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FOREIGN OPERATIONS, EXPORT FINANCING, AND RELATED PROGRAMS APPROPRIATIONS FOR 1999
Wednesday, February 11, 1998.
SECRETARY OF THE TREASURY
WITNESSES
HON. ROBERT E. RUBIN, SECRETARY OF THE TREASURY
DAVID LIPTON, UNDERSECRETARY FOR INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY
Chairman Callahan's Opening Statement
Mr. CALLAHAN. Secretary Rubin, we are happy to have you before our committee this morning.
I know you have been spending a lot of time on Capitol Hill lately explaining the needs not only of the International Monetary Fund but of your proposed budget for 1999, and I know you have met with the leadership, and I know you have met with other responsible Members of Congress, both House and Senate. But you are at the right place now because, before anything can take place that you are requesting, it has to take place at this committee level. We are apologetic that we do not have as many Members as you would like.
As you know, there was a retreat, both the Democratic and Republican retreat, the first part of this week. Many of the Members are attending that, and rightfully so, but this hearing, especially as it involves the IMF issue, is something we felt we could not postpone. Because if indeed the Congress is going to act upon this request, we are not going to have time to wait an additional month before we begin the committee process.
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I don't know whether the Asian crisis will stall our Nation's economic growth cycle, but I do know that it has impacted one industry, at least, in my home congressional district. We have a pulp mill in Alabama that announced a 2- to 3-week layoff of the entire factory, a shutdown of the mill, simply because its primary customer was a company in Indonesia, and the Indonesians could not pay them for the pulp. So it has directly impacted my district.
In addition to that, I represent a port, a major port, probably the best port in the entire United States, if not the world.
Ms. PELOSI. Probably?
Mr. CALLAHAN. But, nevertheless, we ship a lot of products to and from our port that either begin in the Asian region or wind up in the Asian region, so it has very seriously impacted my district.
You may know that the American people still do not understand the International Monetary Fund—they have no earthly idea what we are talking about. They most recently were made aware of the existence of such a fund in the Mexico crisis. They do not know the success of the Mexican bailout. They think that the $20 billion or so, maybe $30 billion we sent to Mexico was never repaid. They don't know the history of that or of the International Monetary Fund.
You are receiving a lot of unfavorable publicity, or the IMF is, from a lot of prominent people who were formerly in responsible positions in the government who are indicating maybe the time has come to eliminate the International Monetary Fund. Those are problems we are going to have to face if indeed we present this to this subcommittee and to the full committee and to the U.S. House.
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I heard Secretary Albright in her presentation in Senate hearings yesterday indicating something to the effect that the International Monetary Fund was like a credit union. That is a very good analogy.
I think you and the President, if you are going to be successful and if we are going to continue to participate in the International Monetary Fund, have to immediately describe this to the American people and describe its importance the impact it is going to have, rather than the national opinion, that all we are doing is bailing out a bunch of insurance companies and a bunch of banks. I know better than that, but most Americans do not, and someone is going to have to televise that message if indeed you are going to muster together the sufficient strength to add to the International Monetary Fund.
Most people do not realize it is an international fund. They think that we, the United States, are putting up all of the money. They don't realize we are only a contributor to the International Monetary Fund. Nor do they realize the control we have over the International Monetary Fund.
So someone has to get that message out, Mr. Secretary. I think that someone should be either you or the President or Madeleine Albright. But, at this point, the American people, in my limited capability of investigation, do not believe that the Congress should act favorably upon your request. Nor do they understand the need to impact or to contribute to the Asian monetary crisis because of the economic impact on the United States.
So it is a very important thing that we are going to have to address in the not-too-distant future. But, before it can be, someone has to explain to the American people why we have to increase our quota another $14.5 billion.
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With respect to your budget, we are going to have to take a little bit more time on your appropriation request for 1999. There are some questions I will have that I will submit to you with respect to some of the increases you have requested, for example, the increase from $48 million to $300 million for the global environment facility.
We are going to have to have answers with respect to the individual requests you have made for 1999.
Your request for debt relief is $79 million, including $7 million for the enhanced structural adjustment facility. Last year, we appropriated $27 million, so that is a big increase. As you know, this subcommittee, and especially this Chairman, have not been too receptive to increases with matters that are perceived to be foreign aid. We are going to have to live within our limitations of monetary constraints; and, although there will be some agencies or institutions that receive additional monies, we are going to have to have real justification for these increases.
At the end of the day, this committee will have to convince a skeptical House of Representatives of the merits of your International Monetary Fund and the multilateral development banks as well, about our ability to work together. We have, as you well know, a working relationship with the Democrats, not only on this panel but on the full committee and in the full House of Representatives, too.
We try to stay out of your hair. We don't want to run your department. We don't want to run foreign affairs. But we do have an obligation to our constituents and to the American people to make absolutely certain that the money is being spent in the most frugal way possible.
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I know you are aware of it and I know all the members of our committee are aware of it, but, since our subcommittee last met, we have been blessed with the appointment of a new member to our panel. I think she is joining us for the first time.
Miss Kaptur, we certainly welcome you to our committee and look forward to a continuing working relationship with your side of the aisle.
With that, I will close. I will submit to you my formal statement.
I have already asked you privately a couple questions with respect to some parochial concerns I have, and I hope you will be able to respond to them in the not-too-distant future.
With that, I would recognize the gentlelady from California, Mrs. Pelosi.
Ms. Pelosi's Opening Statement
Ms. PELOSI. Thank you very much, Mr. Chairman. I am pleased to join you in welcoming Secretary Rubin to our committee on this the first of our hearings of the year. It is very appropriate Secretary Rubin lead off, because some of the first issues to come before the Congress will be from his department.
First, though, Mr. Chairman, once again I want to commend you for your leadership and your courtesy in welcoming Representative Kaptur. I want the record to show we have a full complement of Democrats, including our Ranking Member on the committee, Mr. Obey, long-time chair of the subcommittee.
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Perhaps our conference ended earlier than yours. I am pleased that Representative Kaptur is with us, and I know she will make a valuable contribution——
Mr. YATES. Or in advance.
Ms. PELOSI [continuing]. To the committee. An advance.
Mr. CALLAHAN. Let the record reflect that you started before we did. That is why.
Ms. PELOSI. Okay. In whatever case, I am certain every member of this committee understands the importance of the testimony that Secretary Rubin is to present today. I associate myself with the remarks of our Chairman about the need for the administration to educate the public about why we are involved with the IMF to begin with and why it is in our national interest to support it. I think this understanding will lead to support. Certainly there are many questions, as we have discussed, leading up to this hearing.
But, before we start, I want to say that, with all this attention focused on the IMF replenishment, we must also continue to recognize the importance of and need to provide for the U.S. contributions to various international financial institutions.
Of the $1.7 billion requested, $502 million is to pay for U.S. arrears. With the support of Chairman Callahan last year, the Congress agreed to provide over $600 million in arrears, including all outstanding arrears for IDA. As you know, this has enabled the U.S. to regain the strong leadership position it needs at the World Bank to continue its pursuit of reform.
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The request for $502 million, if granted, would almost wipe out U.S. arrears to the international banks and significantly strengthen the U.S. position on a host of policy issues at other institutions in addition to the World Bank. This Administration, I think, deserves a great deal of credit for negotiating U.S. commitments to these programs down by 45 percent, saving the taxpayer $1 billion. That is a tribute to your leadership, Mr. Secretary.
Arrears are requested, as our Chairman mentioned, in fiscal year 1999 for the Global Environmental Facility, the Inter-American Bank, Asian Development Bank and African Development Bank. I am certain that, in your testimony, you will give justification for the need for this funding.
I support this funding, but I do, again, say it is important for the Administration to explain the importance of these institutions and the need for the increase.
With respect to the IMF replenishment and the request for the New Arrangements to Borrow, the Administration has requested both of these items in the 1998 supplemental. I support the need for these items in the supplemental, but I have a number of concerns to discuss with the Secretary. The essence of these concerns centers around the kind of lasting changes and reforms that will be achieved through these bailouts.
And, yes, Mr. Chairman, I agree that Secretary Albright explained it clearly. I don't think most Americans know that this is not money given away; it is a loan. And, we do get an asset in return for it, so it isn't an opportunity cost in our budget that is taking the place of other expenditures we might want to make domestically. In fact, the United States must respond to the Asian financial crisis by supporting multilateral institutions set up to deal with such situations.
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The establishment of these institutions was predicated on the fact our economies would have an impact on each other, and they do. And when the situation arises, as in the Asian crisis, the IMF as a multilateral way to proceed is preferable to a bilateral way to proceed, but we must act. Mr. Chairman, you pointed out very eloquently a demonstration of the adverse impact of the crisis on your own district.
I believe support of the IMF is necessary, primarily because of the detrimental effects on the U.S. economy that might occur as a result of entire countries in Asia going into default. I see this in three ways: What kind of reforms? How can we prevent this from happening again? How can the IMF operate its own house in a way that has more transparency, addressing some governance issues? How can it function in a way that there is a better understanding in the public as to what it is, what its purpose is and what the borrowing country's attitude is? There are internal reforms that need to be taken at the IMF.
Then there are reforms that might relate to the IMF and its relationship to the borrowing countries and the conditionality it places on them. So much of the IMF activity is based on conditionality. It begs the question to me, if you can have conditions placed on IMF lending that affect the economy, why would we not be able to include as conditions issues relating to wages and workers rights in those countries, which also are a part of the economy?
There are other people, and I share their concern, who believe that issues relating to the environment and human rights should be taken into consideration as well. I am willing to grant that that might be something we can do in a third category, which is what we, as the U.S., can take the leadership on to compensate for the impact of IMF restructuring in a country.
