SPEAKERS CONTENTS INSERTS
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U.S. AGRICULTURE, THE ASIAN
FINANCIAL CRISIS, AND THE
INTERNATIONAL MONETARY FUND
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
MAY 21, 1998
Serial No. 10548
Printed for the use of the Committee on Agriculture
COMMITTEE ON AGRICULTURE
Page 2 PREV PAGE TOP OF DOCROBERT F. (BOB) SMITH, Oregon, Chairman
LARRY COMBEST, Texas,
BILL BARRETT, Nebraska
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, Illinois
JOHN T. DOOLITTLE, California
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
RON LEWIS, Kentucky
HELEN CHENOWETH, Idaho
JOHN N. HOSTETTLER, Indiana
ED BRYANT, Tennessee
MARK FOLEY, Florida
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JO ANN EMERSON, Missouri
JERRY MORAN, Kansas
ROY BLOUNT, Missouri
CHARLES W. (CHIP) PICKERING, Mississippi
BOB SCHAFFER, Colorado
Page 3 PREV PAGE TOP OF DOCJOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GEORGE E. BROWN, Jr., California
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SCOTTY BAESLER, Kentucky
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
SAM FARR, California
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
VIRGIL H. GOODE, Jr., Virginia
MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
Page 4 PREV PAGE TOP OF DOC JAY W. JOHNSON, Wisconsin
LEONARD L. BOSWELL, Iowa
PAUL UNGER, Majority Staff Director
DAVID G. DYE, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
VERNIE HUBERT, Minority Counsel
C O N T E N T S
Barrett, Hon. Bill, a Representative in Congress from the State of Nebraska, prepared statement
Berry, Hon. Marion, a Representative in Congress from the State of Arkansas, prepared statement
Chenoweth, Hon. Helen, a Representative in Congress from the State of Idaho, prepared statement
Smith, Hon. Robert F. (Bob), a Representative in Congress from the State of Oregon, opening statement
Letter of April 24, 1998 to Speaker Gingrich
Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, opening statement
Glickman, Hon. Dan, Secretary, U.S. Department of Agriculture
Greenspan, Hon. Alan, Chairman, Federal Reserve Board, Federal Reserve System
Page 5 PREV PAGE TOP OF DOCPrepared statement
Rubin, Hon. Robert E., Secretary, U.S. Department of Treasury
Agriculture for Fast Track, statement
Executive Intelligence Review, statement
National Cotton Council
The Bretton Woods Committee, letter of May 20, 1998, submitted by Secretary Rubin
U.S. AGRICULTURE, THE ASIAN FINANCIAL CRISIS, AND THE INTERNATIONAL MONETARY FUND
THURSDAY, MAY 21, 1998
House of Representatives,
Committee on Agriculture,
The committee met, pursuant to call, at 10:30 a.m., in room 1300, Longworth House Office Building, Hon. Robert F. (Bob) Smith (chairman of the committee) presiding.
Present: Representatives Combest, Barrett, Ewing, Goodlatte, Smith of Michigan, Everett, Lucas, Bryant, Chambliss, Emerson, Moran, Schaffer, Thune, Cooksey, Stenholm, Condit, Peterson, Dooley, Clayton, Pomeroy, Holden, Bishop, Farr, Baldacci, Berry, Goode, McIntyre, Stabenow, Etheridge, and Boswell.
Staff present: Paul Unger, majority staff director; Bill O'Conner, policy director, Lynn Gallagher, senior professional staff, Jason Vaillancourt, Vernie Hubert, minority counsel/legislative director; Andrew Baker, Caleb Gilchrist; Callista Bisek and Wanda Worsham, clerks.
Page 6 PREV PAGE TOP OF DOCOPENING STATEMENT OF HON. ROBERT F. (BOB) SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON
The CHAIRMAN. The hearing will come to order.
We will have two short statements.
The purpose of the committee's hearing is to review the facts surrounding United States agricultural exports, the financial crisis in Asian countries, the International Monetary Fund, including the administration's request for funding for the IMF.
United States farmers and ranchers and our agriculture markets are dependent upon export markets around the world. The United States must protect its economic interests, particularly its share of the agricultural markets in Asia. The USDA was able to approve $2.5 billion of GSM export credit guarantees for South Korea, Indonesia, Thailand, and Malaysia to help maintain the U.S. share of that market only because of the reforms required by the IMF in those countries affected by the Asian financial crisis. A loss of Asian markets, which account for 12 percent of the United States agricultural export market, would have a devastating effect on U.S. farmers and ranchers, and, I might add, that number is $7 billion a year, every year, should it be lost.
The IMF can promote economic stability. It is able to require reforms, including those related to agricultural trade. Examples of some of these reforms in Korea, all trade-related subsidies will be eliminated, and international science-based measures on pesticide residue levels are adopted.
In Thailand, IMF urged that tariffs and tariff rate quotas be eliminated. In Indonesia, its import and distribution monopoly will be limited to rice, and private entities will be allowed to import wheat, flour, soybeans and garlic. Without IMF loans, the USDA would have been unable to provide GSM102 credit guarantees to Korea, Thailand, Indonesia and Malaysia. None of these countries would have been creditworthy according to USDA standards.
Page 7 PREV PAGE TOP OF DOC So far in 1998, the USDA has approved $1 billion in GSM102 credit guarantees for these countries. As a result of these approvals, U.S. farmers and ranchers have been able to sell a wide variety of products including wheat, meat, hide, skins, cotton, soybeans, soybean meal and other products. These sales would not have been made without IMF loans. The USDA has announced a total of $2.5 billion of GSM credit guarantees in the region. That means that we can expect another $1.5 billion in agricultural sales to this region this year.
The IMF lends only to central banks and governments, not to commercial banks or businesses. Governments do use some of the IMF funds to help rescue commercial banks and businesses. Without the IMF action in the Asian countries, the serious economic crisis would be worse.
IMF helps out a country only when that country is no longer able to pay its debts or is on the brink of default. In the Asian countries, the IMF loans helped, but the IMF also placed conditions on receipt of those loans. Asian countries had to strengthen their banking regulations, privatize banking decisions to eliminate the ability of governments to require banks to make questionable loans to state-subsidized businesses.
Without IMF loans, countries are likely to respond to a financial crisis with a series of negative actions such as erecting barriers to trade. As is often the case, such barriers have a negative impact on U.S. agricultural exports and put our farmers at a competitive disadvantage.
With IMF help, Mexico was able to move rapidly through the severe 1995 peso crisis. That stabilizing effect helped them to continue the market-oriented reform of their economy and repay ahead of schedule the loans extended by the United States Government. The IMF lending also made possible extension of GSM credit to Mexico that resulted in an increase of $1 billion in United States agricultural exports following the peso crisis.
There would have been no GSM program in Mexico during that period without the IMF loans. A financially healthy Mexico is good for United States agriculture.
Page 8 PREV PAGE TOP OF DOC Remember, IMF contributions are considered to be like deposits in the bank. When the IMF draws on the commitments, the United States receives an interest-bearing offsetting claim on the IMF. IMF contributions do not increase the deficit. In fact, U.S. contributions to the IMF over the past 50 years have cost the U.S. taxpayer absolutely nothing.
I add, the IMF has never defaulted. I support funding for the IMF because it is good for U.S. farmers and ranchers.
I am pleased at this point to recognize the gentleman from Texas, the ranking member, Mr. Stenholm.
OPENING STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. STENHOLM. Thank you, Mr. Chairman and thank you for holding this hearing to examine the impact of the IMF on U.S. agricultural exports.
Hopefully, we will soon have an opportunity to vote on meeting the needs of the International Monetary Fund in order to contain crises like the ones in Asia. Many believe the IMF should be reformed before we approve funding. We should certainly look at ways constantly to improve the IMF, but we should consider such reforms in a stable financial environment.
By delaying IMF funding, however, we add to market uncertainty in key agricultural markets around the world. Consider this: In the past 10 years, we have doubled agricultural exports to Asia and Latin America. The events of the past week in Indonesia make it clear that the crisis in Asia is not over. President Suharto's resignation last night offers some hope for a peaceful transition and democratic reform in that country. It is essential that economic recovery accompany these reforms.
As Chairman Greenspan pointed out in his last appearance before this committee, there is also a significant risk that the crisis in Asia could spread. On Tuesday, Russia's central bank raised its refinancing rate from 30 to 50 percent to shore up the ruble. Chile, which has a strong trade relationship with the Asian countries affected by the crisis, has already felt the impact of declining Asian currencies.
Page 9 PREV PAGE TOP OF DOC Secretary Glickman's team has done excellent work with the Export Credit Guarantee programs to contain the damage to U.S. agricultural exports to Asia. But without IMF backing, local banks in the affected countries would have been unable to participate in the credit guarantee programs which have enabled the United States to maintain a market share worth $12 billion annually.
Forty percent of our exports now go to emerging markets. Even with sound economic programs in place, U.S. agriculture is expected to lose 3 to 6 percent of its market share in Asia. Here are some of the statistics to consider:
Ten years ago Asia bought $12 billion worth of United States agricultural exports annually. Next year it is expected to buy $21.5 billion. Ten years ago Latin America bought $3.8 billion worth of U.S. agricultural exports annually. Next year it is expected to buy $10.8 billion. If this crisis spreads to Latin America, demand for U.S. agricultural products could fall dramatically.
I commend you, Secretary Glickman, for the foresight the Department has shown in responding quickly to the Asian crisis. It is now up to Congress to show the necessary foresight to contain the crisis.
As a result of the Asian crisis, the IMF financial resources are at historically low levels. That means the Fund has limited ability to respond if the crisis should spread. Additional funding for the IMF is needed immediately.
It should be noted that U.S. contributions do not increase the deficit or divert resources from other spending priorities. There is no budget outlay for IMF contributions. When the IMF does draw on our commitments, we receive a liquid, interest-bearing claim on the IMF.
It is also worth noting that for those countries receiving aid, the IMF has reached agreements which will liberalize trade to the benefit of U.S. agriculture. As Chairman Smith pointed out, Korea has streamlined import certification, Indonesia is reforming state trading enterprises, and Thailand is adopting harmonized import licensing procedures and establishing more transparent customs evaluation procedures. Many of those items we have striven for for years.
Page 10 PREV PAGE TOP OF DOC We are all anxious to hear the thoughts of today's distinguished guests regarding the need for IMF funding. I will conclude here by joining the 71 members of the Agriculture for Fast Track Coalition in thanking you, Mr. Chairman, for your leadership on this issue.
The CHAIRMAN. I thank the gentleman.
Each of you has a copy of the letter from the 71 agricultural organizations in this country, and without objection, I want to submit that for the record. Hearing none, it is so ordered.
[The letter apppears at the conclusion of the hearing.]
The CHAIRMAN.Members of the committee may submit their written statements for the record.
[The prepared statements of Mr. Barrett, Mrs. Chenoweth, and Mr. Berry follow:]
"The Official Committee record contains additional material here."
The CHAIRMAN. I am pleased and honored to welcome these distinguished gentlemen today to discuss a most important issue with us and to help us clear through to the facts of IMF and what IMF is really about. Especially Secretary Rubin, thank you for coming. Assistant Secretary Roth, Deputy Secretary Summers are the two gentlemen with you. Chairman Greenspan, thank you, sir for being here. Secretary Glickman and Deputy Secretary Rominger, welcome.
We will begin, Secretary Rubin, by hearing your statement, please. Thank you for being here.
STATEMENT OF HON. ROBERT E. RUBIN, SECRETARY, U.S. DEPARTMENT OF THE TREASURY
Page 11 PREV PAGE TOP OF DOC Secretary RUBIN. Thank you, Mr. Chairman. As you know, Chairman Greenspan and Secretary Glickman also have statements, and all of us are prepared to respond to questions.
As the members of the committee know, there were important developments in Indonesia last night, and I would like to begin, if I may, by sharing with you again the President's statement from last night.
And I quote: ''We welcome President Suharto's decision which provides an opportunity to begin a process leading to a real democratic transition in Indonesia, an opportunity for the Indonesian people to come together and build a stable democracy for the future. We urge Indonesia's leaders to move forward promptly with a peaceful process that enjoys broad public support. The United States stands ready to support Indonesia as it engages in democratic reform,'' end of quote.
Now let me spend a new moments, if I may, Mr. Chairman, to discuss the critical importance of approving funding for the International Monetary Fund in light of the imperatives, which in your two statements you pointed out are to our economic interests in helping to restore financial stability in Asia and protect financial stability around the world, and examine the impact of the Asian crisis on American businesses, workers and farmers.
Let me make one overarching point to start. We have critical economic and national security interests in restoring financial stability in Asia. Nearly 40 percent of America's agricultural production is exported, and 40 percent of those exports go to Asia. In general, 30 percent of American exports go to Asia, supporting millions of U.S. jobs, and we now export more to Asia than to Europe. In States like California, Oregon and Washington, exports to Asia count for more than half of each State's total exports. Financial instability, economic distress, and depreciating currencies all have direct effects on the pace of our exports to the region, the competitiveness of our goods and services in world markets, the growth of our economy, and ultimately the well-being of American farmers and workers. Moreover, if the problem were to spread to developing countries around the globe, an issue that we were very much focused on at the height of the crisis last December, the potential impact on our economy could be severe.
Page 12 PREV PAGE TOP OF DOC The United States also has a critical national security interest in seeing restoration of financial stability in the region. We have 100,000 troops based in Asia, 37,000 of which are on the Korean peninsula. A stable and prosperous Asia is more likely to be a peaceful Asia as was the case over the last decade when Asia was experiencing dynamic growth. Economic stability and political stability, political reform and social stability are separate but closely interrelated, and they all promote peace and our national security interests.
In short, Mr. Chairman, by doing everything sensible to help these Asian countries get back on track, we support our exports to the region, reduce the risk that financial instability will spread to other developing countries with potentially severe impacts on us, and help protect our national security interests in the region and around the world.
There are difficult times ahead for the Asian countries in crisis and many challenges to be met, but a number of the countries affected by the recent crisis have committed themselves to sustained reform, and that has led to real signs of progress. Moreover the contagion risk that threatened in the early stages of the crisis has so far largely been contained, and economic instability has not spread to other developing countries in other parts of the world.
In Korea, newly inaugurated President Kim has acted strongly to implement the IMF-supported economic reform program and has worked effectively to reschedule Korea's debt with Western banks. Thailand's new government has also acted strongly to implement the IMF reform program, particularly in beginning to restructure its banking sector. Investors and creditors are starting to show renewed confidence in these countries, though as I said a moment ago, there are difficult times and many challenges ahead for both Korea and Thailand.
Let me say a word now about Indonesia. Although the political situation is changing rapidly, I do think two points need to be made. First, it is important to emphasize that it is the economic crisis and political conditions in Indonesia, and the Indonesian Government's mishandling of the crisis, that has led to a loss of confidence in the government by the Indonesian people and the global financial markets. All of this in turn exacerbated the current economic problems and led to political instability. The IMF reform program was a response to the economic crisis, not a cause.
Page 13 PREV PAGE TOP OF DOC The IMF program did include difficult measures, but implementing difficult measures is always necessary in restoring financial stability. There are no easy answers in financial crisis, but there are many examples of the necessary rigors of IMF-led reform promoting real progress.
And if a country is not successful in taking tough steps and getting back on track, the crisis would likely be far worse and far longer duration and economic conditions far worse than during the difficult period that reform is being put in place. It is also important to note that IMF programs typically include specific provisions to reduce impact on the poor, and that was certainly so in Indonesia.
Second, when the financial crisis developed in Indonesia late last year, the most immediate and pressing issue was to restore financial stability. At the same time the administration has always emphasized the close links between financial stability, political stability, political reform, pluralism and human rights. In the early stages of the Indonesian crisis, the IMF and the international community judged that attaching political reform conditions to the IMF program would not have worked. Indeed, for very important reasons the IMF is barred in its own charter for engaging in political conditionality. Therefore we pursued political and human rights objectives through other means. Moreover, significant components of the IMF-led reform program were designed to undo the monopolies and the subsidies that were part and parcel of the existing system, and this was an important step toward political reform.
Clearly the circumstances then changed. In addition to the President's statement last week, the United States joined with the other Nations in the G8 this past weekend calling for political reform in Indonesia.
