SPEAKERS CONTENTS INSERTS
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FUNDING REQUESTS FOR THE INTERNATIONAL MONETARY FUND
THURSDAY, MARCH 20, 1997
House of Representatives,
Subcommittee on Domestic and International Monetary Policy,
Committee on Banking and Financial Services,
The subcommittee met, pursuant to notice, at 11:07 a.m., in room 2128, Rayburn House Office Building, Hon. Michael N. Castle [chairman of the subcommittee] presiding.
Present: Chairman Castle, Representatives Lucas, Weldon, Flake, Kennedy, Sanders, and Jackson.
Chairman CASTLE. The hearing will come to order.
Do you feel lonely out there, Mr. Geithner? I'm glad we reserved so many seats. That may be a good sign, I don't know.
I will make an opening statement, and depending on who else is here, they can make an opening statement. Then we'll turn it over to you.
Serving as Chairman of the Monetary Policy Subcommittee has reinforced my view that American leadership in the world economy is critical to the economic and security interests of the United States. I should hasten to add that this is not a perspective that is unique to me. Indeed, it has been widely shared on a bipartisan basis since the end of the Second World War. It is also the view of the current Administration and the Department of the Treasury.
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I would suggest, however, that the Administration must follow up on a promising start this year by delivering a focused, coordinated message that a stable international monetary system in the International Financial Institutions, IFIs, are critical to U.S. economic security on our broader foreign policy interests. If the Administration slips back into its neglectful habits of treating the IFIs like the unloved step-children of U.S. foreign policy, Congress is likely to treat IFI funding requests accordingly.
This year, the Administration confronts significant policy-based and political challenges to maintaining U.S. leadership in the IFIs and the world economy. Part of that challenge arises from the enormous changes that have swept the globe since 1989. The collapse of Communism and the end of the Cold War, the economic success of newly industrializing countries in Asia and Latin America, and the increasing globalization of capital markets and international finance. But part of the problem is also political.
Changes in the world scene and an era of limited budgets have emboldened critics of American engagement to demand that the U.S. withdraw from these international institutions. Simply put, the Administration must define and explain to the Congress and the American people a convincing strategic rationale for U.S. international economic leadership. I understand that this is a tough job, one that requires constant work with Members of Congress, the business community, and NGOs. But it must be done for Congressional support to be maintained.
Deputy Secretary Larry Summers was to have made this case before us today, but he is obliged to be with the President in Helsinki this week. Deputy Assistant Secretary Tim Geithner will fill in for him and present the case for the Administration's request. In this regard, perhaps the least explained and least understood element in the Administration's request for the IFIs relates to the International Monetary Fund, IMF. As Members may know, the IMF fosters open trade and economic growth by helping to maintain stability in the international monetary system.
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With respect to the Fund, targeted by some as a symbol of corporate welfare, the subcommittee will be asked to support a substantial dollar amount of legislative authorization. The IMF-related requests encompass $3.4 billion, U.S. contribution to the New Arrangements to Borrow, NAB, part of a $47 billion line of credit from 25 countries who have made available to the Fund in the event of an international financial crisis that requires ordinary IMF resources to be supplemented. A possible increase in the ordinary capital base of the IMF, known as a quota increase, $75 million for the IMF's concessional loan facility for developing countries, and possible authorization for the Secretary of the Treasury to negotiate a change in the IMF Articles of Agreement to allow for a special allocation of an IMF monetary instrument, known as SDRs.
Even though all the authorization requests outlined above, except for ESAF, have no outlays and will not increase the deficit, this is a very tall order. If this subcommittee is to come to a consensus on supporting this level of funding, persuasive statements from the highest levels of the U.S. Government will be required, emphasizing that these requests are critical to U.S. interests. Likewise, we will need to hear a much stronger public articulation of the rationale for these requests than the Banking Committee has heard to date.
[The prepared statement of Hon. Michael N. Castle can be found on page 20 in the appendix.]
Mr. Geithner, we do welcome you. We understand that it is your good fortune to make this case today on all of these various matters. Let me just say, and you and I have already had a little conversation up here for everyone's benefit, this is an extremely busy day on the Hill, both on the floor, committees, subcommittees. In fact, I am pulled about three ways myself, even as we speak. But obviously when you speak here, the words are taken down, not ''taken down,'' the words are recorded, and hopefully your words won't be ''taken down.'' The various staffs will pore over them, as well as the Members themselves. So please pretend you are speaking to a full house. We appreciate you being here, Mr. Geithner.
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STATEMENT OF MR. TIMOTHY GEITHNER, SENIOR DEPUTY ASSISTANT SECRETARY OF THE TREASURY FOR INTERNATIONAL AND MONETARY AND FINANCIAL POLICY
Mr. GEITHNER. I will do so. I am told I have to begin by asking that my full statement be entered into the record.