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So it is threefold: one, the IMF internally; two, the IMF in relationship to the borrowing countries; and, three, what we as a superpower and a main supporter of the IMF can do bilaterally in order to—at the same time but separately and not part of any IMF legislation—to mitigate for some of the impact of IMF restructuring in a country, to promote the environment and to promote human rights. I would hope that the issue of workers' rights would permeate all three of these arenas.
Again, the economic effects of the crisis in Asia and its impact on Japan and China clearly loom as potential impacts on the U.S. economy. The consequences could even be greater than just in the countries already impacted. The conditions of and the further aggressive pursuit of export-led growth policies of China and Japan could undermine economic growth in this country. The question then becomes, how will the U.S. respond, what steps are we going to take in the IMF, the World Trade Organization and other institutional bodies to prevent disruption of our own economic growth? I will explore them in my questions this morning.
I look forward to hearing your testimony, Mr. Secretary. Once again, may I commend you for your hard work and your dedication. I believe the Administration and indeed the country are well served by your continued presence and good judgment, especially now in this time of the crisis in Asia. There have been many other times when your leadership has gotten us through.
With that, I join my distinguished Chairman in welcoming you and look forward to your testimony.
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Mr. CALLAHAN. I thank the gentlelady and would like to recognize the ranking Democrat on the full appropriations committee who serves as sort of the vice chairman of every appropriations committee, one of the hardest working Members of the entire U.S. Congress, the gentleman from Wisconsin, Mr. Obey.
Mr. OBEY. Thank you, Mr. Chairman. I hadn't intended to say anything, but since you have given me the opportunity, I certainly will. I appreciate that.
Mr. Secretary, let me simply make an observation that I find very troubling. The Congress last year had three very important issues which it left unresolved when we irresponsibly walked out of town.
Mr. Obey's Opening Statement
The first issue was IMF funding, which is designed after all, in the last analysis, to protect our own economy from being affected by the collapse of Asian currencies.
The second is the issue of U.N. arrearages, which is crucial at a time when we are trying to maximize a sense of unity on the part of the U.S. and our U.N. allies with respect to the Iraqi situation.
And, third, the unrelated but nonetheless important issue of Mexico City policy and how it relates to the international family planning policy of the United States.
In my view, last year, in an act of consummate recklessness, the Congress left town without dealing with the IMF and U.N. issues. That, in my view, has left us less able to effectively provide leadership at the United Nations. It has also enhanced the risk to the American economy by inaction on the IMF front.
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It seems to me that if Asian currencies were to resume their slide, if the Japanese government continues to follow its obtuse fiscal policy, that the result will be a flood of Asian goods into this country because of the cheapening of Asian imports into this country relative to U.S. goods because of the currency level changes.
If that happens, once again, the persons who will be called upon to pay the economic price for the folly of financial elites and big boy investors and finance ministries in the various countries around the world, will be American workers, many of whom can't even afford to buy a single share of stock anywhere, in the United States or the Asian markets.
Under those circumstances, I believe it is essential for this Congress to deal with the merits of each of those three issues, but not in the context of political blackmail, which creates artificial political linkages between the issues. I think we have an obligation to try to work out our differences on Mexico City. I think we have an obligation to deal with the U.N. arrearages. I think we have an obligation to deal with a number of the questions Mrs. Pelosi has raised with respect to how we provide support for the IMF in a way which will be conducive to reform of the international financial structure.
But when I read in Congress Daily this morning that Representative Smith has indicated he has assurances that the House leadership will not support supplemental funding for the IMF unless the administration engages in an artificial deal on that issue and Mexico City, it seems to me that is a short route to chaos.
Each of these issues deserves to be addressed on its merits. We have an obligation to try to respond to the legitimate concerns of persons such as Mr. Smith and others in the Congress on Mexico City but not as part of an overall political deal on Mexico City that would transform a political minority into a majority through political blackmail.
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These are big-league problems we are talking about, and it seems to me that if we don't deal with the issues like big leaguers then we shouldn't be dealing with them at all. It just seems to me that what we ought to be talking about is how we are going to provide assistance to the IMF in a discrete and effective way which not only meets the current economic crisis but does promote the kind of long-term change that we are talking about, and the way we deal with international financial issues.
It seems to me we need to discuss the legitimate concerns that people have on Mexico City. But if this gets tangled up in one of these all-consuming three-legged deals, we are going to be sitting here all year fiddling while Rome burns.
Obviously, I am concerned about what happens in Asia. My concern is not what happens to the Asian countries; my concern is what happens to the workers in this country if we don't meet our responsibilities on the IMF.
So I would urge the administration to consider all of the concerns of those who have doubts about our IMF policy, those who have doubts about U.N. arrearages and those who have doubts about Mexico City. But I would urge the administration to deal with those issues the way they ought to be dealt with, separately, with dignity, on the merits, rather than as some kind of political sideshow that gets us involved in nothing but ships passing in the night for the next 6 months while the world economy goes to hell with American workers suffering the consequences.
Thank you, Mr. Chairman.
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Mr. CALLAHAN. Mr. Secretary, we will accept your statement in its entirety for the record and will invite you now to address the committee.
EDUCATING THE AMERICAN PUBLIC
Secretary RUBIN. Thank you very much, Mr. Chairman.
Let me start by addressing a comment you made, if I may. That is the need to educate the American people.
I think you are exactly right. I think we are in a new era. I saw it developing when I was still in the investment banking business, and I think we are now in a global economy and a global financial market.
People say the words, but I don't think there is a broad-based understanding of what they mean. I think you capture it very well with that plant in your district, and I think Americans have benefited enormously from this globalization. But there are also risks, and there are problems. I think, as a Nation, our economic well-being is going to depend very much on how we learn to take advantage of the opportunities and manage the risks; and a lot of what I have to say deals with that.
I think your subcommittee becomes extremely important because I think a lot depends on the work we do with these international financial institutions. It is during this period of, say, the last 10 or 15 years that the flow of capital into developing countries has increased to levels that one could not have imagined, say, 15 or 20 years ago; and that has, in turn, financed growth and financed investment and has resulted in developing countries absorbing something over 40 percent of our exports. But, on the other hand, it has also carried the kinds of risks with it that we have seen manifested first in Mexico and now, more broadly, in Asia.
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As I said a moment ago, I think all of us are going to be preoccupied—this committee, our administration, the administration to follow us—with the questions of how we as a nation provide leadership to the world in learning to deal with both taking advantage of the opportunities and managing the risks.
We appreciate, Mr. Chairman, the spirit in which we worked with your committee last year. I think we accomplished a great deal in terms of providing effective leadership in the international financial institutions. We also worked to set priorities for the future, and that has been very helpful to us as we have moved forward to negotiate with and work with these institutions.
As I think Congresswoman Pelosi mentioned, we cleared our arrears in the World Bank's IDA; and that clearly has greatly increased our ability to work effectively in that organization to promote views that the United States believes should be promoted by the World Bank.
Mr. YATES. Would you please pull the mike closer?
Secretary RUBIN. Is that better?
Mr. YATES. That is much better.
Secretary RUBIN. Too close?
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Mr. YATES. No, I want to get close to you.
Mr. RUBIN. Well, that is a different set of issues, which I think I will leave aside, if I may, Mr. Yates. I have got enough problems.
Mr. YATES. I will withdraw that.
REFORM
Secretary RUBIN. We have, as you know, negotiated a 40 percent reduction, as Congresswoman Pelosi said, in our commitments to multilateral development banks; and so, once we clear up the arrears, we will then be on an annual funding scale of about $1.2 billion, which is less than our commitment had previously been to IDA alone. On the basis of that $1.2 billion, we will have enormous leverage over institutions that, in the aggregate, lend roughly $45 billion a year.
It is an enormously effective way for the United States to pursue its view of how developing countries should pursue reform and growth, which is all enormously, as I said a moment ago and Mr. Obey suggested, in our interests. At the same time, we have worked forcefully to reform these institutions.
I think it would be fair to say the United States has been far and away the leading voice with respect to reform. We have provided leadership in reducing overhead and increasing transparency, created a far greater focus on corruption. We have worked with these institutions so that they have focused much more on promoting the private sector in developing countries and becoming more sensitive to environmental, labor and human rights concerns.
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The World Bank, as you know, is undergoing a major reorganization right now. The Asian and European Bank budgets have been frozen for several years; and the African Bank, with a great deal of discussion with the United States, has substantially cut its staff and, in our judgment, has engaged in a very serious reform program. We believe that the multilateral development banks are providing very good value for American dollars and better value than at any time in their history.
ARREARS
Having said that, the arrears are still something over $600 million. In addition, we have a $75 million shortfall on our pledge to the ESAF, the IMF's Enhanced Structural Adjustment Facility. Our 1999 budget includes $509 million toward these commitments.
Our highest priority, having said that, is, as always, the current contribution; but these arrears that I just mentioned are critically important, too; and we feel very strongly they need to be satisfied.
Let me touch, if I may, on a few items worthy of particular mention not because of priority but because I think their substance merits a few moments of discussion.
GEF
The first is the Global Environmental Facility, which is referred to as the GEF. The GEF is really a unique instrument because it helps developing countries work on environmental problems that affect not just that country but, rather, have cross-border effects, very much including effects on our own country—for example, the state of the oceans or protecting the ozone layer.
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Our $300 million request for the GEF includes roughly $200 million for arrearages, and we think it is very important we pay our arrearages and that we become current in this very important institution, that is going to affect our health and our prosperity very centrally.
AFRICAN DEVELOPMENT FUND
Secondly, we are requesting $155 million for the African Development Fund. Over half of that request would go to pay arrears. The African Bank, as I mentioned a moment ago, has made very substantial reforms; and it is very importantly involved with us, the United States, as we look to focus more effectively on the continent that has lagged all the rest of the world with respect to economic growth, and that is Africa.
We are requesting $5 million for Treasury technical assistance. I know that will sound like a minute number to this committee, and it is minute in the context of the budget, but it is a very important request. Treasury provides exceedingly professional technical assistance, and it is funded from outside of Treasury. It is a very difficult process to arrange.
