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REVIEW OF THE OPERATIONS OF THE INTERNATIONAL MONETARY FUND
TUESDAY, APRIL 21, 1998
U.S. House of Representatives,
Subcommittee on General Oversight
and Investigations
Committee on Banking and Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. Spencer Bachus, [chairman of the subcommittee], presiding.
Present: Chairman Bachus; Representatives Sanders, Saxton, and Kucinich.
Chairman BACHUS. Good morning. I would like to call to order the House Banking Committee, the Subcommittee on General Oversight and Investigations.
Today the Oversight subcommittee meets to review the operations of the International Monetary Fund. Today's hearing builds on many other excellent hearings in recent months concerning the IMF. Unlike most of those other hearings, our focus is not on the ongoing economic crisis in Asia, and I want to stress that. Rather we are here to discuss how the Fund operates, including the transparency of its decisionmaking process; the appropriateness of its approach to lending money, including the questions of subsidized loans and the so-called moral hazard as opposed to borrowing money in the marketplace at market rates and lending at market rates; whether its policies are consistent with and further United States economic interests; the appropriateness of its policy furthering other United States interests, including social and environmental issues; finding out whether those are considered and the ability of the U.S. through its Executive Director to influence IMF actions and policies.
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All Members of Congress and, for that matter, most Americans, are aware of the threat posed by the Asian economic crisis to the American economy and to our own national interest. However, is the link between the Asian crisis and the requested funding increase overstated? A cursory review seems to indicate that the IMF has the necessary funding to handle the Asian bailout. We want to explore that with you.
The Clinton Administration has asked Congress to appropriate $17.9 billion in U.S. taxpayer dollars to fund an increase in the 18 percent share the U.S. holds in the International Monetary Fund. This request is currently pending before the Congress. The requested $18 billion increase raises a question unrelated to the Asian crisis: Should we permit the IMF to continue its business as usual?
Both Ranking Member Sanders and I feel it is the responsibility of this subcommittee to have a more detailed explanation of the workings of the IMF before the Congress hands over more U.S. money. The American taxpayer has a right to know what we are getting in return for our investment.
Whether the U.S. should increase funding for the IMF and whether the IMF plays a necessary and beneficial role in the world economy is a matter of great dispute and debate. There is certainly honest disagreement among many Members of Congress, economists—and I am not saying Congressmen are economists, but there is also debate among economists on both sides of this issue. This is a matter that deserves serious and thoughtful attention by the Congress, and we will have a panel of economists who will testify after the first panel's testimony.
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My opposition to increased funding without significant reform is well known. I do not necessarily call for the abolition of the IMF. There may indeed be a useful role for it. However, until concerns are addressed, I feel it is appropriate to oppose both the increased funding and the expansion of the IMF role for several reasons.
First is the so-called moral hazard problem, the reality that many IMF loans result simply in the bailout of large investors who made poor investments. The IMF interferes with the market in this sense and could encourage poor investments. I am not aware of anyone who seriously disputes that the moral hazard problem exists. The only issue is whether the benefits of IMF actions should be seen as outweighing this drawback. We don't bail out banks and investors domestically when they guess wrong on investments. In my home State, the Government does not bail out banks and investors who become overextended. Should we bail out investors when they overinvest in other nations? Are we encouraging more risky investments by offering subsidies and bailouts when these investments turn sour?
Second, money is power. When we transfer U.S. taxpayer money to the IMF, we empower the IMF and make it a much more powerful institution. We should not commit U.S. taxpayer resources unless and until we can answer the question, will it be used in a way which protects our national interest. We cannot do this at this time, or at least I am not satisfied that we have answered that question, and now is the appropriate time to look at that in that we are faced with this request for additional funding.
The IMF is not an open institution. Some argue that Treasury Department bureaucrats wield tremendous influence at the IMF, and I am sure that is true and I am thankful for that. That may well be true, but that is insufficient accountability to the American taxpayer, just the assurance that people at Treasury have great influence.
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It is not encouraging that prior attempts by Congress to change IMF policy, more than 30 such attempts, seem to have little effect on the IMF, and sometime during this hearing we will introduce for the record a report on that.
Today's hearing will provide an opportunity to take a closer look at many issues that deserve attention. Is it appropriate for the IMF to make loans to nations at below market rates, less than 5 percent in most cases? Companies in my district borrow money far above the prime rate. Most of my constituents and most Americans must borrow money at or above the prime rate, especially those who are experiencing trouble in repaying current obligations, as is the case with the IMF loans. International investors do not make loans at these rates. Why should the IMF use U.S. taxpayer money or guarantees to make what amounts to a subsidized benefit to foreign interests?
There are other basic management issues at the IMF that should be addressed. Are salaries appropriate? It is reported that the IMF compensates its employees for income taxes paid. Let me make that point again. IMF employees who live and work right here in Washington, with salaries funded in part by U.S. taxpayer money, live tax free. I also question why the IMF does not comply with the same laws we demand of other employers here in the United States.
Is anyone satisfied with the degree to which the IMF makes its conduct open to public scrutiny? The IMF is funded with taxes from citizens throughout the world. Many live in democracies and at least in theory can hold their governments accountable.
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The stockholders of the IMF are the U.S. taxpayers and taxpayers from other countries, not the economic bureaucrats in those countries. The taxpayers of the world are entitled to see how the IMF works. In this regard, the legislation introduced by Representative Jim Saxton, H.R. 3331, should be given serious consideration. It would make IMF funding contingent upon the IMF Board making public key documents and meeting minutes. If IMF programs are so important, there is no reason why it cannot be fully open to review. Public review encourages accountability and discourages mischief.
As I said before, the IMF should not be permitted to operate like a private club with public money, and that is how it operates today.
The Administration apparently believes we should provide the IMF the additional $18 billion before we attempt to make the necessary changes from within the organization. This is putting the cart before the horse. The time to consider the Saxton legislation and other reform proposals is now, before and not after funding when our leverage is lost.
I am aware, and most people that are following this issue are aware, that the Senate has put no conditions on this latest situation. Therefore, it is basically up to the House at this point to take a stand if one is to be taken. Departments and agencies of the United States Government must account for every penny they are appropriated by Congress. Now with the Results Act they must also be able to show Congress what the American taxpayers are getting for their hard-earned investment.
Why should we expect any less from the IMF? In my opinion, the demands of the American people can have an impact at the IMF, because, if as is reported, the other IMF members will not agree to a quota increase until the U.S. Congress takes the first step, and of course that puts an additional burden on this Congress, knowing that the world is waiting for our action both in approving additional funding and, if changes need to be made, at least demanding those changes.
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To provide us a window into the mysterious and sometimes murky world of the IMF, we have invited the current U.S. Executive Director, Ms. Karin Lissakers, to appear today. It is her ''voice and vote'' on behalf of the United States that is used to impact IMF policy. This will be her first appearance in this capacity before the Congress. I appreciate the cooperation of the Department of the Treasury in making Ms. Lissakers available. Its initial refusal to do so, in my opinion, was indefensible.
Appearing with her is Treasury Department Assistant Secretary for International Affairs, Mr. Timothy Geithner.
The second panel of witnesses includes former Federal Reserve Governor and current resident scholar at the American Enterprise Institute, Dr. Lawrence Lindsey; former Executive Director to the IMF under the Bush Administration, Mr. Thomas Dawson; Mr. Ralph Nader, who I suppose needs little introduction; and Dr. Edwin J. Feulner, President of The Heritage Foundation.
Professor Jeffrey Sachs, Director of the Harvard Institute for International Development, also was scheduled to appear but notified us yesterday of a conflict. I think his differences with Secretary Summers are well known and his viewpoints are fairly well documented, so we have some understanding of what he would say if he were here.
Our last panel of witnesses will be comprised of Dr. Walden Bello, of Focus on Global South. He is from Bangkok, Thailand. Mr. Ian Vásquez, Director of the Project on Global Economic Liberty, Cato Institute; and Mr. John Cavanaugh, Director of the Institute of Policy Studies.
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Ms. Marijke Torfs, Director, International Projects, Friends of the Earth, was also scheduled to appear but was unable to do so.
[The prepared statement of Hon. Spencer Bachus can be found on page 82 in the appendix.]
I now turn to Representative Sanders, the Ranking Member of the subcommittee. Mr. Sanders' longstanding interest and involvement in IMF matters are well known. He brought to me the initial request for this hearing. I will now turn to him for any opening remarks he may make.
Mr. SANDERS. Mr. Chairman, thank you very much for holding this important hearing today, and I want to welcome all of our guests who are going to be with us.
The taxpayers of this country, many of whom are working longer hours for lower wages than they did just 20 years ago, are being asked to contribute another $18 billion to the IMF on top of the $36 billion which we have already contributed. Even in Washington, that is a lot of money.
Nonetheless, most Americans, and in fact in my view most Members of Congress, know relatively little about the functioning of the IMF or about the record that it has established.
Today's hearing is important because it is high time that we remove the veil of secrecy which has surrounded the IMF for so many years, and it is high time that we understood the role of the United States in the IMF. That secrecy has got to end and I agree very much with what the Chairman said in regard to that.
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We are here today, among other things, to find out if the IMF is an institution that serves the interests of the working people and the middle class of the United States, the vast majority of our citizens, or whether the IMF is simply a front group for giant banks, global corporations and wealthy investors. Who does the IMF represent?
We are here today to find out if the IMF is improving the lives of the people of the Third World, many of whom are living in desperate, grinding poverty, or whether the IMF primarily serves the interests of the local ruling classes and elites in those countries in which the IMF does business.
Whom again does the IMF represent? Among other things, we are curious to know about the IMF bailouts in Mexico and Asia. Is it true, as reported in the press, that much of the benefit of the IMF's Asian bailout will go to six American banks who made billions of dollars over the years investing in Asia, but when their loans went sour came running to the taxpayers of the United States for $19 billion—banks such as Chase Manhattan, BankAmerica and Citibank.
Is that really where the taxpayers of this country should be spending their money? Was Richard Medley, head of the Medley Global Advisers, correct when he asserted and I quote, ''The only winners in Korea are the foreign banks, who will get their money back and then some.''
Did the bailout of large banks in the Mexican peso crisis lay the stage and the groundwork for in fact what followed in Asia, and will the Asian bailout lay the groundwork for another bailout in years to come which may be even of a much greater magnitude?
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Further, we want to know whether the representatives of the United States to the IMF in the Reagan Administration, the Bush Administration, the Clinton Administration, have obeyed the law. Some of us spend a lot of time up here doing our best to make laws that we think are sensible, and every now and then we would like the law to be obeyed. Congress for the last 20 years has repeatedly required specific actions by United States Executive Directors, but there is grave doubt as to whether these legal requirements have in fact been carried out.
Have the IMF and the United States Executive Directors simply ignored congressional requirements regarding such important questions as workers rights, child labor, the environment and moral hazard? If these have been ignored, what has been the impact on workers, children, the environment and investor responsibility? These are important questions which must be explored and we hope to get into some of that this morning.
Amidst all of the recent discussion about the role of democratic institutions in the developing world, some of us want to know if the IMF strengthens or undermines democracy around the world. The New York Times described the IMF and its sister institution, the World Bank, as ''the overlords of Africa.'' Ninety countries with more than half the world's population have lived directly under IMF-imposed conditions. In other words, the IMF has had an enormous impact on billions of people throughout the world. Has the IMF contributed to the democratic empowerment of the people of the developing world or has it diminished local democracy by forcing many developing countries to make major economic transformations which they did not want to make, but which they had to make in order to receive desperately needed loans in foreign capital? In certain instances has the IMF reinforced the power of tyrants like Mobutu of Zaire and Suharto of Indonesia and perhaps other dictators as well?
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We hope with these hearings to shed light into the musty corridors of the IMF. We want to know whether the IMF itself follows the high standards of transparency and accountability that it claims to demand from others, and I think the Chairman touched appropriately on this point. Most Members of Congress and most citizens would find it rather incredible to learn that the IMF systematically destroys its own minutes and that official records of votes are not maintained. The United States taxpayers and those of other countries have a right to know what is being done with our money. Is this an acceptable level of accountability to democratic institutions? The bottom line, when you put billions of dollars into an institution you have a right to know how decisions are being reached and we don't know that today.
Should taxpayers pay tens of billions of dollars to expand IMF funding without knowing what the real effects of its past policies have been? The Chairman made this point. When we have a program, we want to know whether it is succeeding or not and if it is not, we say, ''Change it or get rid of it.'' If it is succeeding, maybe we want to put more money into it. How well has the IMF performed in improving the lives of the people in the Third World? Has the IMF helped countries who come to it for loans become more self-sufficient and become more independent, or has it turned them into loan junkies?
In other words, the IMF contacts another country and has a relationship with another country because they need money. And one might think that after the IMF is done with these countries they would be less in debt than before the IMF got to them in the first place. It is disconcerting to learn, therefore, that from 1982 through 1990 debtor countries in the South paid their creditors in the North $6.5 billion in interest and another $6 billion in principal payments every month, as much as the entire Third World spends on education and health.
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Yet the debtor countries were 60 percent greater in 1990 than in 1982. In other words, after cutting all of their basic programs, they were more in debt than when the IMF got to them in the first place. Does that sound like a successful loan program? Not to me it doesn't. It sounds like loan sharking, to be honest.
Has this dismal record improved or are the countries under IMF tutelage continuing to grow another day older and deeper in debt? A study this year of 71 countries operating under IMF and World Bank conditions has found that through 1995 the average increase in debt among these countries was 49 percent.
Has the IMF improved the lives of people in the Third World? That is a pretty simple question. During the 1980's in African countries with World Bank programs' spending on health decreased, underlined, decreased by 50 percent and on education decreased by 25 percent. That is in Africa.
A United Nations advisory group reported that throughout Africa ''health systems are collapsing for lack of medicines, schools have no books and universities suffer from a debilitating lack of libraries and laboratory facilities.''
As recently as December 1997, a study by a joint task force of the International Labor Organization and the United Nations Development Program charged that structural adjustment in Africa has been ''purchased at the price of economic attraction, high unemployment and massive poverty.''
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My, that is a record that we should all be proud of. Maybe we should want to discuss a little bit of what the IMF has done to those desperately poor Third World countries and whether they are worse off after the IMF gets in there.
We have heard that the IMF-led Mexican bailout was a success because Mexico has not defaulted on its loans. Larry Summers was in this room a couple of months ago talking about that, and that speculators have been repaid and investment has started to return and the trade deficit in Mexico has become a trade surplus.
But what about the Mexican people? Do we ever talk about them? In the past three years some 1.8 million peasants have left home in search of work, many of them coming to the United States. One-third of all Mexican businesses went into bankruptcy. Two million jobs have been lost. One-third of Mexico's economically active population is unemployed or in precarious jobs. The Mexican minimum wage now buys only one-third of what it did in 1981. If that is a successful economic restructuring, I certainly would hate to see an IMF failure.
Perhaps all of the answers to these questions will be reassuring and we look forward to hearing from Ms. Lissakers and Mr. Geithner, but it seems to me we need to ask, as the Chairman indicated, what changes have to be made in the IMF so that it can achieve its goals in an effective and accountable way and we need to ask what legislation may be necessary to correct what seems on its face to be an appalling record of failure and irresponsibility.
Mr. Chairman, thank you very much.
[The prepared statement of Hon. Bernard Sanders can be found on page 85 in the appendix.]
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Chairman BACHUS. Thank you.
Mr. Kucinich from Ohio, would you like to speak?
Mr. KUCINICH. Thank you very much, Chairman Bachus and Congressman Sanders. I appreciate the opportunity to join with the subcommittee for this very important hearing and thanks for permitting me to join with you today.