Mr. Chairman, I am of course very pleased to testify before you today on the President's request for the International Monetary Fund. Let me start by conveying Deputy Secretary Summers' regrets. He would have been here if he had not been required to accompany the President to Helsinki. He would like very much to come up and meet with Members of the subcommittee, perhaps on an informal basis some time soon to make the case directly to you and to respond to your questions.
As Secretary Rubin and Secretary Albright have already testified, the international financial institutions, including the IMF, play a critical role in U.S. foreign and international economic policy by helping to spread growth and development, open markets, and expand trade, and thereby create the conditions for stability, democracy and individual opportunity.
The IMF's part in this integrated effort is to establish the framework of strong macro-economic policies and market-oriented reforms that are necessary for sustained economic growth in national economies, and that is necessary for maintaining the stability of the international financial system. The economic programs the IMF helps design are an essential complement to both the bilateral assistance we provide and to the lending operation of the multilateral development banks about which my colleague, Bill Schuerch, testified last week.
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Let me start by summarizing the main reasons why it is so important to the United States to assure that the IMF has adequate resources to carry out its mission and why that mission is critical to the strategic and economic interests of the United States. In a world of new and potentially greater financial risks, the IMF needs a solid financial footing. The United States has a unique stake, a great stake, in maintaining a strong IMF that multilateralizes the burden of financial support for ongoing reform in countries that are important to our interests. We have to be prepared to participate financially in the institution, and to contribute our share, if we are to continue to influence the policy and operations of the institution effectively and to implement needed reforms.
Our financial commitment to the Fund leverages several times as much from other sources. Except for the relatively small case of ESAF, our transactions are not scored as budgetary outlays. Created as World War II was in its final stages with bipartisan support from the Congress, the IMF is the principal monetary institution for the world economy, responsible for overseeing the stability of the international financial system. It provides the United States with a forward defense of our key economic and strategic interests. If it did not exist now, we would be forced to create it.
Let me give you a few specific examples of the recent successes of the institution. First, in many Eastern European and former Soviet Union republics, inflation has stabilized, the role of the state has been reduced, the budget deficits have been brought under control, the private sector has expanded, trade barriers have been reduced, and growth has been established. The technical assistance and conditional lending programs of the IMF were fundamental to the progress achieved so far in these countries.
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The IMF has been a powerful force for trade liberalization around the world. In countries as diverse as Sri Lanka, Argentina, Uganda, and the Baltic States, to name a few, IMF programs have resulted in the elimination of state monopolies, the liberalization of licensing and quantitative restrictions on imports, and the reduction of high effective tariff rates.
The IMF's response to the Mexican financial crisis helped contain the risk of an escalating series of crises throughout the emerging markets, which could have resulted in much greater damage to U.S. economic interests. Throughout the world, countries that at one point adopted IMF programs have established long records of strong economic performance. Five of the 14 new countries that have agreed to participate in the New Arrangements to Borrow were previous beneficiaries of IMF programs.
The success the IMF is having in these countries, and in others, reflects in part the success of reforms undertaken by the institution, largely in response to U.S. initiatives. The IMF has strengthened and refocused its surveillance and its adjustment programs. With strong U.S. encouragement, the IMF now pays more attention to the quality of fiscal adjustment, encouraging countries with IMF programs to cut unproductive expenditures--military expenditures, for example--and to shift more resources to primary education, health care, and to essential capital investment. The proportion of spending for military purposes is declining in countries with IMF programs, but increasing for social purposes. A new emphasis on effective governance and anti-corruption will over time help accelerate and deepen economic reform, and lead to a more equitable distribution of economic opportunity and rewards.
The IMF has also adapted or is in the process of adapting to new challenges in the global capital markets. The IMF has been instrumental in carrying out a number of initiatives launched by the U.S. and the G7 at the Halifax Summit in 1995, including the adoption of strong disclosure standards and greater attention to financial sector vulnerability.
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The IMF has improved its own transparency and its accountability to outside review. Under continued urging by the United States, the IMF now publishes far more information on member countries' economies. We will continue to push for more extensive release of IMF documents.
To be sure, the IMF has to do more. Reform is an ongoing process. But the IMF's critics of recent years have essentially won the debate. This is a dramatically different institution than it was 10 years ago. Let me just outline briefly the specific requests in the Administration's budget and those now under consideration.
First, the President has requested an increase in the resources available to the IMF in financial emergencies. The New Arrangements to Borrow is a set of credit lines to the IMF designed to enable it to respond more effectively to financial emergencies. This agreement builds on a set of credit lines called the General Arrangements to Borrow that were established more than 30 years ago. The General Arrangements to Borrow were last increased by the Congress in 1983 in response to a request by President Reagan after the onset of the Latin debt crisis. Significantly, the NAB adds a group of 14 new participants, including a number of emerging market economies.