All financial crises involve enormous economic, political and social complications and uncertainties, but those uncertainties must not stop us from acting. Instead the international community must make the most practical judgments as to what is most likely to work with respect to the interrelated objectives of financial stability, economic well-being, political stability, political reform and human rights, and then adapt their programs' approaches as circumstances warrant. This is a most difficult undertaking. The results take time, and there is no easy course. But undertaking this effort is critical in our economic and national security interests.
Page 14 PREV PAGE TOP OF DOC Let me now say a few words about the impact of the crisis on the American economy. We have begun to directly feel the impacts of this crisis in Asia. On an annualized basis, exports to the key countries were down about $23 billion in the first 3 months of this year, and that is likely to worsen in the months ahead. Moreover, the effects are being felt by American farmers. As I said earlier, nearly 40 percent of America's agricultural production is exported, and roughly 40 percent of that export goes to Asia. That is about $23 billion.
Many fishermen in Alaska are suffering because depreciating currencies have caused their fish to be too expensive for Asian markets. For example, Seattle-based NorQuest Seafoods, Inc., which procures much of its catch from Alaska, reports that demand for surimi, a fish paste used in artificial crab meat, has declined by 30 percent. Corn farmers in the Midwest, livestock producers in the West are all feeling the effects. Corn exports are expected to fall 7 million tons, or 11 percent. Cattle and other livestock exports are expected to drop $7.5 billion this year from $8.2 billion that were expected for this year.
American farmers have a tremendous stake as you have well recognized, Mr. Chairman, in a restoration of economic health in the region and a tremendous stake in preventing future crises or most effectively dealing with future crises and containing them if they occur, and that gives American farmers a large stake in the future strength of the IMF.
The IMF has been central to the effort to restore financial stability through reform programs to address the causes of crises in each Nation. The IMF has the expertise to shape effective reform programs, the leverage to require a country to accept conditions that no assisting nation could require on its own, and it internationalizes the burden.
Let me point out that recent IMF programs in Asia included significant markets opening and structural reform measures, which the chairman commented on, that increased the opportunities for U.S. farm exporters.
As the chairman and the ranking minority member both said, our contributions to the IMF have not cost the taxpayer one dime in 50 years. When the IMF draws on our commitments, we receive a liquid interest-bearing offsetting claim on the IMF of equal value. There are no budget outlays under CBO scores and no increase in the deficit or reduction of resources for other priorities.
Page 15 PREV PAGE TOP OF DOC We are asking Congress to approve funding for our participation in the IMF as quickly as possible. As a result of the recent situation in Asia, the IMF's normal financial resources are approaching a historically low level, and the IMF does not have sufficient funds to deal with a truly major crisis; for instance, if the Asian crisis were to deepen and spread, or if a new crisis were to develop. It is in our economic interest to have that vulnerability exist for as little time as possible.
Moreover, as we are actively promoting a broad range of reforms within the IMF, as we continue to pursue funding for the IMF, we are also promoting a broad range of reforms within the IMF to make it a more effective institution; reforms that in many cases are directly responsive to requests and suggestions by Members of Congress.
We have also been working to develop mechanisms so that investors and creditors more fully bear the consequences of bad decisions, and in Asia, in fact, many investors and creditors did take very large losses. The United States is leading an international effort to strengthen the architecture of the international financial system to address this important question of moral hazard and more generally to better prevent financial crises and better manage those that occur.
Mr. Chairman, let me conclude by reiterating how important it is to secure full IMF funding now, even as we work to improve the IMF and strengthen the international financial architecture. We live in an interdependent world where the conditions in one country or a group of countries can dramatically affect the economic well-being of farmers and workers in our country. We need the IMF to help deal with financial instability problems when they occur.
The probability of a serious reversal in the Asian situation and contagion to developing countries around the world or of a new crisis in the short term is small, but these occurrences are possible, and the consequences to us could be severe. We cannot afford to take the risk that such events could start to unfold and the IMF not have sufficient resources to cope effectively.
Page 16 PREV PAGE TOP OF DOC Recognizing the importance of moving forward, the Senate approved funding by a vote of 86 to 14, a very substantial bipartisan majority. I strongly urge you, the House of Representatives, to follow suit. Full IMF funding is needed now to protect the interests of American farmers, businesses and workers.
Thank you very much Mr. Chairman.
[The prepared statement of Secretary Rubin appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you very much Mr. Secretary.
I have an additional letter from the National Cotton Council regarding IMF that I will insert, without objection, into the record.
[The letter appears at the conclusion of the hearing.]
The CHAIRMAN. Chairman Greenspan, we are privileged to have you here. We will hear from you now.
STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE BOARD, FEDERAL RESERVE SYSTEM
Mr. GREENSPAN. Thank you very much, Mr. Chairman.
The global financial system has been evolving rapidly in recent years. New technology has radically reduced the costs of borrowing and lending across traditional national borders, facilitating the development of new instruments and drawing in new players. Information is transmitted instantaneously around the world, and huge shifts in the supply and demand for funds naturally follow, resulting in a massive increase in capital flows.
This burgeoning global system has been demonstrated to be a highly efficient structure that has significantly facilitated cross-border trade in goods and services and, accordingly, has made a substantial contribution to standards of living worldwide.
Its efficiency exposes and punishes underlying economic imprudence swiftly and decisively. Regrettably, it also appears to have facilitated the transmission of financial disturbances far more effectively than ever before.
Page 17 PREV PAGE TOP OF DOC Three years ago, the Mexican crisis was the first episode associated with our new high-tech international financial system. The current Asian crisis is the second.
We do not as yet fully understand the new system's dynamics. We are learning fast and need to update and modify our institutions and practices to reduce the risks inherent in the new regime. Meanwhile, we have had to confront the current crisis with the institutions and techniques we have.
Many argued that the Asian crisis should be allowed to run its course without support from the International Monetary Fund or the bilateral financial backing of other nations. They asserted that allowing this crisis to play out, while doubtless having additional negative effects on growth in Asia and engendering greater spillovers onto the rest of the world, would not likely have a large or lasting impact on the United States and the world economy.
They may well have been correct in their judgment, and some would argue that events over the past 6 months have proved them right; we have so far avoided the type of continuing downward spiral that some feared. There was and is, however, as the Secretary has just pointed out, a small but not negligible probability that the upset in East Asia could have unexpectedly large negative effects on Japan, Latin America, and eastern and central Europe that in turn could have repercussions elsewhere, including the United States.
Thus, while the probability of such an outcome may be small, its consequences, in my judgment, should not have been left solely to chance. We have observed that global financial markets, as currently organized, do not always achieve an appropriate equilibrium, or at least require time to stabilize. Moreover, the effects of the Asian crisis on the real economies of the immediately affected countries, as well as our own economy, are only now just being felt.
Opponents of IMF support for member countries facing international financial difficulties also argued that such substantial financial backing, by cushioning the losses of imprudent investors, encourages excessive risk-taking. There doubtless is some truth in that also, though arguably it has been the expectation of governments' support for their financial systems that has been the more obvious culprit, at least in the Asian case. In any event, any expectations of broad bailouts have turned out to have been disappointed. Many, if not most, investors in Asian economies have to date suffered substantial losses.
Page 18 PREV PAGE TOP OF DOC Moreover, the policy conditionality associated principally with IMF lending, which dictates economic and financial discipline and structural change, helps to mitigate some of the inappropriate risk-taking on the part of governmental authorities. At the root of the problems has been poor public policy that has resulted in misguided investments and very weak financial sectors. Convincing a sovereign nation to alter destructive policies that impair its own performance and threaten contagion to its neighbors is best handled by an international financial institution such as the IMF. What we have in place today to respond to crises should be supported even as we work to improve those mechanisms and institutions.
Some observers have also expressed concern about whether we can be confident that IMF programs for countries, in particular the countries of East Asia, are likely to alter their economies significantly and permanently. My sense is that one consequence of this Asian crisis is an increasing awareness in the region that market capitalism, as practiced in the West, especially in the United States, is the superior model; that is, it provides greater promise of producing rising standards of living and continuous growth.
Although East Asian economies have exhibited considerable adherence to many aspects of free-market capitalism, there has nonetheless been a pronounced tendency toward government-directed investment using the banking system to finance that investment. Given a record of real growth rates of close to 10 percent per annum over an extended period of time, it is not surprising that it has been difficult to convince anyone that the economic system practiced in East Asia could not continue to produce positive results indefinitely. Following the breakdown, an increasing awareness, bordering in some cases on shock, that their economic model was incomplete, or worse, has arguably emerged in the region.
As a consequence, many of the leaders of these countries and their economic advisers are endeavoring to move their economies much more rapidly toward the type of economic system that we have in the United States. The IMF, whatever one may say about its policy advice in the past, has played an important role in this process, providing advice and incentives that promote sound money and long-term stability.
Page 19 PREV PAGE TOP OF DOC The IMF's current approach in Asia is fully supportive of the views of those in the West who understand the importance of greater reliance on market forces, reduced government controls, scaling back of Government-directed investment, and embracing greater transparencythe publication of all the data that are relevant to the activities of the central bank, the Government, financial institutions, and private companies.
It is a reasonable question to ask how long this conversion to embracing market capitalism in all its details will last in countries once temporary IMF financial support has come to an end. We are, after all, dealing with sovereign Nations with long traditions, not always consonant with market capitalism. But my sense is that there is a growing understanding and appreciation of the benefits of market capitalism as we practice it, and that what is being prescribed in IMF-supported programs fosters their own interests.
Similarly, it is a reasonable request to ask whether U.S. authorities should not seek greater assurance that the ongoing process of reform in the IMF's policies and operations will produce additional concrete results before we agree to augment IMF's resources. I have reason to believe that the management and staff of the IMF are committed to a process of change. We face a somewhat more difficult task in convincing the IMF's membership as a whole of the need for change. However, I am confident that our leverage in this regard would be reduced if the United States failed to agree promptly to the proposed increases in the IMF's resources.
Accordingly, Mr. Chairman, I continue fully to back the administration's request to augment the financial resources of the IMF by approving as quickly as possible U.S. participation in the New Arrangements to Borrow and an increase in the quota to the IMF. Hopefully neither will turn out to be needed, and no funds will be drawn.
Although the tendency in recent months toward stabilization in the East Asian economies is encouraging, clearly those economies are not out of the woods, as recent events attest. Moreover, we have not yet put in place the strengthening of the international financial architecture that will enable us in the future to place less reliance on the IMF to deal with potential systemic crises. Thus, it is better to have the IMF fully equipped if a quick response to a pending crisis is essential.
Page 20 PREV PAGE TOP OF DOC Thank you, Mr. Chairman.
[The prepared statement of Mr. Greenspan appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you Mr. Greenspan, very much.
Secretary Glickman has just returned from Geneva. Welcome.
STATEMENT OF HON. DAN GLICKMAN, SECRETARY, U.S. DEPARTMENT OF AGRICULTURE
Secretary GLICKMAN. Thank you, Mr. Chairman.
Before I begin, I would like to briefly just touch on my trip to Geneva for the WTO meeting. Your colleague Tom Ewing was there and did an outstanding job representing the Congress, and there were also staffers from this committee at this meeting.
President Clinton set the tone for the ministerial conference by giving prominence to agriculture in his address to the WTO. He mentioned agriculture first and foremost and called for the further reduction of agricultural tariffs and subsidies and other trade-distorting practices, and also called for rules rooted in science to encourage the full fruits of biotechnology, and he proposed that even before negotiations near conclusions, WTO members should pledge to continue making annual tariff and subsidy reductions so that there is no pause in reform.
The President is correct. We can't wait another 7 or 10 years for reforms to take place in agriculture. And I am pleased that the President challenged trade ministers to agree to continue to reduce tariffs and subsidies even before the 1999 negotiations are concluded. This would be the fastest way to achieve real progress for our farmers and ranchers.
I also addressed the WTO trade ministers and set forth a number of key objectives the United States will pursue in the 1999 agriculture negotiations, including reemphasizing all the key points the President made, in addition to disciplines on unfair practices of state trading enterprises and tightening rules on technical and health-related trade restrictions.
Page 21 PREV PAGE TOP OF DOC To emphasize the importance the United States is placing on the next round, the President invited the WTO to hold its third ministerial conference in the United States next fall. And since next year's conference will actually launch the negotiations on agriculture, holding this conference in the United States will give added impetus to the process. So I think we come back with positive news from Geneva.
Let me now turn to the subject of today's hearing, and I will not repeat the words of Secretary Rubin and Chairman Greenspan, but I do think focusing on the practical aspects of agricultural exports is probably useful.
The United States has long been an important supplier of agriculture and food products to Asia, benefiting our farmers and ranchers as well as Asia. Overall we export about 40 percent of our U.S. agricultural exports worldwide. During 1991 to 1997, the Asian region accounted for 45 percent of our export growth.
Weaker demand in Asia is taking a toll on U.S. exports, and in almost every product category. And Secretary Rubin went through the effect on particular countries, and I won't do that now.
But I think it is important to note that the reduction in import demand is lowering commodity prices around the world as well as at the farm gate and reducing the value of U.S. exports to non-Asian markets as well. Current projections for U.S. agricultural exports stand at $56 billion for this fiscal year, down $1.3 billion from last year, and this number could drop further. This reduction is largely a result of lower U.S. crop and livestock prices due to larger global supplies, lowering the value of exports regardless of destination, as well as lagging demand in Asia.
For fiscal 1999, the decline in U.S. agricultural exports could be greater. We may begin to see additional declines in exports of bulk commodities such as grains and soybeans. This will be due to three or four factors: One, the sharply slowing economies in Asia and their reduced import demand; two, competitive pressures from southern hemisphere producers such as Argentina; three, large crops elsewhere in the world, particularly in the EU countries; and, fourth, the appreciation the U.S. dollar relative to the currencies of our competitors. However, after fiscal year 1999, Asia's currencies, economies, and import demand are expected to begin to recover.
Page 22 PREV PAGE TOP OF DOC Given Asia's importance as a market for U.S. agricultural products, it is crucial we support the efforts of the IMF. The stabilization programs and reforms are extremely important in continuing U.S. agricultural trade with the Asian countries affected by the financial crisis as well as other countries, and let me explain why.
In December and early January when the financial crisis was at its worst, and there was near panic in Asian financial markets, the USDA wanted to respond in the way that would best preserve our exports to that region and give the countries access to needed imports of key commodities from the United States. That meant use of our GSM102 credit programs and their guarantees. But GSM102 has a strict legislated creditworthiness criterion that has to be met before we can make allocations. We need to believe there is a strong probability of repayment.
In the face of the financial turmoil, there was no way we could make this determination based on only what we knew of the dwindling foreign exchange availabilities and other problems in these economies. But the quick action of the IMF in negotiating stabilization packages gave us the confidence we needed to go forward with our program. With the additional resources made available by the IMF, and the economic reforms negotiated with each country, we had a reasonable assurance that the credits by U.S. banks that we were guaranteeing would be repaid when they fall due. We could move forward, as we did, with $2 billion in credit guarantee allocations and later increase Korea's allocation by an additional $500 million. Over $1.1 billion of this has now been used, as the chairman mentioned. That is the measure of how much more U.S. exports could have fallen to the affected countries had we not been able to use the GSM102 program. And over the longer term, the structural reforms that the IMF has negotiated will advance our trade agenda by increasing competition and transparency within each country.
And I would like to particularly give credit to Chris Goldthwait the general manager of the Commodity Credit Corporation, Gus Schumacher and Lon Hatamiya who have lead the effort in developing these programs and implementing them.
Page 23 PREV PAGE TOP OF DOC This combination of IMF efforts and our export credit guarantees were successfully used during Mexico's economic problems in 1994. Today Mexico is our third largest single country market for agriculture, estimated to buy a record $5.8 billion worth of U.S. agricultural products in 1998, which is an increase over 1997.
IMF frees markets in which our products can more readily compete. For example, in Korea the IMF agreement specifically requires economic reforms that should be positive for U.S. agriculture. And in January Korea began to harmonize its technical standards affecting food imports with international codes, which should increase access to U.S. exports. Korea is also moving to revise pesticide tolerance levels in harmonization with CODEX, which will allow U.S. fruit to enter Korea unimpeded. Korea has agreed to eliminate restrictive licensing provisions that could lead to the solution of a number of long-standing access problems for U.S. exporters of such items as corn grits, soy flakes and peanuts.
In Indonesia, in accordance with the IMF agreement, the monopoly of Indonesia's state trading agency, Bulog, over the importation and distribution of essential food items has been abolished. This action coupled with removal of restrictions in importing activities should provide the opportunity for full private sector participation if the situation there stabilizes, because private sector importers are interested in purchasing U.S. agricultural products.