Fortunately, we have an effective process now with those who provide the funding for Central Europe and the former Soviet Union. But when you get away from that area, funding technical assistance is a very time-consuming process. In places like Asia, where there is a tremendous demand right now for our technical assistance with respect primarily to financial institutions and similar matters, we cannot get the funding quickly enough to get the technical assistance in place when it is needed and on a timely basis. So we have this $5 million request to enable us to mobilize and deploy those resources on a rapid basis.
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IDA
Finally, as always, we strongly support the World Bank's International Development Association, IDA. IDA, as you know, is far and away the largest organization in the world that deals—in the international financial institution world—that deals with the problems of developing countries. I think it is a tremendously constructive force; and, under its president, there is both a reform program with respect to how it operates and also, we think, a more effective focus on the kinds of things we think IDA should be focused on—health, children, education—the underpinnings, if you will, for a market-based economy.
ASIA AND THE IMF
Mr. Chairman, let me comment briefly, if I may, about Asia and the IMF. There has been, as you know, a remarkable set of events in Asia which have been referred to by some as the first crisis of the 21st century.
I said in my opening remarks that I think the kinds of issues we have seen in Asia and the kinds of issues that are going to be dealt with in this committee for a long time to come, as we all learn to deal with this new era, will critically affect our economic well-being. Financial instability, economic distress, depreciating currencies all very much affect our workers, our farmers, our businesses.
Number one, these Asian countries are very large markets for our goods; and, number two, the depreciation their currencies affects the competitiveness of our goods in world markets and also here in the United States. Moreover, if the problems in Asia had spread to other developing countries around the world—and that had begun, as you may remember, at the beginning of this Asian crisis—and had those countries gotten enveloped in the same problem, then many more markets would have been affected. You would have had many more currencies depreciating and the effects on this country would have had the potential for being quite profound.
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As it is, even if the situation in Southeast Asia can heal and if the contagion does not occur, there will still be a palpable effect on our economy. I still think we will have solid growth and low inflation next year. However, there is always the possibility, though I think it is a relatively low probability, that the crisis could reignite, that the enormous risk contagion that had us so focused between Thanksgiving and Christmas could, in fact, take place.
With all of the consequences that come from that, I think the leadership of the international financial institutions and the international community are very much catalyzed in many ways, by the United States. We were successful in preventing this thing from becoming what it could have become; but there is still some risk, although I think a low probability, that it could happen again.
I think it is a risk we must not take. We are requesting the support for the funding as rapidly as possible for both the new arrangements to borrow and the IMF quota, so that if this low probability event should happen, the international community will have the capacity to deal with it rather than be left with an enormous crisis that could have profound effects on our economy without an effective mechanism for dealing with it.
As far as the policies of the IMF themselves are concerned, the programs in these Asian countries have been very much focused on the problems that gave rise to the financial instability. That is to say, they have been focused on the structural issues in these countries that gave rise to these problems.
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I think they have been well constructed. I do not believe they are austerity programs. You can argue about how much macroeconomic content, that is to say fiscal policy and interest rate policy, they should have had, but these are certainly not traditional IMF austerity programs.
Let me comment briefly, if I may, Mr. Chairman, on two concerns that have been raised with respect to these programs.
First is the moral hazard question. The question is—well, the assertion is—that these programs, in effect, enable banks to come out whole from risky investments and that, in turn, creates perverse effects on behavior going forward.
The principle is clear. Creditors and investors should bear the consequences of their investment.
In Asia, vast numbers of investors and creditors have taken very large losses. You may have seen that Deutsche Bank reserved $777 million for losses anticipated in Asia. The Financial Times reported early last week, I think it was, that European banks are expected to have losses of up to $20 billion with respect to Asian loans.
Having said that, there are some institutions that may come out better off than they would have been without these programs. That is a by-product—I have said many times, but I will say it again—we would not spend a nickel to protect a bank, but that is a by-product of programs whose purpose is financial stability and the rest, the recovery and reestablishment of economic well-being in these countries.
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The other issue is the issue Congresswoman Pelosi raised, which is the question of labor rights, human rights and the like, environmental protection.
I don't think there is any question, if you look at these countries, at least there is no question in my mind. I come away with the view that when you look at the countries in Asia—effective human rights and labor rights regimes are very important with respect to having effective economies over time. So I think it is not just a social and moral issue. It is an economic issue.
It still leaves us with the question of how much you can accomplish in these programs. It is my view, at least, as you go to implement and get sustained implementation of programs that are aimed at financial stability, which require wrenching changes in a very short period of time, there is a limit to how much you can accomplish—or attempt to accomplish—without greatly reducing the probability of success; and both the workers in those countries and the workers in our country are very much affected by whether or not we can achieve success. Moreover, success in this effort to reestablish financial stability and economic growth is, I think, essential for creating an environment conducive to pursuing human rights, worker rights and environmental protection, protecting objectives which we very much share with Congresswoman Pelosi.
I think the challenge to all of us is the one you stated: how do we pursue these objectives while, at the same time, not vastly increasing the difficulty of reestablishing financial stability. As you know, we are working on this and trying to think the issues through in a very serious way. They are issues we are committed to as values and also because we believe they are essential to having effective economies over the long run.
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Final comment. I think the IMF is exceedingly well situated to be the central institution in this entire effort with respect to reestablishing financial stability. It has great expertise, and can internationalize the burden so it doesn't fall on the United States itself. It can require countries to do things, in terms of conditionality, that no bilateral provider of credit could.
Having said that, there is clearly a need for great changes in the mechanisms and institutions that deal with the global economy and the global financial markets. The markets and the economy have developed very rapidly, and the institutions have not kept pace.
Mr. Chairman, we have a process with the Federal Reserve Board right now which is very intensely focused on the architecture of the future. However, these are mind-bogglingly complex issues and it will take a substantial amount of time, in my judgment, to develop sound and sensible ideas, working with Congress and other nations around the world. We cannot, at least in my judgment, wait upon that process to be completed before we provide the funding for the IMF so that we will have the capacity to deal with what all of us hope will not happen, and what I think is a low-probability event, but will be a risk. In my judgment, we should not take the risk of either this crisis becoming far worse or a new crisis occurring elsewhere in the world.
With that, we would be delighted—Under Secretary Lipton heads all international activities at the Treasury and would be delighted with me—to respond to any questions you may have.
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Mr. CALLAHAN. Thank you, Mr. Secretary.
[The statement of Mr. Rubin follows:]
Offset folios 29 to 32 insert here
MEXICO CITY LANGUAGE LINKAGE TO IMF
Mr. CALLAHAN. First, let me respond to the issue of whether Mexico City language will be attached at some point in this process to emergency needs of the International Monetary Fund.
Congressman Obey indicated we have a minority controlling a majority, and I most respectfully disagree with that, because the Mexico City issue is not going to be attached probably to our bill. If it comes through this committee with respect to the IMF, it is going to be attached by a majority of the Members voting on the floor of the U.S. House of Representatives.
This issue is not going to go away. It is something other administrations have lived with, successfully, with respect to international policy in the past; and this issue is going to be attached to this bill in one shape or the other. So the administration must accept this fact, whether or not you agree with Mexico City language. This issue is going to be offered, in the least, as an amendment on the floor.
History will tell you that the majority of the Members of Congress support Mexico City language. History will tell you that, on supplemental appropriations, it is always a temptation, especially in a crisis situation, that issues like this are attached to supplemental appropriation measures. So it is going to become an issue that the administration is going to have to negotiate, and you may as well accept that.
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While it is not going to be probably passed out of this subcommittee or even the full committee, when it gets to the floor it is going to be attached, so I think the administration is ultimately going to have to make a decision as to whether or not this international monetary crisis in Asia and the funding of International Monetary Fund is so necessary that it will stand in the way of the majority of the Members of Congress. But that is an issue that I am just telling you is going to come up.
Congressman Obey mentioned this is the major league, but you have a lot of us minor league capability people playing in this ball game and, nevertheless, we are going to be a factor. I am pro-life, and I am not ashamed of that. I am right proud of that. That is my personal philosophy. I am going to vote for the Chris Smith amendment, even though I agree that maybe this is not the place for it.
The attempts of the past have been unsuccessful in negotiating something through the Congress to tell the administration that we want Mexico City implemented. So it is going to be an issue. It is going to be attached, more than likely, if this is what the leadership decides; and whether the leadership decides or not, the attempt is going to be made, it is going to be attached to this issue. So you must prepare yourself to either accept that language or else come forward with some language that is acceptable to the Mexico City proponents of the legislation.
With respect to IDA, Mr. Secretary, as you know, this committee and the Congress, a great majority of the Congress, were very concerned about the procurement arrangements that were negotiated by Chairman Wolfensohn; and we were told if indeed we were able to come forth with the necessary monies for IDA that the procurement would be revisited and the monies would not be spent unless the terminology of that agreement was changed. Have we arranged to repeal the procurement policies negotiated?
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Secretary RUBIN. Yes, ITF has been terminated, and whatever is left in that—and I actually don't know the numbers. Whatever is left there is now fully available. As I understand it, roughly a billion dollars is fully available to American companies for competitive bids.
Mr. CALLAHAN. Very good.
Mr. Frelinghuysen.
Mr. FRELINGHUYSEN. Thank you, Mr. Chairman.
Good morning, Mr. Secretary, how are you?
IMF WALL STREET JOURNAL ARTICLE
In an article in the Wall Street Journal from your predecessor, Bill Simon, also co-written by former Secretary of State, George Schultz, and also by Walter Wriston, even though I support IMF funding, when those three people get together to write an article, I take a close look at what they are talking about.
One of their premises is that, when the IMF intervenes, the government and its—and lenders are rescued but not the people. I have examined some of your testimony before other committees, and I would like you to address that issue.