The agreement we negotiated provides better burden sharing, with enhanced U.S. control. Congressional support for the NAB will ensure that we have a more effective multilateral instrument to respond to future financial crises that threaten U.S. interests. To participate in the NAB, we are seeking Congressional authorization of about roughly $3.4 billion. This amount, when combined with the $5.9 billion equivalent already authorized and appropriated for the General Arrangements to Borrow, will give us a share of nearly 20 percent of the roughly $47 billion new set of expanded credit lines.
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The Administration is also reviewing the adequacy of IMF quotas, which finance the ordinary lending of the institution. If as a result of this review, we come to believe that an increase in IMF quotas is needed to ensure that the institution has adequate resources to carry out its responsibilities well into the next decade, and if we are able to negotiate a satisfactory agreement, then the Administration will propose that the Congress authorize an increase in the U.S. quota. We will consult closely with the Congress as this review proceeds.
The Administration and the Congress have since 1968 agreed that transactions with the IMF related to credit lines like the GAB or to the U.S. quota, are treated as exchanges of monetary assets that do not increase the deficit and are not scored as budgetary outlays. Thus, our ability to participate in these programs does not come at the expense of our ability to finance domestic programs.
The second element of the President's request is authorization for our participation in the ESAF. The enhanced structural adjustment facility supports concessional lending to the poorest countries that are willing to undertake strong macro-economic policies and comprehensive market-oriented reforms. The President has requested authorization of $75 million, but outlays of only $7 million in the fiscal year 1998 budget.
Finally, we are also considering an amendment of the IMF Articles of Agreement to enable the newer members of the IMF to participate fully in the IMF's Special Drawing Rights arrangement. An amendment of the IMF Articles of Agreement such as this would require authorization of the Congress. However, no appropriation of budget authority or budget outlay would be entailed in an amendment of the Articles for this purpose.
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Let me just conclude by saying that the IMF's role in the system is now more important than ever because of the rapid increase in financial integration and the dramatic changes in the international capital markets. The United States has a major stake in ensuring that the IMF can continue to serve as an effective instrument for promoting growth, openness, and financial stability.
I would be happy to respond to your questions.
[The prepared statement of Mr. Timothy F. Geithner can be found on page 26 in the appendix.]
Chairman CASTLE. Thank you. Mr. Geithner, I will ask questions for a little bit here, and then turn it over to our distinguished, very distinguished, Ranking Member, Mr. Flake, who may wish to say something since he wasn't here at the beginning, and may also ask questions.
I am going to start with this question. I'll tell you what the bottom line is going to be so you can be thinking about it while I go through some of the detailing of it. But has the IMF essentially outlived its usefulness, or whatever its earlier usefulness was, which you referred to earlier-on? The IMF's role has evolved over time, particularly since the collapse of the fixed system of exchange rates in the early 1970's and the growth of global capital markets. In this context, how would you respond to the following criticism: The world's major economies neither borrow from the IMF nor do they follow its policy advice. Elsewhere, the IMF failed to anticipate or prevent the Mexican peso crisis, while among the world's poorest countries it has become a development institution like the World Bank, but with a narrow macro-economic focus. The IMF is an agency in search of a mission.
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In a broader sense too, as I said, I wonder where it's going and what its role should be in the future, or should there be a role? I know that's a very broad question, but I would be interested in your answer.
Mr. GEITHNER. Sure. Well, it's a good question. The question underlies a lot of the reasons why we have pushed the IMF to adapt to changes in the system over time. But the IMF has really two fundamental purposes. Those purposes existed when it was created 50 years ago, and they exist now, today. The first is to encourage countries to adopt strong policies and market-oriented reforms. The second is to maintain stability in the system.
The U.S., because it's a large power with major economic and strategic interests around the world, has a major stake in ensuring the IMF does that well. It's because of the importance of that stake that for the last 50 years Administrations representing both parties and the Congress, with bipartisan support, have supported the institution. It's our view that the changes in the capital markets today, the dramatic increase in private capital flows, the dramatic increase in integration of national financial systems, the speed with which finance can now move around the globe, all create new challenges for us and for the institution. The IMF is really uniquely positioned to deal with those challenges.
In short, it is a dramatically different world. It's a more dangerous capital market in some ways, despite all the benefits that have come with the increase in private flows. We think the IMF is more important now than ever before in many ways.
You said that the industrial countries do not now borrow from the IMF, and suggested that in some ways that may undermine the reasons for its existence now. It's worth recalling that the last time the GAB, the General Arrangement to Borrow was activated, was to support a drawing by the United States. That was as recently as 1978. So it is not inconceivable that we might face a situation in the future where a large country may need to rely on the resources of the IMF. I think that's a good reminder--1978 is not so long ago.
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Chairman CASTLE. I am going to ask a follow-up question. It's a little bit different, but I just would make the observation because quite frankly, I don't think that most, including me, Members of the Congress truly understand the function of the IMF all that well. I wonder if some Administrations in the past, Republican, Democrat, whatever, and Congress in the past have just sort of gone along with this without a true understanding? I just hope that somebody is really pausing and looking at this.