Of course, the IMF cannot do its job without resources, which is why the President called on Congress to provide the IMF with additional funds, and why the Senate's vote in March was so important. And the President strongly urges the House to follow suit.
Mr. Chairman, the IMF-led effort in Asia is helping those countries make financial and structural changes that should lay the foundation for their future growth. Helping in this effort is clearly in our interest, in the interest of global financial stability, economic growth and trade, and certainly in the interest of U.S. farmers, ranchers and exporters. Agriculture has as much or more at stake as any industry sector in helping these countries get back on their feet and back on the growth path. And I would add parenthetically, Mr. Chairman, at a time of large stocks worldwide in many agricultural products, and at a time of somewhat reduced prices, the insurance of our export markets is all the more critical for farmers and ranchers at home.
Page 24 PREV PAGE TOP OF DOC Thank you very much.
[The prepared statement of Secretary Glickman appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you very much, Mr. Secretary.
And I want to echo your comments about Chris Goldthwait, who I think has done an outstanding job in using the tools that we have available and left in agriculture to expand agricultural trade and export. So I appreciate those thoughts and statements about him.
I want to ask you all one question, and if it is difficult to answer at the moment, I would appreciate an answer in writing or an extension of remarks or thoughts in writing, if you so choose.
Many of our colleagues are concerned about the structure of IMF as you, Mr. Greenspan, have indicated. They would like to see, as you also indicated, transparency, reforms in the IMF, and I want to ask you each if in that light, is it possible, in your opinion, or would you support an amendment to the IMF funding that would direct reforms for transparency or changesas you indicated, Mr. Greenspanchanges in, and what kind of changes would you support, or would you support any in connection with IMF funding?
Secretary Rubin, may I ask you first?
Secretary RUBIN. Yes, Mr. Chairman. We are very supportive of working with the IMF to increase transparency and to make various other changes in IMF that we think are appropriate and sensible, and we have worked with Members of Congress as reflected in the bill that came out of the House Banking Committee and also the House Appropriations Committee.
I think the distinction that needs to be made, and it is critical, if we are going to get IMF funding and get it quickly, which we, as you know, very much think we need, is that there are 182 members of the International Monetary Fund, and while we have a very important voice there, it is an organization through which these kinds of changes need to be worked.
Page 25 PREV PAGE TOP OF DOC So our view is that we need to see what can we accomplish right now. And then clearly there are things we can accomplish right now. For example, having a GAO review of activity at the IMF by virtue of giving the GAO the documents that our Executive Director receives, that is the kind of thing we can do now.
But there are other kinds of changes that all of us might think make sense that if they were put on as conditions of legislation would basically make the legislation null and void in terms of receiving funding with any reasonable period of time, because it is going to take time to work those kinds of changes through the organization. So what we have tried to do is to work with the requisite committees of Congress to construct conditions that are doable now, and then to create voice and vote kinds of requirements with respect to the Treasury Department so that we can continue to advocate the other changes in the IMF, rather than put a mandate on that cannot possibly be met and would, therefore, in effect prevent funding within a reasonable period of time.
The CHAIRMAN. Mr. Greenspan.
Mr. GREENSPAN. Mr. Chairman, I would be in favor of such an amendment if I knew what was going to be in it. At the moment, as I indicated in my prepared remarks, we are in the process of trying to understand exactly how this new high-tech international financial system works in full detail. We have still got a way to go. We are struggling to understand a number of different aspects. I think we are going to succeed within a reasonable period of time. And at that point, I think the role of an institution such as an IMF will become clear.
The role of an IMF-type institution cannot be effectively comprehended until we know what it will have to deal with and why. And we do not yet fully understand that structure.
So, as I indicated previously, pending our understanding fully of how this system works and, therefore, the type of structure that an institution such as the IMF should have, I think it is necessary to support the existing institutions, which are perhaps not as good as they should be, but certainly far superior to having nothing.
Page 26 PREV PAGE TOP OF DOC And I think the presumption that we somehow can give instructions to the IMF as to how they ought to reform, without knowing what those realistically should be, makes no sense to me, Mr. Chairman.
The CHAIRMAN. Thank you. Mr. Secretary.
Secretary GLICKMAN. Just a brief comment. One is I agree with Secretary Rubin. I would not want to see this delayed in order to make very fundamental changes in IMF. I think we need to move quickly to deal with the problem. I would say when the President spoke at the WTO meeting in Geneva Monday night, he talked about increasing transparency and openness in the WTO procedures. He said there is a lot of feeling in this country that a lot of this is done secretly, and I know from sitting where you are, that a lot of folks out in rural America often think that maybe there are forces beyond their control in charge of a lot of these activities without their knowledge.
I do think that we ought to be following the President's leadership in terms of all of these international organizations to try to break down the secrecy where we possibly can, but that is a long-term change and I don't want to do anything that would impede the immediacy of this problem.
The CHAIRMAN. May I ask any of you, do you have a balance sheet on the IMF? Does anyone?
Secretary RUBIN. I actually think I may have brought one. Hang on one second.
The CHAIRMAN. Fine. If you have one, I will ask the Clerk to distribute that.
Secretary RUBIN. We can get you a balance sheet. What this actually is, it is a set of numbers that is similar to a balance sheet, but not a formal balance sheet.
Page 27 PREV PAGE TOP OF DOC The CHAIRMAN. I wanted to back up your statement about urgency, is my point.
Secretary RUBIN. I can do that if you would like. I can do that from memory, actually. The institution has about $40 to $45 billion of uncommitted lending capability. It has been estimated that it probably has to reserve about $30 billion of that as a reserve against the deposits, including that of the United States, I might add, at the IMF so that if we, for example, want to withdrawwhich we have a legal right to dothe monies that we have in effect on deposit at the IMF, we can get our money.
So if you take the 30 away from the 45, you are left with about something in the neighborhood of $15 billion of immediately available money. That is a rough estimate.
In addition, there are the general agreements to borrow, which as you know are a separate entity but work throughit is a somewhat cumbersome method but it works through the IMF, and that is $23 billion or something like that, Mr. Chairman. So you put the two together and you have about $38 billion on those set of estimates. My recollection of the range on all of that comes out to about $35 to $38 billion counting the GAB.
The CHAIRMAN. And commitments made, what are the outstanding commitments?
Secretary RUBIN. No, that is over and above. That is net of all existing commitments.
The CHAIRMAN. That is above commitments?
Secretary RUBIN. That is above commitments. That is about the same, I believeand correct me if I am wrong Larrybut I believe that roughly $38 billion is roughly the same as the commitments, maybe a little bit less than the commitments that have been made in the Asian crisis. So if you had another crisis of equal size, you would not have sufficient resources to deal with itor we so feared in December. Had this spread to developing countries around the world, there was a reasonable chance we would have been unable to do what the IMF needed to do.
Page 28 PREV PAGE TOP OF DOC The CHAIRMAN. And for comparison, already the investment in Indonesia is what by the IMF?
Secretary RUBIN. Well, the commitment was, I believe, $10 billion, was it? But the IMF has only disbursed, I believe, $4 billion.
The CHAIRMAN. South Korea?
Secretary RUBIN. Do you remember that number, Larry?
Mr. SUMMERS. Twelve or $13 billion, with a commitment of $25 billion.
The CHAIRMAN. With a follow-on commitment of $25 billion.
Secretary RUBIN. No, a total commitment roughlythose are rough numbers.
Mr. SUMMERS. Total commitment.
The CHAIRMAN. Well, if it is possible for the committee, would you kind of put this all down in perspective for us so we could see exactly where we have gone with the IMF, what commitments, and what surplus there may or may not be?
Secretary RUBIN. We will get you exact numbers, Mr. Chairman. We actually have, if you have one second, Mr. Summers can give them for the record.
The CHAIRMAN. Please. Thank you.
Mr. SUMMERS. Mr. Chairman, I misspoke slightly. In Korea the total IMF commitment was $21 billion, of which 13 has been disbursed, leaving 8 to be disbursed. In Indonesia the total commitment was 9.9; 3.9 has been disbursed. In Thailand, the total commitment was 4, of which 2.7 has been disbursed.
The CHAIRMAN. And for clarity's sake, again, the $23 billion will cover those commitments?
Secretary RUBIN. For clarity's sake, those commitments are all fully covered, and over and above all of those commitments there are, give or take, $35 to $38 billion of total resources available, which means that you could, roughly speaking, do another equivalent of the Asian crisis and be totally out of resources.
Page 29 PREV PAGE TOP OF DOC The CHAIRMAN. I understand. And it wouldn't touch the problem in Japan, obviously.
Secretary RUBIN. Well, Mr. Chairman, that is not a problem that we ever expect to have to deal with.
The CHAIRMAN. Well, you mentioned the possibility of extension to the Japanese market.
Secretary RUBIN. Well, I wasn't really anticipating the possibility of that.
The CHAIRMAN. There is a small chance? There is no chance? Mr. Greenspan said there is a small chance.
Mr. GREENSPAN. Before we create a real problem, let me suggest to you that there is a significant difference between the problems that Japan is having and those of the other East Asian economies.
The East Asian economies is a shortage of foreign exchange, of dollars. They cannot produce dollars; only we can. As a consequence, they can run out of them and indeed have. And that has created significant difficulties.
The problem in Japan is largely a problem of yen. They can produce as much yen as they need to, so it is not the same sort of problem which an International Monetary Fund has the facilities or resources to assist on. They don't need dollars. They have got huge amounts of dollars. Their problems are really quite different and are not directly the type of issues which the monetary fund addresses. And we do not consider Japan in this context, which I don't think is a relevant issue.
The CHAIRMAN. Thank you very much.
Mr. STENHOLM. Thank you, Mr. Chairman. First, a comment. I don't think in my 19 years on this committee that we have ever had a more heavyweight panel to appear before this committee. But in the new modern agricultural language, I would prefer to say you look more like a lean, mean, fighting machine.
Page 30 PREV PAGE TOP OF DOC And in light of Secretary Glickman's early comment regarding the WTO, it occurs to me that one of the things that we are trying to accomplish today with this hearing is to answer questions of a skeptical citizenry. And there is no more skeptical citizenry than the agricultural community when it comes to trade negotiation agreements, IMF funding, fast track, et cetera, because of being burned in the past and some cases of feeling like we are always there as a country when we begin negotiations but we are never there in the end.
I make this comment as we pursue a very exciting possibility that Chairman Smith is working on regarding fast track and moving it, yes, this year as a possibility; this committee holds the key to that. And Chairman Smith is working very hard to accomplish that. The IMF funding, which is the subject of today, is criticalas 71 farm organizations have acknowledged that. But we have some problems and we need to answer some questions.
My question to you regarding IMF: Can you help and put it in language that a farmer like me can understand on the wagon tongue of a trailer regarding IMF funding? And when we say the IMF presently has $65 billion in loans outstanding, fully $40 billion in reserves, of which only $10 to $15 billion is likely to be available, can you explain that a little more in depth?
And also when the IMF makes a loan under conditions like you have described, is it short term? Long term? And then what is thewe say, and I have said this over and over and I read it again today, that we have never lost a penny. The United States has never lost a penny regarding IMF funding. But can you talk just in terms of banking as farmers understand it and what we are talking about and what kind of loans? And are these countries that get these loans paying them back?
Secretary RUBIN. The answer to most of those questions is yes. In terms of are they paying them back, the answer is yes. We will start in reverse order if I could, Mr. Stenholm. A loan from the IMF is treated with enormous seriousness by recipient countries. In fact, it takes priority as a practical matter, although I think not as a legal matter, over all other loans. So the IMF has an excellent record of loans being paid back.
Page 31 PREV PAGE TOP OF DOC I will let the Deputy Secretary respond to that.
Mr. SUMMERS. There are a number of different IMF instruments, ranging from the 3-year range for much of the financial support for Korea because it was a large emergency situation, to loans that range up to 10 years for some of the poorest countries, with the most normal loan being of 5-year maturity.
I might add to the Secretary's answer that in addition to the IMF's strong ability to collect, which has caused it not to have a major default in its 50-year history, not from all the countries that had problems with commercial banks in Latin America during the 1980s, no major default. The IMF holds gold reserves that are equal in value to approximately two-thirds right now of its outstanding loans. And that provides a further source, if you like, of collateral when financial support is provided.
Mr. GREENSPAN. Larry, why don't you explain the farm cooperative that has a credit union.
Mr. SUMMERS. Thank you for that hint, Mr. Chairman. The IMF functions in many ways like a credit union. Member nations make deposits. They earn interest on those deposits. Once one takes account of the currency adjustments that have taken place, we have actually earned on our IMF deposits an amount that exceeds our borrowing costs over the last 20 years. As in a farm co-op or a credit union, when members have a need to make a withdrawal, they are able to do that. The United States made a withdrawal in 1978.
When members need to borrow money, they borrow money from the co-op with interest, paying interest, and with conditions to assure that they are using that money well. And many, many of the IMF's members have availed themselves of that. For example, it was in 1976 that the British availed themselves of IMF resources at a time when they had liquidity problems. Several other European countries have also had occasion to borrow from the IMF. And as I said, while we did not borrow from the IMF at a time of financial strain in this country in 1978, we made a withdrawal from the credit union.
Page 32 PREV PAGE TOP OF DOC As with any credit union, there is a need for there to be a certain amount of cash on hand in case somebody needs to make a withdrawal. And that is the resources that the Secretary was referring to.
While there are some uncommitted resources of approximately $45 billion, the estimate is that the vast majority of those resources, somewhere in the 30 to 35 range, needs to be held back, not for new loans but to provide for the possibility of withdrawals for the depositors from the credit union. Once one takes that 30 to 35 awayI may be losing your constituent farmer hereone is left with a quite small sum of actual lendable resources from the IMF to meet new purposesthat sum of perhaps $10 to $15 billion. That is all that is there. That 10 to 15 could, in emergency and extraordinary circumstances with quite a cumbersome procedure, be potentially augmented by a mechanism known as the GAB which provides for resources to the IMF in the event of financial emergency. And the 10 to 15, plus the 23, is what led up to the $38 billion figure that the Secretary spoke to a moment ago.
But in sum, after providing vault cash for countries to withdraw, there is very little there. And there is the emergency finance. But even with the emergency finance, the resources would not be there to provide loans for another crisis on the scale of Asia.
Mr. STENHOLM. Now, to finish that loop, since we are using cooperative and credit union, what was the margin, or profit, of IMF last year? And did they declare a dividend? Or did they issue patronage retains? And if you can't answer that right now, I think that is an excellent way to describe in language that I certainly understand how it is working. But in using that analogy, then you have to go ahead and say was there a profit? Is that allocated back to the member nations on a participation rate? And, if so, how much?
Secretary RUBIN. Mr. Stenholm, we will get you the numbers. I don't recollect them offhand, but there was a profit and there has been a profit and it does get allocated back to the members. And if you look at the United States' contributions over the now 50-year history, roughly speaking, and you take into account all the interest rate considerations and exchange rate considerations, not only have we not lost a dime, we actually have had a profit on our position, although that was not the intention of it.
Page 33 PREV PAGE TOP OF DOC We will get you the numbers and we will put all of this, I think both the Deputy Secretary's prior answer and thisin a letter.
Mr. SUMMERS. I have been passed a helpful note, Congressman Stenholm. Out of the proceeds of this mutual, if you like, the spread between the borrowing and the lending, all of the administrative costs of the IMF are, of course, covered. And in addition, the net income has been about $100 million. It was $100 million last year, and of course it varies from year to year and that income has been allocated to reserves to further fortify the financial position of the institution.
Mr. STENHOLM. So there was no dividend declared? We built our reserves?
Mr. SUMMERS. We get interest on our contribution to the credit union. And the rate of that interest varies a little bit with the financial performance of the credit union. But the excess last year was allocated to increased reserves.
Mr. GREENSPAN. Those are dividends in the same sense that shareholders of a credit union get monies, whether you call it interest or dividends or what you like. That is basically what we get. So, the analogy does actually hold.
Secretary RUBIN. When I responded yes, there was a distribution, there was a reserve. But as the chairman said, it is a distribution and it varies depending on performance.
Mr. STENHOLM. And you will get us the amount.
Secretary RUBIN. We will get you the amount and a letter explaining the process. We will get all of this in the form of a letter, Mr. Chairman.
The CHAIRMAN. Mr. Combest.
