last five years direct investment by italian firms expanded substantially ; the inflow remained virtually unchanged ; the balance showed a deficit of 30 trillion lire. the quest for higher profits in a climate of renewed confidence in stability and economic growth can be directed towards expanding the scale of production and investment, with a view to creating employment. wage moderation must be maintained, thereby permitting a reduction in unit labour costs ; the albeit limited pressure on prices - - particularly producer prices - - must not be allowed to increase. last year saw substantial progress towards the consolidation of the public finances. on the basis of the latest data, general government net borrowing should be less than 3 per cent of gdp. a start has been made on reforms aimed at improving the working of the public administration and rationalizing the tax system. cuts have been made in some expenditure items and transfers to non - state public bodies reduced. what is needed now is action of a structural nature to consolidate the results achieved. public services must be made more efficient and provide effective support for productive activity. there is a manifest need for flexible formulas in the use of labour that will enhance its productivity. unit labour costs must be brought down substantially in the less developed regions, where both youth unemployment and the underground economy are present on a large and growing scale and where the labour force participation rate, particularly among women, is very low. it is indispensable to eliminate the rigidities in the economic relations between employers and employees, which prevent wages and salaries and other contractual conditions from adjusting to the level of productivity and the demand for labour. excessively high labour costs lead to forms of hidden employment ; they prevent most young people from embarking on a career in the regular economy and, together with high tax rates, give rise to evasion of abnormal proportions. a lack of effective demand is increasingly evident. a low level of investment is common to all the european economies ; it lies at the root of the decline in employment in certain sectors and the rise in unemployment. it is serious in the more depressed regions, particularly in southern italy ; together with high labour costs, the fall in private and public sector investment is adversely affecting the economic and productive fabric. appropriate policies are required to restore higher rates of investment. lower unit labour costs and increased competitiveness provide fertile ground for a recovery in investment. - 10 - i have spoken at length elsewhere of the potential and actual availability of private saving in italy. i have endeavoured to show that a higher level of economic activity and

have been caught up in the crisis. events in the markets and the poorer prospects for the economies of the countries hit by the crisis have adversely affected the already delicate balance of japan ’ s capital market and the quality of its banking system ’ s assets. the chinese economy has not been drawn into the crisis, owing to its initially strong competitive position, relatively underdeveloped financial system and the preference given to direct inward investment over portfolio investment. the volume of financing mobilized by the imf, other international organizations and the nations working to cope with the crisis is without precedent. the world bank and the asian development bank have been called upon to contribute to objectives beyond the scope of their respective institutional mandates. total disbursements of around $ 110 billion have either been made or are envisaged. banks will have to help in containing the effects of the crisis by rolling over existing loans. the intensity of the crisis and the fear of systemic repercussions have produced a disarray in the measures and decisions adopted that suggests the present arrangements for international cooperation are inadequate in the face of the challenges posed by the globalization of markets. 2. international monetary developments the backdrop to the asian crisis is the persistent problem of the uncertain performance of the japanese economy and the excessive burden placed on monetary policy. this situation is an inheritance from the mexican crisis in the early months of 1995, which led initially to an abnormal appreciation of the yen and to fears of a prolonged decline of the dollar. the lowering of interest rates in japan to near zero led in the second half of 1995 to a fall on the order of 20 per cent in the effective exchange rate of the yen. the economy did not benefit sufficiently in terms of growth, while the imbalance associated with japan ’ s large external credit position was aggravated. the weakness of the exchange rate tended to depress share prices, thereby contributing to the contraction in domestic bank credit. fiscal policy, even after the recent announcement of a small reduction in taxation, continues to be directed towards the undeniably desirable objective of containing the public debt in the long term. a further reduction in the budget deficit is expected in 1998 ; there does not appear to be sufficient concern about the deflationary implications of this course in the short term. the measures now before the japanese parliament provide for a limited stimulus to domestic demand based on tax reductions that should amount to around half a percentage point of gdp. the package also includes a plan for shoring up and rescuing the financial and banking system