This leads up to this question, which is: Some of us hear from our colleagues, as well as constituents--and we do hear this--that the United States should no longer contribute to the IMF, or NAB, because they represent a form of corporate welfare that might be used to bail out the American banks and other investors who should otherwise bear the market risk, or bail out corrupt Third World governments. What is your response? I am asking it sort of in a political sense. Before, you answered it in a structural sense. But in a political sense, what is the response to that when we hear this from our constituents?
Mr. GEITHNER. I think there are only two real responses that work in this context. One is that the IMF does not cost the taxpayers money, because our transactions are not scored as budgetary outlays, and this is not something that diverts resources from other purposes we might want to use them for.
Second is that I think it's important to know that if the primary result or the sole purpose of IMF programs was to insulate private investors from risks they should take, then we would never support those programs. But it is true that when the IMF gets involved, that there may be circumstances in which investors, foreign and U.S. investors, benefit from the activity. But that is unavoidable. But if that were the purpose of the IMF programs, then we wouldn't support them, but sometimes that's the necessary consequence; there are some indirect beneficiaries of these things.
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There's no perfect response to that basic charge. I think the important thing we all recognize is that what the IMF does in these countries in promoting strong policies, promoting stability and promoting openness and trade is fundamentally important to the United States. It's a fundamentally important reason why U.S. exports have grown so strongly over recent years. It's a fundamentally important reason why we in the post-war period have enjoyed such a dramatic increase in economic prosperity, and why we have been able to avoid the cycle of depreciation, default and depression that preceded World War II and preceded the creation of the institution.
Chairman CASTLE. Let me just close by saying that's a good answer. I give you a C+ or so. I give you about a B on the first part of it. Then it got a little bit into the old esoterical part at the end. But I kid about that a little bit because it is a good answer. But we really need to be able to explain this. I mean the funding requests, regardless of whether they are counted against the deficit or not, are significant. There really is a lot of criticism, political and otherwise, of these agencies. There's just a general feeling in America that maybe we have gone too far. So we really do need to think how can we answer, if we are going to do this, how can we answer these questions in a way that the average Member of Congress, the average constituent out there, truly understands? I think you actually did better than I thought you would do. So I give you pretty high marks on that. But we've got to upgrade it even a little more.
Mr. GEITHNER. You can see we find it a challenge too. Can I just, since you are about to finish, can I just say that I have to tell you, I think the Secretary of the Treasury and the Treasury generally, and the Administration fully share, fully agree with everything you said in your opening statement. We recognize how important it is to make a forceful, compelling case for these institutions. It is true that past support does not necessarily justify continued future support. We're prepared to make that case. I think you'll find people more senior than me and more articulate than me able to make that case quite well as we go forward.
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Chairman CASTLE. Well, I don't know if they are any more articulate than you. They may be more senior. We appreciate that. I have talked to Mr. Summers about this. We know why he cannot be here, and it's fully understood. We recognize how significant the Secretary is in the Administration. But that case really does have to be made. I can't stress that enough. You know, it really has to be made in the broadest sense possible. So hopefully that message will be reinforced. I know it's not a new message.
Let me turn, Mr. Sanders, you had your hand up. Mr. Flake is next.
Mr. FLAKE. Thank you very much, Mr. Chairman. Let me just take a moment to put this opening statement in the record. I think it's important as we move forward. As I stated last week in the hearing, the United States is a vested partner in the international financial institutions. As a partner, you and I both have advocated positions that state that we should honor our past commitments to the institutions. As we are beginning to see the erosion of our leadership position because of our constant arrearage, I think it is critical for us to do everything we can in this particular year and this particular budget cycle to try to repair this situation to the best of our ability.
I don't think we can afford to continue to lose influence based on a lack of neglect on our part. I think it has long-term ramifications for us if we do not, as it relates to our ability to participate both in international development as well as to try and work toward some level of poverty reduction in the areas in which we participate.
Further, if we fail to contribute to the IMF, we could plausibly be on the financial hook for the kind of bail-out issues that we faced in Mexico. I think you and I and all of us who are involved in this process know that if we get in that kind of situation, things get to be a little more difficult because we have the glare of publicity. People take very strong positions on each side of it. I would hope that we would solve the problem before that point.
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I think we have many serious questions that need to be answered. The NGOs are questioning the need for contributions to ESAF. Of course you know the budget hawks here are concerned about any new arrangements that are made for borrowing. We need to deal with the question of how our relief measures are functioning, how effective they are and what kind of tools need to be in place to make sure that they work even more efficiently.
I think that we, as we go forward in the next few months, we obviously will have to do a lot of study and analysis so that we can give some comfort to our colleagues here, many of them not feeling as positive about the necessity for this replenishment as we do. But I think it is imperative that we do not have what I would consider to be a black eye as it relates to our participation at this international level.