Mr. COMBEST. If I am a manager of this credit union and have 182 members, right, are they all depositors?
Page 34 PREV PAGE TOP OF DOC Mr. SUMMERS. They are all depositors, butand here there is a difference between a domestic credit unionthey are all depositors but they deposit, in effect, their own currencies.
Mr. COMBEST. I understand. But they are all depositors at some point in time, maybe like if I make a deposit to a credit union or bank or whatever, I may also have more money that I have borrowed than I deposited. Who is my biggest customer as the credit union manager as far as depositors?
Mr. SUMMERS. At this instant, I believe it is Korea.
Mr. COMBEST. In terms of
Mr. SUMMERS. Excuse me, in terms oftwo questionsand one question is in terms of outstanding obligations and the other question would be in terms of new loans in the last year.
Mr. COMBEST. Who is my biggest customer in terms of depositor and who is my biggest customer as far as who I have loaned to?
Mr. SUMMERS. As a depositor, your biggest customer is the United States of America.
Mr. COMBEST. OK.
Mr. SUMMERS. In terms of outstanding borrowings, your largest customer as of this moment is South Korea.
Mr. COMBEST. And traditionally over the 50 years, has the United States been the biggest depositing customer?
Mr. SUMMERS. Yes.
Mr. COMBEST. What percentage, roughly, of the total deposits of the credit union does the United States make?
Mr. SUMMERS. It has declined over time, Congressman. And now it is approximately 18 percent.
Page 35 PREV PAGE TOP OF DOC Mr. COMBEST. Approximately 18 percent. And if the request that the administration has made, would that still be at that same basic percentage?
Mr. SUMMERS. The size of the deposits, sir, are adjusted for changes in the world economy, so our percentage would decline slightly. The average quota increase is 45 percent. The increase in the American contribution would be 40 percent.
Mr. COMBEST. Thank you. That is very helpful.
What happens, in your opinion, all three of you, if we don't do anything? What happens to all three entities if we do nothing?
Mr. SUMMERS. If we do nothing?
Mr. COMBEST. If we do nothing.
Secretary RUBIN. If Congress doesn't act?
Mr. COMBEST. Right.
Secretary RUBIN. I think the problem that you have got, and the chairman tried to describe it and so did I, is that we do live in a new global financial market and we live in an uncertain world. The world has tremendous opportunities for us, particularly for farmers and agriculture in this country, but it also has new risk.
And I will give you my view. I think inevitably from time to time, there will be a real possibility of some kind of significant crisis no matter how good our preventive mechanisms are. And we all have an enormous stake in having an effective mechanism for dealing with that.
We are working with the Federal Reserve Board and the Treasury in really providing the leadership of the world to improve the architecture of this global financial market. But the fact is, as the chairman said, until those kinds of improvements are madeand I would argue that even after they are made, the IMF will have an important role. But until they are made, it is the IMF around which all of this activity will have to center. I think they will continue to have a very important role even after they are made.
Page 36 PREV PAGE TOP OF DOC And if you should have a major crisis and you don't have sufficient funds in the IMFand the IMF is at historically low levels nowthen the international community will not have sufficient funds in this instrument through which it works to try to deal with that crisis, and you run the risk of a contagion and a spread to developing countries around the world, decreasing currencies, shrunken markets for our goods, and I think conceivably severe impacts on our economy. The probability of that I believe is low, probably very low; but if it happens, the effects could be severe and it is not sensible not to have this insurance when it costs you nothing.
Mr. COMBEST. Chairman Greenspan or Secretary Glickman, either one.
Mr. GREENSPAN. I would just emphasize that the probability that we will get through this particular crisis, that we will be able to understand the new structure of the currently developing international financial system adequately to comprehend the types of institutions we need, the chances of our going through this period, eventually making that judgment, and making whatever other alterations seem to be appropriate in the IMF and other institutions, the chances of being able to get through that I think are exceptionally high.
There is a nonnegligible probability that we will not. And if the results of not being able to get through were small, then we would just take the risk. But there is too much at stake if we are wrong. And not taking our insurance in the same sense that one takes out insurance on a house but you don't take out insurance on some small eventsin other words, some small item you will self-insurethis is a risk that is too large if it happens to self-insure. We really need to have backup in the event it happens.
And I would say that, technically speaking, the cost is not zero because there is the remote possibility of something going wrong and the American taxpayer losing some money. That is a very low risk but it is not zero, and as a consequence there is obviously some element of cost. But I think the insurance premium embodied in that cost is exceptionally low relative to what effectively we are insuring against, the risk we are insuring against. So it strikes me as a particularly good insurance play, if I may put it in those terms.
Page 37 PREV PAGE TOP OF DOC Secretary GLICKMAN. If I just may add, in the post-farm bill environment, we all talk about trade being the ultimate safety net in addition to perhaps better risk management type of program. So trade is the ultimate safety net. Agriculture will be the most vulnerable to the inability to export of perhaps any other commodity.
Mr. COMBEST. If it all goes bad?
Secretary GLICKMAN. If it all goes bad, and that trade fluctuates a lot anyway depending on a lot of circumstances. And without the IMF programs, if there are future crises, these dips would probably be bigger than they are now. And agriculture would be harder hit because of its export reliance. And so our ability to provide future GSM102 in future crises, I think would be smaller without the IMF than with it.
Mr. COMBEST. My time has expired but let me just make sure that I understand because, again, this is something that we have to sell; I have to sell it to my farmers like Charlie has to sell it to his.
If all goes bad then the dips, you said, will probably be much greater. But can I, in all honesty, say to my producers that short of a crisis in which we do not have the IMF's ability to engageand it has been indicated there is a potential for that, it is not greatbut if we go ahead and make that deposit in our IMF credit union account, I cannot go to my farmers and say that these dips will not continue. They will continue to be there, and there may not be a noticeable improvement in the export picture. Is that a correct statement?
Secretary GLICKMAN. Well, it strikes me, for example, that credits to Korea, we provided additional credits
Mr. COMBEST. But Dan, granted, you did provide those. But assuming that we don't have a crisis in the IMF and it does continue, then those credits could still be made without even an additional infusion?
Secretary GLICKMAN. If we got to the situation where in fact the funds were not there in the account and the dip would fall worse, you would clearly have a worse situation than you would otherwise have.
Page 38 PREV PAGE TOP OF DOC Mr. COMBEST. Right. If we got to that point. But if we didn't get to that point and if we didn't put in the money, a farmer is not going to notice a substantial improvement necessarily.
Secretary GLICKMAN. Well, the only thing is that you would have some stability in the world markets knowing it would be there. It is like having insurance. Knowing it is there, you can go out and borrow and refinance, you can go out and develop. The fact that it is there I think gives people confidence.
Mr. COMBEST. Thank you. I finally got where we were trying to go. Thank you.
The CHAIRMAN. Mr. Chairman, I will not ask you to define nonnegligible. I will not do that.
Mr. PETERSON. Thank you, Mr. Chairman. And I don't want to be the skunk at the picnic here, but I have got to raise some issues here.
Chairman Greenspan said that we have run out of U.S. dollars, or these countries have. Well, I think the chairmanI have told you this beforethat in my part of the world, my farmers have run out of U.S. dollars as well. He also said this is too large to self-insure. Well, our problem is too large to self-insure and the Government crop insurance system is not working.
And we have had this problem where people haven't had a crop for 5 years. Right now I have got a county that is under 3 feet of water again. And this is not working. And the Secretary said that the trade is going to be the ultimate safety net. Well, maybe it is, but right as of this time it is not working. And the Secretary has been kind enough. He is coming out and he is going to meet with these folks in a week and we really appreciate that. And he has also I think genuinely been trying to come up with answers to try to address this situation that we have got going in our part of the world. But, frankly, without some legislative changes, I don't think that he has the ability or his department has the ability to address this.
Page 39 PREV PAGE TOP OF DOC Those of you that are in this situation, I just warn you that you are not going to be very comfortable if you get in this situation, because we have got hundreds of auction sales where people are coming from southern Minnesota, buying farm equipment at one-third the price that they can buy them in southern Minnesota and hauling them back to the corn and soybean country where things are going well. And it is a huge problem. This is the tip of the iceberg. We are probably going to see land values plummeting.
This is some of the richest farmland in the world and we no longer have the disaster program which we desperately need back. The crop insurance system doesn't work because we have been losing the amount that we can cover. And we are in a real dilemma. And so somehow or another we have got to get something changed. And when they hear that we cannot respond to their problem, yet we can run off and put $18 billion into the IMF, they do not understand it.
And the other thing they do not understand, I am also not supporting fast track because we have a situation where now barley is coming into California, they are subsidizing it, and apparently, Mr. Secretarycorrect me if I am wrongwe agreed to this in the GATT agreement. So apparently they can do this. The Europeans can bring this barley in at $50 a ton, and I am told there is nothing we can do about it. So that, first of all, is a question I would like an answer to, Mr. Secretary.
The second thing we have got a lot of pressure now to use EEP, my people want us to use EEP in response. The Canadians apparently went ballistic over this and said if you guys use EEP we are going to dump wheat and barley on you like crazy. Is there nothing we can do to stop the subsidized barley coming in from the Europeans?
And secondly, can we respond with EEP in a targeted way to send them a message that this is not something they should be doing? Is there some way to respond to this without getting the Canadians and the Australians and everybody else all stirred up?
Page 40 PREV PAGE TOP OF DOC Secretary GLICKMAN. Let me say that the GATT agreement doesn't specifically allow the barley to come in. It is coming in right now. This is a private sale. But without going into much detail, I have warned the Europeans that if future sales occur like this one, subsidizing barley into markets like ours where we have a surplus, that we would take appropriate action both under our trade laws as well as under USDA's authority. And we also stated that unequivocally in Europe as well. I am led to believe that there will be no more of these barley shipments, but the warning has been sent.
Mr. PETERSON. What would be the appropriate action?
Secretary GLICKMAN. Well, there are a lot of possibilities and I don't want to prejudge them. We discussed the countervailing duty case. There are a variety of options that could be used.
The CHAIRMAN. Would the gentleman yield for just one second on this point? In fact Mr. Fischler has responded from the European Union that this was a glitch, that this was not a planned program. There are no other barley shipments following this case, and that has been backed up by the European Union ambassador in Washington, DC.
Secretary GLICKMAN. My caveat to that, of course, is that we are sitting with very large worldwide stocks, and if Europe, as well as the rest of the world, has a large production of wheat and barley, this pressure valve may continue. And so that is why I think we have sentI cannot stop a private sale. Some folks would like me to do it. I can't. I don't have the legal authority to do it. But what I can do is to utilize ourif there is a pattern of subsidizing extensively into our markets, I do have and the USTR has some certain trade authorities to use, and we will use them.
Mr. POMEROY. Will the gentleman yield?
The CHAIRMAN. Please, this is an IMF matter.
Mr. POMEROY. We will wrap it up now and then talk about the IMF during my regular questioning. I have never been part of a street protest in my life, but I just came from the EU building, holding this sign on the street, joining barley growers from North Dakota, Washington State, protesting this salethese farmers that came to Washington right in the heart of their growing season, at their own nickel, and they did that in a state of frustration and outrage that you can't believe. They do not get a market price in this country to even cover their production costs, and the EU exports barley and sends it to California and beats our price. It is an absolute outrage. And as you acknowledge, statements from them that this will not happen again simply are not enough.
Page 41 PREV PAGE TOP OF DOC As Collin Peterson's comments represented, even an issue like IMF or an issue like fast track is determined ultimately by the public policy, the public confidence in our trade policy. And when we can have European barley coming into the United States under our costs of production, there is no confidence in our trade policy. And there is, therefore, no great support here to give the administration greater leeway to negotiate on our behalf in these other areas.
I would ask you formally and privately, we have got to have a measured response to Europe. Europe has stuck it in our eye with this subsidized sale and we need to find a proportional way to stick it back in their eye as we come to the diplomatic niceties about resolving this so that it will not happen again. What plans are under way?
Secretary GLICKMAN. Let me put it to you like this. As Mr. Ewing, who is not here, but as he can attest, the barley issue was in big pulsating electronic letters at the Geneva meeting. And everybody was talking about the fact that the United States would not tolerate future types of sales.
We are meeting on an interagency basis to look at other forms of actions that we can take generally, as well as relating to this particular one. Assuming this is legal and assuming this was permitted under the previous GATT negotiations, the only way we are going to be able to deal with these problems in the future is to negotiate them away. We have got to get rid of the capability of doing this kind of thing.
How do you do this? You can't do that without some sort of fast track authority. The question is can we do it in some way to make sure it happens, and what assurance do we have that we can negotiate this away? But, unfortunately, we are going to have to have it so the agreements in the future are more ironclad, but they are going to have to be negotiated directly.
The CHAIRMAN. And now back to the subject.
Page 42 PREV PAGE TOP OF DOC Mr. Barrett.
Mr. BARRETT. Thank you, Mr. Chairman. I particularly appreciated a couple of the comments from Mr. Stenholm about talking about the subject of IMF in lay language so that farmers and ranchers can really understand what is happening or what is about to happen or might happen. It would be helpful, as Charlie suggested, if you could lay out in simple terms what it is we are talking about. I particularly liked the comments about the co-op and the credit union. That was a good analogy. Those sorts of things can be understood in farm country.
I think it is very important not only to members of this committee but, more importantly, to the people that we represent and the people that we have to answer to. I hope that would be forthcoming. I liked the comments from Chairman Smith about the balance sheet, and I guess that will be particularly important if that is available to us in addition to what you have told us today.
But let me go back to those numbers for a moment because it occurs to me that the amountthe current IMF bailouts now exceed $1 billion. Is that basically correct?
Secretary RUBIN. There is a technical expert, but I think it is 85 to 90. Is that total commitments of the IMF?
Mr. SUMMERS. Congressman, are you referring tothe total outstanding commitments of the IMF are somewhat less than $100 billion. The programs for Indonesia, Korea, and Thailand added together are close to $100 billion, but not all of that funding, indeed the majority of that financing does not come from the IMF. So for both
Mr. BARRETT. Where does it come from? What are you saying at that point?
Mr. SUMMERS. It comes from the other international financial institutions, principally the World Bankif you are speaking about the major Asian countries and the packages that were announced for them, some of the financing comes from the World Bank and from the Asian development bank. And some of the financing comes from commitments from bilateral donors for what has been referred to as second line of defense financing.
Page 43 PREV PAGE TOP OF DOC Mr. BARRETT. Excuse me, Mr. Secretary?
Secretary RUBIN. Is that the number you are looking for, Mr. Barrett?
Mr. BARRETT. In any event, it is a staggering figure. I will leave it right there. Then go back to the numbers that you shared with us a moment ago, Korea being the beneficiary at $21 billion.
Secretary RUBIN. Of commitments, yes.
Mr. BARRETT. And Indonesia 9.9, or say 10, and Thailand at 4.
Secretary RUBIN. Of total commitments, that is correct. Not disbursements but commitments.
Mr. BARRETT. You confirm that?
Secretary RUBIN. And that is IMF alone.
Mr. BARRETT. Now, those are the only three commitments out of the five southeast Asian nations that are found in that part of the world?
Secretary RUBIN. There is the Philippines where the commitment is $1.1 billion and that has all been disbursedno, no, there is another one. Deputy Secretary Larry Summers points out 2.37, 2.5?
Mr. SUMMERS. There have been commitments totaling about 2.5, of which about 1.5 has been disbursed.
Mr. BARRETT. To what country?
Mr. SUMMERS. Philippines.
Mr. BARRETT. Thank you. To Malaysia?
Mr. SUMMERS. No.
Secretary RUBIN. In that immediate region.
Mr. BARRETT. All right. Thank you.
Page 44 PREV PAGE TOP OF DOC Mr. Greenspan, I noticed that the Fed has now decided to leave the short-term interest rates as they were. According to the New York Times, one of the factors that helped make that decision was the situation in Southeast Asia. And I guess my question would be simply are you more concerned or less concerned now about Southeast Asia than you were when you visited with this committee in February? And a follow-up: If so, why?
Mr. GREENSPAN. I am trying to remember February. Certainly we are less concerned now than we were, say, in December and November when the crisis was heating up and it looked as though it could create some very serious international contagion. The situation, as you know, improved quite significantly through the latter part of the winter, at least in the Northern Hemisphere, and into I would say several weeks ago. Obviously it has deteriorated since.