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I think the public perception is—and Wriston and Simon and Schultz seem to follow pretty much along that public perception—that the people in these countries are totally devastated by what is occurring.
Secretary RUBIN. Three comments, if I may.
One is that I know and enormously respect Bill Simon and George Schultz. I talked to George yesterday twice about the Asian crisis. But, on this issue, we disagree.
You will see an ad in the New York Times with something like 150 signatories supporting the IMF, including a large number I think you would have equal respect for, so it may give you a little more comfort in terms of the company one keeps.
I also noticed in the article you referred to he said we should get rid of the IMF after it deals with the Asian crisis. It was sort of recognizing this is the way we can deal with crisis.
Mr. FRELINGHUYSEN. I am not an advocate of doing away with the IMF, but when these three persons make a comment, I think somebody needs to rebut the claims.
Secretary RUBIN. I agree with you.
Look, I think the answer is as follows: The problems that the people of these countries suffer—and they do suffer problems—are not a function of what the IMF has done. They are a function of financial instability, loss of confidence, collapse of economies and collapse of the currencies.
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The IMF is, if you will, the cure, not the problem. When the IMF comes in with its assistance but also conditionality, what that does over time, and though it does take time—these things do not happen quickly or easily, unfortunately—the countries get back on track, if it works. Then you start to see incomes go back up. Growth starts. Incomes go back up, and the people begin to reestablish their economic well-being.
Conversely, I don't think there is any question that if the IMF—if the international community—was not effective and successful in doing what it is now doing in Asia and did in Mexico, then most likely you would have a default either of the sovereign debt or maybe systemic failure of the banking system in which you would have vastly greater economic duress and currency depreciation. It would last for a vastly greater period of time, and the people would suffer far worse.
So I think you have two difficult outcomes, but I think one is far better than the other.
I think you have seen that in Mexico now, with the economy growing at 7 or 8 percent—well, growing 7 percent last year, expecting to grow 5 percent this year, in dollar terms. Real wages have increased something like 30 percent since the bottom of the crisis, and in dollar terms, Mr. Yates.
They are not back where you want them to be yet, but they are a heck of a lot—I think very, very substantially better off—than they would be if Mexico had defaulted, in which case I think you would have years and years of terrible economic hardship.
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Mr. FRELINGHUYSEN. The other issue they raise is the IMF can lull nations into complacency as a self-appointed lender of last resort, a function never contemplated by its founders.
Secretary RUBIN. I actually agree.
There was a column today in the Post—I think he got half of this about right. He didn't address a piece of it, but he addressed that piece. I don't think any country would choose to get into the mess or the morass that Mexico and these Asian countries have been in when they get into trouble. So I don't think that government officials are going to be lured into making bad policy decisions because they feel the IMF will bail them out; and, therefore, they feel they won't have to suffer the consequence.
I think the tragedy is what you said. You got it right. The tragedy is that the countries do go through a difficult time no matter what, even if the recovery program is effective, before recovery takes hold.
I think where there is an issue is, to the extent that bankers and investors are better off because of the programs than they otherwise would have been, that, unfortunately, can create the perverse impact—could at least conceptually create the perverse impact—of causing people to be less conscious of the risk than they should be.
Mr. FRELINGHUYSEN. Then you would agree with the third premise.
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Secretary RUBIN. I would agree with that.
I do think in Asia you had vast losses. So I think this would be a good lesson to the banking community, but I do think we need to change mechanisms and architecture to try to prevent that from happening to the greatest extent possible.
Mr. FRELINGHUYSEN. Is it fair to say, to use their own words, that there is a good chance that those who have lent money will get, at some point in time, bailed out?
Secretary RUBIN. No, my guess will be you will find most of the creditors in Asia—I will see if David agrees with this—most of the creditors in Asia and the credit extended in Asia, where there are problems, will wind up taking losses. But I think some will benefit. I think most will wind up taking losses, and equity investors have gotten very large losses.
OPENING UP MARKETS
Mr. FRELINGHUYSEN. The issue of opening up markets, I hate to to be provincial in this business, but I come from a State that represents a lot of pharmaceutical industries. The Chairman obviously has provincial interests as well.
I have a letter in front of me from the Thai government that says that they require all Thai government agencies and semi-private industries to purchase only goods produced in Thailand. I thought part of what we were doing here is actually opening up markets—besides building sound financial practices that we wanted to open up markets.
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My question is, what guarantees do we have that these reforms, these markets, will open up?
Secretary RUBIN. Market opening is an objective we had when the President first walked into the Oval Office; and we accomplished a great deal, although there was an enormous amount left ahead.
When IMF sets up the programs and we do play a substantial role in trying to help think through the content of these programs, what we try to do is to focus on the reforms that most directly relate to reestablishing financial stability. Because, as I said I think in reference to some other similar issues, it is a very difficult thing to do.
You are asking countries or requiring countries to make wrenching changes, changes nobody has asked us to make, and I think we would have an extremely difficult time making wrenching changes in a very rapid period of time.
I believe totally in opening markets abroad, and I believe in being very tough in opening markets. There are systemic things that we do do, and we could describe them if you like, in some of these programs that go to market opening. But I think if we try to accomplish a trade agenda, a United States trade agenda, through these programs, I think we then run into the problem of trying to do a whole other set of things which is going to make it much more difficult and therefore less likely to accomplish.
Mr. FRELINGHUYSEN. Speaking for myself, I think we ought to get something for our financial commitment.
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Secretary RUBIN. Well, we do.
Mr. FRELINGHUYSEN. You have given us those assurances, but how do we actually have a guarantee?
Secretary RUBIN. No, no. I meant something different. What we get for what we are doing is, I think, in our dominant economic interest, which is to prevent—well, it doesn't necessarily prevent but does the best we can to prevent—these economies from continuing to be in free fall and therefore shrinking as markets, and from having depreciating currencies and undercutting the competitiveness of our goods around the world. That, in terms of our broadest economic interests, overwhelms everything else, and that is what we try to do.
Now, we do try to do some market opening. David, do you want to add anything?
Mr. LIPTON. If I could just say——
Mr. FRELINGHUYSEN. We have other partners in the IMF. What is their impact? I mean, are they as interested in opening these markets as we are? We are the major lender here, so to speak.
Secretary RUBIN. Well, we are about 18 percent.
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Mr. FRELINGHUYSEN. Well, 18 percent. Well, that is the highest percentage of anybody.
Mr. LIPTON. Congressman, a couple of points. I think that because there are other members in the IMF, we understand that the IMF will pursue broad systemic opening of economies, trade policy and capital account policy. It is difficult for them to pursue particular industrial or sectoral issues for fear that each of the member countries would want its particular interests advanced.
What we have seen in the Asian country cases is opening in trade, tariffs being reduced in Indonesia for fruit and nonfruit products. We have seen pledges of export subsidies being eliminated, import-licensing restrictions being eliminated in Korea. These are changes that we think are important for these countries to undertake to fix their economies, to signal the direction that the country will go in.
But there is one undeniable problem in the short run, which is that these countries are in a foreign exchange crisis situation. There is a shortage of foreign exchange, which is why the currencies have been so depreciated.
Mr. FRELINGHUYSEN. I understand they need an immediate transfusion. I am just saying, what guarantee do we have in the final analysis that we are going to have these markets opened up?
Secretary RUBIN. I think as you are dealing with these systemic issues, the guarantee—I don't think I would use the word guarantee—but they have committed to these programs, and they get the money in tranches, Congressman, so that hopefully they get it in tranches so that if they don't do what they are supposed to do, then, of course, they don't get the next tranche.
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This will solve some of the problems. It won't solve all of the problems because if we try to put all of our particular interests into each of these things, as Dave Lipton said, other countries do the same, and you would have an overload of trade issues you couldn't accomplish, and then we wouldn't accomplish our overriding objective, which is the financial stability and the——
Mr. FRELINGHUYSEN. And lastly, to conclude, to explain to the average citizen—and I will follow up with what the Speaker says, I think we need to do a better job of that using your bully pulpit. When a call is made for money, does the Treasury borrow the money, or do you create it by fiat?
In other words, how is it literally done?
Secretary RUBIN. We have our little printing presses.
Mr. FRELINGHUYSEN. Well, I am sure that you do have the printing presses.
Secretary RUBIN. No, we use that for ourselves personally.
No. I assume we borrow it.
Mr. FRELINGHUYSEN. You say here that we are not using taxpayer dollars.
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Secretary RUBIN. Right. Well, we are not. It doesn't cost——
Mr. FRELINGHUYSEN. But in reality, how do you—what is the calling mechanism?
IMF
Mr. LIPTON. It is a swap of the dollars which go from the U.S. to the IMF and the IMF provides us an SDR certificate. So it is an asset swap, and they, in essence, call the dollars when they need them in order to extend loans to countries that are borrowing.
Secretary RUBIN. Let me try. Well, we pay interest on the monies that we borrow, when dollars need to be put up. At the same time, we get interest from the IMF.
Mr. FRELINGHUYSEN. Do they come from the general fund of the Treasury, from borrowing, or the creation of inflationary——
Mr. LIPTON. I don't know the answer to that.
Secretary RUBIN. Let us get back to you, Congressman, but I am sure the answer is they come from the general fund because that is only place dollars can come from, and since we are still in deficit—although only slightly in deficit—net dollars would have to come from borrowing.
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But as Dave Lipton said, there is no impact on the budget, for the reasons we have described, and so you are borrowing dollars, but then you are creating an asset of equal value when you get their claim back and the interest rates, roughly speaking, wash. So there is no cost to the taxpayers.
Mr. CALLAHAN. I would like to commend the gentleman from New Jersey for his knowledge of this issue. Without offending my great friend Mr. Obey from Wisconsin, he brought up the major leagues, so rather than plagiarize him, let me tell you that Rod Frelinghuysen has turned out to be the John Elway of this subcommittee, with all due respect to the problems that the gentleman from Wisconsin had with John Elway on specific issues.
