Economic Report President

the vulnerability of the international system to future crises. Theseinitiatives are described in detail in Chapters 6 and 7.A first prerequisite for restoring strong world economic performanceis strong growth in the industrial countries that are the maincustomers of the crisis-afflicted economies. This need has been clearlyrecognized and addressed in both words and deeds by the UnitedStates and its partners among the Group of Seven (G-7) large industrialnations. In October the G-7 finance ministers and central bankgovernors issued a joint statement indicating that, in their view, thebalance of risks in the world economy had shifted. With inflation lowand well controlled, countries should commit themselves topreserving or creating the conditions for sustainable domestic growth.Monetary conditions were subsequently eased in the key industrialcountries. In the United States, the Federal Reserve reduced theFederal funds rate three times, helping restore confidence andliquidity. Japan, Canada, and most of the major European countriesalso lowered interest rates. Japan, a country in deep recession whoserecovery is particularly critical to the growth prospects of its crisisafflictedAsian trade partners, has also taken steps to provide fiscalstimulus and has committed substantial resources to strengthen itsfinancial system. Much remains to be done, however, and many privateforecasts are for continuing contraction in Japan. Although it is prematureto conclude that the rest of the world economy is out of peril,conditions have improved noticeably since October, when it appearedthat the world might be headed into a generalized global credit crunch.It is important to emphasize that, in serving as an engine of globalgrowth during this period, the United States will inevitably see anincrease in its already sizable trade deficit, and some sectors, particularlythose heavily exposed to trade, will experience disproportionateimpacts. The result may be a rise in calls for protection, and it willtherefore be important to find constructive approaches to thedisruptions caused by trade. The United States remains committed tooutward-looking, internationalist policies and has urged the crisisimpactedcountries to keep their own markets open.Beyond working to ensure growth in the industrial world, theAdministration has focused since the onset of the crisis on the need tocontain the international contagion of financial disruption and torestore the confidence of market participants. The Administration hassupported the IMF in its goal of providing financial assistance to countriesin crisis that are willing to implement the reforms needed torestore economic confidence and strengthen the underpinnings of theireconomies, including their corporate and financial sectors. The emphasisof IMF programs on financial sector reform reflects the growingconsensus, discussed in Chapter 6, that structural weaknesses, particularlyin the process of financial intermediation, were a key element ininitiating the crisis. It appears that many countries in East Asia have35