The International Monetary Fund has quickly and recently become a familiar name to people of this country, and I am sure to Members of the Congress. We have been told that it is essential for Congress to give $18 billion to the IMF. We have been told that the funds are needed to deal with the Asian financial crisis. We have been told that if Congress is dissatisfied with IMF policy, it should accomplish those changes by directing the U.S. Executive Director to use her voice and vote. We have been told that an immediate contribution of $18 billion is required. We have been told that the international economy depends on Congress giving $18 billion to the IMF, that American leadership in the world is at stake, that U.S. national interests are at stake. Well, we will see about those and other claims.
I have high hopes for this hearing. I understand that it is the first time ever that the American Executive Director of the IMF has testified before Congress. Thank you for coming. It has taken far too long for this day to arrive. I hope that it is not the last time that the American Executive Director will come before Congress when requested and hope to hear that agreed to today.
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Besides that, what I hope to determine for the record includes the following points: Was the $18 billion the IMF wants Congress to give it designed to meet the needs created by the Asian financial crisis, or did the IMF desire those funds and plan to obtain them even before the Asian crisis became apparent?
Secondly, are the tools that Congress uses to accomplish change at the IMF adequate? Is the so-called voice and vote directive an effective one?
Third, is there truly a need for Congress to rush to give the IMF $18 billion, as some have said? Do their claims match up with the reality?
Fourth, what effect does the IMF have on multinational investors?
Finally, what effect does the IMF have on debtor countries and the billions of people who work and live there?
Once again I want to thank the Chairman for holding this hearing and thank Mr. Sanders for his work on this issue.
Thank you.
Chairman BACHUS. Thank you. At this time the first panel will begin. We will not swear you in. We will simply ask that if you have an opening statement, and we understand, Mr. Geithner, that you have a statement and that Ms. Lissakers will just be available for questioning.
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Mr. GEITHNER. She will make a brief statement, too.
Chairman BACHUS. Fine.
STATEMENT OF HON. TIMOTHY S. GEITHNER, ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE TREASURY
Mr. GEITHNER. Thank you, Mr. Chairman and Mr. Sanders. I welcome the opportunity to testify today on the IMF. Joining me as our star witness is Karin Lissakers, who is the U.S. Executive Director of the IMF.
Secretary Rubin, Chairman Greenspan and a number of senior Treasury officials have testified on the broad policy issues raised by the President's IMF requests on ten occasions over the past several months.
In this statement today I am going to focus on a series of detailed questions you raised in your letters to Secretary Rubin and to Karin Lissakers related to the following issues: The ways in which we seek to advance policy initiatives in the institution, and in this context, our successes and failures in advancing congressionally mandated policies; the financial structure of the IMF; transparency in the IMF; and possible performance measures for the IMF.
Following my statement, Karin Lissakers will provide some additional details on the governance of the IMF, our position in the institution and the role played by the Executive Director.
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Since 1997, Congress has on several occasions mandated that the United States seek specific changes in IMF policies. These legislative mandates have generally taken the form of requiring the Secretary of the Treasury to instruct the USED to use the voice and vote of the United States to seek the adoption of measures that would advance the attainment of those policies goals.
We take these mandates seriously. They become a core feature of the policies we advance in the institution and the principal focus of where we direct our influence in the institution. In response to these provisions in U.S. law, we develop guidelines on how to implement the law and how to be most effective in advancing the objectives in the IMF. We provide specific instructions to our EDs to guide their efforts on the board. We engage the management and staff of the IMF in trying to design strategies that can work in the institution. We work with the major shareholders of the institution to develop the consensus necessary to be effective. We raise these issues in other multilateral fora and in public statements. These mandates are effective in shaping U.S. policy in the institutions and in many cases through the sustained efforts of Ms. Lissakers and her predecessors, they have induced fundamental changes in the policies of the institution.
In cases where we have been less successful in changing the IMF, a variety of factors are at work. Most fundamentally, although we have substantial influence in the IMF, we do not have the capacity of acting alone to force change in its mandates and its policies. Our roughly 18 percent of the voting power of the institution is not the 51 percent or the 71 percent or the 85 percent required for approval of programs or major changes in policies. In many areas we have faced active opposition from a broad range of countries. In some cases the other members of the IMF believe that policy objectives in U.S. law is outside the scope of or inconsistent with the mandate of the institution.
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In other cases the opposition is based on substantive disagreements with the policy objectives mandated by Congress and in other cases the objectives are simply considered incompatible in the view of member countries with their vital national interests and their prerogatives as sovereign nations.
Where we have been successful, we have worked carefully over time to create the necessary consensus and support for change. Recently we have been particularly successful in building the case for significant improvements in transparency, in limiting growth in the administrative budget and staff salaries, in making trade liberalization an important part of IMF programs, in strengthening the social safety net as part of IMF programs, and in identifying ways to reduce corruption and improve governance in the IMF member countries.
As you can appreciate, our capacity to advance reforms in the IMF going forward depends critically on the capacity and willingness of the United States to participate in the pending quota increase and establishment of the New Arrangements to Borrow. I thought it might be appropriate to provide a more detailed report on our experience to date pursuing the four specific issues you raised in your letters, those relating to worker rights, the role of the private sector, human rights and military spending. Let me just briefly walk through our experience in those four areas.
Workers' rights. Since the passage of the Sanders-Frank Amendment in 1994, the U.S. has worked actively to encourage the IMF, the World Bank and other multilateral development banks to pay greater attention to labor issues, including the adoption of policies to encourage borrowing countries to guarantee core labor standards. Considerable progress has been made in the World Bank where, for example, the importance of improving labor standards is formally acknowledged by the institution. A comprehensive policy to eliminate exploitative child labor has been adopted, and the multilateral guarantee agency is prohibited from extending guarantees for programs involving forced labor or exploitative child labor.
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Progress has been slower and more limited in the IMF. The initial reaction of most IMF members has been that this is an issue more appropriately addressed in the MDBs and the ILO rather than the IMF. In spite of this, we have worked to encourage the IMF to develop a stronger working relationship with the ILO where the expertise in these issues is strongest. We have pressed management and staff to incorporate core labor standards into program design and to include representatives from organized labor in program discussions, and we have raised worker rights issues in specific country reviews where the U.S. has particular concerns.
This effort is beginning to produce some results, although much more work remains to be done. The IMF and the ILO are developing a close working relationship at all levels, including meetings of senior officials, joint sponsorship of conferences, attendance at each institution's annual meetings and enhanced staff cooperation in specific cases. And as part of the effort to promote country support, broad-based support in these countries for IMF supported programs, the IMF is reaching out to a wider range of representatives from civil society, including labor unions, and urging government to consult more closely with labor groups in the formulation and implementation of economic policies.
Our efforts are continuing. The IMF and the World Bank, together with the ILO, are holding a conference in Bangkok on the implications of the Asian crisis for workers in the region. In several recent speeches the IMF Managing Director has highlighted a need to adapt annual Fund policies to place greater emphasis on labor issues, including core labor rights, so we are making some success and winning broader support in the institution, but not that much yet.
The role of private creditors in the resolution of financial crisis. Fifteen years ago in the midst of the Latin American debt crisis, the Congress directed the Secretary of the Treasury to instruct the USED to oppose any IMF funding which in his or her judgment is to be used principally for repaying imprudent bank loans to a member country and to encourage the rescheduling of bank loans. At U.S. urging, the IMF adopted during the 1980's a variety of measures to facilitate these objectives. Between 1987 and March 1997, 31 debtor countries had more than $180 billion in commercial bank debt restructured and the original claims of the banks were reduced by $83 billion.
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The Asian crisis has demonstrated again the importance of finding more effective mechanisms for sharing with the private sector the burden of managing the financial crises, and in a world in which trillions of dollars flow through international markets every day, there simply is not going to be enough official financing available to meet crises that could take place in today's markets.
We feel very strongly that official financing should not absolve private investors from the consequences of excessive risk taking and thus create the moral hazard that could plant the seeds of future crises.
This issue was a central topic at the meetings in Washington last week of the G–7 and a special meeting of finance ministers and central bank governors from 22 countries. We outlined some initial steps to help address these concerns, and we are committed to a careful, thorough process for trying to figure out more effective ways to figure out these concerns going forward.
Human rights. A number of provisions of U.S. law require us to pursue the advance of human rights, and we do so through a variety of diplomatic channels and international institutions.
As provided in legislation, the USED has opposed IMF financing to countries about which the United States has human rights concerns and to countries harboring war criminals. It is important to note that our ability to pursue this objective in the IMF is constrained by the fact that most countries about which the United States has human rights concerns do not borrow from the IMF.
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Military spending. The issue of military spending is another area where Congress has sought to promote changes in IMF policy. Here we face strong opposition from the members of the institution, as this raises sensitive national security concerns to most members.
We have tried to make progress in this issue by placing it within the context of a good governance initiative advocating the importance of reducing unproductive spending, such as excessive military spending, while ensuring basic investment in the infrastructure and human resources and by trying to encourage countries as part of IMF programs to make off-budget accounts more transparent and move those on budget.
The financial structure of the IMF, which I described in more detail in my written statement, is similar to that of a credit union. All members contribute to the resources of the IMF and each member is entitled to obtain financing based on agreed uniform criteria. A member that provides resources to the IMF used in funding to another country is paid interest on its creditor position. The country receiving financing pays interest charges on its loan. The rates of interest are based on the special drawing rate interest rate, which is the weighted average of the market interest rates on short-term government securities in the U.S., the United Kingdom, Germany, Japan and France.
The SDR interest rate is a floating rate which changes weekly. There are fluctuations in the interest rate on the component securities. Consequently, the rates of what are called the rates of remuneration and charge are adjusted in response to changes in market rates. When the IMF draws on our commitments, we receive an interest bearing, offsetting claim on the IMF. As a consequence there are no budget outlays under CBO scoring and no increase in the deficit or reduction in resources for other spending priorities.
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As requested by the subcommittee, we have provided a table indicating the net benefit where cost of U.S. participation in the IMF, based on the methodology used in the 1990 table we have provided the Congress, in association with a quota increase request at that time.
One of the most prevalent concerns about the IMF is that it discloses inadequate information about its lending programs. In general we share these concerns. We have been at the forefront of efforts to promote greater openness and accountability in the IMF and have successfully gained support for a number of changes in IMF policies. While the progress has been substantial, there is clearly room for more, and at the interim committee last week, the Secretary of the Treasury outlined a substantial new program for improving IMF transparency. He presented specific proposals to expand the scope of data provided to the markets by member countries, to expand information members provide on their Article 4 consultations and, perhaps most importantly, to require release of letters of intent, which are the basic loan documents of the IMF.
The subcommittee has asked us to identify concrete performance measures by which the Congress could judge the effectiveness of the IMF. This is a difficult task in an institution like the IMF. The issues which the IMF seeks to address are not fully in the institution's control and depend importantly on decisions and actions taken by the member governments and the markets. In this context any assessment of the IMF's performance would have to be judgmental and qualitative. There are a variety of approaches that Congress could consider.
First, the Congress could consider the extent to which the IMF meets the general purposes contained in its Articles of Agreement to promote trade and growth and employment and a stable international monetary system.
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It is possible and appropriate to assess what are the policies and programs the IMF advances that contributes to these objectives, although it is important to recognize that the IMF does not and cannot bring about by its actions alone a positive change in any of these areas.
Second, the Congress could evaluate the extent to which the United States succeeds in advancing specific policy issues, such as core labor standards or improving transparency in the IMF. Here it is clearly possible to measure performance against a specific list of objectives. And Congress could also examine the more specific questions of how countries with IMF programs perform, whether they meet the conditions in the programs and whether the policies pursued with IMF support are effective in strengthening growth and employment, for example.
The legislation now being considered by the Congress contains a number of reporting requirements that are designed in part with those objectives in mind. We would be pleased to work with you and other interested Members of Congress to explore how best to identify performance measures which would provide a useful picture of the effectiveness of the institution.
Our view is that the United States and the world are significantly better off with the IMF than they would have been without it. The legislation now before the Congress to replenish the IMF's resources is critical to ensure that it has the financial capacity to deal with any spread or intensification of the current crisis and to deal with future crises that could threaten U.S. interests.
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We are committed to supporting reforms in the IMF and in the architecture of the international financial system as a whole that will help advance U.S. interests and best respond to future challenges to U.S. interests. We look forward to working with the Congress toward these objectives.
Thank you.
[The prepared statement of Hon. Timothy S. Geithner can be found on page 124 in the appendix.]
Chairman BACHUS. Thank you.
At this time we will hear from the United States' Representative to the IMF, Ms. Karin Lissakers.
STATEMENT OF HON. KARIN LISSAKERS, U.S. EXECUTIVE DIRECTOR, INTERNATIONAL MONETARY FUND
Ms. LISSAKERS. Thank you, Mr. Chairman and Members of the subcommittee.
I just want to add a few brief remarks to those of Mr. Geithner about my own role as Executive Director and the workings of the IMF Executive Board.
I am one of 24 Directors of the Executive Board representing the 182 member governments of the IMF. The Executive Board meets in continuous session with formal meetings held three to four days a week under the chairmanship of the Managing Director or one of the three Deputy Managing Directors. In the 1997 calendar year, the Executive Board met in 166 sessions for a total of 635 hours.
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The work of the board includes reviewing the staff's annual economic policy consultation with each member government, oversight of the use of Fund resources, including approval of all IMF-supported adjustment programs and disbursements under such programs. The board also spends considerable time discussing developments in financial markets, exchange rate developments generally, and other global economic issues. And of course we discuss and debate IMF policy issues, including recently the ESAF and HIPC initiative, proposed capital account amendment, administrative matters, including budgets, staffing and so on.
The board is devoting an increasing amount of time to review an evaluation of the IMF's own performance, including the quality of its policy advice and the effectiveness of its various programs and instruments. We have also established a new process of regular evaluations conducted by independent outside evaluators who report directly to the Executive Board. This is in addition to an internal evaluation process started last year.
Most board decisions are reached by consensus. There are few formal votes. I believe the board discussions themselves can be quite fluid and lively; however, much of my work is done behind the scenes through informal meetings and discussions with other Directors, with management and senior staff. Of course I devote considerable time to consulting my U.S. Government authorities, particularly the Department of the Treasury. I also try to meet regularly with Congressional staff, academics, business and labor groups, NGOs, and others who have particular interest in IMF issues.
As the largest member of the IMF, with nearly 18 percent of the voting power, the United States and its Director play an important leadership role in the institution. Nevertheless, we cannot advance the U.S. policy agenda in the IMF without gaining the support of other member governments sufficient to muster at least a simple majority.
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I note in passing that the EU member governments now have 29 percent of total votes. With the advent of monetary union, one can expect greater coordination and cohesion among the European members, although they do not currently vote as a bloc or work as a bloc.
It is important to remember that the IMF is a cooperative institution. And unlike the development banks, membership is not divided between creditor countries and debtor countries. I think people often forget that in the 1970's Italy, the United Kingdom and the United States were the largest users of Fund resources.
In order to be effective, therefore, we have to build coalitions with a broad range of countries with diverse political systems and policy perspectives and sometimes competing economic interests. This is the most interesting and challenging aspect of my work as Executive Director.
As Secretary Rubin and other Administration witnesses have told the House Banking Committee and other Congressional bodies, the IMF's resources have been severely strained by recent events in Asia. My board colleagues ask me daily and with great anxiety about prospects for speedy congressional approval of the quota increase and NAB.
I have told them that I believe Members of Congress recognize the vital role the IMF plays today in the global economy and understand the enormous stake the United States has in its continued effectiveness. The IMF cannot continue to be effective without adequate resources, which includes the proposed quota increase and the NAB.
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Thank you, Mr. Chairman, I am happy to answer any questions you have about the IMF's operations or my role in it.
Thank you.
Chairman BACHUS. Thank you.