Mr. OBEY. Well, if the chairman would yield, let me say I think the questions Mr. Frelinghuysen are asking are precisely the kinds of questions that we should be asking rather than looking for ways to blackmail each other on very important issues.
Mr. CALLAHAN. I certainly agree, and I am very appreciative of Rod Frelinghuysen for taking the time and the effort and the input that he has provided to me on this very, very complicated issue.
The gentlelady from California.
MEXICO CITY LANGUAGE
Ms. PELOSI. Thank you very much, Mr. Chairman. I am going to follow your lead and not use my question period now.
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I am very glad you didn't bring the hourglass. I don't know what system we are using here, the flexible 5, it seems like. But I am not going to use mine. I am going to have you recognize the gentleman from Illinois, Mr. Yates.
But I am going to follow your lead in making a comment about the Mexico City language.
I do not believe that the poor women of the world should have to pay the price for crony capitalism, corruption and other poor business judgment anyplace in the world.
I listened very carefully as the Secretary talked about how there is conditionality at the IMF, but we don't want to bog down this supplemental because we need to move quickly in order to get the money out there. So it seems ironic to me that while we might not be able to put conditions that directly relate to the economies and the health of the economies of these countries on the IMF supplemental, we are going to put a condition that poor women, throughout the world, will not be able to receive information about their reproductive freedom.
I think that that gag rule has no place, anyplace, in this Congress, least of all on an IMF replenishment.
I have said that with the greatest respect, of course, for my chairman, as you all know, and also for the maker of that motion on the floor of the House, whoever he or she may be, and if it is Mr. Smith, he is my friend, I hold him in high regard. But this is a fight that we have to make and that we have to come to terms on, and it is important for the American people to know that no U.S. taxpayer dollars are spent on abortions anyplace in the world. That is the law.
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And it is important for them to know that the Mexico City language isn't about abortion. What we are talking about is family planning and not having a gag rule on the spread of information about family planning.
With all the respect in the world for my distinguished chairman, sometimes I, too, wish we had a unicameral Legislature, as long as the one house was the House of Representatives. It just doesn't happen to be the case. And while there may be—and I hope there is not—some level of success for the Mexico City language on the floor of the House, that isn't the end of the game. The
legislation has to pass through the Senate and be signed by the President, and then two-thirds of this body has to sustain that position.
So it is a very difficult issue. We are all trying to work closely together to address the concerns that people have, where there are real reasons for opposing the Mexico City language. But if these concerns are just an excuse for antichoice policies, they have no place in this debate because this isn't a choice issue, it is a family planning issue. If they try to disguise themselves as something other than what they are, I think everybody should point to the gross irresponsibility, which I hope the Republican leadership will not exercise, in saying that these two issues are tied in perpetuity, as I believe the language has been used.
And with that, Mr. Chairman, I will save my questions for later about the moral hazard argument and why we should be bailing out the private sector. I think the American people are very tired of privatizing the gain and nationalizing the risk. I appreciate what the distinguished Secretary said about why that is nonetheless in our interest, but my questions will go along that path.
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With that, I yield back my time, Mr. Chairman.
Mr. CALLAHAN. The gentleman from Illinois, Mr. Yates.
Mr. YATES. Thank you, Mr. Chairman.
Mr. Secretary, welcome to our committee. We are glad to have you here, with your very capable assistant.
IMF
Here I have a letter from one of my colleagues. ''Say no to the IMF because the IMF has ample funds without Congress. Dear colleague, the recent Asian financial crisis and the IMF bailout have combined to put pressure on Congress to approve billions of dollars for the IMF. The fact is the IMF has ample resources right now without any new congressional appropriation,'' and there are other paragraphs, but that is the kind of thing that we were getting.
It itemizes what seem to be an enormous amount of resources available to IMF: $45 billion in liquid resources; $25 billion credit line through the general arrangements to borrow; $37 billion in gold reserves; blank billion in funds IMF can borrow from the private capital market.
Let's suppose IMF were not in existence, Mr. Secretary. You have not indicated the possibilities of what will happen in the event that the Congress turns down the $18 billion. You have not indicated that, without IMF funds, how these countries are going to pull themselves out.
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Are there adequate resources in the private market in order to do this kind of a job for them? I would appreciate your giving those of us who support the IMF the arguments that are necessary to show that these are necessary.
Secretary RUBIN. Thank you, Mr. Yates. I think those are very important questions.
Let me start with respect to the—I will go to the numbers in one second, but let me start, if I may, with respect to the question without the IMF, is there money in the private sector?
The problem is in these kinds of crisis situations, this kind of capital does not exist in the private sector. In the first place, it has kind of an uncertain—there is kind of an uncertainty and a risk about it that would make it impossible to mobilize the amounts of money that are needed and needed very quickly for these countries.
It just simply does not exist. It is not available. It could not happen.
Secondly, the IMF, as mentioned in my testimony, imposes conditionality that is central, it is the central feature of these recovery programs, and private sector lenders, even if they exist—and they would not exist, but even if they existed—could not impose that kind of conditionality. So the answer is without the IMF, there would be no capital from any source.
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Mr. YATES. And what would happen to the countries then?
DEFAULT
Secretary RUBIN. I think what you would have is a default, and once you had a default, there would be no access to the international capital markets, and the countries' economies would go into gridlock and would continue to depreciate very substantially, as would their currencies. And unfortunately—well, that in itself would be terrible for the people there and for the people here, for the reasons we discussed before. But in today's interconnected economy, the probability is, I think, quite high that it wouldn't be limited to one country. You saw that in Asia back at the end of last year where a problem in one country then created problems in a number of countries in the region.
As you may well remember, between Thanksgiving and Christmas, as I said in my testimony, the concern was that that would spread out beyond Asia to other parts of the world. So it could become a global problem.
Mr. YATES. In other words, there is no private funding available without public funding to start it?
Secretary RUBIN. There is no—you have said it very well. That is correct. I couldn't say it better, so I won't repeat it. That is correct.
Mr. YATES. Well, I wish you would repeat it.
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REESTABLISHING FINANCIAL STABILITY
Secretary RUBIN. There is no private funding available until the conditions have been reestablished that will make that an attractive thing for private creditors to do, and that isn't going to happen until there is some element of—some reasonable level of financial stability and confidence and reestablished, and that requires reform and requires this international financial institution funding to, in effect, provide breathing room to enable these countries to stretch out the short-term debt that is choking them.
On the numbers, Mr. Yates, there is $45 billion right now of liquidity in the IMF, but about $30 billion of that is not usable. It is like a credit union. That is, I think, the right analogy. And just like a credit union, you have to have liquidity so that if your depositors want their cash, they can get it. And it has been estimated that roughly there is about $15 billion right now of usable money in the IMF. $37 billion of gold is simply the asset of the IMF that gives it the creditworthiness that enables us to put up our money, get back a claim of equal value because of the high creditworthiness of that claim.
There is $25 billion, roughly—I have forgotten now whether it is $23 billion or $25 billion, it doesn't matter—$23 billion or $25 billion in the GAB, as you mentioned. But it is that $25 billion, plus the, say, $15 billion or thereabouts in the IMF, that is the only money available right now. And if we were to have—and we are all working as hard as we can to prevent this, and we have to believe—and I do believe—it is a low-probability event, but if it were to happen that this crisis were to reignite and then spread out and bring in other parts of the world, that is a woefully insufficient capacity to deal with the problems that we would face.
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Mr. YATES. You indicated in your testimony that the Deutsche Bank has lost about $700 million, I think.
Secretary RUBIN. Well, I don't know what their losses are but they reserved—they announced they reserved—$777 million against either projected or possible losses.
Mr. YATES. Will the loans of the IMF be used to pay back the amounts that the banks, that the various banks, have lost in their investments?
Secretary RUBIN. Well, the loans from the IMF are being used for different purposes in different countries. In Korea, originally, some of the IMF money was used to repay banks and, therefore, those banks came out whole who might—who would not otherwise have come out whole. That is why I said that while there have been vast losses taken, there are some people who will come out whole who would not otherwise have come out whole, and that is a by-product of this process.
Mr. YATES. Mr. Frelinghuysen raised that point, coming out of the Schultz-Simon article.
Secretary RUBIN. Yes, but I think that the problem with the Schultz-Simon article is that what it did not acknowledge is that while there will be some people who will come out whole, there are vast losses that are going to be taken, both by creditors, bank creditors, and investors of all sorts. But there will be some—there will be some bank creditors that will come out whole or at least close to whole, that would not otherwise have come out whole, and that is a problem that is inherent in the system that we have right now.
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Mr. YATES. We are taking the lead in trying to reestablish the financial stability of these countries. Are we being helped by other nations, and in what respects are we being helped by other nations?
Secretary RUBIN. Oh, yes, this has been an international effort. If you take a look at the IMF, we have 18 percent of the, if you will, the ''capital'' in the IMF, so other nations have 82 percent. And then if you look at the so-called second line of defense, contingent agreements that we have made to provide additional money, although so far we have not actually disbursed anything, in Korea we committed $5 billion, Japan committed $10 billion, Europe committed $8 billion.
Mr. LIPTON. That is correct.
Secretary RUBIN. And that was about it, I guess.
Mr. LIPTON. There were a couple of others.
Secretary RUBIN. And there were a couple of other smaller ones. So this has been an international effort. This is not like Mexico. This has been a real international effort.
Mr. YATES. You are in the global economy and in global competition with the nations that are helping. Do you find that that interferes in any way with your cooperation in reestablishing the financial stability?
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Secretary RUBIN. With the nations that we are helping?
Mr. YATES. No, with the—of nations that are joining you in helping the IMF.
Secretary RUBIN. I am sorry. I got it. No, because they all have the same economic interests we have. These are their markets. If these countries keep depreciating, it hurts their workers just like it hurts our workers.
Mr. YATES. Okay. All right. Thanks, Mr. Chairman.