I would notit is still a sufficient concern at this point because we don't know the ultimate outcome, and until it fully stabilizes we can't really have confidence that the system itself will not induce additional contagion.
I would say probably we are about as concerned now as we were back in February, but in between those two dates, the situation has improved, I think, considerably and we have reversed a goodly part of that.
Mr. BARRETT. You are speaking about the entire region?
Mr. GREENSPAN. Yes.
Mr. BARRETT. Thank you very much.
The CHAIRMAN. I thank the gentleman. I would advise members that I have promised these gentlemen that we would allow them to retire about 12:30, so we will try to get as many members' questions in by that time as possible.
Mr. BALDACCI. Thank you, Mr. Chairman. And thank you for your leadership with our ranking member to just open up more of the world to the agricultural community and be able to go around the world.
Page 45 PREV PAGE TOP OF DOC I think that we truly do have the main team here as far as economic policy is concerned. And we have a favorite expression in Maine: If it is not broke, you don't need to fix it. And certainly with what we have around the table, we don't want to have any changes because we are very pleased with their performance.
Agriculture is certainly 40 percent in the Asian market, and 40 percent of our agriculture goes in that direction, and it is a big economic impact. There are Maine farmers who are going to end up not having a market, and at the same time because of the goods returning back and not having a home, their prices are going to be depressed here at home. So it really does impact on the Maine farmers and the farmers in the United States.
The one area that I would like to suggest possibly, knowing that we do need to have significant reforms and needing to work on a separate track maybe from full funding for the IMF, is the fact that if we do maintain 18 percent as our share in the credit union, and if we were to have legislation saying that it would not go any higher than 18 percent, would that, in factwould that, in fact, give us the resources that we would need, would be my first question, so that we would be intimating to our agriculture community and our community in general that it is not going to exceed 18 percent?
And the second question would be, if that is not a doable suggestion, is that if there were some way that we could gauge the debtretirement of the debt that would be retired after a 5- to 10-year period to the new abilities to the IMF to have these resources. So I guess I would ask the Secretary, Secretary Rubin, and Chairman Greenspan to comment.
Secretary RUBIN. Let me see if I have the questions correctly. The first one was on the question of our quota? In a word, what was the question?
Mr. BALDACCI. The question was if our position is now 18 percent, what I thought I heard Mr. Summers say.
Secretary RUBIN. Going down slightly.
Page 46 PREV PAGE TOP OF DOC Mr. BALDACCI. If we were to pass legislation saying that it would not exceed 18 percent.
Secretary RUBIN. There is a complication in this. The 18 percent is the correct number. And last year it will go down slightly, but not all of those currencies are usable. They are not hard currencies in many cases. Of the usable lendable currencies, it is 24 or 25 percent of the lendable currencies.
Now, you could conduct legislation that way, I suppose, if you wanted to, but I don't think I would recommendthat is not something we have thought about. My instinct would be not to recommend it only because sort of right now you would be doing a replenishment at whatever the rates are, 18 percent or thereabouts, and when we come back to Congress in 5 years for another replenishment, we could deal with the facts then. I don't think that you gain anything by doing that.
Mr. BALDACCI. There is concern about putting more into it without having reforms more in place or additional reforms.
Secretary RUBIN. If you replenish now, as all of us have said seems an imperative, then the replenishment seems to come up every several years, 4 or 5 years. When the next administration comes to this Congress for replenishment, you could consider what you want to do at that time. There would be no additional contributions by the United States Government in that interim period. It is not like the yearly appropriations that exist with respect to many other matters.
Mr. BALDACCI. So what is your feeling then as far as the issue about debt retirement? About all the same
Secretary RUBIN. As the IMF lends money and then it gets paid back?
Mr. BALDACCI. Right.
Page 47 PREV PAGE TOP OF DOC Secretary RUBIN. What happens then is that the IMF receives the money back, but the world being the highly uncertain place that all of us have tried to describe, although all of us believe that the risksthe probability of a crisis is low, the world does seem to have more than adequate need for the resources that are available.
For example, in places like Russia today and many other countries around the world, there are IMF programs because of the problems that exist. I will speak for myself. I certainly don't envision a situation in which there are not going to be a lot of difficult situations, a lot of different circumstances in countries that have to be dealt with.
If we reach a point, which the chairman may have been suggesting, that the architecture is developed to the point that the IMF has a smaller role in the totaland I don't know if we will reach that point or notthen it might be possible to do such a thing as you are talking about. I don't thinkwe are too early in the process to answer that.
Mr. BALDACCI. I support the IMF full funding. I support the President's leadership in regard to making sure that the situation is certainly stabilized. It is in our own country's interests and our farm agricultural interests, and I would like to see that brought to fruition. And I think the chairman's holding this hearing and bringing the issue to the Congress and to the House is signal that we need to address it as soon as possible.
I also support the reforms that need to be made, because I do think that they do need to be addressed, and I am concerned about the situation as it pertains to the Suharto government and the replacement and, in fact, as to how long that replacement is going to be there. But do I think that we need to have the resources there at the IMF in case of an emergency. And I would just like to again thank the chairman for the opportunity to have this hearing and to raise this issue, and would work with the chairman in regards to bringing the issue to the House.
The CHAIRMAN. I thank the gentleman.
Page 48 PREV PAGE TOP OF DOC Mr. LUCAS. Thank you, Mr. Chairman. And I appreciate the opportunity to be here. And I must make a confession to my colleagues, serving on both the Banking and the Agriculture Committees, when we make our comparisons of the IMF as a co-op I am just fine with that. I prefer to use the phrase ''loan pool'' but I still suffer from political scars from H.R. 1151, so the credit union phrase will probably make one of my bankers watching this link today twitch a little bit. But nonetheless I think it is worth reinforcing some of the points that we made here today, and I turn to Secretary Rubin on this.
In describing the IMF as a co-op or a credit union, a loan pool, whatever, it is worth reinforcing that point that this is a fund not just for developing countries or eastern European countries or poor countries. This is an entity that all of the participants have access to. That literallyas was pointed out earlier, the English have used it, the French have used it, the Italians have used it. We in the late 1970s have used it. It is a resource that has never cost the American taxpayers a cent. Those are all fair statements?
Secretary RUBIN. Did we actually use it in 1978? That is all correct, subject to one caveat.
Mr. SUMMERS. I would make one qualification. I would distinguish between our experience and the British experience in this way. We withdrew a portion of our deposit. The British made a borrowing that was in excess of their deposit and so were a net borrower from the loan pool.
Mr. LUCAS. It is still a fair point by being participants in the program, the resources were there when we need to have those resources.
Secretary RUBIN. What you said is essentially correct.
Mr. LUCAS. It is also fair to say in the language that we passed out of the Banking Committee in an effort to go forward on this effort that there was language adopted by amendment in the committee to encourage efforts to reduce agricultural trade barriers and to make that a priority with us. I think the administration essentially agreed, and Chairman Leach agreed, and the language was added along those lines.
Page 49 PREV PAGE TOP OF DOC Secretary RUBIN. That is correct. If I remember, Mr. Lucas, you were instrumental in having that happen.
Mr. LUCAS. Absolutely. We had many hearings before the Agriculture Committee about the efforts to lower those trade barriers to make progress. You and your predecessors have worked diligently for a long time. Isn't it a fair statement to say, though, that there is a dramatic difference between negotiating trade agreements in that kind of an environment versus the circumstances that theshall I say the leverage that was provided to us or to the IMF through the need for a number of countries in recent months to make those loans; that it is much easier to persuade people to modernize and open up when they are looking across the desk from their banker as opposed to just a trading partner so to speak?
Secretary GLICKMAN. Absolutely. For example, we have seen Indonesia's trade barriers come down significantly largely as a result of the IMF assistance. We now have rice access into markets such as Korea, Taiwan and Japan, not all due to IMF, but at least in some of those markets they have been due to the IMF reform.
Mr. LUCAS. So it is a fair statement; I can look my constituents in the eye in western Oklahoma and say that real progress was made as part of those IMF loan agreements, and that by continuing to participate, we place ourselves as a country in a position to help assure that those kind of potential progresses can be made in the future?
Secretary GLICKMAN. I agree with what your statement is.
Mr. LUCAS. Secretary Greenspan, our competitors in this ever-competitive world market include New Zealand, Australia, the Canadians. If we do not do everything within our power to help stabilize the world economy, is it a fair statement to say that countries that are inparticularly that do business with or are located in the Pacific area, because of the stress that the whole region would face, would see the values of their currency decline and, therefore, have an increased and enhanced trade advantage competing with us with a strong dollar?
Page 50 PREV PAGE TOP OF DOC Mr. GREENSPAN. Well, Mr. Lucas, I think we have already seen that. That is one of the immediate consequences of the weakness in East Asia has been the fairly dramatic decline in broad categories of commodity prices generally, since it turns out that, for example, Canada and Australia are major wheat exporters, that the weakness of their commodity exports and the commodity markets generally has essentially weakened their dollars, the Canadian dollar and the Australian. The consequence of that is obviously to put competitive pressure on us in the wheat market, as we have seen. I mean, a number of thosethere are a number of your colleagues who come from the tier bordering on Canada have been clearly aware of the immediate consequence of the hard wheat competition that has gone on across the border, and that the weakening of the Canadian dollar as aftermath of the East Asian crisis was a factor, and obviously the same is true of Australia.
Mr. LUCAS. Thank you, Mr. Chairman. And as you said many times, Mr. Chairman, having made that commitment by a majority of Congress in the 1996 farm bill, the President's commitment by signing the bill that we would farm for market, if we don't do everything in our power to have that market, then we are clearly betraying our own people.
The CHAIRMAN. We violated our side of the contract. That is correct.
Mr. DOOLEY. Thank you, Mr. Chairman. And I want to thank Secretary Rubin and Secretary Glickman and Chairman Greenspan for the leadership that you have been providing on this issue throughout the last few months. Your restatement today of some of the direct impacts on agriculture and the fact that 40 percent of our agricultural production is exported, and 40 to 45 percent of that goes to Asia, the fact that we have $23 billion in our agriculture sales are now dependent upon those Asian markets clearly points out the interest that we have in making investments in stabilizing those financial markets.
Page 51 PREV PAGE TOP OF DOC I think, you know, the statements that you have made have been so compelling and have had an impact; the vote that you acknowledged in the Senate where it was 86 to 14, certainly a testament of that body understanding the rationale and the significance of us funding IMF.
The fact that we have 71, 72 agricultural entities that have come behind the Agriculture Coalition for fast track that are also supporting full funding for IMF is certainly a testament to the fact that the agriculture industry fully understands the magnitude and the importance.
Frankly, I think it is a travesty that we have not had this measure brought to the floor of the House for us to take action. And I would also say that I am somewhat, you know, disappointed and concerned that we have Mr. Armey that made a statement yesterday that IMF funding should be fully offset. And I guess I would like to hear from Secretary Rubin and maybe Chairman Greenspan, when we heard these analyses earlier today in terms of this being somewhat analogous to a co-op or credit union, what is there to offset?
Secretary RUBIN. Well, all I can tell you is that the Congressional Budget Office has always said there is nothing to offset, and for the reasons that I detailed or outlined, discussed in my testimony. And I think that that position is correct. You have an offsetting claim. And I think one thing I didn't say I probably should have said is that we can get that money back if we want. You have to make a declaration with respect to your need for balance of payments purposes, if I remember correctly, but that is a self-declaration. There is nobody who can review that declaration. You have within your control to get the money back.
I think the Congressional Budget Office has been correct that there is nothing to offset, and it should be scored as no cost, and that has been the position of the Congressional Budget Office.
Mr. DOOLEY. And actually when we are earning interest on this investment, too, so actually it might even be scored as a positive?
Page 52 PREV PAGE TOP OF DOC Secretary RUBIN. I don't remember the numbers, and I will get them for you.
If you take the interest proceeds that we have received and also the effectsthere are some small foreign exchange effects in this, take all of that together and then charge against that the cost of money, the interest that at least you can deem or impute as to have paid out, we actually have a slight profit on that difference. It is not intended for that purpose, but it has been the effect over the 50 years that we have done this.
Mr. DOOLEY. And I guess in your prior debate on some of the budget agreements, there has obviously been some discussion about whether or not we use OMB or CBO, and has the Republican leadership almost invariably been supporting CBO numbers?
Secretary RUBIN. My recollection is that last year's budget agreement explicitly recognized the treatmentMr. Stenholm is saying yesspecifically recognized the budgetary treatment involving no offsets, and for the good reason that I just mentioned.
Mr. DOOLEY. So if Mr. Armey is trying to proceed in a different manner, it would be clearly inconsistent with the past practices that have been endorsed by the Republican leadership.
Secretary RUBIN. It would be inconsistent with the budget agreement that we all agreed to last year. That is correct, Mr. Dooley.
Mr. DOOLEY. Thank you.
Secretary RUBIN. And, of course, the 50 years that many administrations and many CBOs and many OMBs have looked at this issue.
The CHAIRMAN. And to be totally consistent, if the gentleman will recruit the Democrats for fast track, I will recruit the Republicans for IMF.
Secretary RUBIN. Why don't we both agree to make a full court press effort. You have, let me say.
Page 53 PREV PAGE TOP OF DOC The CHAIRMAN. I have, and that would be fair. That is the point I am attempting to make. Before we disparage any part of our nice little clique of 435, we ought to be trying to pass both of these issues.
Dr. COOKSEY. Thank you, Mr. Chairman.
Secretary Rubin, when we had our smaller meeting in February, I had expressed concern about voting for IMF because of my doubts about Suharto and the contrived economy. And you basically agreed with me, but I will notyou had understood those concerns.
Habibie, who is the new president and was the vice president, has a very close relationship that dates back to the time he was 13 year old and Suharto was a young officer across the street from his home. Do you think that the economic policies will be better, that they will move to a true market-type capitalism, or do you think they will continue with the contrived economy, particularly in view of the fact that Habibie subscribes to a zig-zag theory of economics? And I would like to hear Chairman Greenspan'swell, what his beliefs are on the zig-zag theory of economics.
Secretary RUBIN. Whether Chairman Greenspan subscribes to zig-zag economics? You correctly recollect that we were troubled by aspects of President Suharto's approach to economic issues, and I remember our conversation actually was that it was our view that the IMF gave us an opportunity to try to inject real reform into a system that was very troubling.
And I guess I would give you the same answer. I think there is a need for economic reform, there is a need for political reform. I can't tell what you Mr. Habibie is going to do, but I think your concerns are not ill-founded, but I think what we need to do is to pursue economic reform and pursue political reform in all ways that seem practical in light of whatever the issue is at the time that we have an opportunity to act, and that is what we will be doing.
Page 54 PREV PAGE TOP OF DOC Mr. GREENSPAN. I don't have anything to add. I think we have to wait and see what type of policies emerge and what type of political and economic structure comes out of what has truly been chaos.
And you as you know, the President has indicated earlier today that he is supportive of the reforms that are in place, and has not gone much beyond that as far as I understand. So I think it will require some time for this to evolve and get a much better sense of where the new President stands and what type of Cabinet he will have.
Dr. COOKSEY. Good. I understand he is a German-trained engineer. And of course that should make himmaybe not an economist, but it is better than being a political science major.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you very much.
Members who remain, I am going to ask that we limit questions to one. We will try to get to everybody.
Mr. POMEROY. Like the rest of the financial world, Mr. Chairman, I love reading and pondering the nuance in your testimony. Today you write that the global financial system exposes and punishes underlying economic imprudence swiftly and decisively. Regrettably, it also appears to have facilitated the transmission of financial disturbances far more effectively than ever before.
To put it in agriculture parlance, financial markets can bolt like a herd of spooked sheep, and, in fact, there was a time late in 1997 where that was really a terrible concern relative to this Asian crisis.
I want to commend Secretary Rubin and Deputy Secretary Summers for their heroic efforts during the dark days in late December so this thing didn't go into meltdown. It was a real concern.
Page 55 PREV PAGE TOP OF DOC I would also like to commend Secretary Glickman for using the relative stability in the area in order to use the GSM program to move our agriculture product. I am particularly delighted about the announcement of the 1.8 million bushels of spring wheat moved into Indonesia.
My question is for the chairman, and it relates to some quoted remarks of the majority leader yesterday. He is talking about the IMF needs to be more forthcoming about its internal operations before Members will feel comfortable voting for the money. ''There is an adage in politics, when in this doubt, vote no.'' And he is quoted as adding that it is impossible to separate the examination of IMF from the personalities running it.
