Mr McDonough comments on the implications for the strong US growth for the world economy  Speech by Mr William J McDonough, President of the Federal Reserve Bank of New York, before the Japan Center for Economic Research, Tokyo, on 30 March 2000. *  *  *  Good afternoon, ladies and gentlemen. It is a great pleasure to be invited to speak before such a distinguished audience. My thanks to the Japan Center for Economic Research for extending such a kind invitation. This afternoon I would like to share with you some of my thoughts on the US and the world economies as we move forward into the 21st century. To do so, it is helpful to step back and take a somewhat longer-term view of how the stage was set for much of the current strong economic performance the US economy has enjoyed in recent years. In addition, I would like to comment on the implications of the strong US growth for the world economy. The United States is now experiencing the longest economic expansion in its history. This expansion, which began in April 1991, not only has reached record length, but also has done so in a far stronger manner than had been expected. Most notably, inflation has been subdued, notwithstanding the most favorable labor markets that the United States has experienced in a generation, and the country’s fiscal accounts are in surplus. There is no question that this expansion reflects some remarkable changes in the US economy.
Among the emerging market countries, those in Asia in particular have long been considered engines of vitality and technological adaptation in the world economy, and this recognition had been reflected in very high rates of GDP growth until the financial crises of 1997 and 1998. One problem those crises revealed is that in many countries, economic resources, notably capital inflows, had been misallocated. In the Asian countries, financial market and corporate sector reforms are widely viewed as necessary. It is encouraging to see that some progress has been made on financial restructuring, although the extent to which markets - as opposed to governments - have been the main shaper of change differs across countries. Other reforms appear to be less far along, and the greatest risk is that the sharp recovery so many of these countries have enjoyed will reduce the impetus to undertake and follow through on needed reforms. When we turn to Latin America, we observe an example of how important internal labor market and corporate sector reforms are. In the 1980s and early 1990s, many countries in this region made enormous strides in achieving sounder fiscal and monetary policies, especially in bringing down inflation and strengthening reliance on market mechanisms. However, in several countries, internal reforms were incomplete, with banking systems left in need of further strengthening, labor markets still remaining too rigid, and fiscal policies requiring more attention, starting with the need to ensure that all public sector spending be brought under control.