Mr. CALLAHAN. Mr. Wolf.
Mr. WOLF. Thank you, Mr. Chairman. I appreciate it, and I want to thank Mr. Kingston for deferring the time. I have another appointment coming up.
EAST TIMOR AND INDONESIA
Mr. Secretary, welcome. I have two questions. One with regard to East Timor, and Indonesia. Nowhere do you ever raise the issue of what is going on out there, and if the American taxpayer will be contributing money to the Indonesian Government to bail them out, which may very well be appropriate, you have never raised those issues.
Now, they may have been raised privately, but I understand they are not even being raised privately. In East Timor, in the last year, more people have died. It is a reign of terror. Bishop Belo, the Catholic bishop, has received the Nobel Peace Prize. Wouldn't this be the opportunity to tell the Indonesian Government, please give the people of East Timor autonomy or independence, particularly since we are helping in a very critical issue like this?
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Secretary RUBIN. Congressman Wolf, my understanding, and let me ask David to add to this, if he would, is that the East Timor issue has been raised aggressively by the State Department on a number of occasions with Indonesia. We have not raised it in the context of trying to work through this program. Look, I think you are right on East Timor. I think there is a serious problem, and I would identify with your concerns.
On the other hand, if Indonesia goes into default, the Indonesian people are going to be—including the people of East Timor—vastly worse off than if we can reestablish—not we, but if the international community can help Indonesia reestablish financial stability, and that is itself proving to be a very difficult undertaking, as you know.
Mr. WOLF. Well, I understand that, but the State Department really hasn't done very much, and the conditions are worse today than they were a year ago. I was out on the island. I mean, we saw young boys with their ears cut off, the atrocities, and the atrocities have continued.
It would seem to me that with Treasury working with State, here is an opportunity to say to the Indonesian Government, we are coming to your assistance; we do expect—we are not linking these things necessarily, but we do expect progress, and we want something publicly said because the people of East Timor are suffering, and they have seen no improvement whatsoever. And I personally feel that if I am going to support something like this, I would like to see you speaking out both publicly as well as privately.
There were reports several years ago that one American manufacturer was paying Michael Jordan more money for promotion of a particular product than they were all the salaries of all the Indonesian workers. There are some things like this, but in East Timor these people are dying. Forty-two, I think, have died since last year. There ought to be some linkage in the sense that you put pressure on the Indonesian Government to do the right thing and, in the process of doing it, I think will strengthen the Indonesian Government because businesses will see that they have made progress on a very sensitive issue, which has been recognized by the Nobel Peace Prize, by the Pope, by the American Catholic bishop, by Cardinals, and by people all over the world.
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Secretary RUBIN. You know, I think you raise an interesting point—I may ask David to comment, if I may, Congressman, but let me just make one comment, if I may. I think that a case that we have to make more effectively, not just in Indonesia but elsewhere, is that human rights is actually good economics.
I have come to feel rather strongly that when businesses look at countries in which to invest, they look at the political and social situations, and they are obviously concerned about political and social stability, and countries that have real human rights problems I think are less attractive, because people—there is a greater concern about the possibility, at some point at least, along the line of instability. I think that is an argument we need to make more effectively, and that is one of the things that we have been talking about how we can do it.
As far as East Timor itself is concerned, I know the President—I think the President—yes, the President did raise that when he was in Vancouver with Soeharto.
Do you have any other, David?
Mr. LIPTON. I didn't have any information beyond that point.
Secretary RUBIN. I know that he raised it with Soeharto. This was in Vancouver.
Mr. WOLF. I think it is important to raise it again publicly as well as privately, since the IMF crises and the bailout and all these things have taken place. And I would respectfully urge you to publicly, either you or Mr. Summers, make a case to send a signal to the Indonesian Government and also to the people of East Timor that we do care.
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I am not saying there needs to be a direct linkage, that if you don't this, we won't do that, but the fact that we are doing this, we urge you to give them autonomy or independence. And I think you actually hold the key to the future of about 500,000 people. And there were 700,000 people on the island 20 years ago. Two hundred thousand have been killed; roughly 25 percent of their population killed; not just that they have lost the right to vote and they can't go out at nighttime, but killed.
And so I think Treasury and State together holds the key to unlocking their future, which I think, as you say, would be good business for the Indonesian Government. And I publicly make a request, and I am not conditioning my vote, obviously, but this does help drive how I deal with this issue, and publicly, for State and you together to say, to say something. And I would ask you to do that.
Secretary RUBIN. Let me do this, Mr. Wolf. Without commenting right now, I would like to discuss this with the State Department people and see how—in the context of everything there, what is going on, how they feel this would relate to everything else we are trying to do in the environment and everything else.
I think it is a very sensible suggestion. Whether it is something they—all of us together think we should do at this moment or not, I don't know. But we will get back to you as soon as I have talked to them.
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EAST TIMOR
The Administration monitors the overall situation in East Timor closely and has urged the Government of Indonesia to reduce force levels, curb human rights abuses, and improve human rights conditions there.
The State Department continues its efforts to help bring about a resolution of the situation in East Timor and we strongly support the UN-facilitated initiative to reach a satisfactory settlement.
We also welcome confidence-building measures being undertaken through the All-Inclusive East Timorese Dialogue in an effort to improve human rights, and promote peace and stability. The Administration supports proposals to give East Timorese greater control over their own affairs and accord recognition of their unique history and culture.
The subject of East Timor has been raised at the highest levels, by President Clinton, Secretary Albright and other State Department officials.
We will continue to press all sides to resolve this issue, which remains high on our bilateral agenda.
Mr. WOLF. Yes, sir.
SUDAN
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The other issue doesn't deal with IMF. It deals with Sudan, just a quick answer yes or no, and then I will move on.
Please do not grant any waivers to the Sudanese Government. I know that Treasury is now looking at that issue. Some people want waivers on gum arabic extract, some people want waivers on other things.
The administration did the right thing by putting sanctions on the Sudanese Government. If your waivers take away the sanctions, it would almost be like you got good credit for doing something right, and then by giving the waivers you would go the other way. There should be no waivers at all for the Sudanese Government.
They were involved in the assassination attempt on Mubarak. Every major terrorist group has an operation in downtown Khartoum. You could have an international convention of terrorists in Khartoum, and nobody would have to come in from outside the country.
There is slavery, whereby they enslave their own people, and so no waivers. And I would like you to tell me publicly, I mean, will you oppose granting any waivers to Sudan?
Secretary RUBIN. Let me do this, if I may, Mr. Wolf: We have discussed this, and, as you know, the State Department is very deeply involved with these issues as well.
David, do you want to comment?
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Mr. LIPTON. Well, first, one waiver that was granted was a very, very limited waiver for Citibank to be able to help finance the humanitarian efforts that are underway there.
Mr. WOLF. I don't believe that that is valid, though, when you look at it. I think Citibank has really been funding the gum extract business, and I am really worried about this. And they hired high-powered lobbyists who come in. And what about the poor people in the south that are put in slavery?
Mr. LIPTON. We are very sensitive to the point that you are making. It is my understanding that trade finance has been cut off by the very restrictive nature of the waiver, and I can get information for you to see whether what has been done, in fact, is satisfactory.
There were a set of, I believe, seven waivers granted for gum arabic trade that had commenced already with shipments underway.
Mr. WOLF. That was moving forward, which is understandable.
Mr. LIPTON. Right. But there have been none granted since that point. There are a number of applications that have been put before the Treasury Department.
Mr. WOLF. Yes.
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Mr. LIPTON. And no action has been taken.
Mr. WOLF. I would urge—one, when will you make a decision on that?
Mr. LIPTON. This is the Office of Foreign Assets Control that is in charge of this, and I am not sure what their timetable is for decision.
Mr. WOLF. The poor people of Sudan, where there is slavery, and crucifixions both of Muslims and Christians, and animists, have not the money to hire the best law firms in Washington. So I know the other side has.
I would ask you respectfully, as somebody who has been to Sudan three times in the south, please do not grant any waivers above what you have done, because it will basically wipe out the good that you have already done.
We sent a letter commending the administration for its action. Do not grant waivers—in essence, that would make the sanctions meaningless. Please, grant absolutely, positively, categorically no waivers.
Can you imagine, had their assassination attempt been successful on Mubarak, the impact on the Middle East? I mean, just do not grant any waivers which gives them economic ability to continue to do what they are doing.
And I would appreciate it if you could kind of tell me when you make that decision, and I would hope, please, do not grant any.
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Secretary RUBIN. Why don't we do this, David. We will meet with the people at OFAC. We have also—the State Department gets into this pretty heavily. Right?
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"The Official Committee record contains additional material here."
Mr. LIPTON. Uh-huh.
Mr. CALLAHAN. The gentlelady from New York.
Mr. WOLF. Thank you very much, Mr. Chairman.
Secretary RUBIN. And we will get back to you on this, Mr. Wolf.
Mr. WOLF. Thank you, Mr. Secretary.
And I want to thank you Mr. Kingston for deferring the time.
Mrs. LOWEY. Thank you, Mr. Chairman.
I do want to thank Secretary Rubin for your leadership. Many of us sleep better at night knowing that you are in charge, and we appreciate all your hard work and your commitment.
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HUMAN RIGHTS
Before I move to new areas of questioning, Mr. Secretary, I just wanted to associate myself with comments of several of my colleagues. First of all, with my colleague, Mr. Wolf, I feel very, very strongly that issues related to East Timor and Sudan should be a part of these negotiations. And, in fact, in your own words, where you are saying human rights is good economics, you said that human rights, worker rights, are important factors in a strong economy. The United States is strongly committed to the values, and they are key to successful economies in the long run. As you know, you and I have had many discussions, most recently concerning fast track. As someone who does believe in the global economy, who did want to support fast track, it was very disappointing to me that in the end, all those corporations that signed that ad today and included passing fast track as one of their priorities, and all of us in Congress and the administration who believe that our values are key and that we should take a role in advocating human rights and worker rights as leaders, could not put sufficient pressure on the part of the leadership of this Congress to give this administration the same fast track authority that the other Presidents had in the past.
