Following is a transcript of Taylor's September 20 press roundtable in Manila, the Philippines:

PRESS ROUNDTABLE WITH UNDER SECRETARY TAYLOR

Moderator: Thank you for coming to this press roundtable. You were present at the larger session, and heard the remarks that the Undersecretary delivered in the speech today. So, I don't know if the Undersecretary has some additional, opening remarks that he would like to make or would prefer to just go into your question and answer session. Mr. Secretary? Please, however you would like to begin.

U/S Taylor: Actually, let me just mention one other thing that my visit to the Philippines involved, the meetings today at the Asian Development Bank, but also a meeting yesterday with government officials, in particular, Secretary Camacho. I met and talked about the economy, we also had a signing ceremony for a new debt-for-nature arrangement, and that I also had the opportunity to meet with the President yesterday, too. So it was a very good opportunity to be here for a couple of days. I wish it could be longer but let me just mention that, as a part of my visit, too and then take questions. Thank you.

Moderator: We have about fifteen minutes for this session, so if you would please give your organization, affiliation and your name, I'll take your questions. Why don't we start with you, Param?

Question: I listened to your speech just now. Parameswaran, from Agence France Presse. You have spoken about the link between poverty and corruption and productivity and a few other things but conspicuously missing was an argument put forward extensively in this part of the world, in Asia, where they have linked poverty to terrorism. How do you see this link? And you also said in your speech that you had linked poverty to openness, democracy and all that. The latest terrorism threat after September 11 had resulted in the erosion of whatever you call it, democracy and democratic institutions to preserve security. Could you please comment on this?

U/S Taylor: I think that the efforts that are underway to combat terrorism are very frequently consistent with the things that are necessary to encourage economic development. So let's say, for example, in the financial sector, we are spending a lot of time trying to make sure that the flows of financing to terrorists are stopped or are interrupted. But to do that, you have to have a good working financial system. A very transparent financial system, one in which you can follow the flow of funds accurately. And so, in a way, the efforts that would be underway to have a financial system that reduces the threat of terrorism are the same things you would do to have a financial system that encourages good economic development. It's transparency and then the rule of law. So, I think there's generally a consistency between the two. I also think that you have to realize that not all terrorism comes from poverty. Bin Laden came from a very well to do family, but at the same time, areas of the world like Afghanistan, which bred a lot of terrorism, were very poor without a rule of law. So, as we work hard on reconstruction in Afghanistan, and as you know, that's where I'm going very soon, we need to stress that that's important from the point of view of not only improving people's lives but reducing terrorism as well.

Question: Just a quick follow up. Are you happy with the efforts by the governments in this part of the region in cracking funds linked to terrorism?

U/S Taylor: More work needs to be done on this topic. We've been very reassured by the degree of cooperation in tracking terrorist funding but more work needs to be done and the most important thing now is to have a policy where simultaneously, one can block the assets of terrorist regardless of what country they happen to be in. And so when the United Nations designates a terrorist or someone who's financing terrorism, we'd like to freeze those accounts globally as rapidly as possible. And more work needs to be done on that but we're making good progress. And I really wouldn't focus on any particular region in this respect. I think all countries can do better, and we're actively working on it. It was a topic of conversation at the recent APEC Finance Ministers' meeting where there was an action plan for improvements in combating terrorist financing in the APEC countries, which, of course, involves both Latin America and some Asia-Pacific countries as well.

Question: Good afternoon, sir. I'm Jun Ebias. I'm a reporter from Bloomberg News. I just want to get your comments on the plan of the Bank of Japan to help its banking industry by buying shares of these banks. Thank you.

U/S Taylor: The Bank of Japan had pledged a year ago in March to prevent deflation from continuing and that is to get inflation equal to greater than zero. And it also pledged to do this by increasing the quantity of liquidity in the economy -- that is, money. So far deflation has continued, so it really hasn't reached its goal score. And what I understand is there's now going to be greater efforts to purchase other kinds of assets in order to increase liquidity. And if, in fact, it does increase liquidity, then that will be good for the country and for reducing the amount of deflation, actually ending deflation. With respect to the banks, there's still a problem of non-performing loans and in order for the efforts of the Bank of Japan to end the deflation, these problems in the banks have to be remedied directly. So, that's how I would answer your question with respect to the recent policy changes in the Bank of Japan.