Frankly, with more than 80 votes in the Senate for IMF funding, it looks to me like House leaders are looking for an excuse to not fund IMF.
Clearly, you are in a position to know better the personalities and the internal workings of IMF better than any Member of Congress. Can you give us any insights in this regard? Is there anything about the internal workings of IMF, including personalities, that ought to prevent us from moving forward with IMF replenishment at this time?
Mr. GREENSPAN. Not that I am aware of, Congressman. It is true that there are certain negotiations that go on between the IMF and individual countries that are appropriately held at least temporarily confidential because they would spook markets if they got out and actually become counterproductive to any endeavor on the part of the IMF and a recipient country to stabilize the country's market system.
So there are occasions when, in my judgment, it would probably be inappropriate to be fully transparent. But having said that, the vast majority of things that they do should be transparent. And I think the encouragement by the IMF to the countries who undergo what is called article 4 surveillance, meaning an evaluation by the IMF of a particular country to make that report publicly available, is, I think, a quite important move in the right direction, and a number of countries are now starting to do that.
Page 56 PREV PAGE TOP OF DOC My guess, and it is a guess at this stage, is that when we finally come to understanding what is going to be necessary for the new international financial structure, that we will be able to define those elements within the IMF or the equivalent institution which are appropriately disclosed and those which need not be or should not be.
But I don't think we can make a generalized judgment at this particular stage. I do think that the IMF is increasingly becoming aware of the need to do many of the things which it previously had not been disclosing, to start to disclose them. And indeed, one of the crucial issues is the evolution of data from a number of countries which will be enhanced and made available to people who will be lending money to a number of countries which will enable them to be far more knowledgeable about the risks they are taking, and I think that can only be helpful.
The CHAIRMAN. I thank the gentleman.
Mr. SMITH of Michigan. Well with the esteem and knowledge at the table, I hope I can ask my other six questions in writing and you might respond.
The CHAIRMAN. Without objection; any member that would like to submit questions, I am sure the gentlemen would answer in kind.
Mr. SMITH of Michigan. I guess my question for the day would be, Walter Badgett, in one of his great directions for what the role of a central bank should be during the time of crisis, that you should lend freely, but you should have a penalty rate on interest and make sure you had good collateral. And it seems to me that the IMF decision, as I understand it, most often is a 4 to 5 percent interest rate. And that is less, of course, than most Americans can borrow the money. And so what is your philosophy of this kind of rent subsidy that may be contrary to the normal logic that you would use in an economy?
And I hope Chairman Greenspan and Secretary Rubin, that you have influence or you guide our representative on IMF.
Page 57 PREV PAGE TOP OF DOC Mr. GREENSPAN. There is a considerable amount of debate on precisely this issue, Congressman. There are those who argue that because the IMF funds are up front and will be repaid earliest, it is in a far better creditor position than the market so to speak, and therefore should haveone could recognize the desirability of lower interest rate.
I am more inclined in the Badgett direction myself. I think that it would be helpful to start thinking in terms of market or above-market rate. And indeed, the most recent institution, which the Deputy Secretary is the author of, as I recall, goes in that direction. And I think that is the right direction to go eventually.
Mr. SUMMERS. If I could clarify two points in that regard. First, on the ordinary lending rate, the comparison of the 4.5 percent rate with U.S. interest rates is, I would suggest, misleading because what is being lent is a combination of dollars, yen, and German marks and, for example, the Japanese interest rate is half a percent. So if you compare the IMF's lending rate with the lending rateswith the interest rates in the currencies that are being lent, the IMF's normal interest rate is actually slightly greater than the lending rate in the currencies. So the dollar portion, if you could think of it as the dollar portion of the IMF interest rate, is actually slightly greater than the U.S. interest rate.
The second point is the one that the chairman referred to. I think in recognition of this problemand it is a problem that is particularly important in the lending in response to a liquidity crisis kind of situation that we have seen in South Korea and in the Asian economies that is really the situation where the Badgett kind of doctrine fliesthe United States led the effort to get the IMF to enact what in their parlance is referred to as a new facility for handling situations of that kind.
And when that kind of situation is addressed, it will be addressed with a premium interest rate, which iswhich rises, actually, the longer you keep the funds. But that starts at a premium interest rate of 3 percentage points or 300 basis points above the institution's cost of borrowing.
Page 58 PREV PAGE TOP OF DOC The IMF also tries to respond to the other part of the Badgett doctrine by imposing conditions on the use of the money to ensure its prompt repayment.
Mr. SMITH of Michigan. And that would be my second you might answer in writing, is in Thailand, in Indonesia, IMF required higher taxes as a condition of getting the loans. And so sometimes, since that is seemingly inconsistent with the growth and strengthening of the economyif you could give me that answer.
The CHAIRMAN. In writing. Thank you.
Mr. BISHOP. Thank you very much. Let me thank you for your testimony this morning. Mr. Greenspan, the popular consensus is obviously you have presided over an ever-growing and a rising ship that is the American economy. And virtually every sector of the economy in America seems to be doing well, with the possible exception of the farm sector.
There is no doubt that a great deal of pain in the farm community results from low commodity prices that are prevailing this year. But in my home State of Georgia, the farmers endured a quadruple hit this year. We had an early draught that was followed by excessive rain, then a late frost and flooding, which was exacerbated then by the excessive low commodity prices that the farmers received at harvest, if they were indeed able to harvest their crops because of soggy land from the flooding.
The combination of all of these circumstances prevented many of our farmers from making any profit, and instead they suffered crippling losses which has caused them to default on many of their bank loans.
Many of them have lost their shirts the past crop year and they have not had the funds to put the current crops in the ground. As Secretary Glickman mentioned, the emergency disaster lending and the crop insurance has really offered little solace or help to these farmers, while the commodity groups are asking and clamoring for more IMF funding.
Page 59 PREV PAGE TOP OF DOC I appreciate your testimony, and I appreciate the help you have given to date, but I need your continued help to help me explain to the average family farmer in Georgia why they need to bail out somebody else's disaster while they continue to suffer.
I think that what you have offered today is quite helpful. But it is going to be very, very critical for those of us who come from farm country, where we are suffering, to help us to be able to explain why it is so crucial to agriculture to fund the IMF when so many of the farmers in our districts cannot even get the current year's crop into the ground.
Can you kind of address that and offer some assurance that can help us to make the case to our farmers who are suffering in the short term, why in the long term this is a good investment? And let me also thank Secretary Glickman for his help with regard to our foreign exports, particularly in Korea, with textiles and cotton. Our farmers were very appreciative of that.
Mr. GREENSPAN. Congressman, it is certainly the case that the IMF or, indeed, most any other economic institution, has very little control over El Nino or the weather or the various other difficulties which are inherent and have always been inherent in agriculture.
The one thing that we all are arguing for today is the issue of open markets and open international finance which, other things equal, are very helpful to the American farmers who are highly competitive in the world, are major exporters of commodities around the world. To a very substantial extent, our major crops and livestock would not be able to function at the levels that they currently are were it not for the availability of broad export markets for their products.
So, while it is certainly the case that we cannot argue that IMF funding is going to change the nature of weather conditions or soil moisture or other characteristics which are so crucial to a good crop, the presumption is that when the crop gets in the ground and gets a good yield, that these financial institutions will be of assistance in making certain that it is exported at the best prices that could conceivably be obtained in the world markets.
Page 60 PREV PAGE TOP OF DOC The CHAIRMAN. Thank you.
Secretary GLICKMAN. If I just may add, and as Sanford talked about, we have sold a lot of U.S. cotton under GSM programs over the last 6 months to both Korea and Indonesia and it has made, I think, a big difference. But I agree with you; the crop insurance and other domestic programs may not work as well as we would like them to work, but that is no reason, frankly, to cripple our export opportunities.
I understand out there people push this all in one big basket. If they are hurting, help us first, don't help them. But I guess the bottom line here is we are helping ourselves. We do need to work on other things as well, but if you don't move the crop, then you don't have anything; no income as well. So you have to work on all of these different things.
The CHAIRMAN. And they will answer your written questions. Thank you, Mr. Bishop.
Mr. CHAMBLISS. Thank you, Mr. Chairman. I had not thought about it before this discussion here today, but I can't wait to go back and face my bankers and tell them that the two most powerful bankers in the world came to the Agriculture Committee asking for support for their credit union. I won't ask you whether you all are members of a credit union.
Since Sanford and Collin and Mr. Pomeroy have all alluded to this, I would just echo what they said, Dan. It is a serious situation in agriculture country now. You came down with Sanford and myself and looked at our situation, and I can never remember in my 30 years of being involved in the agriculture community of being into a planting season where every single commodity is depressed right now from a price standpoint. And last year was a tough year, but I don't know what this year is going to hold if things do not improve.
I do think, as they said, that there is a direct tie in what we are talking about today and those prices, because the future or actually the current situation but, more importantly, the future of our folks in agriculture is directly tied to our trade in the international market. We are not going to survive without that long term, so I understand we have got to have that. And that is the one frankly bright spot that I see in the area of making our contribution to the International Monetary Fund.
Page 61 PREV PAGE TOP OF DOC But I have one question I wanted to direct to Secretary Rubin and to Chairman Greenspan, and that is how you do respond to that oft-stated criticism from both financially sophisticated as well as financially unsophisticated individuals who say that the contribution that we are being asked to make to the International Monetary Fund is simply a bailout for the big banks and the poor banking practices that have led to this? How do you respond to that?
Secretary RUBIN. That is a very serious problem. Let me take a first shot at it and the chairman will very substantially improve upon it.
We have said on many occasions, I will say it again, I would not spend one nickel to bail out a bank, a creditor, or an investor. What these funds are used for is to help these countries get back on their feet so their markets will revive and their currencies will revive, all of which is in our economic interest. Having said that, there have been very, very large losses taken by creditors and investors in this Asian situation. Deutchebank reserved $777 million for their losses, or something like that. One of the large American banks, I believe, said something about $500 million reserve for losses they have either taken or anticipated in Asia. Very, very large losses.
It is true that there will be some creditors and some investors who benefit from these programs as a by-product of another objective, and that objective is restoring this financial stability. And what all of us are very focused on is exactly the issue you have raised, which is trying to improve the process, improve the structure so that investors and creditors will get less protection and be less shielded from the effects of their decisions, but at the same time preserve the beneficial impacts of the IMF in terms of restoring financial stability.
Mr. GREENSPAN. I just want to add that the answer is yes, there are numbers of investors who, because there has been assistance to stabilize the markets in which they lent, will do better than if that assistance were not there. That is not the purpose of the assistance. So the argument has got to be, well, if you don't want to bail them out, that means that you want the whole economy to go down, which is the only way to avoid it.
Page 62 PREV PAGE TOP OF DOC There is just no way to avoid helping someone who probably doesn't deserve to be helped if you try to stabilize an economy. Some people who made bad investments and should be subjected to very severe losses will end up with much less in the way of losses than they deserve as an inevitable result of trying to stabilize an economy.
The only choice we have to avoid doing that is not to stabilize the economy, and so that the whole thing crashes and everything is in terrible shape. And I would say that I don't think that is a good trade-off. I think the problem is, yes, people who don't deserve it will get bailed out. But that is a by-product of something which is important to do and not doing it to avoid the bailout is a worse choice.
Mr. CHAMBLISS. Mr. Chairman, if I could make one final comment, and that is, Dan, going back to this issue of commodity prices, the chairman and some other members of this committee just got back from a trip to Europe, as you are probably aware of, and one comment that I have heard the chairman make, as well as some other folks who were there, is about the fact that in talking with individual farmers they always got around to the issue of subsidies. And right now the situation they talked about with respect to barley is a classic example, and with the Chinese dumping cotton on the international market now which is depressing farmers and those farmers are being significantly subsidized.
If this goes through, I don't know whether there is any opportunity in the international framework of this to discuss the phasing out of subsidizing of those farmers the same as we are doing in our country; and I think acting responsibly by doing so, that it would certainly help our overall situation and, gee whiz, it helps us sell this type of proposal in agriculture country for sure. Thank you.
The CHAIRMAN. As the gentleman knows, there is a revisitation of the Uruguay Round in 1999. That doesn't help today or tomorrow or this crop. But those are issues that this country will take to the 1999 revisitation of the Uruguay Round.
Page 63 PREV PAGE TOP OF DOC Mr. Schaffer.
Mr. SCHAFFER. Thank you, Mr. Chairman. You know, it seems to me that the more fundamental issue that needs to be addressed on an international level with respect to financing is some of the political conditions that need to be changed which IMF, if I understand, is barred from attaching political conditionalities to the expenditures that it makes, the loans that it grants.
I guess my question is to Dr. Greenspan in that regard, because in your comments you mentioned that you have some confidence that the IMF staff understands the need for institutional reform as well as having a broader understanding of the need for economic reform in many of the countries that we are dealing with. Yet the member countriesthe IMF members may be a little bit less convinced that those reforms need to take place.
So from a historic perspective ofwell, from our perspective as Members of Congress, isn't it at least prudent to ask the question shouldn't the reforms take place before we start dishing out the cash; or should we be confident that the reforms will take place later?
Mr. GREENSPAN. It is often very difficult to have two goals to try to accomplish simultaneously. I do think that there is a really quite impressive shift in the general attitude amongst policymakers around the world, and very specifically within the IMF itself, towards the recognition of the extraordinary benefits of free markets and market capitalism generally.
It has been a slow process in certain prospects, but there was earlier in the post-World War II period a very significant experiment between central planned economies on the one hand, and free market economies. And as is rarely the case, the result has been unequivocal in the sense that nobody has even questioned whether, in fact, the market economies clearly bested in all respects the nature of either quasisocialism or some form of central planning.
Page 64 PREV PAGE TOP OF DOC That has spilled over into virtually all international financial institutions. It spilled over into the World Bank. It spilled over to the IMF. It spilled over into virtually every economic organization that we deal with around the world. So that trend is clearly under way.
Is there a way in which we should try to facilitate or push it faster if we can? Sure. Is it something which can be done as an amendment to IMF quota? I doubt it. In fact, my suspicion is that it is probably far better to allow the intellectual ferment which is going on quite considerably to work its will, because I think it will probably be a far more significant effect than anything we endeavored to mandate in one means or another through amendments to IMF legislation directly.
Secretary RUBIN. Could I just add one comment, if I may? I think we actually are and will be implementing substantial reforms in the IMF, particularly as mandated in the conditionality to the legislation that has passed in the House Banking and House Appropriations Committee. There is a lot we can do now, but there are other things that we cannot do now, and the concern that we have is that those be attached as mandates in legislation, which would mean that we would not be able to fund the IMF in short order. And it is that distinction that I think is worth keeping in mind.
The CHAIRMAN. I thank the gentleman. Mr. Boswell, we are down to one question.
Mr. BOSWELL. Thank you, and I will be very, very short. I got the signal.
You have been described by the way, earlier this morning, and I think you are, as teachers. You know, we are a world economy now, and you have come to teach us. The meeting we had several weeks ago, I walked out of there convinced, Mr. Greenspan and Mr. Rubin and Mr. Glickman, that this is a very, very serious matter. And we must deal with it.
Page 65 PREV PAGE TOP OF DOC And I recognize some of my colleagues who are very serious about wanting to do some things to make some corrections and so on in the apparatus of the operation, but this is a very serious thing. And an analogy came to my mind. I used to teach youngsters to fly, to prepare them to go to Vietnam. And I told them if the weather changes very quickly and a storm could come up so suddenly, and you know, that can destroy you, too. But if you prepare, you do the right things, you might see a storm coming, the potential for a storm. And if we prepare and we do the right things we can survive this storm. But if we don't, I don't know what will happen and I don't think we have to take the risk.
And so you have convinced me that we don't have to take the risk and we ought to be doing this. And so I feel very committed and very supportive. And I want to thank you personally for your interest in trying to teach us that this is a very, very serious matter and the time is at hand to act. And we can do these other repairs also. It could be ongoing but we need to act to be sure that we don't take this hit on our country and on agriculture, and on the country that we are being exposed to.
I had to come back, even though I was called out, and some of you know who I was talking to, if I told youto come back to tell you that I appreciate what you are doing.
Secretary RUBIN. Mr. Boswell, I thank you very much. I really do. That is a very good statement of what we have been trying to do.
Mr. Chairman, may I enter a letter in the record that I did not have at the beginning? It is dated May 20, 1998 and it signed by 37 former Cabinet officials, National Security Advisors; I would guess from looking at it, is about half Democrats and half Republicans, supporting funding of the IMF now for the purposes that we have discussed in this hearing.