At this time we will have questions.
Ms. Lissakers, I am trying to get an understanding on exactly how the U.S. Executive Director operates, what your role and what your influence is. I will use the Indonesian loan process as maybe an entry point because there have been press reports that the IMF is negotiating a loan agreement with Indonesia. There have been press reports that that agreement has been made.
How much money has been lent to Indonesia by the IMF to date?
Ms. LISSAKERS. Three billion dollars have been disbursed to Indonesia to date. The program with Indonesia was actually negotiated, concluded in November, but the Indonesian authorities initially failed to fulfill the conditions of the agreement. There was a subsequent round of negotiations with an effort by the IMF to tighten the performance criteria to increase the likelihood that the authorities would follow the program and to limit the risks of slippages. Nevertheless, subsequently there were additional slippages in the program. We interrupted disbursements because they were not meeting the terms of the agreement.
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Chairman BACHUS. What was the interest rate on the loan?
Ms. LISSAKERS. The interest rate is the standard IMF interest rate, which is the cost of funds to the IMF of this blended SDR rate that Mr. Geithner mentioned plus an administrative——
Chairman BACHUS. 4.5 to 4.7?
Ms. LISSAKERS. The rate fluctuates. It is adjusted weekly to reflect current market rates for the currencies that make up the SDR basket, but it has recently been in the range of 4.5 to 5.
Chairman BACHUS. So the $3 billion loaned to Indonesia is on a floating rate?
Ms. LISSAKERS. Yes, on a floating rate of cost to the IMF of its funding. Its funding, however, is not dollars, but a blend of currencies.
Chairman BACHUS. Was there a formal vote on approving the loan agreement?
Ms. LISSAKERS. There was a formal decision. It was like a voice vote, if you will, in Congress in that there was—normally when we discuss a program or anything that involves a formal decision by the board, and I have submitted for the subcommittee copies of all of the decisions, some 2,000-plus which have been made by the board since January of——
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Chairman BACHUS. And we got those about 9:30 last night so we have had some problem in trying to——
Ms. LISSAKERS. Yes. You asked that it be submitted with our statements.
Chairman BACHUS. I understand.
Ms. LISSAKERS. It took some time to put them all together.
However, the normal procedure is that there is a round of comments by the board members in which they discuss the program. There are often disagreements about specific features of the program.
Chairman BACHUS. You participate in these discussions?
Ms. LISSAKERS. Yes, I do.
Chairman BACHUS. Did you bring out labor issues, core labor standards?
Ms. LISSAKERS. Among other things. We raised a number of issues.
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Chairman BACHUS. Are any of those in the agreement?
Ms. LISSAKERS. There are no formal core labor conditionalities in the program. Our views on the inclusion, the desirability of including labor provisions in Fund programs as part of Fund conditionality is not generally accepted by most other member governments.
Chairman BACHUS. Did you make that presentation? Was there a vote on accepting or rejecting?
Ms. LISSAKERS. No. There was no recorded vote. The members of the board comment on the program that the staff have negotiated with the government and critique, if you will, or comment on various aspects and discuss what we see as the strengths and the shortcomings of it. We also indicate whether or not we support going forward with the program, and the U.S. did support going forward with the program with Indonesia.
Chairman BACHUS. What were some of the core labor issues that you said need to be in the agreement that were not?
Ms. LISSAKERS. Let me just explain a little bit more about how we get to the point in the board discussions.
Before the program was presented to the board, there were many briefings, informal briefings to members of the board by the staff and management about the status of the negotiations in these rounds.
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Now, the initial round, as you know, was conducted in very great haste, and indeed the board decision—normally there is a lag of two to three weeks between the time a program is negotiated with a country and the timing of the board decision. In all of these Asian cases we have severely compressed.
Chairman BACHUS. I understand the urgency of it. My question is did you discuss some of the labor issues informally—let's say formally before the board?
Ms. LISSAKERS. We have been raising the labor issues with management. As I said in the board——
Chairman BACHUS. But aren't you management?
Ms. LISSAKERS. The Executive Board represents the voice and vote of all of the member governments, yes, but there is a Managing Director and the senior management that direct the day-to-day work.
Chairman BACHUS. For instance, they are down in Indonesia and they are negotiating an agreement? Do you have input? Do you instruct the staff as to what to do? Does the staff come back from Indonesia and say ''here is what we have agreed to,'' or is the agreement step-by-step approved here?
Is this basically a staff decision and you basically say yea or nay?
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Ms. LISSAKERS. In all of these Asian programs there has been a fair amount of input from the Executive Board and various member governments, including the U.S. Government, in consultation with management and with senior staff. We try to stay in close touch to monitor the status of the negotiations and to urge inclusion of various policy measures that we thought were vital.
Chairman BACHUS. What were some of the policy measures? Were there any environmental issues discussed?
Ms. LISSAKERS. The environmental issues, one of the biggest, most important elements in the program, which also gets to the question of governance, is the use of the reforestation fund by the government as a fund to support other than environmental activities to which it is supposed to be dedicated.
The government collects fees from loggers in Indonesia which are supposed to be used for reforestation funds, and we made it a very high priority in the program, the IMF did, with the strong urging of the U.S. that the reforestation fund be put on budget, that it be subject to proper audit and disclosure and that the resources be used the way that they are supposed to be used.
Chairman BACHUS. And that is in the agreement?
Ms. LISSAKERS. That is in the agreement. Yes, it is.
In the labor area we were not able to get specific requirements in the program. There have, however, been efforts by staff and management to reach out to the labor groups in Indonesia as well as in other Asian countries and to try to foster a dialogue between the unions and the government.
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This week there is an ILO conference with active participation by the World Bank and the IMF to look at the impact of the Asian financial crisis on labor conditions and on workers in Asia. So there is a continuing effort.
Chairman BACHUS. Isn't that kind of after the fact?
Ms. LISSAKERS. After the fact in terms of——
Chairman BACHUS. We have already had agreements with them, with three of the major countries.
Ms. LISSAKERS. That is right. As I said, we are working to try to bring this issue, put this issue on the table.
Chairman BACHUS. But I am saying we have already made our loan agreements with Indonesia, Thailand, and South Korea. Do you anticipate further agreements, more money where we would be able to include—or do we anticipate modifying the agreements to include—these issues that you are discussing at this conference with the ILO?
Ms. LISSAKERS. The terms of the agreement with Indonesia, specifically in terms of conditionality, are largely unchanged from the original agreement. What the Fund has tried to do in these subsequent negotiating rounds is to nail down more specificity in terms of performance on each one of those criteria.
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But as Mr. Geithner explained, there is little support among other member governments who would have to approve any change for including labor conditionality as a specific conditionality.
Chairman BACHUS. Is the short answer that there aren't really any core labor issues included in the agreements with these three countries and the reason is because the other countries did not go along with it?
Ms. LISSAKERS. There are no specific performance criteria relating to labor standards.
Chairman BACHUS. Let me ask one more question. I have been told that the arrangement with Indonesia will involve setting up some sort of medium that will help loans be paid back to banks. Is this accurate in the Indonesia loan situation?
Does the arrangement include some sort of mechanism for helping pay back loans held by banks for the Indonesian businesses that have bank loans that have gone sour or in default?
Mr. GEITHNER. It is sort of alongside the negotiation of this latest strengthening of the IMF program. The Indonesians have sought to put in place a framework for trying to resolve the substantial burden of corporate debt they have outstanding. That framework is still under development. That is going to involve a detailed series of negotiations between Indonesian corporations and their creditors on how to allocate the losses that are going to be inevitable in this process. The creditors to Indonesian corporations are going to take a substantial hit on their exposure to Indonesian corporations, and the equity holders in those Indonesian corporations are going to take some substantial losses as well.
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It is likely as part of this scheme that the Indonesian government is probably going to provide some form of exchange rate protection which they will sell to those Indonesian corporations at a market price, but the precise details of that scheme have not yet been finalized and there is a range of outstanding issues on the table in these discussions. We will keep you informed as those discussions evolve.
Chairman BACHUS. Let me just read this. This is 22 U.S. Code 286 (dd), which states that ''the Secretary of the Treasury shall instruct the United States Executive Director of the Fund to oppose and vote against any Fund drawing by a member country where in his judgment the Fund resources would be drawn principally for the purpose of repaying loans which have been imprudently made by banking institutions to the member country.''
Does that also include loans made to corporations in the country, where a bank has lent to a corporation, an imprudent loan and the Indonesian government is setting up this mechanism to pay these corporations so they can pay the banks back? Is that a violation of that section?
Mr. GEITHNER. I don't believe that this would come close to meeting the standard in the law in this situation.
Chairman BACHUS. Does it violate the standard?
Mr. GEITHNER. No, I don't think it would come close to violating the standard in the law.
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Chairman BACHUS. Why is that?
Mr. GEITHNER. I wasn't around when this was drafted, but it was drafted to very carefully say which, in his or her judgment, are principally directed at—I am sorry, I want to read you the precise language—''would be drawn principally for the purpose of repaying loans imprudently made by banking institutions,'' and so forth, and so forth.
Now, maybe it is worth stepping back a bit.
It may have been unfortunate the way that this is drafted, but that is a very hard standard for any program to meet because again the language reads ''would be drawn principally for the purpose of repaying loans imprudently made by banking institutions.''
There is no IMF program that is principally directed at that objective or where the principal result is that result.
Chairman BACHUS. Have you got standards set up? Have you got a list of standards where you look at this requirement and then you look at what the Indonesians are doing to see if it complies with the code?
Mr. GEITHNER. When this law was passed, the U.S. Treasury, I think the lawyers of the Treasury, laid out a variety of specific guidelines for how we interpret this provision and how we apply it, and I think that is one of the documents that we provided the subcommittee.
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Chairman BACHUS. Did you use that document in the Indonesian loan process?
Ms. LISSAKERS. It is part of the guidance that I have generally for looking at any program.
Chairman BACHUS. Have you looked at the Indonesian agreement to see if it complied with this code provision and does it?
Ms. LISSAKERS. In my judgment, the agreement completely complies with that legal requirement. The total size of the IMF program is less than $10 billion, of which we have only disbursed $3 billion. The Indonesian private sector debts are on the order of—I don't have——
Mr. GEITHNER. $130 billion.
Ms. LISSAKERS. The IMF as a matter of principle is what the Managing Director often calls a ''catalytic lender.'' It is there to restore foreign exchange reserves and above all to induce a coherent program of policy measures.
Chairman BACHUS. I understand that. I understand that if we were doing that, if it stopped there it would comply with this, but is this money going into a government fund to pay corporations to pay their banks?
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Ms. LISSAKERS. IMF resources are normally transferred to the central bank of the government.
Chairman BACHUS. Has the Indonesian government indicated that they are going to set up a medium? Have they actually submitted to the IMF and said we are going to set up an organization which will go to these corporations who have defaulted on their loans to banks and we are going to make loans to those corporations so that they can then pay the banks? Am I in error about that?
Mr. GEITHNER. That is not quite the way that it is going to work.
Chairman BACHUS. How does it work? What have you been told?
Mr. GEITHNER. This framework for negotiating a corporate debt restructuring in Indonesia is still being developed and is still under negotiation.
Chairman BACHUS. I understand all of that. Just focus on this narrow point.
Mr. GEITHNER. But it is likely to include some kind of provision whereby the government of Indonesia may agree to sell exchange rate cover for—to cover a portion of the written-down part of the debt that gets renegotiated. If they do so, they do so at a market price. Indonesia has $16 billion in reserves now that they could use for that purpose. The IMF money will not be used to finance that operation. We have a strong interest in watching how that unfolds and seeing that it meets a whole range of policy considerations we apply in this context. It is not just those contained in U.S. law, but this is a provision that like many other provisions in U.S. law we take seriously, but I don't think that this is going to come close to meeting the standard in U.S. law.
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Chairman BACHUS. You have mentioned they had $16 billion worth of reserves. Why aren't they using that before they utilize the IMF money?
Mr. GEITHNER. They have in fact used a substantial portion of their reserves. Although the IMF disbursed $3 billion in November——
Chairman BACHUS. But you said they had $16 billion in reserve.
Mr. GEITHNER. Their reserves at that point were $27 billion, and so they have actually used a substantial portion of their reserves already ahead and alongside the IMF resources.
Chairman BACHUS. You said that they have remaining $16 billion. Why don't they use that as opposed to us lending them money at 4.5 percent interest? Are we negotiating more arrangements to give them more money?
Mr. GEITHNER. The initial IMF program laid out a sort of series of conditions and a plan for over time making available $10 million to Indonesia if they complied with the specific criterion in the program.
Chairman BACHUS. I am aware of that. My question is, is it the policy of the IMF to lend money to countries when they have available themselves the resources to commit their own reserve?
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Ms. LISSAKERS. Mr. Chairman, $16 billion sounds like a lot of money, but Indonesia is a large country with a large economy and a large balance of payments. These foreign exchange reserves would cover only about one month of Indonesia's imports, so by a normal standard where three months coverage of foreign exchange reserves is considered sort of minimal for a country being deemed by markets and by investors, in terms of confidence, to have adequate reserves, it is actually fairly low, and particularly given the large external obligations of the economy as a whole.
Mr. GEITHNER. To answer your question, IMF does not lend money to countries that they do not believe need the money and it is not our policy to encourage the IMF to lend to countries where we don't think that additional finance is necessary.
Chairman BACHUS. My last question. Ms. Lissakers, have you discussed with the IMF staff or with your staff or have you discussed with other members, other executive directors, this U.S. provision that says we will not give money to member nations which will be used to bail out financial institutions that have made impertinent loans? Has that been discussed and are you satisfied that there is nothing in this agreement which does that?
Ms. LISSAKERS. To answer your last question first, yes. I don't recall discussing the specific provision with my colleagues. It is possible that my predecessors did, but the whole issue of moral hazard and not bailing out is a very actively debated issue before board and management, and I think that the vast majority, probably every member of the board shares the sentiments that that law reflects, which is that it is not the IMF's mission to finance commercial debt repayments.
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Chairman BACHUS. Have you ever voted against a loan because it was going to finance commercial loan repayment?
Ms. LISSAKERS. In my time as Executive Director, management has never brought forward a loan that would require or induce me to make the judgment that the terms of this loan violated the provisions of the act we are discussing or would even come close to constituting a primary bailout of banks.
Mr. GEITHNER. Mr. Chairman, one thing in response to that. More importantly, we have gone well beyond the requirements in U.S. law over the past 15 years. Throughout the decade of the 1980's and beyond, systematically as part of IMF programs countries entered into rescheduling agreements with their banks and in—to some extent each of these recent programs we have—there have been efforts to make sure that private investors rolled over their existing exposure as part of these agreements. Those things are not required by U.S. law, but they are things that we have done anyway because we are concerned about the moral hazard implications that official intervention of this kind can generate.
Chairman BACHUS. Thank you.
Mr. Sanders.
Mr. SANDERS. Thank you very much, Mr. Chairman.
To begin, and you won't mind if I quote: ''the United States pursues the advancement of human rights through a variety of diplomatic channels and international institutions. As provided in legislation the U.S. Executive Director has opposed,'' and let me go slowly on this. This is what you wrote:
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''As provided in legislation, only legislation passed by the Congress, the United States Executive Director has opposed IMF financing to countries about which the United States has human rights concerns or countries harboring war criminals.''
Is that what you wrote?
Mr. GEITHNER. There are actually three provisions in U.S. law which relate to human rights.
Mr. SANDERS. That is what you wrote, is that correct?
Mr. GEITHNER. I am not sure. I didn't read it as you were reading it, but I assume that is what I wrote.
Mr. SANDERS. Well, I am a good reader. I read exactly what you wrote.