I am going to, rather than ask questions, since both of us have to leave, I will submit my list of questions which are written out for the record and if you would give responses to them, I would be most appreciative. We certainly thank you and give our regards to the Secretary and inform him that we are interested in--Mr. Castle and I, as we were last term--interested in trying to get this replenishment done. But we need the full cooperation of the Treasury in order to really do it in a way that we can guarantee that we have a bipartisan effort and have enough votes to be able to do it.
So thank you for coming, and we look forward to working with you over the next few months.
[The prepared statement of Hon. Floyd H. Flake can be found on page 22 in the appendix.]
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Chairman CASTLE. Thank you, Mr. Flake. Let me just add, because there may be other Members here who will wish to submit questions to you in writing. In fact, I'm never going to get through all the questions that we have here. But we may want to do the same thing, and others may, so that is something as a follow-up that you probably know about. It's a follow-up that we would want to do.
Mr. SANDERS. Thank you. Mr. Chairman, I would like to take you up on that and be able to submit some written questions on my part.
Chairman CASTLE. Without objection. Any Member may submit questions.
Mr. SANDERS. Thank you, Mr. Chairman. I apologize for coming late and just catching the very end of Mr. Geithner's statement.
I would suspect, Mr. Geithner, that you would agree that the function of the international financial organizations would be to both help those countries to whom we provide assistance as well as the United States? Would that be a fair statement?
Mr. GEITHNER. Absolutely.
Mr. SANDERS. Now if somebody were to suggest to you that in both instances, the programs are not working, I would suspect that you would disagree? I think I caught the tail end of a remark by which you talked about how these programs are beneficial to the American economy, our economy as well in terms of our trade situation, in terms of our standard of living.
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Now how would you respond if I asked you, and I understand that these programs are by no means our entire trade policy, we have a recordbreaking trade deficit. We have run up a trillion dollars in trade deficits over the last 20 years. So what's so good about our trade program when we have recordbreaking trade deficits which are costing us millions of jobs? Isn't our trade policy failing disastrously?
Mr. GEITHNER. Well, I'm not sure how compelling an answer you will find this, but our trade deficit is more a function of the fact that we invest more than we save in the United States. Because investment opportunities are so attractive in the United States and foreigners are willing to finance investment opportunities in the United States, it's sort of inevitable and necessary that we run a trade deficit as long as that occurs.
Mr. SANDERS. That's not a good answer.
Mr. GEITHNER. But I will say that----
Mr. SANDERS. Not only is it not a good answer, it's a very bad answer. We have a trade deficit which is costing us millions of jobs. When you talk about trade investment opportunities, you are not talking about the people in the State of Vermont. You are talking about millionaires and billionaires. What about the working people? Do they come into any consideration? What about the loss of millions of decent paying jobs that have now gone to China and Mexico and every other country in the world? Is that part of the trade equation?
Mr. GEITHNER. Of course it is. But I think it is also important to note that throughout this period of what are still relatively modest trade deficits as a share of our economy, U.S. employment has grown very rapidly and quite extensively.
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Mr. SANDERS. Modest trade deficits? What is the trade deficit this year?
Mr. GEITHNER. The trade deficit is quite large if you think of it in the billions of dollars, but if you look at it in the context of the overall size of the U.S. economy, it's a relatively modest share of our economy.
Mr. SANDERS. Mr. Chairman, this man will probably be a President of the United States. He does very well. I really applaud that. We have the greatest trade deficit in the history of this country, and it's a modest trade deficit, and really within the broader context, it's not so bad. It is a disaster, and let's face it. Our trade policy is a failure. I think we should recognize that. It really disturbs me that we try to slough it over.
Now you talked about--I caught the tail end of your remarks. Maybe I misunderstood you, but you also talked about how it benefits the American economy. Twenty years ago, American workers had the highest wages in the industrialized world. Do you know what place we're in today in terms of the wages and benefits our workers receive?
Mr. GEITHNER. I know that we're probably not the highest, by any means, anymore.
Mr. SANDERS. Actually we're in double digit. We're about 13th. Now if the economy is doing so well, how do we go from first in the world for working people down to 13th?
Now on the other hand, it is true that there has been a significant growth in billionaires and millionaires. Maybe that is what you meant by our economy doing well. Some of us try not to just represent millionaires and billionaires, but working people. I know it's a radical concept for this institution, but it's true that some of us try to do that.
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But if the real wages for American workers have declined and we have gone from first to 13th in the world, how do these programs work so well for the average American?
Mr. GEITHNER. I don't think you are going to find any answer I give you satisfactory on these questions. I don't mean to suggest in the way I answer that we don't recognize the concerns in your questions, I think we do. We have a slightly different view about what the best way to address those concerns are, but I think we share those concerns.
Our basic policy has been and will continue to be that it is in our interest to support growth overseas, to support opening markets overseas. These institutions play a critical role, a somewhat unrecognized role in that process.