The CHAIRMAN. I thank the gentleman. And without objection, it is so ordered.
Page 66 PREV PAGE TOP OF DOC [The information appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you, Mr. Boswell.
Mr. STENHOLM. Yes, I just thank the gentlemen for being good teachers today. A perfect analysis of this and being an ex-teacher myself, good teachers learn every day as they teach. And, Assistant Secretary Roth, we have ignored you today but I hope you have learned also a little of the plight of agriculture, and that as we embark in a bipartisan way in the support of IMF and also fast track with the chairman, it is going to be extremely important that you folks are in on the end of some of these negotiations.
I would point out to my colleagues who have worried about fast track, the only way we deal with the problems of the barley and others is by having our negotiators at the table. That is all fast track is about, and IMF. You have done an excellent job of explaining it, so I believe that we farmers on the wagon tongue will have a better understanding of what IMF is all about.
The CHAIRMAN. I want to join my friend in thanking each of you. We appreciate your directness and your support for IMF.
And thank you for taking your valuable time. There will be a press opportunity. Secretary Rubin and Secretary Glickman are invited. I would invite the chairman, but I understand he does not do these things.
Mr. GREENSPAN. I am shy. [Laughter.]
The CHAIRMAN. He is shy. I will repeat that.
Joining us will be Donna Reifschneider, the National Pork Producers Council; James Sanford, the National Cotton Council; Richard Newpher, from the American Farm Bureau; Dale Moore and Chuck Lambert from the National Cattlemen Beef Association. That will be immediately in room 1302, which is next door. We have a vote in about 2 minutes. We will return immediately so we won't delay you much longer. Thank you all very much.
Page 67 PREV PAGE TOP OF DOC [Whereupon, at 1:00 p.m., the committee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Hon. Robert E. Rubin
Mr. Chairman, members of this committee, let me spend a few minutes to discuss the critical importance of approving funding for the International Monetary Fund in light of our attempts to help restore financial stability in Asia, and examine the impact of the crisis on American businesses, workers and farmers.
Let me make one overarching point to start. We have critical economic and national security interests in restoring financial stability in Asia. Nearly 40 percent of America's agricultural production is exportedand 40 percent of those exports go to Asia. In general, 30 percent of U.S. exports go to Asia, supporting millions of U.S. jobs, and we now export more to Asia than Europe. In States like California, Oregon and Washington, exports to Asia account for more than half of each State's total exports. Financial instability, economic distress, and depreciating currencies all have direct effects on the pace of our exports to the region, the competitiveness of our goods and services in world markets, the growth of our economy and, ultimately, the well-being of American farmers and workers. Moreover, if the problem were to spread to developing countries around the globe, the potential impact on our economy could be severe.
The United States also has critical national security interests in seeing a restoration of financial stability in the region. We have 100,000 troops based in Asia, 37,000 on the Korean peninsula alone. A stable and prosperous Asia is more likely to be a peaceful Asiaas was the case over the last decade when Asia was experiencing dynamic growth. Economic stability and political stability, political reform and social stability are separate but closely interrelated, and they all promote peace and our national security interests.
Page 68 PREV PAGE TOP OF DOC In short, Mr. Chairman, by doing everything sensible to help these Asian countries get back on track, we support our exports to the region, reduce the risk that financial instability will spread to other developing countries with potentially severe effects on us, and help protect our national security interests in the region and around the world.
Mr. Chairman, there are difficult times ahead for the Asian countries in crisis and many challenges to be met, but a number of the countries affected by the recent crisis have committed themselves to sustained reform and that has led to signs of progress. Moreover, the contagion risk that threatened in the early stages of the crisis has so far largely been contained and economic instability has not spread to other developing countries.
In Korea, newly inaugurated President Kim has acted strongly to implement the IMF-supported economic reform program and has worked effectively to reschedule Korea's debt with Western banks. Thailand's new government has also acted strongly to implement the IMF reform program, particularly in beginning to restructure its banking sector. Investors are starting to show renewed confidence in these countries, though, as I said, there are difficult times and great challenges ahead for both Korea and Thailand.
Let me say a word now about Indonesia. Although the political situation is changing rapidly, I do want to make a couple of points. First, it is important to emphasize that it is the economic crisis and political conditions in Indonesiaand the Indonesian government's mishandling of the crisisthat have led to a loss of confidence in the government by the Indonesian people and the global financial markets. All of this, in turn, exacerbated the current economic problems and led to political instability. The IMF reform program was a creative response to the economic crisis, not a cause. The IMF program did include difficult measures, but implementing difficult measures is always necessary in restoring financial stability. There are no easy answers to financial crisis, but there are many examples of the necessary rigors of IMF-led reform promoting real progress: Latin America in the 1980s; Russia, though it has many great challenges ahead, and Poland and other ex-communist nations in the early 1990s; and Mexico in the mid1990s. And if a country is not successful in taking tough steps, and getting back on track, the crisis will very likely be far deeper and far longer and conditions far worse than during the difficult period of implementing reform. The key in all of these situations is for the government and the people to internalize and commit to reform on a sustained basis. It is also important to note that the IMF typically includes specific provisions in the programs to reduce impact on the poor, and that was so in Indonesia.
Page 69 PREV PAGE TOP OF DOC Second, when the financial crisis developed in Indonesia late last year, the most immediate and pressing issue was to restore financial stability. At the same time, the administration has always recognized the close links between financial stability, political stability, political reform and pluralism. But it is also important to note that restoring financial stability in a crisis is essential both to prevent the most vulnerable from further suffering and to lay the foundation of long-term economic health necessary for political reform and stability. In the earlier state of the Indonesian crisis, the IMF and the the international community that attaching political reform conditions to the IMF programs would not have worked; indeed, for very important reasons, the IMF is barred in its own charter from engaging in political conditionality. Therefore, we pursued political and human rights objectives through other means. Moreover, significant components of the IMF-led reform program were designed to undo the monopolies and price subsidies that were part and parcel of the existing system, and this was a step to reform. Clearly, the circumstances have now changed, and in addition to the President's statement last week, the United States joined with the other nations in the G8 this past weekend calling for political reform in Indonesia. In the short term for Indonesia, restraint by the authorities and political dialogue and reform are necessary to reestablish political and social stability and create a framework within which essential IMF-supported economic reforms can be implemented to restore financial stability.
All financial crises involve enormous economic, political and social complications and uncertainties, but those uncertainties must not stop us from acting. Instead, the international community, through the IMF and otherwise, must make the most practical judgements as to what is most likely to work with respect to the interrelated objectives of financial stability, economic well-being, political stability, political reform, and human rightsand then adapt their programs' approaches as circumstances warrant. This is a most difficult undertaking: the results take time, and there is no easy course, but undertaking this effort is critically in our interest.
Page 70 PREV PAGE TOP OF DOC The financial assistance mobilized by the International Monetary Fund has played a key role in providing breathing room and developing strong reform programs for these countries. What is important now is sustained adherence to these strong reform programs, as difficult economically and politically as that may be. This is the best path back, and the alternative to reform is far worse. Sound macroeconomic policies, stronger financial systems, structural reform and more open markets are key to restoring financial stability and to the long term economic health of these nations.
Let me now say a few words about the impact of the crisis on the US economy. We have begun to be directly affected by events in Asia. On an annualized basis, exports to the key countries were down about $23 billion in the first 3 months of this year, and that is likely to worsen in the months ahead.
Moreover, the effects are being felt by America's farmers. As I said earlier, nearly 40 percent of America's agricultural production is exported, and 40 percent of our agricultural exportsabout $23 billiongo to Asia. Many fishermen in Alaska are suffering because depreciating currencies have caused their fish to be too expensive for Asian markets. For example, Seattle-based NorQuest Seafoods, Inc, which procures much of its catch from Alaska, reports that demand for surimi, a fish paste used in artificial crabmeat, has declined by about 30 percent. Corn farmers in the Midwest, livestock producers in the West, are all feeling the effects. Corn exports are expected to fall seven million tons, or 11 percent. Cattle and other livestock exports are expected to drop to $7.5 billion this year from $8.2 billion projected before the crisis and $7.7 billion last year. American farmers have a tremendous stake in a restoration of economic health in the region, and a tremendous stake in preventing future crises or most effectively dealing with them and containing them if they occurand that gives them a large stake in the future strength of the IMF.
Let me point out that the recent IMF programs in Asia included significant market-opening and structural reform measures that increase the opportunities for US farm exporters. Additionally, we are taking bilateral actions to help farmers. US bilateral export assistance has been stepped up via more than $2 billion in additional export credit guarantees. The US ExIm Bank has also assisted U.S. capital goods exporters with $4 billion in additional short-term trade insurance available for sales to the countries in crisis.
Page 71 PREV PAGE TOP OF DOC The IMF has been central to the effort to restore financial stability through reform programs to address the causes of crisis in each nation. The IMF has the expertise to shape effective reform programs, the leverage to require a country to accept conditions that no assisting nation could require on its own, and it internationalizes the burden.
Our contributions to the IMF have not cost the taxpayer one dime in 50 years. When the IMF draws on our commitments, we receive a liquid, interest bearing offsetting claim on the IMF of equal value. There are no budget outlays under CBO scoring and no increase in the deficit, or reduction in resources for other spending priorities.
We are asking Congress to approve funding for our participation in the IMF as quickly as possible. As a result of the recent situation in Asia, the IMF's normal financial resources are approaching a historically low level, and the IMF does not have sufficient funds to deal with a truly major crisis, for instance if the Asian crisis were to worsen and spread to developing countries elsewhere, or if a new crisis were to develop. It is in our economic interest to have that vulnerability exist for as little time as possible.
Moreover, failure to support fully the IMF now could shake confidence in American leadership in the global economy just at a time when confidence and American leadership are so important in reestablishing stability in Asia and once we act the rest of the world will act very quickly. At the last IMF replenishment, in 1992, all of the other countries acted within six days of action by the U.S. Congress.
Some have suggested that we should not advance new monies to the IMF unless it agrees to attach certain conditions to all its reform programs. We agree with the importance of many of these objectives. Let me discuss a few steps we are taking to strengthen the IMF and to prevent future crises or deal with them when they occur.
First, we are actively promoting a broad range of reforms within the IMF to make it a more effective institutionreforms that are directly responsive to suggestions by members of Congressand many of these have been attached to the legislation passed in the Senate and passed in the House Banking and House Appropriations Committees. Our contribution to the IMF affords us enormous influence in the IMF, but it does not give us the capacity to control the institution. Important changes and policy decisions require that we work with the 180 member countries and build support for our policies. Thus, while we can and do work energetically to achieve these objectives, some can be accomplished quickly, and others will take time.
Page 72 PREV PAGE TOP OF DOC Second, we have been working to develop mechanisms so that investors and creditors more fully bear the consequences of bad decisions. In fact, many creditors and investors, have taken large losses in Asia. However, a byproduct of programs designed to restore stability and growth may be that some creditors will be protected from the full consequences of their actions. That is because any action to force investors and creditors involuntarily to take losses, however appropriate that might seem, could cause banks to pull their money out of the country involved, and, perhaps from other emerging markets, which, in turn, could cause serious global economic disruptions.
The United States is leading an international effort to strengthen the architecture of the international financial system to address this question of moral hazard, and, more generally, to better prevent financial crises and better manage those that occur. Last month, I hosted a meeting of finance ministers and central bank governors from 22 countries to focus on this problem.
The United States believes reform of the international financial system should focus on three areas: First, an increase in transparency and disclosure so that investors have better information with which to make good decisions. However, investors must then use that information well. We were struck during the Asia crisis by how little rigorous risk analysis was done by many creditors and investors. Second, strengthening domestic financial systems, to reduce the risk of economic and financial crises. Virtually all financial crises in developing countries either began in or were exacerbated by badly flawed financial sectors. Finally, as I just discussed, we must work to create mechanisms so that creditors and investors more fully bear the consequences of their actions.
Mr. Chairman, let me conclude by reiterating how important it is to secure full IMF funding now, even as we work to improve the IMF and strengthen the international financial architecture. We live in an interdependent world, where the conditions in one country or a group of countries can dramatically affect the economic well-being of farmers and workers in this country. We need the IMF to help deal with financial instability problems when they occur. The probability of a serious reversal in the Asia situation and contagion to developing countries around the world, or of a new crisis in the short term, is small. But these occurrences are possible and the consequences to us could be severe. We cannot afford to take the risk that such events could start to unfold and the IMF does not have the capacity to try to cope effectively. Recognizing the importance of moving forward, the Senate approved funding by a vote of 8614. I urge you to follow suit. The full IMF funding is needed now, to protect the interests of American farmers, businesses and workers. Thank you very much.
Page 73 PREV PAGE TOP OF DOC
Statement of Hon. Alan Greenspan
The global financial system has been evolving rapidly in recent years. New technology has radically reduced the costs of borrowing and lending across traditional national borders, facilitating the development of new instruments and drawing in new players. Information is transmitted instantaneously around the world, and huge shifts in the supply and demand for funds naturally follow, resulting in a massive increase in capital flows.
This burgeoning global system has been demonstrated to be a highly efficient structure that has significantly facilitated cross-border trade in goods and services and, accordingly, has made a substantial contribution to standards of living worldwide. Its efficiency exposes and punishes underlying economic imprudence swiftly and decisively. Regrettably, it also appears to have facilitated the transmission of financial disturbances far more effectively than ever before.
Three years ago, the Mexican crisis was the first episode associated with our new high-tech international financial system. The current Asian crisis is the second.
We do not as yet fully understand the new system's dynamics. We are learning fast, and need to update and modify our institutions and practices to reduce the risks inherent in the new regime. Meanwhile, we have had to confront the current crisis with the institutions and techniques we have.
Many argued that the Asian crisis should be allowed to run its course without support from the International Monetary Fund or the bilateral financial backing of other nations. They asserted that allowing this crisis to play out, while doubtless having additional negative effects on growth in Asia, and engendering greater spill-overs onto the rest of the world, would not likely have a large or lasting impact on the United States and the world economy.
They may well have been correct in their judgment, and some would argue that events over the past six months have proved them right; we have so far avoided the type of continuing downward spiral that some feared. There was and is, however, a small but not negligible probability that the upset in East Asia could have unexpectedly large negative effects on Japan, Latin America, and eastern and central Europe that, in turn, could have repercussions elsewhere, including the United States. Thus, while the probability of such an outcome may be small, its consequences, in my judgment, should not have been left solely to chance. We have observed that global financial markets, as currently organized, do not always achieve an appropriate equilibrium, or at least require time to stabilize. Moreover, the effects of the Asian crisis on the real economies of the immediately affected countries, as well as on our own economy, are only now just being felt.
Page 74 PREV PAGE TOP OF DOC Opponents of IMF support for member countries facing international financial difficulties also argued that such substantial financial backing, by cushioning the losses of imprudent investors, encourages excessive risk-taking. There doubtless is some truth in that, though arguably it has been the expectation of governments' support of their financial systems that has been the more obvious culprit, at least in the Asian case. In any event, any expectations of broad bailouts have turned out to have been disappointed. Many if not most investors in Asian economies have to date suffered substantial losses.
Moreover, the policy conditionality, associated principally with IMF lending, which dictates economic and financial discipline and structural change, helps to mitigate some of the inappropriate risk-taking on the part of governmental authorities. At the root of the problems has been poor public policy that has resulted in misguided investments and very weak financial sectors. Convincing a sovereign nation to alter destructive policies that impair its own performance and threaten contagion to its neighbors is best handled by an international financial institution, such as the IMF. What we have in place today to respond to crises should be supported even as we work to improve those mechanisms and institutions. Some observers have also expressed concern about whether we can be confident that IMF programs for countries, in particular the countries of East Asia, are likely to alter their economies significantly and permanently. My sense is that one consequence of this Asian crisis is an increasing awareness in the region that market capitalism, as practiced in the West, especially in the United States, is the superior model; that is, it provides greater promise of producing rising standards of living and continuous growth.
Although East Asian economies have exhibited considerable adherence to many aspects of free-market capitalism, there has, nonetheless, been a pronounced tendency toward government-directed investment, using the banking system to finance that investment. Given a record of real growth rates of close to 10 percent per annum over an extended period of time, it is not surprising that it has been difficult to convince anyone that the economic system practiced in East Asia could not continue to produce positive results indefinitely. Following the breakdown, an increasing awareness, bordering in some cases on shock, that their economic model was incomplete, or worse, has arguably emerged in the region.