Having said that you are fighting hard for human rights, trying to obey the law here, let me quote from not a very radical organization, not Ralph Nader, not some NGO, not Bernie Sanders, a fairly conservative group called the United States State Department.
Chairman BACHUS. Are you saying that Ralph Nader is a radical group?
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Mr. SANDERS. Good progressive and we will hear from Ralph in a moment.
This is what the State Department says in its annual human rights report for 1996 regarding Indonesia, and I quote: ''Despite a surface adherence to democratic forms, the Indonesian political system remains strongly authoritarian. The government is dominated by the lead, comprising President Suharto, now in his sixth five-year term, his close associates in the military. The government requires allegiance to a state ideology known as concasala, which stresses consultation and consensus but is also used to limit dissent, to enforce social and political cohesion and to restrict the development of opposition elements. The judiciary is subordinated to the executive in the military.''
Further the report states, and I quote: ''The government continued to commit serious human rights abuses.'' Further, the report from the State Department says, and I quote: ''The authorities maintain their tight grip on the political process which denies citizens the ability to change their government democratically.'' That is the United States State Department.
Now let me read you from the law that was passed by the United States Congress, and it has to do with an amendment that I played a role in called the Sanders-Frank Amendment of 1984. ''The Secretary of the Treasury is to direct the United States Executive Directors of the international financial institutions to use the voice and vote of the United States to urge the respective institution: One, to adopt policies to encourage borrowing countries to guarantee internationally recognized worker rights and to include the status of such rights as an integral part of the institution's policy dialogue with each borrowing country.''
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Now, it seems to me on the surface you very clearly disobeyed the law. The State Department tells us we have an authoritarian government that does not believe in human rights. The law says you should use your voice and vote, V-O-T-E, against providing loans to those countries and you provided billions of dollars to General Suharto. Can you please tell me what was going on?
Mr. GEITHNER. Absolutely. There are actually three provisions of U.S. law that relates to human rights. One requires the United States to oppose NDB and IMF assistance to countries who engage in a, quote: ''pattern of gross violation of internationally recognized human rights unless the assistance serves basic human needs.''
There is another one that requires us to vote against any loan utilization of IFI funding to or for Burma, and there is a third one that requires us to vote against any IMF assistance to a country which knowingly grants sanctuary to persons indicted as war criminals or for war crimes.
In each of those cases we have a set of procedures under which the State Department essentially tells us which countries meet these standards, and we then vote against or oppose assistance to countries who the State Department so designates.
The State Department has identified five countries for which it has, so-called, a policy of human rights, and the five countries are China, Sudan, Equador, New Guinea, Iran and Mauritania.
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Mr. SANDERS. Excuse me. I am a little bit confused. I just read to you from a report of the State Department which says that Indonesia is an authoritarian, undemocratic country which, among other things, jails the leader of the labor movement in their country. Now I am a little confused. That is what they say but they don't tell that to you? They keep that a secret from you or what?
Mr. GEITHNER. The law has a different standard than the standard of the report.
Mr. SANDERS. Ah.
Mr. GEITHNER. We don't make an independent judgment at the Treasury because it is not really our expertise on how to interpret standards of law or how to judge which countries are quote: ''Gross violators of internationally recognized human rights.''
Mr. SANDERS. You don't know how to do that?
Mr. GEITHNER. We at the Treasury don't make an independent judgment on that. We defer to the State Department on that.
Mr. SANDERS. I read to you from the State Department which says that you have an authoritarian undemocratic government, but that is not good enough for you, and then the United States Congress tells you not to provide funding for those type of countries. But I am a little bit confused here.
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Mr. GEITHNER. I think you are asking a good question.
Mr. SANDERS. It is a good question and I would like a good answer.
Mr. GEITHNER. This law was passed. The law sets the standard. We apply the standard through a set of procedures under which we defer to the State Department on a judgment of which countries meet the standard. They so inform us and when they do we oppose loans that——
Mr. SANDERS. Let me see if I can try to translate. The Congress tells you not to provide funding for governments which are authoritarian and suppress internationally recognized workers' rights. The State Department writes a report that says Indonesia suppresses human rights and is an authoritarian country.
But then in connection with the IMF, the State Department suddenly does not include what they wrote in their annual report, but they worry about Mauritania and—what? North Korea.
Some of us aren't that sophisticated. We kind of thought that when the State Department says that a country is authoritarian, when we say don't fund authoritarian countries, that you might want to obey the law.
Mr. GEITHNER. This is not an issue of sophistication. It is that the law has a different standard than the standard in the human rights report, and that is not something that we are responsible for.
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Mr. SANDERS. I think you are responsible for it and I think that is a very feeble excuse. I think you have done something in violation of the law.
Let me ask Ms. Lissakers a question. It gets back to a point that Mr. Kucinich was making a few minutes ago.
Since becoming the U.S. Executive Director to the IMF, how many votes have you cast at Executive Board meetings? 50, 100, a couple hundred?
Ms. LISSAKERS. Formal votes?
Mr. SANDERS. Votes?
Ms. LISSAKERS. There have probably been—formal vote where the chairman goes around——
Mr. SANDERS. Yes. We vote here all the time.
Ms. LISSAKERS. It may have been 20 or so.
Mr. SANDERS. So you have cast 20 votes where you are recorded as voting aye or nay, is that correct?
Ms. LISSAKERS. Yes. Sorry, we have——
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Mr. GEITHNER. That is in the ballpark.
Mr. SANDERS. And will you tell us, is that public information on how you voted on various issues? You will submit that information to the Members of Congress?
Ms. LISSAKERS. Yes. There are 12 formal votes. I was trying to think if there was anything that might have dealt with administrative issues that is not covered in this list, but I don't believe so. I think this is a comprehensive list.
Mr. SANDERS. And these are votes where you voted aye or nay or are these votes where you said abstention and objection?
Ms. LISSAKERS. That is why I was uncertain about the total number because there have been a few cases where we have had a formal vote and voted aye.
Mr. SANDERS. You have kindly submitted to us some information on maybe a dozen votes in terms of Mauritania and staff compensation, you voted in abstentia or objection; is that what you are talking about?
Ms. LISSAKERS. The list I gave you was in response to the question about how we have met the mandated voting provisions of the Congress.
Mr. SANDERS. OK.
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Ms. LISSAKERS. But there have been a few other votes which did not involve congressional mandates that I have not listed here, but I would be happy to submit that for the record.
Mr. SANDERS. So in addition to that you have voted aye or nay perhaps a dozen times?
Ms. LISSAKERS. I would be happy to provide the specifics to you.
Mr. SANDERS. Could you give us a guess how many issues have come before the Executive Director in total, of which you voted aye or nay perhaps twelve times?
Ms. LISSAKERS. How many decisions have come to the board?
Mr. SANDERS. Yes. What percentage of the time do you actually vote aye or nay?
Ms. LISSAKERS. We have had more than 2,000 decisions by the board since I came.
Mr. SANDERS. You have 2,000 decisions and the record will show that you voted aye or nay perhaps a dozen times?
Ms. LISSAKERS. Yes, but this is defining vote as a formal reported——
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Mr. SANDERS. That is right. That is exactly what I wanted to know.
What you are saying is that you have been involved—as I understand you saying it, in some 2,000 decisions and perhaps there were a dozen times when the record will show that you voted aye or nay; is that a fair interpretation of what you are saying?
Ms. LISSAKERS. Yes. In the narrowly defined way of saying individual chair says yes or no.
Mr. SANDERS. I will tell you why I want it to be narrow and ask my question. Because for 20 years Members of the Congress have obviously been wasting their time by passing all kinds of fine-sounding legislation, including legislation which I passed with Mr. Frank saying to use your voice and your vote. The only problem is you don't vote.
Maybe you might have come up here and told us that and it would have saved us a lot of time so we would have developed another mechanism to kind of tell you what we thought would reflect the best interest of the United States. Don't you think that we kind of wasted our time to ask you to use your voice and vote when you hardly ever vote on the important issues?
Ms. LISSAKERS. There are two instructions. One is voice and one is vote.
Mr. SANDERS. Yes.
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Ms. LISSAKERS. And I think the thrust of my oral remarks this morning was that it was the voice that produces the most results because of the manner in which the board conducts its work and the institution works generally.
I think that if you look back, certainly at the areas that Congress has specifically mandated, but more generally about the reforms that Congress has been urging on the Administration and which the Administration has largely supported, at least in my time we have in fact made very significant changes in the institution and Congress has in fact succeeded in influencing the path of the IMF, and let me just mention several reforms.
On the question of transparency, the institution is really transformed since the beginning of the Clinton Administration, both in terms of the amount of information it puts out on the public record, both with regard to its own actions and the actions of member governments in the area of the fund's responsibility and competence, and in terms of the attitude of management staff and increasingly member governments in the institution. There is a very major improvement. We have not accomplished everything we have set out to accomplish and the Congress has urged us quite rightly to press, but we have made enormous strides and I think Congress should recognize that.
Mr. SANDERS. Let me just jump in and respectfully disagree with you. You see, we pass legislation which we think is the law of the land. My view is that you have not obeyed the law of the land. I use the issue of human rights in Indonesia. I think it is as clear as the nose on anybody's face what the law meant and you did not obey the law.
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My understanding, and correct me if I am wrong, is that the United States has essentially veto power. I think you wrote that, veto power within the IMF, essentially because of our ownership of a large percentage of the quota.
Mr. GEITHNER. Only over a very small number of key policy issues, those requiring 85 percent vote to pass. That applies to a decision to increase IMF quotas or change relative quotas or issue SDRs, but the normal programs and policy of the institution have a much lower threshold of about 50.
Mr. SANDERS. Getting back to a point that the Chairman made and that I am trying to make, if you have significant power and we can use our vote, you have indicated that you hardly ever use the vote, so if the vote came up for Indonesia and you say I have to vote no because the United States Congress told us that we don't give funds to authoritarian countries, basically we could have prevented the money going to Indonesia?
Mr. GEITHNER. If we had voted against the Indonesian program, it would not have blocked the program from going into effect. The law does not require us to vote against the program in Indonesia despite the concerns you express and the concerns we share about human rights in Indonesia and worker rights issues in Indonesia.
We have substantial influence in the institution. If you had up here before you today any other director from any other country or the management of the IMF, you would hear from them in brutal detail how extensively we use our voice in the institution.
We cannot, however, as the United States alone force these things on the institution. There are extraordinary limitations of what we can do given the opposition of many Members to many policies, but we do work very, very hard to comply with the law and we have been very effective in a whole range of areas.
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As I said in my statement, where we have not been effective it is because so many countries do not share our policy objective or they view it as sort of fundamentally incompatible with——
Mr. SANDERS. We have a disagreement as to how effective you have been. Sometimes we lose votes. I lose votes, but I vote no and I come back and tell my constituents I voted ''no'' on a piece of legislation on appropriation, but I lost. But you don't vote no.
Let me ask you this. I want to get back, and you will have your chance, Mr. Geithner.
Please help me on this one. Is it true that paragraph C–15 of the IMF's rules and regulations requires that all verbatim records of Executive Board meetings shall be destroyed after a summary is made of the meeting unless the Chairman or Executive Director requests otherwise?
Mr. GEITHNER. That is a mystery to me, but if you are reading from the laws, I have no basis to challenge that.
Mr. SANDERS. And that is what my staff picked up. If someone wants to correct me and tell me that it is not true, I will——
Mr. GEITHNER. I am surprised by that, but I have no personal knowledge. But I am happy to check.
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Mr. SANDERS. Mr. Chairman, I would submit for the record the language of the IMF which does contain that.
[The information referred to can be found on page 112 in the appendix.]
Mr. SANDERS. Now the problem is you are telling us the vigorous fights that you are making with your voice. What is the record on that?
Mr. GEITHNER. On transparency?
Mr. SANDERS. You are telling us that you are fighting for human rights. You are telling us that you don't want us to be bailing out large multinational banks. Can you give us the record on all your statements on that?
Mr. GEITHNER. We submitted an extraordinary number of pages over the last few days in some graphic detail how we tried to pursued these policies in the institution. If you want us to do more, we will.
Mr. SANDERS. I will conclude to say it is my judgment that our representatives for all intents and purposes have not obeyed the law, have not followed the mandates that we have made.
I think your line of questioning was quite appropriate. I think what is reported in the press is that recently large multinational banks that have made billions of dollars investing in Asia were essentially bailed out by the middle class of this country. I think you are funding in terms of General Suharto a vicious dictator who jails his opponents in violation of the law, and that concerns me very much.
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Thank you, Mr. Chairman.
Mr. GEITHNER. Mr. Chairman, can I respond on that last point?
Chairman BACHUS. Yes.
Mr. GEITHNER. Mr. Sanders, we fully comply with the law. We are very careful about the law. I am a civil servant of the Treasury and I have been there for ten years and we take these things very seriously and we are very careful to comply with the law.
You are unsatisfied with how successful we have been in the institution, and I think that is fair for you to be unsatisfied with that because you can point, I think, to many cases where we have not been able so far to achieve a fundamental redirection of the institution in response to U.S. congressional mandates.
However, that is not for lack of trying and there are some limitations we may never overcome, but we work very hard to do it and we do so through a lot of different means and we have had extraordinary success in a number of areas.
Let me say on your concern about investors and multinational companies being bailed out. I think the record will show that most investors across Asia are taking a huge bath, that if you just look at the scale of official resources put on the table relative to the total external debt of these countries, you will see that it is quite trivial in comparison to that.
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Mr. SANDERS. The question, Mr. Geithner, why the average person in this country, many of whom are working longer hours for low wages, should be paying one nickel to bail out a profitable institution like the Chase Manhattan Bank—which made billions of dollars investing in Asia—one nickel, let alone along with other banks, $19 billion?
Mr. GEITHNER. The only reason we are here and the only reason we support the IMF is because we are concerned about the threat to American workers that comes from crises like this. It is a contestable view, but it is our view that the risk to American workers and American farmers and American companies would be much worse if we left these countries to sink into protracted economic downturn with currencies falling off the cliff forever.
That would present much greater costs to American interests than the costs that we are already bearing in this crisis, and that is something that we want to avoid. There is a legitimate debate about whether we have succeeded in that objective and wouldn't we be better off without these programs. That is why we are here. We are not here because we think it is important to insulate Chase Manhattan Bank or any other private investor from the consequences of the lending decisions they make, and by and large we are not.
Mr. SANDERS. Thank you.
Chairman BACHUS. At this time I would like to welcome Representative Jim Saxton, who is Chairman of the Joint Economic Committee.
Mr. SAXTON. Mr. Chairman, first permit me to express my appreciation for your invitation to be here. I appreciate it very much, and also I apologize for being late. I was on my way into town or I would have been here at the outset.
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Ms. Lissakers, it is a pleasure to meet you, too. Ms. Lissakers, I would just like to ask you some questions about the finances of the IMF, if I may.
The total amount of assets that the IMF has in its accounting is measured in SDRs; is that?
Ms. LISSAKERS. Yes, that is correct.
Mr. SAXTON. And SDRs, as I understand it, is a blend of currencies so that we can talk about SDRs from a common point of view? In other words, it is a measure of currency; is that correct?
Ms. LISSAKERS. That is correct.
Mr. SAXTON. What is the total SDR that is referred to as the total quota?
Ms. LISSAKERS. I am sorry, I am not sure I understand your——
Mr. SAXTON. When we add together the SDR quotas for all of the member countries, what would the total be?
Ms. LISSAKERS. It is 145 billion SDRs.
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Mr. SAXTON. So the total quota of 145 billion SDRs means then—or does it not mean that the IMF has 145 billion SDRs to put to use to make loans to various countries?
Ms. LISSAKERS. A large part of those resources are already committed to programs in Asia and elsewhere.
Mr. SAXTON. So those funds that are committed obviously couldn't be used. Are there any other funds which could not be used?