So I would just ask you, not only on this issue of the IMF, but all the other issues that you have been so involved in, if we really believe that human rights is good economics, then we have a responsibility, and all those corporations who signed that ad today, and I read every one of them, have a responsibility to say to the leadership, human rights is good economics, and that issues of worker rights and human rights in Sudan and East Timor are and should be part of this negotiation.
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So I ask you, again, to take some leadership in this area.
Secretary RUBIN. But Mr. Wolf distinguished, I think, Congresswoman Lowey, in a way that I think was very useful—his distinction, I think, related to my testimony.
Mrs. LOWEY. Right.
Secretary RUBIN. The question is, how do you accomplish these things? And what I said in my testimony, which I believe to be the correct case, is that as important as these issues are—I think they are very important to the economy, as well as for moral and social reasons—when you have to deal with a crisis and you have to accomplish wrenching changes in a very short period of time, I think if you try to accomplish these purposes in those programs, I think you are going to try to accomplish more than you can—are likely to be able to get done. And I think you are going to greatly reduce the chances of accomplishing your basic objective of reestablishing, achieving financial stability.
So what I said in my testimony, I don't think you can link them in these negotiations, but I think what you need to do—I think you can certainly raise them in all kinds of ways, as the Congressman suggested, but I think if you try to link them as conditions, I think you really are very substantially reducing the chances of being successful.
Mrs. LOWEY. But, again, I would like to say in associating myself with the remarks of my colleague, I certainly respect your expertise and your wisdom on these issues. And I don't think anyone in the Congress is going to say we should be doing 1, 2, 3, 4, 5, but then again, the administration shouldn't be precluded from discussing these issues during a negotiation.
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Secretary RUBIN. Oh, I agree with that.
Mrs. LOWEY. I believe this is what many of us have been advocating and would like clarified.
Secretary RUBIN. There is nothing which exists today that would be preclusive.
Mrs. LOWEY. Which is what I wanted to clarify.
ABORTION LINKAGE TO IMF
Secondly, I did want to also associate myself with the comments of Mr. Obey and Ms. Pelosi in that I do respect my Chair and all those who have a prolife position on issues of abortion. But, again, zero funds in our bill goes to abortion, and I think it would be a real tragedy if we can't debate the issues concerning international family planning fully and thoroughly, and even having a vote in the Congress. But to link it to other issues doesn't do that issue justice and certainly, I think, is very damaging in holding these other issues hostage.
So I would beg my colleagues here on this committee, who managed to avoid the linkage in holding up the foreign aid bill, and I would certainly urge those who have any kind of influence with the leadership in this Congress not to abide by what I also read in Congress Daily today, because I think there should be no linkage. And when you think about the importance of international family planning to the women of the world, it is absolutely outrageous that there should be any linkage. So I just wanted to mention those two points.
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HEALTH AND EDUCATION PROGRAMS
I would like to ask you questions in a few other areas, Mr. Secretary. I have been concerned about recent reports that the World Bank's commitment to health and education lending fell by almost 50 percent from 1996 and 1997. These were the numbers that were given to me.
I certainly believe that devoting resources to health and education programs is absolutely critical to our effort. So I would be very appreciative if you have any information regarding that, or if you could address this matter with the World Bank, because their commitment to health and education, I think, is vital.
Secretary RUBIN. I agree with your general statement. I think it is an essential mission.
Mr. LIPTON. In fact, I think what you are alluding to and what is responsible for this is that the lending of IDA in Africa has been low the last 2 years and below what the World Bank had projected under the IDA-11 replenishment. This is something that we have been discussing with them. I can assure you that other donors are very eager to see them lending aggressively in Africa.
The share of IDA lending that is devoted to health and education issues has been growing, but the total has been——
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Mrs. LOWEY. Right.
Mr. LIPTON [continuing]. Has been below projections.
The problem we have is that one of the goals that the World Bank has is to be selective and to make sure that the programs that they are supporting with their money actually are put in place, that the countries are dedicated to reform. And so there is a bit of back and forth on that that I think is responsible for this. But the World Bank has assured us that they are going to work very hard to restore their operation level to what was intended in the IDA-11 pledging.
Mrs. LOWEY. I thank you.
And, gentlemen, in the fiscal year 1998 foreign operations bill, we included the full administration request for IDA. And I would be interested in a response concerning the responsiveness of IDA to our concerns regarding child labor, the environment, and the need to reduce corruption.
Have they been responsive to our request to focus on these areas as a response to our full funding of the program?
Mr. LIPTON. Yes, they have. I think there is a process on our part of trying not just to make sure that the institution is responsive, but to gather strong support from other member countries. I think this is an area where we are making progress, and more can be made.
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I think that, in particular, on the corruption side, both the IMF and the World Bank have made corruption a special focus in the last year. The issue has made its way into their operations, as well as into the rhetoric, into the speeches, and in the information that they provide publicly and to member countries.
On child labor—and on labor issues more generally—I know that Jim Wolfensohn has taken a special interest in this subject. He has made a visit to the ILO. He has established special contacts between the World Bank and the ILO.
There are a couple of in-country cases where the World Bank has begun to include child labor issues in negotiations. The other development banks have also taken this on seriously as well. I think it is an area where there is a lot more to be done and a lot more that we really have to do to press them to follow through.
MICRO LENDING
Mrs. LOWEY. In another area, Mr. Secretary, I know that you and your Department have been focused, as many of us are, on the effectiveness of microcredit lending. Could you share with us what kind of coordination is currently taking place between the Treasury and AID to ensure that this money is targeted in the most effective way?
Secretary RUBIN. You are right in your general comment. I actually don't know the answer to your question, Congresswoman Lowey.
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I think I actually visited a couple of microlending sites abroad to see how it was working—well, when I was there anyway; it wasn't a special trip, but when I was there anyway—to see how microlending works in very poor neighborhoods. It was very impressive, it really and truly was, particularly when the money was combined with technical assistance.
I don't know how we are coordinating with AID. Do you know, Dave?
Mr. LIPTON. I mean, we follow the AID programs and speak to them, in particular, about the countries where we have an active interest and involvement.
I would say that another very important area, and I am not sure that you might be aware of it, is that the MDBs themselves have stepped into the microcredit area; the IDB in a particularly strong way. They are now going to dedicate $500 million to small lending and microlending programs in Latin America. That is something that we have been supportive of and we hope will be successful.
Mrs. LOWEY. The reason I was interested in the coordination, I remember our last meeting with Jim Wolfensohn, and he is very interested in microcredit, microlending. In fact, he said it is really still less than 1 percent, a very small part, of their whole lending package.
Everyone agrees it is very important. It has an important effect. There are still millions and millions of people who could use that help. So how USAID works with the World Bank to help the World Bank increase their investments in microcredit, I think, could be very helpful.
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Mr. LIPTON. There have been collaborations between AID and the World Bank in cases where AID, in essence, does the pilot work and then the World Bank picks that up and follows through to develop a larger, more heavily funded program. I think that is a promising area for collaboration.
IMF
Mrs. LOWEY. I thank you. And just lastly, Mr. Secretary, before—just to get back to the IMF for a moment, because we understand your case and you are very persuasive in making it, that this is crucial to the world economy. Could you perhaps elaborate on your statement that we have to change the mechanisms and architecture to prevent this from happening? How are we working to truly ensure that Indonesia will implement the critical reforms that we are demanding of them?
Secretary RUBIN. Oh, that is a slightly separate question.
Mrs. LOWEY. Okay.
Secretary RUBIN. Let me break it into two pieces, if I may. In terms of my comment about the architecture, I was really referring to the sorts of things that Mr. Frelinghuysen had raised from the George Schultz-Bill Simon article.
GLOBAL ECONOMY
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We have institutions that were created 50 years ago. I think they are vital to our national interests, but the global market, the global economy, in the meanwhile, has developed in the last, say, 10 years at a very rapid pace, and we need to find better mechanisms for dealing with these problems, especially to deal with the moral hazard questions that were raised in that article, although I think they are far less in Asia than they were in Mexico because of the losses that have been taken.
And the Federal Reserve Board and Treasury are working together right now in a very intensive fashion, but these are mind-boggling, complicated issues. Just to develop, sort out analytically, what we think, how much we can accomplish relative to what we would like to accomplish, I don't know, and once we develop our thoughts, we obviously need to work with Congress and we need to work with nations around the world to get consensus.
So this is not a short-run process, but it is a process we are pursing. I have a meeting this afternoon, as a matter of fact. David Lipton is providing the leadership at Treasury. Plus Alan Greenspan, Larry Summers and myself have been very deeply involved.
On the question of Indonesia, their economic self-interest lies in economic reform, both to deal with the problems that gave rise to this instability and to reestablish confidence. But I think you put your finger on it. There are no guarantees in life, and I think the only way you get assurance is by a sustained commitment on their part to these programs, and that is what the world is watching right now.
Mrs. LOWEY. Well, I think I have taken enough of my flexible 5 minutes. But just in closing, I want to say we were talking about the concerns that our constituents have and we have about money going—and you mentioned this in your opening remarks—to bail out the banks and to bail out the investors. If we are so quick to cover those losses, how will they behave in the next situation? And certainly in terms of Deutsche Bank, we talked about their losses. I don't know if we discussed their profits.
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Secretary RUBIN. No. This was a question of were they absorbing the consequences of their credit extension in Asia.
Mrs. LOWEY. Uh-huh.
Secretary RUBIN. And the question of nationalizing losses and privatizing gains, which I think is a very serious and totally appropriate, and a very important issue. That was the only point of my comment.
Mrs. LOWEY. Well, I thank you, Mr. Chairman.