Page 75 PREV PAGE TOP OF DOC As a consequence, many of the leaders of these countries and their economic advisors are endeavoring to move their economies much more rapidly toward the type of economic system that we have in the United States. The IMF, whatever one might say about its policy advice in the past, has played an important role in this process, providing advice and incentives that promote sound money and long-term stability. The IMF's current approach in Asia is fully supportive of the views of those in the West who understand the importance of greater reliance on market forces, reduced government controls, scaling back of government-directed investment, and embracing greater transparencythe publication of all the data that are relevant to the activities of the central bank, the government, financial institutions, and private companies.
It is a reasonable question to ask how long this conversion to embracing market capitalism in all its details will last in countries once temporary IMF financial support has come to an end. We are, after all, dealing with sovereign nations with long traditions, not always consonant with market capitalism. But my sense is that there is a growing understanding and appreciation of the benefits of market capitalism as we practice it, and that what is being prescribed in IMF-supported programs fosters their own interests.
Similarly, it is a reasonable question to ask whether the U.S. authorities should not seek greater assurance that the ongoing process of reform in the IMF's policies and operations will produce additional concrete results before we agree to augment the IMF's resources. I have reason to believe that the management and staff of the IMF are committed to a process of change. We face a somewhat more difficult task in convincing the IMF's membership as a whole of the need for change. However, I am confident that our leverage in this regard would be reduced if the United States failed to agree promptly to the proposed increases in the IMF's resources.
Accordingly, I continue fully to back the administration's request to augment the financial resources of the IMF by approving as quickly as possible U.S. participation in the New Arrangements to Borrow and an increase in the U.S. quota in the IMF. Hopefully, neither will turn out to be needed, and no funds will be drawn. Although the tendency in recent months toward stabilization in the East Asian economies is encouraging, clearly those economies are not out of the woods as recent events attest. Moreover, we have not yet put in place the strengthening of the international financial architecture that would enable us in the future to place less reliance on the IMF to deal with potential systemic crises. Thus it is better to have the IMF fully equipped if a quick response to a pending crisis is essential.
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Statement of Hon. Dan Glickman
Mr. Chairman, members of the committee, I am pleased to appear with Secretary Rubin and Chairman Greenspan to discuss the effects of the financial situation in Asia on U.S. agricultural exports, and our support for funding for the International Monetary Fund (IMF).
Asian Problems Slow U.S. Agricultural Exports
The United States long has been an important supplier of agricultural and food products to Asia, benefitting both Asia and our farmers and ranchers. Overall, we export about $23 billion worth of U.S. agricultural products to Asia annually, or about 40 percent of U.S. agricultural exports worldwide. During 199197, this region accounted for 45 percent of our export growth.
Weaker demand in Asia is taking a toll on U.S. exports, pulling market prices and net cash farm income down in 1998 by about $2 billion less than had there been no crisis and U.S. sales losses are occurring in almost every product category, especially corn, hides and skins, soybeans, cotton, animal feeds, soybean meal, meats, fruits and vegetables, and hardwood lumber. U.S. consumer food exports to the region are also suffering. With five months of fiscal year 1998 complete, U.S. agricultural exports to Korea were down $742 million, or 44 percent, compared to the same period last year. Exports to the ASEAN marketsIndonesia, Malaysia, Thailand, and the Philippineswere down $448 million, or 28 percent. Declines were smaller to Japan, 8 percent; China/Hong Kong, 6 percent; and Taiwan, 7 percent.
The reduction in import demand in Asia is also lowering commodity prices around the world, reducing the value of U.S. exports to non-Asian markets. Current projections for U.S. agricultural exports stand at $56 billion for this fiscal year, down $1.3 billion from last year, and this number could drop further. This reduction is largely the result of: (1) lower U.S. crop and livestock prices due to larger global supplies, lowering the value of exports regardless of destination and (2) lagging demand in Asia.
Page 77 PREV PAGE TOP OF DOC For fiscal year 1999, the decline in U.S. agricultural exports could be greater; we may begin to see additional declines in exports of bulk commodities such as grain and soybeans. This will be due to three factors: the sharply slowing economies in Asia and their reduced import demand, competitive pressures from Southern Hemisphere producers, and the appreciation of the U.S. dollar relative to the currencies of our competitors. However, after fiscal year 1999, Asia's currencies, economies, and import demand are expected to begin to recover.
Support for the IMF is Crucial for U.S. Agriculture
Given Asia's importance as a market for U.S. agricultural products, it crucial that we support the efforts of the IMF. The IMF stabilization programs and reforms are extremely important in continuing U.S. agricultural trade with the Asian countries affected by the financial crisis. Without the quick intervention of the IMF in putting stabilization programs in place, we could not in good faith have extended the GSM102 credit allocations we made to these countries. Given the financial turmoil, we could not have said that they met the creditworthiness criteria that are legislatively mandated for GSM102. And without the GSM102 allocations, under which we have now sold over $1 billion worth of American agricultural products to the affected countries, our trade would have been that much lower. In the longer term, the structural reforms that the IMF has negotiated will advance our trade agenda by increasing competition and transparency within each country.
This combination of IMF efforts and our export credit guarantees were used successfully during Mexico's economic problems in 1994. Today Mexico is our third largest single country market, estimated to buy a record $5.8 billion worth of U.S. agricultural products in 1998.
IMF-led reforms are helpful in another way, too, because they promote more transparent, freer markets in which our products can more readily compete. For example, in Korea, the IMF agreement specifically requires economic reforms that should be positive for U.S. agriculture, and in January, Korea began to harmonize its technical standards affecting food imports with international codes, which should increase access for U.S. exporters. Korea is also moving to revise pesticide tolerance levels in harmonization with CODEX, which will allow U.S. fruit to enter Korea unimpeded. Korea agreed to eliminate restrictive licensing provisions that could lead to the solution of a number of longstanding access problems for U.S. exporters of such items as corn grits, soyflakes, and peanuts. In Indonesia, in accordance with the IMF agreement, the monopoly of Indonesia's state trade agency, Bulog, over the importation and distribution of essential food items has been abolished. This action, coupled with the removal of restrictions in importing activities, should provide the opportunity for full private sector participation if the situation there stabilizes because private sector importers are interested in purchasing U.S. agricultural products.
Page 78 PREV PAGE TOP OF DOC Of course, the IMF cannot do its job without resources, which is why President Clinton on February 2 called on Congress to provide the IMF with additional funds. The Senate's vote in March to fund the IMF showed strong bipartisan support for its important role, and we are hoping the full Congress will quickly approve funding. As President Clinton said last month, ''Delay or failure to approve the full IMF requests could undermine our capacity to deal with threats to world economic stability and could leave us unable to protect American workers, farmers, and businesses in the event of an escalation or spread of the Asian financial crisis or a new crisis.''
Mr. Chairman, the IMF-led effort in Asia is helping those countries make financial and structural changes that should lay the foundation for their future growth. Helping in this effort is clearly in our interestsin the interests of global financial stability, economic growth, and trade, and certainly in the interests of U.S. farmers, ranchers, and exporters. Agriculture has as much, or more, at stake than any other industry sector in helping these countries get back on their feet and back on the growth path.
Statement of Executive Intelligence Review
What to do About Agriculture, Asia and IMF? Form a ''New Bretton Woods'' Financial SystemFeed People, Save Nations, Don't Play ''Markets''
At the time of the Agriculture Committee hearing May 21, 1998 and thereafter, the world was well into Phase Two, of a systemic, international financial break-down. Phase I occurred in the latter half of 1997, manifest in the nations of East Asia, and wrongly called an ''Asian problem.'' Currencies, shares and asset values of Thailand, Indonesia, Malaysia, then South Korea, fell 2070 percent; Japan too went into crisis. The effects on the physical economy (trade cancellations, production declines, job losses, suffering) rippled around the globe. Still, it was called the ''Asian'' crisis.
Page 79 PREV PAGE TOP OF DOC But as of 2Q 1998, there can be no confusion about the global scope of the financial blow-out, and the worldwide physical economic impact. Financial crises are underway in Brazil and throughout Ibero-America; in Russia, and Eastern Europe, and at points on all continents, as well as in East Asia and Japanthe second largest economy in the world. Shortly, a ''Big Bang'' can be expected on the New York and other trans-Atlantic stock exchanges (Germany, France, Italy, etc.), which have ballooned to the blow-out stage.
Each day's daily newspaper coverage now provides summary documentation on these unfolding crises. Just to underscore the point here: On May 28, Russian President Boris Yeltsin made special phone hook-ups with President Clinton, German Chancellor Helmut Kohl and others, to confer on the Russian crisis, The pressure on the ruble, the Moscow stock exchange, and Russian state securities had reached the point by May 27, that government bonds (GKOs) were offering 150% short term yields, to ''prevent'' a meltdown. The whole nation is on the brink of insolvency.
What such dramatic events-of-the-day make clear, is that: (1) the financial crises add up to a global emergency, not a concurrence of regional or national problems; (2) that financial reforms and band-aid solutions, will not remedy the situation; and (3) a new financial system, and measures to build-up national economies, are in order.
As of the end of May, many voices were raised in alarm and warning. For example, Hans Tietmeyer, the head of the German central bank, said in a speech in Switzerland, that a ''chain-reaction bursting of speculative bubbles'' on stock markets is to be expected.
LaRouche Was Right
This kind of systemic global financial break-down is just what Lyndon LaRouche, founding editor of EIRNS, forewarned of in early 1998, if no concerted action for an alternative direction was forged in the meantime. In a Jan. 14 radio interview, he said, ''...By the time we're approaching, or entering the second quarter of 1998, we're going to be in the most hellish crisis we've ever imagined, something far more hellish, more profound, than anything that has been seen so far in the 20th century...So, if you think things are bad now, wait until March or April come around. It's going to be impossible...''
Page 80 PREV PAGE TOP OF DOC LaRouche's basis for this prognosis, was his previous, published record of economic analysis, correctly forecasting that the disparity between financial aggregates (share values, speculation in currencies, derivatives, et cetera) rising over the last 30 years, at an ultimately hyperbolic rate, while at the same time, the physical economy went into steep decline, would result in a boundary condition of instability, and then disintegration. That's where we are now.
Certain steps in the right direction have been taken to avert the worst. On Christmas Eve, 1997, Treasury Secretary Robert Rubinannouncing help for South Korea, in the security interests of the United States and the international community, stated that, ''not one nickel'' of public money should go to aid any bail-out private creditor speculators. In February and April this year, Rubin initiated meetings in Washington, DC of finance officers of 21 nations, to confer on what he called a ''new architecture'' of changes for the world financial system. But at the last meeting, on April 16, the result was to form three study groups, to report back, not until next October. Meantime, all hell is breaking loose.
Towards a New Bretton Woods
Nothing less than a ''New Bretton Woods''a new financial system, in the spirit of what was initiated at the end of World War II, is required. In early 1997, Lyndon LaRouche called for an international mobilization for a New Bretton Woods, and as of now, thousands of people in dozens of countries have joined this effort. The idea of the United States initiating this was ''tacked on'' to draft Senate Bill S. 1769 this spring, then set aside. The legislative language mandated the creation of a commission to review the ''future role...if any of the IMF, and the convening of a ''Bretton Woods conference.'' Now is the time to put it to the forefront; but time is running out.
The fact that we face a situation of, a ''New Bretton Woods'' or bust, is most easily summarized by the unpayability of the ratio of volume of international obligations of derivatives contracts outstandingsome $140 trillions (face value), in contrast to the vastly smaller total volume of annual gross national product of nations. Contrary to the Wall Street ''wisdom'' that for every seller, there's a buyer, the day that chain-reactions of non-payment bring down major banks, major stocks, and detonate the derivatives bomb, that's the day the nuclear-explosion style melt-down starts for the whole financial system.
Page 81 PREV PAGE TOP OF DOC Look Ma, No Country
This scope of today's crisis makes clear that economic interim measures on their ownno matter how well-intentioned, are doomed, without progress toward a new nation-serving financial system. So far, the U.S. Department of Agriculture has advanced about $2.5 billion in GSM and related credits to East Asian nations, to provide trade financing for their purchase of U.S. agriculture exports. Over 199798, the U.S. Export-Import Bank has similarly rushed in to make trade-credits available; and the counterpart agencies in other nations, such as Australia, are doing likewise. But pending what contingency?
Agriculture Secretary Dan Glickman has repeatedly stated that, such trade finance loans are good because of the good record of South Korea, and of other borrowing governments. But, without effective financial system replacement, governments themselves are cracking up. 'Look ma, no country.'
This need not be. Look at a crisis situation concretely, for example, the Nation of Indonesiathe fourth most populous in the world. Though their currency, share values and assets were financially devalued (the rupiah is down 70% against the dollar since summer, 1997), the people, resources, infrastructure and potential are all intactfor now. They can be saved; let George Sorosthe mega-speculator that led the assault on East Asian currencies, hang out to dry. Concerted international nation-serving measuresNOT the approach of the IMF (which is to shut down economic activity) would create the conditions for national economies to come back strong.
New Bretton Woods
In brief, the hallmarks of a new financial system in the interests of nations, not financial speculation, call for a return to some of the tried-and-true national interest measures such as re-pegging currencies, imposing foreign exchange controls, and exercising controls over capital flows. These all worked at the beginning of the first ''Bretton Woods'' system, up through the beginning of the 1960s.
Page 82 PREV PAGE TOP OF DOC At the same time, domestically, nations now require versions of what the U.S. codes call ''chapter 11'' bankruptcywhere vital functions are protected and restored, and debts and financial claims are managed in ways to serve that purpose. There are ''worthy'' and ''unworthy'' debts, and the national interest can be the differentiating factor.
One vital improvement over the original Bretton Woods agreements, is to back national-interest central banking, and not private central banks, such as the Federal Reserve System of the United States, which has consistently acted against the interest of the country.
These measures, coupled with mutual-interest national development projects, such as the great ''New Silk Road'' or ''Eurasian Land-Bridge'' perspective of railroad corridors of development spanning the transcontinents of Europe and Asia, can lead the world into unprecedented growth and prosperity. There is no need for collapse. The June 1998 summit between the United States and China could be the launching point.
Get the World Economy Above Break-Even
These are the essential measures required, because in fact, the toll of speculative extractions from the real physical economies of nations, has been so great, that the world economy is, effectively, below breakeven. Basic ratios, per household, and per unit land area, of such necessities as safe water, housing, transportation, power, and so forth, are inadequate the world over, and in most places, on the decline. The only general exception is China.
In the United States, by these real measures of conditions of the potential productivity of the economy, the real ''economic fundamentals'' are in a state of disaster. For example, look at transportation infrastructure. The rail grid, and capacity, have shrunken to the point that the 1997 grain harvest, and other cargo, were unable to be moved in the western States.
One example proves the point: the case of the contested Finland barley imports into California. While the diversionary objection is raised about European farm subsidies, the real issue is that the U.S. rail system cannot reliably move domestically-produced grain cross country on a schedule to maintain dairy cows' rations!
Page 83 PREV PAGE TOP OF DOC This infrastructure break down illustrates how, overall, production and consumption levels in the United States have been on the decline since the late 1960s, by about 2 percent a year, by real ''market basket'' standards of measurement. Households today require several jobs to scrape by, where one principal wage-earner in the 1960s could support the family. Today, family farms are undergoing ruin, where back in the 1950s, when percent-of-parity farm pricing policy still prevailed, a farm household could live on the farm income, with only a small off-farm part-time supplement, if any.
If we approach the present crises of the breakdown of the physical economy, and the financial system, as an opportunity for restoring economic development policies, and ending the insanity of ''post-industrial'' thinking, then we can find the ways to begin reversing the damage, avert catastrophe, and restore hope.
Thus, the U.S. chapter 11 Bankruptcy Codeto reorganize in order to restore, productive activity, is both the model for how to approach saving nations, and for also restoring whole productive sub-sectors, like farming and manufacturing within the United States and other countries.
The Agriculture Committee is well-positioned to take the lead in forcing this policy issue. The food supply is at stake. From that point of view, it is vital to drop any pretense of trying to seek policies to ''save market share,'' or ''protect markets.'' Whole nations are facing disintegration; currencies and trade contracts are blowing out. Time to stop talking ''markets,'' and start talking LaRouche economics. This is reality.