Ms. LISSAKERS. Which could not be use used?
Mr. SAXTON. That is correct.
Ms. LISSAKERS. The IMF has three bases. The quota resources, which are its main——
Mr. SAXTON. That is what I want to focus on, the quota resource.
Ms. LISSAKERS. Of the SDR resource, the quota resources it has at its disposal, some of the currencies—let me back up.
When members take up their ownership shares of their quota resources in the fund, they pay in resources; 25 percent of their quota is paid in in SDRs. The rest is paid in in their own currency. The domestic currencies of some member governments is not readily convertible into other currencies.
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Mr. SAXTON. What do you refer to those currencies? What category do you refer to them as?
Ms. LISSAKERS. Those are non-usable resources if the country lacks adequate foreign exchange reserves to convert them when the Fund wants to draw on that country's quota beyond the reserve tranche.
Mr. SAXTON. Non-usable resources. Therefore, would it be correct for one to assume that they have a different value than usable resources?
Ms. LISSAKERS. One of the fund's principal missions is to get all member countries in an economic condition where their currencies will be convertible, but we have not achieved that goal.
Mr. SAXTON. That is a good goal and I would share your belief that that is a good goal, but in fact unusable currencies in today's IMF at the current time, unusable currencies are not usable and therefore it would be fair for one to assume that they have a different value than currencies which are in fact usable?
Ms. LISSAKERS. However, every member has to pay in, and as I said, the reserve tranche. The tranche that every member pays into this common pie, if you will, has to be in a usable form which is in SDRs. So the core of the paid-in quota resources are usable. Every month—in other words, every member has to pay in some usable resources.
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Mr. SAXTON. Can you explain why it is that some SDRs are referred to as unusable?
Ms. LISSAKERS. The SDRs are all usable. It is the non-SDR component of some member countries' contributions to the quota pool which are not usable, which are the part that they put in their own currency.
Now, when the U.S. contributes in its own currency, the dollars are usable. German Deutschemarks are usable. The Japanese yen are usable, so the full quota is usable.
But some countries, Africa, for example, or other parts of the world pay in, their local currency is simply not usable for other countries in terms of making international payments, for example.
Mr. SAXTON. And those currencies are considered to be part of a quota, are they not?
Ms. LISSAKERS. They are part of the total quota allocation, yes.
Mr. SAXTON. The 145 billion SDR has within it some unusable currencies?
Ms. LISSAKERS. That is correct.
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Mr. SAXTON. First, IMF contributions have been referred to as—might be compared to credit union deposits but the IMF appears to classify a third of the deposits, as we have just discussed, as unusable, correct?
Does the balance sheet of the IMF differentiate between the quality of its contributions and set apart the usable from the unusable in its balance sheet?
Ms. LISSAKERS. I am sorry, could you repeat the question?
Mr. SAXTON. Does the balance sheet of the IMF differentiate between the quality of the contributions as set apart as unusable from the unusable in its balance sheet?
Ms. LISSAKERS. No. No.
Mr. SAXTON. There is no differentiation, there is no differentiation on the balance sheet between usable currencies and unusable currencies?
Ms. LISSAKERS. There is no accounting differences. Obviously in terms of its ability to provide financial support there is a difference.
Mr. SAXTON. Why should there not be a difference on the balance sheet?
Ms. LISSAKERS. The quota contributions from member governments to the Fund are the fund's liabilities, not its assets. I am not sure—I mean, I am not an accountant. I am not sure exactly what valuation distinction you would make between the liabilities of the Fund if you look at the resources.
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Mr. SAXTON. In terms of a credit union, incidentally Mr. Geithner was a witness and a very useful one at the Joint Economic Committee not long ago, and he referred to the IMF in a sense as a big credit union.
If the credit union did not deposit—would a credit union not value deposits that were unusable differently from deposits that could be used for loans?
Mr. GEITHNER. There are many limitations.
Mr. SAXTON. Excuse me, I will get back to you, Mr. Geithner. You and I spent a couple of hours together a month or so ago.
Ms. LISSAKERS. Well, in terms of the IMF's—the judgment of management and member governments about the institution's ability to respond effectively to financial crises, which is its obligation and mission under the Articles of Agreement, there is certainly a judgment and a distinction between usable and nonusable currencies, and that is why we have an operational budget which is reviewed periodically to make clear which currencies can be drawn upon.
Mr. SAXTON. I understand.
However, in my world when we think about a credit union, as this has been referred to by various members of the IMF, a credit union which has assets has a list of assets, all of which are usable, and perhaps a list of other items which would be referred to as liabilities, which could not be used for loans. And my question is, would a credit union not value deposits that were unusable differently from deposits that could be used for loans?
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Ms. LISSAKERS. Quota resources are the fund's liabilities. Its loans outstanding to member countries are its assets in an accounting and balance sheet sense.
In terms of its liabilities, the liquid liabilities of the Fund are the reserve tranches that all member governments have paid in which is the convertible currency component, if you will, of every member's quota resources.
Mr. SAXTON. If one-third of the contributions are classified as unusable and cannot be lent, how are they reflected on the asset side of the balance sheet?
Ms. LISSAKERS. They are not on the asset side of the balance sheet. They are on the liability side of the balance sheet.
Mr. SAXTON. OK, I have not been able to make that distinction on the balance sheets that I have looked at, but if you say that is the case, I will accept that for now. But I have not been able to make that distinction myself and I, like you, am not an accountant so perhaps I am wrong.
Are securities or promissory notes comprising or reflecting unusable quotas valued at face value on the asset side of the balance sheet?
Ms. LISSAKERS. The Fund doesn't have securities or promissory notes.
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Mr. SAXTON. Is the value of assets discounted at all for any reason?
Ms. LISSAKERS. No. Countries that draw on the Fund are required to repay in full with interest.
Mr. SAXTON. The point that I—let me just back up to that last question.
With regard to the answer, are securities or promissory notes comprising of, reflecting usable quotas valued at face value on the asset side of the balance sheet. With regard to your financial statements we have a statement that says each member has the option to substitute non-negotiable or non-interest bearing securities for the amount of currency held by the Fund in the general resources account that is in excess of one-quarter-of-one-percent of the member's quota.
What does that mean?
You just answered that there are no securities or——
Ms. LISSAKERS. Some countries provide letters of credit, which is how the U.S. extends its quota resources to the fund.
Some countries do provide securities, but I understand that is a fairly small number, and I can follow up. I don't have the specifics on hand as to what percent that is, but I am happy to provide it for the record.
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Mr. SAXTON. Are those also listed on the asset side?
Ms. LISSAKERS. All quotas are liabilities of the institution.
Mr. SAXTON. On this general department balance sheets I have here, under assets, general resources account, currencies and securities listed.
Ms. LISSAKERS. Under assets?
Mr. SAXTON. Yes, ma'am.
Ms. LISSAKERS. Those would be—well——
Mr. SAXTON. I know how confusing this is because I have been trying to deal with it for several months myself, and I am fearful that I am putting you on the spot about intricacies of accounting that perhaps aren't fair, and so rather than to go through this, and I think I can see what's perhaps happening. Perhaps some of these questions we can clarify in writing. Would that be fair?
Ms. LISSAKERS. I would be happy to.
Mr. SAXTON. Is this accounting system a transparent system, do you believe?
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Chairman BACHUS. I might go next and that is a question of mine.
Ms. LISSAKERS. I confess it is not fully transparent to me as a layman in this area, but the books of the IMF are subject to an annual audit and there is an auditor's committee that is selected for member governments and, concluding most recently, the chief auditor of the U.S. Treasury has participated in this committee to make sure that the Fund is doing its books correctly.
Mr. SAXTON. Thank you. There doesn't seem to be any adjustment for liabilities for assets that are unusable in your accounting system, and I find that rather interesting.
Is this realistic or sound from an accounting point of view? That is perhaps a question that you might like to get back to us with.
Are there significant adjustments made in the value of liabilities or assets that may be unusable to set them apart from assets that are usable. I think this is a very key point, and obviously one that is perhaps not something that we all deal with every day but is extremely important in representing what the quota really means.
Mr. Chairman, if I may just finish up with one or two very quick questions.
Is the IMF carrying tens of billions of dollars on its balance sheet that correspond to unusable assets on the other side, on the liability side?
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Ms. LISSAKERS. In the history of the IMF, no country has defaulted on the IMF in its 50 years. There are some arrears cases currently. There are four or five.
Mr. SAXTON. Let me get back to the category of unusable assets. Are there any unusable assets characterized as liabilities on the balance sheet?
Ms. LISSAKERS. I am not sure that I fully understand the import of your question. We do have a reserve against arrears so that the IMF sets aside and accounts for any potential non-repayments.
Mr. SAXTON. The Chairman wants to move on and I appreciate his permitting me to go on as long as I have, but what I would like to do is submit the balance of this series of questions to you in writing and perhaps you can respond and let me just finish—would that be satisfactory?
Ms. LISSAKERS. Absolutely.
Mr. SAXTON. One last question. Ms. Lissakers, how long has Iraq been in arrears to the IMF?
Ms. LISSAKERS. I don't have an answer off the top of my head.
Since 1990.
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Mr. SAXTON. Why is it still a member?
Ms. LISSAKERS. We have proceeded with suspension processes against two countries, Sudan and Zaire, because of a very long track record of non-cooperation with the fund. In the Iraqi case we have not yet reached that state. There has been no extension of credit or financial support by the IMF for Iraq since 1990.
Mr. SAXTON. Will the IMF consider expelling Iraq from participation or excluding Iraq from participation in further IMF activities until in fact it pays up?
Ms. LISSAKERS. It cannot draw on Fund resources until it pays up. There is currently no proposal to expel it.
Mr. SAXTON. Thank you very much.
Chairman BACHUS. Mr. Kucinich.
Mr. KUCINICH. That you very much, Mr. Chairman, and to Ms. Lissakers.
How long have you served as the U.S. Executive Director at the IMF?
Ms. LISSAKERS. Since late 1993.
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Mr. KUCINICH. Can you estimate how many loan packages that you have participated in?
Ms. LISSAKERS. I would have to give you the number for the record. There are probably from one year to another between a dozen and 20 loan agreements negotiated. There obviously are decisions under individual programs because normally we disburse on a quarterly basis and there is a board review of each quarterly disbursement to see whether a country has complied.
Mr. KUCINICH. So you are saying 12 to 20? Can you give me a better number?
Ms. LISSAKERS. Each year. We have—currently 65 countries have programs—have loans outstanding. Now part of that are loans that haven't yet been repaid.
We normally have a one-year, 18-month, or a three-year program where there is active conditionality, but the maturity of the loans extended on those programs are somewhat longer than the program period.
Mr. KUCINICH. How many meetings of the Executive Directors of the IMF have you attended?
Ms. LISSAKERS. Last year we had—what did I say? 122 sessions, 665 hours.
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Mr. KUCINICH. So you were at 122 sessions?
Ms. LISSAKERS. No, I do not attend all—when I say session, a session may involve three or four different policy or country items.
Yesterday, for example——
Mr. KUCINICH. How many meetings do you attend? I am trying to find out your presence at these meetings.
Ms. LISSAKERS. Yesterday there were three country items. I attended a session for one of the three items. My economic adviser for one, and one of my technical assistants for the other country item, and that is fairly typical.
Sometimes I am in the chair from 10:00 in the morning until 7:00 or 8:00 at night and sometimes I may only attend one item. I have an alternate Executive Director who is co-equal. If I cannot attend normally my alternate——
Mr. KUCINICH. Thank you.
Unlike a U.S. Government department or agency, changes in the IMF's operations cannot be brought about simply by changing U.S. law. Therefore, congressional proposals for policy changes in the IMF are formulated as directives to the Secretary of the Treasury to instruct the representative of the U.S. Government, the IMF Executive Director, to promote the desired change.
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As Mr. Sanders has gone over earlier, these have often been formulated to use the voice and vote of the United States to achieve a desired goal.
Does that account comport with your understanding of how Congress would seek to change IMF policy?
Ms. LISSAKERS. Yes, sir.
Mr. KUCINICH. Thank you.
According to the Congressional Research Service over the years, ''voice and vote amendments have tended to accumulate.''
Indeed, Congress has made numerous attempts in the past to change IMF policy by directing the U.S. Executive Director to use her voice and vote. You are aware, of course, that Congress has directed the U.S. Executive Director, that is you, to use your voice and vote to achieve certain changes at the IMF.
Now, I want to clarify the record and I want to right now ask you about specific voice and vote directives to determine the extent to which you have followed Congress' specific requirements to use your voice and vote. And since you have testified according to calculations I have made, Mr. Sanders, that you have used your vote about one-half-of-1-percent of the time, I think it is appropriate to try to delineate the areas where you have used your voice or vote, in this case with respect to starting with the Bretton Woods Agreement Act 22 U.S. Code 286, specifically Section 286(s), ''Consideration of basic human needs and economic adjustment programs supported by the fund,'' Subsection (b) of number 1, ''To provide that in approving any economic adjustment program the funds shall take into account the effect such program will have on jobs, investment, real per capita income, the gap in wealth between the rich and poor and social programs such as health, housing and education in order to seek to minimize the adverse impact of those adjustment programs on basic human needs.''
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Have you ever voted to do that?
Ms. LISSAKERS. I have used both my voice and——
Mr. KUCINICH. Have you ever voted to do that, Ms. Lissakers?
Ms. LISSAKERS. The IMF programs consistently and regularly include provisions to minimize the impact of economic adjustment on the poorest.
Mr. KUCINICH. I appreciate your clarification, but my question is have you ever voted in the 12 out of 2,000 votes that you have testified that you have given, have you ever voted to do that? What I just asked.
Ms. LISSAKERS. Have I voted? I have expressed the support of the U.S. Government for numerous programs.
Mr. KUCINICH. Have you ever voted ''no'' on a loan agreement if it didn't take into account the effect such programs would have on jobs, investment, real per capita income, the gap in wealth between the rich and poor and social programs such as health, housing and education?
Ms. LISSAKERS. The essence of every IMF-supported adjustment program is to improve the living standards of the people and the economic conditions and circumstances of the member government which is receiving the financial support of the IMF. That is the essence and core——
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Mr. KUCINICH. I can appreciate that, and the essence of a congressional directive about your vote specifically with respect to the Bretton Woods Agreement Act is that if there is a vote with respect to issues that take into account jobs, investment, real per capita income, the gap in wealth between the rich and poor, that you would be instructed to vote no. Have you ever done that?
Ms. LISSAKERS. I have not been instructed to vote no on programs because they have not failed to meet those broad criteria laid down in the act. The programs that the Fund has approved in my time have been fully consistent with those objectives.
Now, I can't say that they have met every single item in detail to the degree that we might have wished. But in broad sweep, they have been consistent.
Mr. KUCINICH. Thank you for qualifying that.
Let's go to Section C. Have you ever voted on any of those 12 of 2,000 votes to provide letters of intent submitted to the Fund in support of an economic adjustment program to reflect that the member country has taken into account the effect such programs will have on the factors that I just listed?
Ms. LISSAKERS. On the——
Mr. KUCINICH. On the factors that I just listed, jobs, investment, real per capita income, gaps between rich and poor?
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Ms. LISSAKERS. And your question is what?
Mr. KUCINICH. Have you ever taken a position with your vote consistent with Bretton Woods, Subsection (c) of Section 286(s), provide that letters of intent submitted to the Fund in support of an economic adjustment program reflect that the member country has taken into account the effect such programs have had on jobs, investments, real per capita income, the gap in wealth between rich and poor and social programs such as health, housing and education?