Mr. SANDERS. I don't necessarily disagree, but I think under present processes it has been a failure. If we look at what is going on in the American economy. If I am telling you that the standard of living for the average American is in decline, that the new jobs that are being created are low wage jobs, it really is inappropriate for representatives of the Administration to come here and tell us how good things are going. They are not going well. They are doing well for millionaires and billionaires. They are doing very well. I concede that point. But for the middle class and the working class of this country, current economic policies are failing. Trade policies are failing. I gather you do not agree with that statement?
Mr. GEITHNER. No. We have a slightly different view of the success of the Administration's economic policies over this time. But as I said a minute ago, I think we share the concerns in your question. I think our view is that our task has to remain to strengthen the U.S. economy and continue to promote growth and more open economies overseas. We spend a lot of effort doing that, and we have had some success in doing so. These institutions are important to that effort.
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Mr. SANDERS. Well, I am sure you have had some success in opening up markets. But on the other hand, if you go to any department store in America, you are going to find more and more products are made in China that used to be made in the United States. They do jobs that are being created in the service industry rather than in manufacturing.
So I would suggest, I would hope that the Administration, and it's certainly not just the Clinton Administration, the Bush and Reagan Administrations did exactly the same thing. In my humble opinion, our current trade policies are a grotesque failure, and they have got to be thought about.
Can I have a minute or two more, Mr. Chairman?
Chairman CASTLE. Certainly. I will allow an extra minute.
Mr. SANDERS. Thank you very much. In terms of the IMF, we talked about the impact. I understand, believe me, that these are not the essence of our trade policies. It's just a tangential part of it. The other concern that I have, which we don't have enough time to get into now, is how beneficial these programs are working for our Third World neighbors? I have real concerns that the essence of what IMF is about is again, to represent the wealthy in the Third World countries and not the ordinary people, causing massive dislocations for the poor people, its structural adjustments.
Now one question that I would have. In 1994, I authored an amendment which became law which urged--which mandated--that the international financial institution representatives of the United States use their voice and vote to oppose projects and policies that undermined internationally recognized worker rights, such as freedom to join an independent trade union and bargain collectively. In my opinion, many of the strictures required under IMF structural adjustment plans have the practical effect of requiring draconian measures to be imposed on working people when austerity programs are imposed as a precondition for receiving IMF assistance.
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What has the IMF done in the last 3 years to adopt and implement programs that promote international respect for fundamental workers rights at the same time that other IMF policy goals are being pursued?
Mr. GEITHNER. I think it might be useful if I could give you a written set of examples of what the IMF has done in a number of countries. Our view has been that the IMF has made some progress. It is in the process of working on a closer interaction with the ILO and in a variety of specific cases, in Africa most notably, it's undertaken to help countries rewrite labor laws, to address many of the concerns you have expressed. I don't think these are overwhelmingly compelling examples of success, but we think we can point to a few that are sort of helpful.
I think it is important to know though that what the IMF does is to create the conditions for growth in living standards. What the IMF does is help countries bring down inflation when inflation is unsustainable because inflation is the cruelest tax on the poor. It's the poor that suffer most from inflation when it's out of control. So where the IMF is successful, and it is successful in many cases, it's successful because it creates the conditions for growth in living standards and for reduction of inflation. That ultimately is the best way to help.
Mr. SANDERS. Without entering into a major debate, and I understand what you are saying, the IMF intends and tries to develop free market economies. Sometimes in the process, programs which provide food to poor people, education to poor people, health care to poor people, are cut back. Right? And poor people suffer. I'm sure that that's not the case every time, but that happens. Does it not?
Page 21 PREV PAGE TOP OF DOC Mr. GEITHNER. When a country gets in a crisis that forces it to come to the IMF, it often comes to the IMF in a position where it's got an incredibly large budget deficit and it's experiencing hyper inflation. The IMF did not create the conditions that led to that problem, but when it comes in for the solution, there is no solution to these countries except to bring their deficits under control and bring their inflation rates down.
What is significant about what we have accomplished and what the IMF has accomplished over the last several years has been to force the IMF to pay much closer attention to the effects of fiscal adjustment on the poorest sectors of the population. As I said in my statement, they have been quite successful in making sure when deficits have to be cut and expenditures cut, that the effect of those cuts do not fall disproportionately on those programs.
Mr. SANDERS. Thank you very much. Mr. Chairman, thank you for allowing me the extra time.
Chairman CASTLE. Thank you, Mr. Sanders. We'll turn now to Dr. Weldon. Then we'll go to Mr. Jackson.
Dr. WELDON. I thank the Chairman. Mr. Geithner, I was just recently in Russia. I represent Kennedy Space Center in Florida. There are some very serious concerns about the Russian involvement in the space station, the international space station program. Specifically, they are supposed to be paying for a critical module on this station with their own tax revenues. The program is about 12 months behind. It has the potential to cost U.S. taxpayers hundreds of millions of dollars.