Question: Good afternoon, sir. I'm Amethyst Ma, with Dow Jones Newswires. I'd like to ask about a domestic issue from your country. Would the increase spending, that would be needed to fund a U.S. war against Iraq, boost the U.S. budget deficit and, therefore, reduce the possible tax cuts needed to invigorate the U.S. economy?

A: Let me just focus on the tax cut part of your question, because there's always a tension in discussions between tax cuts and budget deficit, and increased spending from whatever reason. You gave one, but there are many reasons for pressure on spending to increase. What President Bush did when he came into office was very quickly enact a very good tax cut. It provided a benefit to the economy last year, which helped quickly end the recession and it's also going to be phased-in, in the future already. So we have phased-in tax cuts coming down the road, if you like next year, the year after. We've already agreed to these tax cuts and it's very important to do that. In fact, if you look at the impact of tax cuts and spending increases on our deficit, spending increases have been, by-and-large, the main reason that surplus has declined, and it's not really the tax cuts. The tax cuts are important for stimulating the economy, and we already have some built-in. They're coming down the road. So that will continue, yes. There are no plans to change those, and it's a good policy for economic growth. It's reducing the marginal tax rates, primarily.

Question: I'm Tess Orejano from the Associated Press. I understand there's a United Nation's report that says that the global campaign to freeze terrorist funds has stalled, and only ten million dollars has been frozen over the last eight months? Can you tell us what are the most important problems that you are encountering?

U/S Taylor: We've been very successful in combating the financing of terrorism. If you look over what's happened since Sept. 11, a year ago. Not only have assets been frozen of over a hundred million, and even though the degree to which assets are frozen has gone down, there's still the potential for these and, in fact, the reality that the freezing disrupts the transfer of funds. The actual amount frozen is not the only, or even the best, measure of success. The success is measured by whether you're able to prevent terrorist acts by preventing the funds going to terrorists. And if the financial system has blocking and freezing on certain accounts, then the funds can't go to the financial system as easily as it otherwise might. So, we think it's actually quite successful. One measure, as you mentioned, is the amount of assets frozen, but the real important thing is to stop the terrorist acts. And the way to stop that is to prevent the funds from going to the financial system, and we are doing that successfully. Again, here's a scenario where more needs to be done to look at alternative ways in which money is transferred across countries, not through formal banking systems but, maybe, through means such as the so-called Hawala dealers. Hawalas are a very important form of transferring money across different countries, but it's also an area where we can do better in terms of stopping the financing of terrorism. Not that long ago, we, in the international community, shut down the operations of a Hawala operation, called Barakat. I think that was actually quite effective in disrupting terrorist financing. And we're going to be continuing the work on it, as I said, with respect to the other gentlemen who asked the question. So, we're quite happy with how it's going, but like everything else, we can do better.

Question: Hi. Michael Barker from Reuters News Agency. With the United States spending more on security post-9/11, what in fact, will it have on your ability to sustain existing levels of funding for MDBs or even increase them, as you indicated? Is there not an impediment there to increasing spending, because of Homeland Security spending, etcetera?

U/S Taylor: Well, Homeland Security has raised the total amount of spending, but there are still many opportunities to control spending and to reduce spending in certain areas. Our proposals for the MDBs and for the Millennium Challenge Account have been budgeted for. We have gone through and seen how they can be funded in the current budgets. The size of the economy grows, continues. We have a good recovery that's in place, and we definitely have ways to do this. We have to get the Congress to fund it. That's going to be a challenge. We're arguing that this is the right way to go. And there seems to be a lot of support, so far, for this increase. But I think your question is a good one because this is the first increase in many years, certainly of this magnitude, a fifty percent increase in foreign aid, over and above the MDB increases that I mentioned, over and above the eighteen percent for IDO and for the other development banks. It's a substantial increase. But because we're emphasizing the performance and the measuring of results in productivity growth, we feel we have a really good chance to get it through Congress. And again, it will be quite historic to have this kind of an increase in funding.