Ms. LISSAKERS. The law does not mandate that we vote no if not every element in terms of our interpretation is met. The U.S. has been very active both in the board and informally in working with management staff and member governments, in increasing the focusing with specificity in IMF programs, on social advancement issues, including explicitly protecting health expenditure and education expenditure in the terms of the IMF programs, when we deal with fiscal components of those programs, and in fact if you look at our programs in——
Mr. KUCINICH. I understand what you are saying, if I may. You don't have to follow every dotted i and crossed t. You did speak to specificity.
Bretton Woods Agreement Act 22 USC 286 (dd), fund bailouts of banks rescheduling of debt. Here is what the section says, ''The Secretary of the Treasury shall instruct the United States Executive Director of the Fund, number one, to oppose and vote against any Fund drawing by a member country where in his judgment the Fund resources would be drawn principally for the purpose of repaying loans which have been imprudently made by banking institutions to the member country.''
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Of the 12 of 2,000 times that you voted, have you ever voted to do that?
Ms. LISSAKERS. None of the financing programs that have come to the board in my time have violated the terms of that statute. I have never been so instructed by Treasury.
Mr. KUCINICH. Can you tell me which part of that directive you don't have to follow?
Ms. LISSAKERS. It is the law.
Mr. KUCINICH. Is there a word there that you disagree with that you just feel——
Ms. LISSAKERS. None of the IMF financing programs have been designed or intended to primarily bail out lending banks and have not done so.
Mr. KUCINICH. They were not designed, but we are talking about a constructive result here.
Ms. LISSAKERS. And have not done so.
If you look back from the mid-1980's to the present, you will see that debt restructuring by commercial banks directly to their obligors has been a consistent component of the international effort to restore financial stability to member countries.
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Mr. Geithner just cited the statistics this morning. That since 1987 through the spring of 1997, which is the latest data we have, more than 31 countries have had commercial bank debt restructurings covering more than $180 billion in which the original claims by banks on those countries were reduced by about $83 billion.
Mr. KUCINICH. Thank you. Now, I want to know if the law in this section I quoted didn't say ''principally,'' have used the word ''principally,'' would that have disqualified loan packages?
Ms. LISSAKERS. No.
Mr. KUCINICH. Fine. I want to move on here, Mr. Chairman.
Bretton Woods again, Section 286 (kk), discussions to enhance the capacity of funds to alleviate potentially adverse impacts of the Fund programs on core and the environment. This is Article 2 here. ''The establishment of procedures which ensure the inclusion in future economic reform programs approved by the Fund of policy options which eliminate or reduce the potential adverse impact on the well-being of the poor or the environment resulting from such programs.''
Have you—in the 12 of 2,000 times that you did vote, have you ever voted to do that?
Ms. LISSAKERS. The answer is yes, that the U.S. has consistently supported, as I said, further refining the design of IMF programs to protect the poorest segments of societies in the countries that we are trying to help, but I would just add on that point that one of the central components of every IMF program is to reduce inflation and inflation is probably the single biggest tax on the poor in any country.
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And to the extent that we succeed in that and we do succeed in that, it is a huge direct benefit to the poorest segments of every economy that the IMF touches. But we have gone beyond that and if you look at the results, in recent years the track record of IMF programs in increasing health expenditures and education expenditures is very clear. Average spending on education under our ESAF programs in Africa increased by 5 percent in real terms or by more than 2 percent on a per capita basis over the life of these programs.
Real expenditures on health care increased by 7.5 percent on average or by over 4.5 percent on a per capita basis and social indicators in the countries under these programs have improved significantly as well. Illiteracy rates have declined.
Mr. KUCINICH. I want to get back to a question that I asked because I am not sure that I had a definitive, clear answer, emphatic answer. It almost seemed like a throwaway answer.
Are you saying specifically on this issue with respect to the well-being of the poor and the environment, that one of those 12 votes that you cast was a direct vote on those issues? Is that what you are saying?
Not the general policy. In voting you can fudge over anything about general policy, but specifically with respect to this section of Bretton Woods?
Ms. LISSAKERS. The programs that we have that I have expressed support for either in a formal vote or in terms of expressing support for the proposed decision that was before the board have been consistent with the terms of the Bretton Woods Act that you cite.
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Mr. KUCINICH. I will wrap this part up, Mr. Chairman, but I just want to say this after listening to this testimony.
I think it is accurate to say that the Director is not using her vote to accomplish the goals that the Congress has set out for you. And I would conclude, therefore, when Congress directs you to use your vote to accomplish policy changes at the IMF Congress unfortunately is not making a meaningful demand of you and it is plainly obvious from your responses and the record now shows that.
I would like to move on in another section and pursue this issue.
Chairman BACHUS. We are going to do that on the second round.
Mr. KUCINICH. Thank you.
Chairman BACHUS. Now we are going to have a second round of questions.
First of all, this quota increase has been tied to Asia and this $18 billion would be about 50 percent of the total amount of money that we have funded the IMF through the history of the IMF, and we are being asked to provide this $18 billion and we are told it is necessary because of the Asian crisis, but let me ask you this. How much has been lent in Asia? How much do you anticipate lending to Asia in the next six months?
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Mr. GEITHNER. The negotiations on the quota increase concluded last September, which was sort of midstream. The broad parameters for the increase were set at a time where we did not anticipate the crisis taking on the dimensions that it ultimately did.
In our view, the reality is as part of the IMF response to the crisis, it has committed substantial resources to bring stability. I want to put it in context because part of your initial question addressed the past.
Our view is that the commitments the IMF has made and the money it has already lent have reduced the available resources of the IMF down to extraordinary low levels and they leave us with an inadequate cushion to deal with——
Chairman BACHUS. I understand the policy and all that. Let's talk facts. How much has been lent?
Mr. GEITHNER. I think roughly $20 billion has been lent by the IMF to the big three—Korea, Thailand, and Indonesia.
Chairman BACHUS. Twenty billion dollars have been lent. How much in addition has been committed?
Mr. GEITHNER. An additional—I will check my facts, but I think the total commitment by the IMF at the beginning of the crisis were $34–35 billion, of which they have already lent $20 billion.
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Chairman BACHUS. Twenty billion, so another $14 billion?
Mr. GEITHNER. If these countries meet the commitments in the programs.
Chairman BACHUS. And if they comply with it.
Mr. GEITHNER. If they comply with the conditions in the programs, yes.
Chairman BACHUS. Twenty billion has been committed, $14 billion ''conditionally'' committed. We will just use that word.
What are the reserves of the IMF, including the $14 billion?
Mr. GEITHNER. After the——
Chairman BACHUS. How much is available to lend to the world community presently?
Mr. GEITHNER. The IMF now has roughly $45 billion in uncommitted loanable resources. Of that, roughly $30 billion the IMF believes that it needs to keep in reserves to meet potential demands by countries like the United States who have these substantial reserve requirements.
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Our view is if you take that $45 and you adjust for $30, the IMF has got between $10 to $15 billion in resources now it could commit to deal with any spread or intensification of the crisis.
Chairman BACHUS. So prior to the Asian crisis, you had $50 billion basically available to commit?
Mr. GEITHNER. I believe so.
Chairman BACHUS. And you committed $34 billion, leaving you with $15 billion?
Mr. GEITHNER. I would have to look at the numbers.
Chairman BACHUS. You are asking for an additional $85 billion above that?
Mr. GEITHNER. The proposed quota increase would increase total IMF quotas by about 45 percent, which would translate into about $90 billion, of which about two-thirds would be usable, if you recall our discussion with Mr. Saxton.
Chairman BACHUS. Of that, what was the decision to hit on that figure?
Mr. GEITHNER. That was the result of a series of negotiations we had with the IMF over the course of last summer.
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Chairman BACHUS. That is anticipated it may be necessary to be used?
Mr. GEITHNER. Well, we have no idea whether it would be used or not. The quota increase is designed to make sure that the IMF maintains some capacity to finance future programs as the world economy expands and global capital markets expand.
Chairman BACHUS. Ms. Lissakers, you stated that most of these loans are 4.5 percent, 4.7 percent?
Ms. LISSAKERS. That is correct.
Chairman BACHUS. Have you ever voted against loans at that interest rate?
Ms. LISSAKERS. The rate of charge—the principal use for rate of charge has been broadly supported by the membership——
Chairman BACHUS. Have you ever voted no because of the interest rate charge?
Ms. LISSAKERS. No, I have not.
Chairman BACHUS. Are you aware that Congress directed the Treasury to instruct you to propose and work with the adoption of a policy regarding the rate of remuneration on the member's subscription and the rate it charges the fund, interest it charges the Fund drawing to bring those rates into line with market rates?
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In other words, to charge market rates? That is the instruction that Congress has said to start lending at market rate? Start paying the member countries at market rate? You are aware of that instruction?
Ms. LISSAKERS. I am aware of that.
Chairman BACHUS. Are you aware that in Asia the market rate would be somewhere between 10 and 14 percent?
Ms. LISSAKERS. The rates the IMF charges are comparable to the LIBOR, what commercial lenders use when they price international loans.
Chairman BACHUS. So you are saying that your rates are comparable to——
Ms. LISSAKERS. When commercial lenders make a loan, they have a base rate, which tends to be the London Interbank Office Rate, the base rate. That is roughly their cost of funds.
Chairman BACHUS. We are talking about market rates, not commercial rates.
Ms. LISSAKERS. That is correct. LIBOR is a market rate. The market rate tends—when a commercial lender makes a loan, there are two components. There is the base rate which is the cost of funds, which is LIBOR. The IMF charges are parallel. The comparable rate for the IMF is the SDR rate that we charge.
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Commercial lenders will add on to that. I am just trying to explain the rationale for why we argue that this is in fact a market rate.
Chairman BACHUS. So you are arguing that you are making loans at market rates?
Ms. LISSAKERS. In terms of cost of funds market rates, yes. But commercial lenders also have: A, a profit motive which the IMF does not; and, B, there is a risk premium component when commercial lenders lend. Since the IMF is seen as a preferred creditor and is not defaulted on, most members believe that the Fund should not charge risk premium and does not need to charge risk premium.
The fund's mission is not to make a profit, it is to provide financial support for countries experiencing a balance of payments emergency that is damaging to the global economic interest, including the collective interest of all member countries. But we do charge the cost of funds that the IMF has for itself, and in that sense it is perfectly consistent with market practices.
Now, I would add that in the Korean case, because of the extraordinary—the unusually large size of that loan and the strength of the Korean economy, the IMF created at the strong urging of the U.S. a new facility.
Chairman BACHUS. The SRF. I am familiar with that. We are very limited on time. Let me ask you this.
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The Wall Street Journal talked about a reimbursing income tax. It also provides its staff, their families with free education, college tuition, education at private schools, is that correct?
Ms. LISSAKERS. The IMF has a multinational staff. It draws from all member countries.
Chairman BACHUS. I understand.
Ms. LISSAKERS. There is an effort to: A, maintain a competitive salary rate that allows us to draw qualified people from all——
Chairman BACHUS. I understand that. I guess my question is not whether it is appropriate or not. My question is simply it is my understanding that IMF pays for educational expenses of family members of non-American IMF employees; is that correct?
Ms. LISSAKERS. It provides an education allowance subsidy for expatriates; that is, foreigners who come to the U.S. who want to provide education for their children in a way that allows them to maintain their language, eligibility for home country schools and other skills.
Chairman BACHUS. That is in addition to their salary?
Ms. LISSAKERS. That is correct.
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On the tax provision the Articles of Agreement specify that non-locals, non-U.S. nationals will not be charged withholding tax on their salary.
Chairman BACHUS. And their countries normally wouldn't charge them anyway?
Ms. LISSAKERS. Most countries don't charge income tax on——
Chairman BACHUS. Let me just ask you this. I am just asking questions here.
Why can't we make all IMF documents public?
Ms. LISSAKERS. I have aggressively used my voice and vote to try to get the IMF to put most documentation on the public record. But we are constrained by two factors. One is that the IMF deals with a lot of market sensitive information.
Second, the Articles of Agreement specify that when the IMF consults its member governments, it is by definition a confidential consultation; for example, the annual economic reviews that I discussed, the so-called Article IV's. Therefore, under the Articles of Agreement, every member of the government has the right, must approve the release of information regarding that consultation.
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So we have been advocating that countries be permitted to release their Article IV's on a voluntary basis. We haven't gotten the agreement of other members to do that yet, but I think we are getting there. But in the meantime the Fund has instituted a new policy, which is at the end of every annual economic review of a member country the Fund will, with voluntary acceptance of a member government, release a very detailed summary of the staff's commentary and assessment of that country's economy and of the board's commentary and assessment of that country's economic policy.
Chairman BACHUS. Thank you.
Ms. LISSAKERS. We only started that last summer and so far 72 countries have allowed the release of this so-called Public Information Notice.
In addition, I would say one of the most important issues is the release of letters of intent that lay out the details of a country's policy program with the IMF. We think that it is very important that those be made public both as a matter of accountability of the IMF, but equally important in terms of ensuring that a country is really committed and has the requisite political support for carrying out the program, and you will note that in the Asian programs the letters of intent have been made public in those countries and are available on the IMF's Web site.
Chairman BACHUS. Thank you.
Mr. Sanders.
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Mr. SANDERS. Thank you. Given the fact that we have gone on for a long time and we have some other panels of distinguished people that we want to hear from, I will be as brief as I possibly can, and I would hope you would allow me to submit questions to our colleagues here.
Let me just touch on two or three issues. Recently the United States nearly went to war with Iraq and we were very concerned about Saddam Hussein's accumulation of poison gas and so on.
I should point out that the comments that I am making do not just reflect on the Clinton Administration, but also on the Bush Administration and the Reagan Administration.
During the 1980's, as I think we all know, Saddam Hussein used poison gas against Iran, and much of the world was outraged by this.
Why given that reality, and I know this was before Clinton was in office, given a dictator who uses poison gas for the first time in modern history, did the IMF feel that this was a gentleman worthy of an IMF loan?
Mr. GEITHNER. My colleague tells me that there has been no IMF loan to Iraq since 1986, but I am happy to, if you want, to check the record and verify that.
Mr. SANDERS. When did he use poison gas?
Mr. GEITHNER. I am happy to check and get back to you.
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Mr. SANDERS. I recognize that Clinton was not in power at that point, but in terms of human rights it is probably not an outstanding record.
The second point, touching a little bit on what Mr. Bachus and Mr. Kucinich indicated, the layperson might think when the IMF lends money to a country in debt that the goal would be to lower that debt; in other words, if you are in debt and I lend you money and the goal is that five years you are going to be out of debt, standing up independently. In fact, the record it seems, as I understand it, is very much to the contrary.
A development gap study of 71 countries that have been operating under IMF-World Bank economic conditionalities shows a positive correlation between the number of years that a country has had an adjustment program in place and an increase of debt as a percentage of GNP. In other words, the more they deal with the IMF the more deeply they are in debt, and so forth.
I would like you to respond to that, but more importantly, getting back to Ms. Lissakers' point, I think a lot of the debate here today, Mr. Geithner raised it, is really the role you have been playing and whether or not you have been obeying the law.
I think you have not, and you can quibble about this and that. I don't think that you have been following the directives of the Congress.
You say you don't vote very often, but you use your voice. Let me ask you a question. As I understand it a Director like yourself has the right to call special meetings; is that correct?
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Mr. Kucinich asked some questions about increasing structural adjustments that in many countries have made the poorest people poorer.
I have indicated that many countries in debt are now further in debt. Have you said we are concerned about this, the Congress of the United States is concerned about this. I am going to call a special meeting to discuss this issue? Have you ever done that?
Ms. LISSAKERS. Yes, and the result is the HIPC debt initiative which grew out of precisely the debate that I triggered in the board and among the member governments and the strong advocacy publicly by senior Administration officials, which was precisely to help the poorest member countries of the IMF and the World Bank which were caught on a treadmill of new loans and increasing indebtedness rather than reduced indebtedness.
