurate forecasting m
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is estimated as the location where
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the recent surge in productivity re
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Box 2-3.—continuedhowever. Import
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Chart 2-12 Three Measures of Core I
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a level of capacity utilization tha
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Box 2-4.—continuedChanges to be i
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Nonfarm manufacturing and trade inv
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has been for the past 3 years. But
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who have traditionally not fared as
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Box 3-1.—continuedas well as full
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and been replaced by younger, more
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Particularly interesting, however,
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Chart 3-5 Median Hourly Wages of Me
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In fact, in 1990 immigrants and nat
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Box 3-2.—continuedsome firms may
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Box 3-3.—continuedmaximum of $3,7
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willing to hire welfare recipients
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participation. The renewed increase
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TANF grants in reserve at the Treas
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JOB DISPLACEMENTWorkers are conside
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evidence finds that the percentage
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their non-labor market activities.
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The Administration is especially co
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CHAPTER 4Work, Retirement, and theE
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Chart 4-1 Life Expectancy at Age 65
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Population aging is not just an Ame
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Box 4-1.—continuedfor couples and
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earlier retirement, by increasing l
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uyouts may also have contributed to
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Box 4-2.—Social Security RulesThe
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available with the same hourly pay,
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Box 4-4.—Types of Pension PlansUn
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worker—declined. More of these ol
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survey) was about 13 percent higher
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well-being is that families have di
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Chart 4-9 Living Arrangements of El
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mentioned earlier in this chapter a
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Box 4-7.—The Federal Role in Empl
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inequality among retirees who have
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whether minorities and women are li
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TABLE 4-4.—Poverty Rates Among th
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TABLE 4-6.—Family Holdings of Fin
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variety of reasons, including the f
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the number of patents granted in th
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The United States has a decades-lon
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matter, depending on various condit
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company Roche Holdings, Ltd. Some o
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The antitrust authorities’ linkin
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espective Writings and Discoveries.
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Box 5-3.—Cooperative Innovation a
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machine owned by another. The disti
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companies begin to offer DSL servic
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and compete for customers on the ba
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In another part of the Internet mar
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technology at hand. But incentive-b
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the flexibility to choose lower cos
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In contrast to both performance and
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The SO 2 experience reveals several
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Box 5-7.—The Partnership for a Ne
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Consumers’ investment in energy e
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clean-energy projects in developing
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Chart 5-2 Energy Efficiency and Pri
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equipment, and more than 90 percent
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Box 5-9.—Is There an Environmenta
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larger coal plants. In 1994 these t
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around the country, and seven other
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other social goals. The fund would
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greater opportunity, faster growth,
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Chart 6-1 Net Capital Flows to Deve
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Box 6-1.—The Explosive Growth of
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Page 236 and 237: Box 6-5.—Moral Hazard in Financia
Page 238 and 239: Empirical studies confirm that, by
Page 240 and 241: withdrew $26 billion in 1997. Altho
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Page 246 and 247: sary revenues to meet these extra i
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Page 252 and 253: Chart 6-3 Real Value of the Dollar
Page 254 and 255: The increase in the trade deficit a
Page 256 and 257: Chart 6-6 Current Account BalanceTh
Page 258 and 259: Chart 6-7 Economic Growth and Trade
Page 260 and 261: investment. The U.S. gross investme
Page 262 and 263: Chart 6-10 Current Account Deficit
Page 264 and 265: with other countries to strengthen
Page 266 and 267: REFORM OF THE INTERNATIONAL FINANCI
Page 268 and 269: about their macroeconomic and finan
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Page 272 and 273: Other measures recommended by the w
Page 276 and 277: Another way to improve global surve
Page 278 and 279: Issues Posed by Hedge Funds and Oth
Page 280 and 281: the best investment opportunities,
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Page 288 and 289: Box 7-1.—continuedpartner; a stro
Page 290 and 291: Chart 7-1 European Short-Term Inter
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Page 294 and 295: Box 7-2.—continuedthrough an auto
Page 296 and 297: advantages of EMU to U.S. residents
Page 298 and 299: Box 7-3.—How Does the Dollar Rank
Page 300 and 301: connection between the currency in
Page 302 and 303: as an economic superpower early in
Page 304 and 305: Appendix AREPORT TO THE PRESIDENT O
Page 306 and 307: Council Members and Their Dates of
Page 308 and 309: The Chair and Members work as a tea
Page 310 and 311: countries. The Council heads the U.
Page 312 and 313: Chief of Staff and General CounselM
Page 314 and 315: affiliations. They are Christopher
Page 316 and 317: C O N T E N T SNATIONAL INCOME OR E
Page 318 and 319: B-71. Aggregate reserves of deposit
Page 320 and 321: General NotesDetail in these tables
Page 322 and 323: TABLE B-1.—Gross domestic product
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TABLE B-2.—Real gross domestic pr
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TABLE B-4.—Percent changes in rea
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TABLE B-5.—Contributions to perce
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TABLE B-6.—Chain-type quantity in
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TABLE B-7.—Chain-type price index
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TABLE B-9.—Real gross domestic pr
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Year orquarterGrossdomesticproductT
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YearBased on1972 SIC:TABLE B-13.—
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TABLE B-15.—Output, costs, and pr
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TABLE B-17.—Real personal consump
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TABLE B-19.—Real private gross fi
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TABLE B-21.—Real government consu
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TABLE B-23.—Real inventories and
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TABLE B-25.—Real exports and impo
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TABLE B-27.—Relation of national
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TABLE B-28.—National income by ty
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TABLE B-29.—Sources of personal i
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TABLE B-31.—Total and per capita
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TABLE B-32.—Gross saving and inve
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POPULATION, EMPLOYMENT, WAGES, AND
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TABLE B-35.—Civilian population a
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TABLE B-37.—Civilian employment b
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TABLE B-39.—Civilian labor force
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TABLE B-41.—Civilian employment/p
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TABLE B-43.—Civilian unemployment
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TABLE B-45.—Unemployment insuranc
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TABLE B-46.—Employees on nonagric
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TABLE B-48.—Employment cost index
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Year orquarterTABLE B-50.—Changes
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Year or monthTABLE B-52.—Industri
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TABLE B-54.—Capacity utilization
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Year or monthTABLE B-56.—New hous
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TABLE B-58.—Manufacturers’ ship
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PRICESTABLE B-60.—Consumer price
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TABLE B-61.—Consumer price indexe
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TABLE B-63.—Changes in special co
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TABLE B-65.—Producer price indexe
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YearandmonthMONEY STOCK, CREDIT, AN
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TABLE B-70.—Components of money s
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TABLE B-72.—Bank credit at all co
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TABLE B-73.—Bond yields and inter
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TABLE B-74.—Credit market borrowi
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TABLE B-76.—Mortgage debt outstan
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GOVERNMENT FINANCETABLE B-78.—Fed
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TABLE B-80.—Federal receipts and
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TABLE B-82.—Federal Government re
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TABLE B-84.—Federal and State and
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TABLE B-86.—State and local gover
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TABLE B-88.—Maturity distribution
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CORPORATE PROFITS AND FINANCETABLE
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TABLE B-92.—Corporate profits of
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TABLE B-94.—Relation of profits a
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Year or monthTABLE B-96.—Business
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End of yearTotalassetsTABLE B-98.
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YearFarm population,April 1Number(t
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YearTABLE B-102.—U.S. exports and
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TABLE B-103.—U.S. international t
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TABLE B-105.—U.S. international t
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TABLE B-107.—International invest
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TABLE B-109.—Civilian unemploymen
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TABLE B-111.—International reserv
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