Moderator: Yes, would you like to follow up, the gentleman from Bloomberg?

U/S Taylor: Just a follow-up on my question. Do you think Japan needs to do more to achieve that goal of ending deflation? Because you mentioned earlier that they are not yet there?

U/S Taylor: Yes. I think they do need to do more, because deflation is still there. And ultimately, deflation and inflation is affected by monetary policy and if you create enough liquidity or enough increase in money, you can end a deflation. The Bank of Japan has increased the base money growth. It's got a fundamental measure of liquidity, substantially over the last year, but it's starting to down again. The base growth is going down again, and I think that's, indeed, a problem that needs to be addressed. My understanding is they are thinking about how to addres

s it, but the deflation is still there and it continues to be a drag on the economy.

Question: One last question. Sir, is there still a policy from the U.S. Government, or from the U.S. monetary authorities, for a stronger dollar against the yen?

U/S Taylor: I'd rather not answer any questions about the dollar or the yen in this. We have a very good system in the United States where only one person focuses on questions about dollar, and that's the Secretary of the Treasury. He has emphasized that there are no changes in our policy, and I'll just re-emphasize what he has said.

Question: When you say that more work needs to be done, could you be more specific on exactly where you feel --- the areas at which you need to work more, and in what countries?

U/S Taylor: Just to be sure, which subject do you mean?

Question: (inaudible)

U/S Taylor: More work needs to be done on sharing information about terrorist activity. More work needs to be done on transfers of funds that don't go through the formal financial system, and I would not focus on any one country at this point. There is, right now, a very fortunate and important initiative that the IMF and the World Bank have undertaken to review the policies of countries with respect to the financing of terrorism, to review the capabilities that they have to counteract money-laundering, and counteract combating of financing of terrorism, and as they collect their data, we'll be able to say more about what happens in individual countries. Each country has their own system and their own process and so, it's really not appropriate for me to name any particular countries right now, but to emphasize that it's a global effort, it's going to continue to be a problem that we need to focus on it. The examples I just gave -- just to repeat - dealing with the non-traditional means of transferring funds and trying to find a way or better ways to share information.

Moderator: I think we're out of time. This will have to be the final question.

Question: Arnold Tenorio of the Manila Times. There's some renewed sense of optimism with the improvement in exports here in the Philippines. But people are still worried about this so-called 'double-dip recession.'

U/S Taylor: Yes. I must say that in my visit here, I was quite impressed with how the economy is doing. The growth in the second quarter was strong. The Government is taking some good actions with respect to the revenue side. It's making some good appointments, and the Government has an extraordinarily good economic team. I enjoyed meeting with and working with Secretary Camacho over the last two days, and in periods before. With respect to the United States, there is really no sign of a 'double-dip.' Growth recovery from the recession of last year is on track. We had a very strong first quarter, somewhat weaker second quarter and the third quarter looks like it will be over three percent again. As we move into next year, growth will be moving in a sustained way, about three percent. What we've seen is that the recovery in the U.S. economy has been good for Southeast Asia, for countries that have a lot high-tech production. Their pick-up is quite related to the U.S. pick-up. And so, it seems to me, that my visit here was quite reassuring, from the point of view of the state of the economy and the policies that the Government is undertaking on the fiscal side.

Question: Just a follow-up sir. You said that you see the U.S. economy going over three percent in the third quarter. What would underpin your economy in the third quarter, sir?

U/S Taylor: Well, the third quarter has had a very strong consumption growth especially in the first part of the quarter. The housing market still remains strong. Investment has not picked up in a substantial way yet. It will be coming down the road towards later in the year, but it's beginning to show some signs but primarily, it's the consumption side in the third quarter.

Moderator: Thank you, and that you all for coming today.