Mr. SANDERS. So you are concerned that after years of lending countries money, they are more deeply in debt and more under the control of the IMF and you are going to stand up and fight that?
Ms. LISSAKERS. And we have created a mechanism which is a complement to the debt reduction which is already done extensively by the U.S. and other creditor governments on the bilateral official loans as well as the commercial lenders, London Club, to have the multilateral institutions also provide significant debt relief to the poorest member countries in conjunction with strong reforms that will put them on a more sustainable economic track.
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Mr. SANDERS. My time is going to run out in a second.
My question is if some of us think that you and other IMF representatives have not in fact respected the laws of the United States, can you give us some advice as to how we can make you do what the Congress has asked you to do? Voice vote obviously has not worked.
Ms. LISSAKERS. I think voice and vote have worked. If you look at the objectives that Congress set out and sought to meet, as I interpret the law, first of all, we have I believe met the letter of the law. But more importantly, we have worked actively and successfully to advance the objectives that Congress has articulated both in hearings and in specific legislative mandates for the Administration and for me specifically, for Executive Directors, and I am very proud of our track record.
I will be the first to say that we have not accomplished everything that Congress has wished us to accomplish and that we would like to accomplish, but our track record is very good and we have been working in good faith and I believe effectively to advance those broad objectives.
Mr. SANDERS. Respective disagreement. Thank you very much.
Chairman BACHUS. Thank you.
This concludes the first panel and we are going to seat the second panel at this time. We appreciate your attendance.
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Mr. Geithner, several Members have asked if they can submit written questions?
Mr. GEITHNER. Absolutely.
Chairman BACHUS. Our next panel includes Dr. Lawrence Lindsey, former U.S. Executive Director to the IMF under the Bush Administration; Thomas Dawson; Mr. Ralph Nader, Consumer Advocate; and Dr. Edwin Feulner, President of The Heritage Foundation.
Gentlemen, we welcome you and we apologize for the delay in empaneling the panel, and if you have no objections, we will go from our left to our right starting with you, Dr. Lindsey.
STATEMENT OF DR. LAWRENCE B. LINDSEY, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE
Dr. LINDSEY. Thank you very much, Mr. Chairman. It is a pleasure to be here today. I have more detailed written remarks and I ask that they be submitted for the record.
At the outset, I should indicate that the views I represent are my own and not necessarily those of the American Enterprise Institute.
Mr. Chairman, I would like to place the specific issues you have asked in your letter in a larger context from which I believe the specific answers to your question can be derived.
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As a matter of fundamental principle, I think the elected representatives of the American people are the ones who should control the terms of assistance to foreign governments and institutions funded by the American taxpayer. Any exceptions to that basic principle must be subjected to a fairly rigorous standard.
Unlike many critics of the IMF, I do believe the IMF can play an important role in the international financial community. And I do believe that a limited quantity of U.S. taxpayer funds can be committed to that purpose. But let's be clear about why the Congress might want to delegate responsibility for the disbursement of such funds to an international body like the IMF.
I think there are two reasons that need to be considered. First, in today's international market, events often move swiftly. Specifically, events might require a decision on the allocation of funds in a timeframe too short for the standard legislative process. In such circumstances, an institution like the IMF might well play a role as a speedy provider of liquidity in a crisis.
I should note that Congress has certainly created precedents for such a time sensitive delegation of decisionmaking. In international security arrangements, the President is empowered to direct military forces to undertake warlike actions without a formal declaration of war. And in financial matters, the Congress has granted the Treasury significant authority to intervene in foreign exchange markets with the Exchange Stabilization Fund without ever consulting the Congress. In domestic banking circumstances, the Federal Reserve might similarly take significant steps which would, at least potentially, commit taxpayer funds without seeking congressional assent.
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Second, it may be that international circumstances are such that a sum so vast is needed whereby the United States cannot prudently be expected to act on its own, or might find it advantageous to act with others. Again, in the international security area we have long delegated decisionmaking to international groups such as NATO, and recently we have established precedents of letting the United Nations act without Congressional assent because we have judged it in the U.S. national interest to work through international bodies.
In the area of foreign financial assistance, the U.S. Congress sometimes chooses to use international agencies such as the United Nations as well.
But a close examination of the Administration's case for yet more taxpayer funding of the IMF essentially boils down to one of those two points. That is either an issue of timeliness or an issue of needing to work with others.
Let me add that I use the words ''taxpayer funding'' deliberately. The pretense, advanced by the Administration in recent congressional testimony, that this money is merely a ''deposit'' and the IMF is something like a credit union is plainly faulty.
Therefore, if the IMF is going to obtain taxpayer funds, it is important that the Congress establish that these funds are going to be used in either so speedy a fashion that the normal legislative process would not work, or that the mission that we are undertaking is of such a great magnitude that we would subsume American interests in a larger international cause.
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I don't think that either of these conditions has been demonstrated in the current case. For example, with regard to the timeliness argument, although the Indonesian banking crisis happened more than seven months ago, the government and the IMF are still negotiating the terms for an IMF disbursement of funds. While one must admit that our Founding Fathers designed the legislative process to be slow and deliberative, even the most extreme critic of the legislative process would have to concede that Congress could beat the IMF in this decisionmaking process.
Frankly, with regard to the issue of timeliness, the Congress has at its disposal much more effective means of allowing both speedy action and a more direct expression of U.S. national interest. The Federal Reserve could be authorized to intervene in international currency markets and be granted an appropriation by Congress to do so. Unlike the IMF, Federal Reserve officials are regularly questioned by Members of Congress, including this subcommittee, a fact to which I can personally attest. They are directly accountable, subject to audit, and dismissal from their posts if Congress finds that they have used the money poorly.
In my view, the Exchange Stabilization Fund could also be used in this manner, but actions by this Administration, in both the current crisis and the Mexican crisis, indicate that those funds were used to circumvent the congressional process rather than to carry out congressional intent.
What about the argument that multilateral action is needed? Certainly the size of the funds being expended seems so large that prudent management would suggest having a partner. But is this expenditure of funds advancing a cause so noble that U.S. national interest should be subordinated to those of an international body?
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Again, I think the reality is that is not the case. I just returned from two weeks in Asia and can tell you firsthand that the IMF bailout has not had an effect which we would consider desirable.
Let me focus in particular on the case of Korea. There, the giant Hanbo Steel Corporation has effectively been absolved for a year from paying any interest on the enormous amount of corporate debt that it has built up over many years. This gives the company an enormous competitive advantage over all other steel producers, American, Japanese, German, whatever. And as the saying goes, when you don't have to pay your bills, your gross is your net.
The fact is, the great majority of the money the IMF disbursed in Korea, and throughout Asia did not go to some noble cause such as feeding the hungry or housing the homeless; it went to helping specific companies which compete in the global marketplace get a reprieve on their debt service. This is not only not in the American national interest, it is not in the interest of the global economy either. Hanbo Steel is not outproducing its competitors because of some inherent cost advantage gained by greater efficiency. It is outproducing its competitors because it has been subsidized by the taxpayers of the United States and other major countries of the world.
There is certainly a foreign policy problem for the United States in the crisis unfolding in East Asia. But I cannot help but wonder how much more effective a direct appropriation of some or all of the $18 billion to the foreign policy operations of the United States would be in advancing U.S. national interest rather than giving a similar sum to the IMF.
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Again, Congress could maximize its control over any direct appropriation, targeting it to those endeavors which it believes would most enhance the economic and security interests of our country.
I have no doubt that a limited sum of money, contributed by a variety of nations, could, if expended in emergencies, provide a much needed function in the modern global economy. The IMF could stick to this mission. It is one that the IMF can carry out with the ample financial resources and vast array of human talents it currently has at its disposal. Its ability to function would be enhanced if it chose to cooperate with the world's central banks in carrying out its mission and if those central banks were empowered to cooperate. But this is not the case today.
Mr. Chairman, in the interest of time I would refer to my written testimony for the specific answers to your question. Thank you.
[The prepared statement of Dr. Lawrence B. Lindsey can be found on page 152 in the appendix.]
Chairman BACHUS. Thank you very much, Dr. Lindsey.
Mr. Nader.
STATEMENT OF RALPH NADER, CONSUMER ADVOCATE, CENTER FOR THE STUDY OF RESPONSIVE LAW
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Mr. NADER. Thank you very much, Mr. Chairman.
I think in over 30 years of testifying before Congress I have never experienced a more almost identical consensus of views between groups that have battled over wide divergences on many other issues as the question of what the IMF has achieved.
I have just read the testimony of Dr. Lindsey, the testimony of the Heritage Foundation, the testimony of the Institute for Policy Studies, my testimony.
This is more than an occasion for an ironic snicker. When you have groups that describe themselves as conservatives and groups that describe themselves as progressive in their political or public philosophy agreeing on point after point, on section after section on the issues before this subcommittee, we are not only witnessing a convergence of these constituencies against the political and economic operations of global corporations, but I think we are also witnessing a concern about the excessive management of risk by public funds which undermine the very legitimacy of capitalism, which is based on the right to fail, the freedom to fail and to fear failure in such a way that it improves the performance of the economic entity and the prudence of its behavior in borrowing.
I think second it signifies an international system of governance that is completely out of control as the word ''control'' is normally meant in the annals of congressional history under our Constitution.
While I have witnessed Members of Congress turn somersaults over what they thought was an excessive delegation of congressional authority to the Federal Trade Commission's regulation of used car dealers, I have rarely seen with few exceptions Members of Congress concerned about the truly massive, historic and unprecedented delegation of our constitutional authorities, of our separation of powers authorities, and more specifically of congressional authority to international, unaccountable autocratic secretive systems of governance, whether they are GATT or NAFTA or the IMF.
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First and foremost, these are systems of governance. They have power. They make decisions backed up by sanctions and they have member governments providing them with what is essentially the power of that governance through enormous delegation.
This excessive delegation of authority now has even transcended congressional concerns, Mr. Chairman. Our judiciary seems indifferent to this delegation of authority because it is easy to have them escape their judicial responsibilities by simply labeling these delegations as matters of foreign policy, which often are deemed to be beyond the purview of our domestic judiciary, but this delegation now is way beyond traditional matters of foreign policy.
The IMF is an international regulatory agency. Its ostensible purpose is to reduce volatility in international exchange markets and inadequate liquidity, but we must not forget it has its collateral purpose of rewarding imprudent risk taking, whether it is done by dictatorial governments, domestic oligarchies or our large banks in this country.
And when we put all of this together, we are—and I will ask the question why is it that while we insist on democratic procedures in this country, such Freedom of Information Act disclosure, accountability, independent reviews, participatory rights, and so forth, are not applied to international organizations which basically enforce a law that is Federal law, and GATT, NAFTA and IMF are Federal law. We signed on through various treaties or trade agreements.
So I would appeal to the Congress to recover its constitutional stature here and get an empirical grasp of what is going on and consider this hearing as only the first in a series of hearings that generate an important public debate and discussion, number one, to demand that the managing director of the IMF break precedent and come and testify before Congress in open—open—hearings, and to begin a series of policies that go beyond exhortations.
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There is no point in being redundant here. The various testimonies—and the first panel went through again and again congressional exhortations that have been ignored, substantially ignored—1989, 1992, 1994, the amended Bretton Woods Agreements Act, and so forth, which are outlined in my testimony and other testimonies on this panel.
The very idea of the IMF and its impact on human beings that have never heard of it, human beings who are trying to get through the day without getting their lives taken because they spoke up or exercised their human rights, the idea that a hearing of this magnitude is conducted in such rarity without the New York Times, without the The Washington Post, without the Wall Street Journal and without the three networks either being here or reporting it tomorrow. For those established members of the media, apart from the dutiful trade press without which Congress would hardly find a way to communicate to the public on many important subjects, for those established members of the press, I say you should be ashamed of yourselves that you don't even have a 1-column to 100-column ratio in paying attention to issues relating to the IMF and to the subject of this hearing as you have paid to Tanya Harding, the Menendez brothers, the O.J. Simpson trial, and the Lewinsky debacle, to name a few, shall we say in a charitable manner, the whimsical orbiting of those who are members of the Fourth Estate.
You asked a number of questions which I tried to answer in testimony, but to quickly summarize them, efficacy at influencing IMF, well, there is a Latin phrase that reflects this situation, ''res ipsa loquitur,'' Mr. Chairman, ''The thing speaks for itself.''
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Congress has basically seen a bureaucracy that turned its back on the local legislature with a complicity of mildly and secretly protesting U.S. governmental participation. What is important to note here is that these kinds of exhortatory provisions are limited by the reality we cannot change the IMF through legislation in terms of structure; it has to be done by treaty amendments and in the voting of the IMF.
But we can deny them funds. That is the principal sanction, the principal message that we can convey to the IMF. There has been enough testimony before this subcommittee to indicate the IMF doesn't need another $18 billion of U.S. taxpayer money; that it has ample funds, unless it is predicating this request to the U.S. and to other member countries on a massive expansion of its role in the world, a massive expansion that the managing director, I think, has a duty to explain in concrete terms subject to cross-examination before this subcommittee and other committees in the Senate, and that massive expansion includes the essence of the multilateral agreement on investments to the extent the IMF can have the framework to apply those kinds of problems.
The mechanisms available to the U.S. Executive Director is to demand more transparency, to demand more public meetings, demand a public availability of transcripts. She has a lot of leverage left. Anybody who thinks that the U.S. doesn't have an effective veto power on the IMF in many areas doesn't understand the politics of the IMF. It has more power over the IMF than at any time in its history except right after World War II, and so forth. That is, it has more power over IMF today than it did ten or fifteen years ago and it should use it.
The IMF should be more like America in terms of its democratic procedures and its democratic pretensions. We also need to look at whether the proposed quota increase raises questions about the IMF's autonomy and ability to influence the world economy.
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That is the rest of the iceberg which needs, I think, some shall we say congressional investigative demands sent over there for information so you can determine in a precise way what they refuse to give you; what they say they cannot give you; what they do give you and what they are able to give you but refuse to give you.
I make those nuances because in what the managing director called, quote, ''the greatest bureaucracy in the world'' is what he called the IMF—and some agree it is the most highly paid bureaucracy in the world, tax exempt—''that this greatest bureaucracy in the world should definitely stop engaging in evasive nuances and start engaging in straight talk. Evasive nuances are not only evasive, they drain potential away for public debate in understandable language about what is going on.''
Finally, I would like to request my entire testimony be placed in the record, including an article on how the International Monetary Fund's stabilization affected the world's poorest, such as in Mozambique; a National Monitor Magazine article; and the article from the Wall Street Journal entitled ''Who Needs the IMF'' by George Schulz, William Simon and Walter Riston.
I asked a friend of these gentlemen how this article came to be. It must have jumped out of the pages to some readers. And it came to be—according to this person—by the aggressive leadership of Walter Riston who somehow persuaded, in a quick time period, George Schulz and William Simon to go along.
What troubles me is that these gentlemen did not follow up on this article, did not appear on programs that I am sure would have been divided, which means perhaps some informal sanctions were applied to this unique waywardness by these three gentlemen writing in the Wall Street Journal.
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But going back to my main point and ending on this, Mr. Chairman, I think that the overall points I have tried to make of the need for public debate, the role the subcommittee can play here, the convergence of conservative and progressive opinion and groups on this issue, and the need to flesh out the bureaucracy of the IMF before Senate and House committees, comes down to a great deal of unfinished business here.
I hope you will not lose heart in initiating this kind of hearing because the main media have chosen to ignore it on the first round. Abraham Lincoln lost four elections, as you know, before he was elected. There have been many failures in the Congress. Senator Norris fought for the TVA for twelve years and didn't get anywhere. This is an issue that bears staccato-type repetition and persistence because the IMF, like any other bureaucracy, it can wear you down. It can in effect turn your attention to other matters that you think are more productive, rather than batting the subcommittee's head against the wall. I hope you persist and persist and break through. It is not likely to happen in the Senate.