Page 22 PREV PAGE TOP OF DOC On my way over there with other Members of the Science Committee, we stopped in Germany. On the way back, we stopped in France. There was a considerable amount of concern about the political and economic situation within Russia. I just wanted you to comment on the status of the Fund's $10 billion extended fund facility for Russia. I have been told that you have cut off Russia for any additional funds. I don't know if that's true or not. How are the resources being used in Russia? Could you comment on that?
Mr. GEITHNER. Yes. This is another issue where it might be helpful if we could give you a detailed briefing separately or a detailed response in writing. The IMF has been in the process for some time negotiating what's called an extended financing facility, which is the program you referred to. There's a mission--IMF mission--just back from Russia recently. I don't think I can tell you today when that program is going to be finalized and when disbursements under that program are going to start to be made. That depends on----
Dr. WELDON. Well, I would like you to respond in writing to the subcommittee and with a copy of it forwarded to me because I am very concerned about the Russians not performing on their international agreement. The Vice President has had four meetings with Mr. Chernomyrdin, and at each one of these meetings, he has been told by Mr. Chernomyrdin that they were going to start releasing funds for the station program, and they have not. Meanwhile, we have the Japanese, we have the Canadians, we have the Europeans spending billions of dollars. We're spending billions of dollars. Then we're turning around and giving them money, loaning them money through the IMF. I would really like to know what's going on with this program, because I have some very serious concerns about how they are handling their finances over there in Russia and our continued involvement with them, both in scientific enterprises like the space station, as well as what the IMF is doing, particularly in light of your requesting additional funds.
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The other question I had is not related to Russia but it has to do with the peso issue. I was under the impression that the IMF was somewhat caught off-guard on the peso crisis 2 years ago. If that is true, could you explain why? If it's not true, could you explain why? Are you making changes to enable you to be able to anticipate those kinds of crises earlier? If so, how?
Mr. GEITHNER. I'm glad you asked that question. Can I go back to Russia for just a second?
Dr. WELDON. Sure.
Mr. GEITHNER. I think you would find we share all the concerns you alluded to about Russia and the IMF. The IMF has a very active role in the progress Russia has achieved. The IMF only gets involved and only makes this conditional assistance if the country is willing to undertake the changes necessary. The IMF looks very carefully at compliance. We watch very carefully too, to ensure that the assistance does not flow unless the reforms are undertaken. But I'll respond in detail in writing and give you a detailed briefing on where things stand and how that might affect the specific concerns you raised about their space program.
On the peso, I wouldn't take issue with the statement you made at the beginning, that the IMF, and it may be true of the international financial community in general, was caught a bit off-guard. But in response to that circumstance, we have undertaken, or the IMF has undertaken at our initiative, a series of really quite extensive reforms to the way it does business which we think will help reduce the risk of future crises and help avoid putting us in the situation in the future where we have to do so much to reduce the risk to our economic interests.
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Can I just mention two of those things that I think are very important? The first is that at our initiative, the IMF adopted a set of very strong disclosure standards which I don't want to say require disclosure, but under which countries provide to the markets much greater detail on a much more timely and frequent basis, information about the underlying financial and economic condition of their economies. That is important because it allows the market to anticipate and react and discipline bad policies early before countries fall off the cliff. We think that's a very useful step forward. It has produced a dramatic improvement in the quality of information that Mexico and a number of other countries provide to the markets.
The second thing I want to point out, it's in my statement, is that the IMF has undertaken a really extensive set of measures to strengthen what it calls its ''surveillance procedures'', which are the systematic reviews it does of countries to help encourage the kind of policies that can avoid crisis. A critical piece of that has been to pay much greater attention to vulnerabilities that come from weak banking systems, from weak supervision and weak financial markets which played an important part in the Mexican crisis. It has made a major investment in improving that. It's literally too early to tell how successful it has been, but we've been pretty impressed and we're continuing to push to make sure they do more.
Ultimately however, it is prudent to say that we're probably not going to be successful and the IMF is not going to be successful in anticipating and preventing every future financial crisis. That's why we thought it was so important to make sure that there was an effective multilateral mechanism like the New Arrangements to Borrow in place in the future to respond to future crises that threaten our interests so that we do not face this situation again, where we had to do so much. The virtue of the New Arrangements to Borrow is that it brings into the system a group of new countries, new emerging market countries, and thus provides substantially better burden sharing for the United States as a result.
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Dr. WELDON. Thank you. Can I just ask one more question, Mr. Chairman, a brief one?
Chairman CASTLE. Certainly.
Dr. WELDON. Mr. Geithner, as I understand it, one of the things that has allowed the United States' economy to prosper as it has over the past 75 or 100 years has been the adoption of standard accounting practices within corporations that allow investors to make a reasonably objective assessment of the financial health of the corporation before investing in the company. In so doing that, it has basically made it easier for investors from all over the country to move capital into corporations. This in turn creates jobs and raises the level of prosperity in our Nation.