I thank you, Mr. Secretary.
Mr. CALLAHAN. Mr. Secretary, the committee is going to stand in recess for 3 minutes, and we will be back in exactly 3 minutes so Congressman Kingston can begin the questioning.
Secretary RUBIN. Good.
[Recess.]
Mr. CALLAHAN. If we can keep our commitment, our 3 minutes has turned into 6 minutes, as usual. But if the committee will come to order.
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Mr. Kingston.
Mr. KINGSTON. Thank you, Mr. Chairman.
Mr. Secretary, let me start by complimenting the Department that you are running. You do a great job, and I think we are all proud, and you have a lot of bipartisan support here on the Hill.
We have—a nuts-and-bolts kind of question right here. The assessment—the quotas are looked at and reviewed every 5 years, and the last quota increase was 1992.
Secretary RUBIN. Right.
Mr. KINGSTON. Is that correct?
Secretary RUBIN. 1992 was the last one, yes.
Mr. KINGSTON. And then it was reviewed again, but not increased, but then in 1982 or 1983 it was increased again, correct?
Secretary RUBIN. 1983, I think, wasn't it, David?
Mr. LIPTON. Yes, 1983.
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Mr. KINGSTON. How much of this is——
Secretary RUBIN. Yes, 1983. It is not actually every 5 years. It is—I don't know. How often?
Mr. LIPTON. It is based on need.
Secretary RUBIN. Yes, it is sort of a need-based thing, and it is negotiated and debated and stuff like that.
Mr. KINGSTON. Okay. How much of this is triggered by the crisis versus the 5 years? You are saying it is the need more than the time?
Mr. LIPTON. The process of discussion had begun probably about a year before the crisis began.
Secretary RUBIN. But the urgency is a function of the amount that was used much more quickly or committed at least much more quickly than expected.
Mr. KINGSTON. Okay.
Secretary RUBIN. And the danger that the crisis could reignite.
SPECIAL DRAWN ACCOUNT
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Mr. KINGSTON. Okay. Of the $14 billion now, that, I was thinking, was an assessment, but that is actually the amount of the special drawn account? Is that—would that be correct?
Mr. LIPTON. That is the increase in our quota.
Mr. KINGSTON. For the special drawn account?
Mr. LIPTON. We have roughly $36 billion. It goes up by $14 billion.
Mr. KINGSTON. Okay. That would be, though, the special drawn account, correct?
Secretary RUBIN. You know what you can think of it——
Mr. KINGSTON. Let me tell you where I am going, is how much of it in hard dollars is backed by gold? And the reason why that is important is because we hear so often it is very safe because it has great collateral, and that collateral is gold.
Mr. LIPTON. The pool of resources right now is about $197 billion. With everybody's new contribution, it would go up into the $280 billion range. The IMF presently has about $40 billion worth of gold.
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Of course, all of the other money, when it is put forward, is not all spent. Some of it is on loan to countries, and the countries repay. There is a very good repayment record at the Fund.
So what stands behind this is all of the assets of the Fund, including the outstanding loans, the unused resources, and the gold.
Mr. KINGSTON. So it is—I think it is a relatively safe loan, but it is not fully collateralized; is that correct?
Secretary RUBIN. The way to think of it, if I could, is that—and remember, it is the Congressional Budget Office that makes this judgment, not the Treasury Department. But I think you have got it right—it is a very high-quality borrower, but it is not technically, no, it is not technically fully a collateralized loan.
NEEDS ASSESSMENT
Mr. KINGSTON. Okay. The other thing is: The needs assessment, do you ever reduce the quota? And the reason why I am asking that is because we are always saying, well, this really isn't going to cost the taxpayers. It is not a budget outlay and so forth.
However, it is almost like the purchase of land that you are never going to sell or perhaps it is an arrangement that you are never going to back out of. Or am I wrong on that?
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Mr. LIPTON. Well, it is——
Mr. KINGSTON. Because, even though the $14 billion isn't going away, it is no longer liquid.
Mr. LIPTON. Your question is a good one. The size of the quota pool has gone up, in essence, because the size of the world economy has gone up, and the IMF membership within the world economy has expanded as Russia and other countries have joined in, and so there has been—just by that happenstance—there has been an ever-expanding need for resources.
The IMF resources right now actually are a far smaller fraction of world GNP or world trade than they were 10 or 20 years ago. So while there has been this expanding need, the IMF has, in a sense, made do with a smaller amount of financial resources relative to its membership's economic activity.
Mr. KINGSTON. There are about 180 countries?
Mr. LIPTON. 182.
Mr. KINGSTON. Now, what binds those countries, besides profit, to American lenders? Are they philosophically pro-American? Do they vote with us at the U.N.? Will they be with us should we get into something with Iraq? And is that something that—Mr. Frelinghuysen mentioned the need for pharmacies to have lower tariffs and so forth, but in another sense we do have this global picture. Are we lending money inadvertently to our enemies just because some of our lenders are making profits on it?
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Secretary RUBIN. No. This is not driven at all by U.S. lenders, by our lenders' profits. I think what binds people together here is a common interest in the health of the global economy and a perception, I think a correct perception, that if the global economy suffers, we will all suffer.
The chairman mentioned a company in his district that laid everybody off for 2 weeks. I think there is a common perception around the world that if developing countries do well then they are very large new export markets for us, and if they do badly, that those markets shrink. They have the kinds of effects the chairman mentioned, and their currencies depreciate, which then reduces the competitiveness of our goods. It is that interest. It is that economic interest that binds people together here, not any of the other interests which in many cases may be at variance with each other.
GLOBAL ECONOMY
Mr. KINGSTON. Okay. Another question: We are, as you opened up, a global economy. But if you look back historically, a country like Great Britain, the English empire, was certainly run on a global economy often doing business with nonempire nations and so forth. How did the monetary system work pre-IMF? Because I know there were—you know, there is criticism where people could hoard gold or undervalue currencies of another nation on purpose and mess with each other economically, which is a tool the IMF kind of neutralizes. But is—what is the pre-IMF picture? What did it look like?
Secretary RUBIN. Can I just make one comment and let David answer, because David can answer much better than I can.
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You didn't have, in the year that you are talking about, the kinds of global financial institutions, the global capital flows, the instantaneous transmission of truly vast amounts.
Mr. KINGSTON. But you would within an English empire; not globally, but within certain nations, you would still have a highly integrated economic——
Secretary RUBIN. You had certain elements of economic integration, but you didn't have markets that could transmit billions, tens of billions, hundreds of billions, of dollars worth of trades within seconds because of technology.
But, David.
Mr. KINGSTON. And I would say, Mr. Secretary, that is a significant difference, too. So I am acknowledging that is huge.
Mr. LIPTON. Congressman, I think the genesis of the IMF is exactly the difficulties that arose in the 1930s. The world had been on a gold standard for quite a few decades, and it served well for a period of rapid growth for Europe and for the United States. But the gold standard, which was in essence a system of fixed exchange rates, broke down, and in the midst of worldwide depression, there were country defaults and deep recessions that were the result of these defaults and the inability of countries to reestablish creditworthiness.
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After World War II, the idea of the IMF was exactly to prevent that kind of thing from recurring. And when we talk today about how default might happen in the absence of some sort of system like we have or some sort of approach like the one we have today, default in Asia could lead to a protracted slowdown, protracted problems that would spread around the world, it is exactly the history before the creation of the IMF that informs that judgment.
Mr. KINGSTON. Is that why all three of these Nations got in trouble simultaneously?
Mr. LIPTON. I think they had common problems. There had been common approaches to the way they managed their economies, and so it was, in a sense, logical that when the problems in one country were exposed, investors looked for similar weaknesses in other places. So it was in part because of the common management of the economy.
Mr. KINGSTON. How absurd were the loans or the lending practices, the financial practices, and was IMF present in these countries 2 or 3 years ago and standing by quietly, as opposed to stepping forward and, you know, saying in 1994, hey, you are heading for disaster, you better change?
Secretary RUBIN. I think you had two sets of lenders that need to be looked at in the context of that question. You had the international lenders, and I think what happened there over the last 5 or 6 years is that, as good times continued, risks became—the weighting of risk—got to be less and less, and, in effect, markets went to excess, as they I think almost inevitably do. So credit was being extended with less attention to risk than should have been the case.
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In the three countries, you had banks making decisions on a noncommercial basis because of their ties with the government. It varied from country to country, but the governments were, in effect, directing credit or commercial enterprises that had special links with banks. And it was that combination of the excess of capital from the outside, and these faulty financial systems on the inside, that was very central to what happened.
In terms of the IMF's presence, IMF does an annual review with each country. They were certainly focused on a lot of the issues, although I don't think anybody expected the combustion that occurred. That was the crisis.
Mr. LIPTON. Just to mention, in the case of the first country that came into crisis this last year, Thailand, the IMF had, in its consultation discussions with Thailand, identified the very same problems that came to spark this crisis and had suggested to Thailand that they take up these kinds of concerns.
I think it was difficult, in a whole region that was growing at 8 percent and had been growing very rapidly for decades, for policymakers to understand the risks that they faced and come to grips with the kinds of changes that were necessary.
Mr. KINGSTON. Thank you, Mr. Chairman.
Mr. CALLAHAN. Mr. Torres.
NORTH AMERICAN DEVELOPMENT BANK
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Mr. TORRES. Thank you, Mr. Chairman.
Mr. Secretary, welcome; Under Secretary Lipton as well. Mr. Secretary, we have had ongoing discussions pertaining to the North American Development Bank. As you know, last year's funding completed the capitalization of the bank required in the agreement between Mexico and the United States. I am pleased to note the progress made on border project financing over the last year in particularly.
However, there is one outstanding issue regarding the bank that simply must be resolved, that is a domestic window issue. As you are aware, our staffs have been talking about this issue at some length. Can you give me your commitment that the two of us can meet later on at some point to resolve this question?