As you assess countries and in particular, not only the governments, as well the major corporations within those countries, are you hampered by a lack of standard accounting practices that causes the people within the IMF to have to do a lot of second guessing analysis, or are there standard practices that you are already forcing on these countries so that you can make those kinds of judgments?
Mr. GEITHNER. You raise a very important issue. You frame the case very well, much better than I did. I think that we are not in a position where we can be satisfied or the IMF can be satisfied with quality of the information that countries disclose at this point. But we are very actively involved in a number of fora, not just in the IMF, in encouraging countries to do more and to disclose more. The strong disclosure standards the IMF has introduced are a key part of that exercise.
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Having strong accounting principles adopted by these countries is critical to making the information they disclose worth something. So that is a critical part of the process too. I agree very much.
Dr. WELDON. I thank the Chairman.
Chairman CASTLE. Thank you, Dr. Weldon. Now we turn to Mr. Jackson.
Mr. JACKSON. Let me first thank the Chairman for holding today's hearing, and apologize for my tardiness because of the conflict of the schedule. I would like to ask unanimous consent that my opening statement be entered into the record at the appropriate place.
Chairman CASTLE. Without objection, it is entered.
[The prepared statement of Hon. Jesse L. Jackson can be found on page 24 in the appendix.]
Mr. JACKSON. I would also like to ask unanimous consent that my questions that I had prepared for Deputy Secretary of the Treasury Summers also be submitted for the record.
Chairman CASTLE. Without objection, they will be submitted for the record and can be sent out to him if you wish.
Mr. JACKSON. I certainly will, sir. I am going to take care of that.
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The question I am going to submit for the record is also one that I would like to address to Mr. Geithner, who I want to thank for being here today. I understand that from time to time, the Congress formally instructs the U.S. executive director at the IMF to vote on certain issues or simply represent U.S. interests at the Fund. Such instructions are added to authorization language that is subsequently passed here in the Congress. I would like to know what additional, if any, direction the U.S. executive director receives from the Administration with respect to pursuing positions that advance or are sensitive to the following issues.
The first which concerns me is human rights, including advancement of rights for women. Second, labor conditions, including safety and wage concerns. Third, the conditions of children ranging from child labor to health issues. Fourth, environmental concerns.
I am concerned that while we have pursued advances in these arenas in our own growth as an industrialized Nation, other governments may ignore the interests of their own people in these matters in order to achieve higher economic growth statistics. Beyond the statistics, obviously we are concerned about the human condition of people in these countries. So again, Congress has specific authorization language for the executive director, but also I'm sure there is an Administration position on these four issues as well which are additional mandates that the executive director is asked to pursue.
Mr. GEITHNER. Well, let me begin by saying that we adhere scrupulously to the specific requirements that Congress has imposed on our voting positions in these institutions. We spent a lot of time thinking about how best to design development programs and development policies in response to many of the concerns you have outlined. I think it would be easy for us to provide you with a careful elaboration of the types of things we try to promote and pursue in these institutions, and I'm happy to do so.
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I should say on the issue of labor standards, in particular, that we're in the process of finalizing a report that will help detail in some detail what the Bank and the Fund, I think, and the other regional development banks have done in that area in particular. But we can provide a more elaborate explanation to you in writing.
Mr. JACKSON. I appreciate that. Just generally, are there additional instructions that the Administration asks of the executive director with respect to voting at the Fund, that may be motivated by any of my concerns?
Mr. GEITHNER. I think there are a number of other general considerations that form the policies we promote in the Fund, and which affect how we instruct our EDs to vote, both to vote and to participate and to try to influence the design of programs as they are developed. Many of those are responses to the concerns you addressed. But I would rather give you a written response so I can be a little more precise in each of the areas you identified.
Mr. JACKSON. Thank you for your time today, Mr. Geithner. Mr. Chairman.
Chairman CASTLE. Thank you, Mr. Jackson. I see no other witnesses. Mr. Flake and I both have to run off to other meetings. So I think we'll close down the hearing. But I would imagine there may not be anyone else in the United States that knows as much about the IMF as you do. We have had this discussion at the beginning. I'll just close with it. That is we really have a sales job to do here of putting it into an understandable economic form and a politically acceptable sales pitch in terms of what has to be done if we are going to be able to continue the good and weed out those things which are not so good.
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We do appreciate your appearance here today. We do intend to follow up with some questions in writing, and some Members could not be here, so that will happen. But we may have to have other sessions and meetings, maybe not full hearings, in order to do all this. I'm sure you'll carry that message back. We do appreciate you being here today and we look forward to working with you in the future.
Unless there's anything further, we stand adjourned.
[Whereupon, the hearing was adjourned at 11:58 a.m., subject to the call of the Chair.]
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