Thank you.
[The prepared statement of Ralph Nader can be found on page 162 in the appendix.]
Chairman BACHUS. Thank you.
The next witness is Tonya Harding—no, Mr. Dawson, if you would.
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STATEMENT OF THOMAS C. DAWSON, DIRECTOR, FINANCIAL INSTITUTIONS GROUP, MERRILL LYNCH INTERNATIONAL
Mr. DAWSON. Thank you, Mr. Chairman.
I notice my great relief that I am not among the individuals Mr. Nader was citing as ''unique convergents.'' In my present employ, whenever you get a unanimous decision, it is a sign to go the other way.
Chairman BACHUS. Yes; on a particular issue.
Mr. NADER. You are predicting a stock market collapse?
Mr. DAWSON. I am talking about—and I would certainly agree this hearing should have been televised. It is a very interesting point on coverage because, if you notice, Mr. Sanders had a very flattering article on page 4 of the Financial Times this morning, highlighting this particular hearing and listing his appearance. But there is a lot to be said in terms of lack of coverage of this issue. As I was walking from our offices down to take the Metro, I ran across two reporters I knew in a previous incarnation, both ready to come here, I thought, and I asked if they were coming to listen, and they said ''not a chance.''
So I think there is a lot of point to that.
Thank you, Mr. Chairman. I have a statement that I think was delivered as close to on-time as anybody, 23 hours ahead, but almost 24. I would briefly review part of it and then much prefer to take questions.
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By way of background, I served for four years as Executive Director for the United States at the IMF in the Bush Administration, the first eight months of the Clinton Administration, and in the early 1980's at Treasury, where I was responsible for Developing Nations matters.
I am presently at Merrill Lynch, serving as Director of the Institutions Group. My testimony is my own and represents no official view of Merrill, although they obviously made me available in terms of responding to your invitation. I have not addressed some of Dr. Lindsey's points that he raised of what the IMF should do on transparency, or fixed issues; but if people wish to ask, I am happy to respond.
Let me start with assertions that I will surprise some with, the first panel as well as part of the second panel, and briefly go over some of the others. First of all, the U.S. has more influence, and exercises it, than any other member or group of members in the Fund.
Second, I think the congressional oversight—Mr. Sanders has expressed frustration as to how it has been working—has been limited to legislation. There has been no oversight between voting. I was involved both in testifying in the 1983 quota increase and in working with the Hill on the 1992 quota increase. And when I was at Treasury and saw Mr. LaFalce, I remember working with him in the early 1980's, and to be frank, there is little staff or congressional follow-up on the institutions over the years. When a country issue comes up, like Poland in 1989, when it was moving to a convertible exchange rate, there were expressions of interest; but from the Congress, there has been legislation and not much in the way of follow-up.
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I would also note that the Treasury itself is not particularly, I think it is fair to comment, Congress-friendly. I think there needs to be a better communication. My particular idea, to be frank—this may not be what the Members want to hear—while we will always have voice and vote as requirements of the Fund, I think it is far more useful to require Treasury to report on whatever the particular issues specified that Congress is concerned on, report on a regular basis to Congress; that will provide this sort of paper trail.
Frankly, I agree with some of the Chair's comments on voice and vote, which I will get to in a moment.
On the transparency, I think it has come a long way on this, I think Members of the subcommittee and the public would be rather disappointed when they see final documents. There are no great secrets in there. There is little market-sensitive information. I don't quite understand that explanation, to be perfectly frank. There are items relating to the details of the negotiations that I think have an element of confidentiality, doctor-patient relationship, that certainly as negotiations go on should not be revealed; but certainly once agreement is recommended, there is every interest for the agreements to be made public.
The hazardous question troubles many in the IMF as much as critics of the Fund. I am a little disappointed on the moral hazard question because it is one I am aware he has written on and he has good ideas on it, but the problem of moral hazard is nobody has figured how you save the system, because that is what the purpose of it is—whether it is a domestic or international financial problem—how you save the system without bailing out at least some investors.
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That is the dilemma: how you manage to have as much market discipline in the failure as you possibly can. I think that is much of what Dr. Lindsey's writing on the subject has been about. I would be careful that some of the solutions to the moral hazard question involve giving the Fund or some international bankruptcy court additional authority. That, I think we should think about very carefully before we as Americans agree to that kind of a procedure, even though they may be, will be, necessary.
I noted my assertion that the U.S. had greater influence over Fund activities than anyone else. Indeed I would think many present critics of the Fund and the U.S. role are, in fact, claiming that they don't like the results of U.S. influence. I think if you look at the 1994–1995 Tequila crisis and the more recent Asian crisis, it is very clear from reading the press; you don't need inside information. The U.S. Treasury was actively working with the Fund in fashioning those solutions, which is another of the reasons why my suggested congressional approach to this is to lay it on Treasury, not on the poor U.S. director, although I could have sympathy for U.S. directors.
Transparency, clearly they need more of it. Frankly the marketplace, however, when you talk about the markets, bond markets and so on, they are able to figure out what the Fund is up to. Markets respond very quickly. And to those critics of Fund operations, I think they should take some pause and consider that in fact the market does value the countries when an IMF program goes into effect. The Fund does provide a degree of reassurance; that has been proven over the years.
From the point of view of the capital markets, it is viewed—it is not because it is a bailout. You can get into arguments about Fund-building, and certainly in the middle 1980's many banks were taking baths with write-offs, and I don't think you could make a bank bail out. There are limits on how public the funds should become.
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Again I will note that I think you would be perhaps a little disappointed when you see the documents. There is a cultural reason why the Fund is secretive, as it is, but in reality there isn't anything being, quote-unquote, ''hidden'' there. That is why I was a little disappointed with the exchange of Mr. Saxton earlier on because there are answers to the question. I am not sure we can deal with it. I don't have my annual report, but I would be happy to meet with you and any others who would like to go over those numbers.
I think I will just stop here, and Dr. Feulner will restore order to the panel, consensus to the panel.
[The prepared statement of Thomas C. Dawson can be found on page 181 in the appendix.]
Chairman BACHUS. I know, Dr. Lindsey, you have to leave at 1:30.
Dr. LINDSEY. Yes.
Chairman BACHUS. You are excused now—or if you wish to wait on the testimony. If you need to get up in the interim, feel free to do so.
Dr. LINDSEY. Thank you all. I'll stay as long as I can. I appreciate that, Mr. Chairman.
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Chairman BACHUS. Our last witness Dr. Edwin Feulner, President of the Heritage Foundation. We welcome you.
STATEMENT OF DR. EDWIN J. FEULNER, PRESIDENT, THE HERITAGE FOUNDATION
Dr. FEULNER. Thank you, Mr. Chairman.
Chairman BACHUS. I would commend you on your materials, not only on this issue but others which have been clarifying.
Dr. FEULNER. Thank you, Mr. Chairman, for those kind words. I appreciate the opportunity to testify. I hope my full statement will appear in the record. To alleviate Mr. Nader's and Congressman Sanders' concerns, the views I am about to discuss will cause discomfort among Heritage's 200,000 supporters around the country.
The fact is, I view myself very much as a conservative internationalist and echoing views such as those of former Treasury Secretary Bill Simon, former Secretary of State George Shultz, Mr. Wriston of CitiCorp, the Nobel economist Milton Friedman, former Secretary of Housing and Vice Presidential candidate Jack Kemp, that, yes, the world must stay involved in the world and exercise responsible leadership, but the time to say no to the IMF is here.
As of January 31 this year, the IMF had financial arrangements, loans and standby arrangements worth more than $38 billion, with 58 countries around the world, more than a quarter of the countries in the world. More than a third of the IMF membership currently have loans or standby arrangements. Either the world economy is, in fact, as bad as Mr. Nader and others think it is, or there are a lot of people looking for cheap subsidized loans and going to the IMF to get it and doing that at significant cost to the U.S. taxpayer.
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Answering the first question that Congressman Kucinich asked when he put forth his three real questions, the IMF officially requested money for the NAB back in 1996, long before there was an Asian crisis. There is no question that that is when they asked for the money. They asked before the Asian crisis occurred. The fact the Asian crisis occurred has given a convenient excuse to come up and browbeat, basically, unfortunately, at least some of my good friends in the other body into compliance with their conditions for this new tranche to increase the reserves by some 45 percent at the IMF.
The fact is if you look at the numbers, they don't need this increase to help Asia. They don't need it for any other foreseeable event. What it is basically for is for their mission creep at the IMF. I, like my colleagues, at least Mr. Nader, on this panel would very much like to hear from the IMF's managing director exactly what is involved in his, quote, ''magnificent bureaucracy'' with this new mission creep he has in mind for the IMF.
The fact is if the IMF portion of the bailout—and it doesn't go out at once, a lot of it stays there and starts to be repaid while it is still going out—they would still have $46 billion in IMF reserves. At the current time you have additional liquid resources available from the standby arrangements, General Arrangements to Borrow. Our calculations are that the IMF could call on up to $100 billion without this renewal.
The IMF published evaluations just months before the current Asian crisis on Indonesia, Philippines, South Korea, and Thailand and they all had excellent reviews. Now what do we hear? We hear that Mr. Camdessus personally was urging the Philippines, Korea, urging them to devalue currencies because they were courting economic disaster. He says he was giving them advance warning. It can't be both ways.
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In fact, the transparency that I commend this subcommittee for in terms of truth in testimony, transparency that ought to be there in terms of IMF, is very, very much more needed as well.
Mr. Saxton asked a very interesting series of questions before about the audit and the annual report of the IMF. I for one would very much like to see the IMF staff apply the same standards to their operation that they try to demand of member countries around the world in the areas of full disclosure and transparency and audits.
In internal transparencies, it may be that there is not much to learn by going to IMF, but when my colleagues attempt to contact the library, they get a recording saying the library is only open to the public on Tuesdays and Thursdays; that you have to submit an application to use the library. If you are a student you can't use it; and that if you apply it will take approximately six weeks to get an answer to your application, and even then it may not be granted. So all this in terms of transparency at the IMF.
Mr. Sanders, I commend you for requesting the CRS compilation of the 30 instructions that have not worked. So what will work? Mr. Geithner told us, I quote: ''There are extraordinary limits on what we can do.''
Well, there may be extraordinary limits in terms of ''voice and vote,'' but there is the primary power the Congress has: the power of the purse.
I would suggest very strongly, at a minimum, that the House put off a vote on any additional funding for the IMF until that organization complies with all outstanding congressional information requests; second, that provisions such as those contained in H.R. 3331 be a first step in alleviating the harmful consequences of the IMF actions; and third, to vote no on future IMF appropriations.
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[The prepared statement of Dr. Edwin Feulner can be found on page 186 in the appendix.]
Chairman BACHUS. Thank you.
At this time we will entertain questions.
Mr. Saxton.
Mr. SAXTON. Mr. Dawson, thank you for referring to the series of questions that I asked. Let me just ask you in a rather direct way, as I look at Zimbabwe, adding it all up, the total quota of 145 billion SDRs, that is a fact. My question is very simply this: How does the IMF balance sheet balance if a third of the quota liabilities cannot be used to create assets on the asset side of the balance sheet? I can't figure this out.
Mr. DAWSON. Let me make this try. That balance sheet I am familiar with. I don't want this to sound the wrong way, but there are included in that report—I will check to be sure they are described in the report—that is the balance sheet that is in one sort of accounting you might call nominal values. That is the nominal values translated into SDRs but when the Fund does its lending operations, that is what we should be concerned about; they have the operational budgets. They take the two-thirds we describe as usable currencies, including the reserve tranches of the other countries that have put them in, that becomes the pool of money or potentially drawn from central banks because we don't put the money in until they want to use it. That is the pool of money to be used; unlent, as it were.
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So in a sense you have a published balance sheet that shows the quotas, but when the Fund engages in lending activities on a monthly basis, they will establish which currencies are usable. Those are added up and basically they are drawn on in proportion to those quotas of that roughly 60 or 65 percent.
There is a limit, a concept of mitigation which limits the amount of U.S. share actually drawn, because there are a lot of circumstances where the U.S. share could be somewhat more. And in the mid-1980's my predecessor, in a painful fight, got in a cap of how much of the U.S. quota is drawn so it doesn't swing exorbitantly high.
But that is as quick an answer I can give, not having looked at the present report, because I guarantee you it is something we do not need in my present position.
Mr. SAXTON. Nonusable assets are——
Mr. DAWSON. No, they are not used in terms of lending. It would be as if you have stock funds; you say what do you lend against; you would eliminate what you describe as dubious assets and you don't lend against them.
The Fund is a very conservative institution when it comes to lending. At the moment, it has no leverage. It did, in the late 1970's and early 1980's, did borrowing from foreign governments. It has; but they basically loan only on money they draw essentially the same day from the central banks of the usable currency country.
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Mr. SAXTON. Let me go to another question and let me just throw this out for any of you to comment on if you wish.
Harvard Professor Jeffrey Sachs stated, and I quote: ''The IMF needs fundamental reform before being given any additional funding.''
I heard various versions of that from most of the panelists this morning. You are probably all aware that I have introduced legislation with a number of other cosponsors that addresses very serious issues of reform relative to the IMF.
We address the issue of transparency, of moral hazard, and market rates and we address the issue of how you enforce this, which was a concern of the previous panel, the concern of some of the Members on the subcommittee relative to questions asked on the previous panel. So we address the issue of enforcement of these provisions by way of a vote through the Congress.
How do you view this? Do you all believe we should just defund the IMF? Do you believe we should just not give them more money or do you believe, as Jeffrey Sachs does, that it needs reforms before it be given additional funding? Perhaps that ends with a question mark anyway.
Would you like to respond to that?
Dr. LINDSEY. I think the proposed reforms are all very well intentioned. I don't think the IMF will be rushed to carry them out.
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For example, the question of having Mr. Camdessus appear here. I can't imagine that ever happening because if he appears he is subject to appearing before 80 other parliaments around the world. That is just not a precedent they will want to establish.
I think that Tom is probably right; there are not a lot of secrets you are going to find in reading minutes. We have turned over Fed minutes.
Mr. DAWSON. They have many of the same editors.
Dr. LINDSEY. No; ours are verbatim transcripts.
Mr. DAWSON. But they speak their own language.
Dr. LINDSEY. Maybe they do.
What you have is a large bureaucratic institution. The question is to give them enough money to carry out the things for which they are well suited and no more. Like any bureaucracy, they are going to look for new missions all the time. They are a very talented group of people and it is a shame to have them wasting our resources and their own brains doing things for which they are not well suited.
I think it is important to have an IMF, as I said in my written testimony, because there will be occasions you will want speedy action. But this has not been one of those times. If you need to intervene in a market in a matter of hours, days, possibly even weeks, that is one thing. If you are going to be dragging out a country for 7, 9, 12 months over a period of negotiations, we can do it more effectively ourselves and represent U.S. national interests more effectively controlling the money ourselves. So I would limit the IMF to having enough money to act as a temporary provider of liquidity should world markets freeze up, but I would not give them any money beyond that fundamental mission.
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Chairman BACHUS. Yes.
Mr. DAWSON. I don't completely disagree with that. There certainly has been some mission creep, no doubt about that. I think we can disagree as to what is enough. Measured by a lot of conventional standards, quotas as proportion of world trade or whatever is a lot less than it used to be. I think in a post-Bretton Woods I floating exchange rate system, there is no doubt the IMF mission has to change.
The Shultz article. I respectfully disagree. The Fund's articles were enacted after the currency started floating and it was 1978 or 1979, 20 years now, that the Fund would be getting into this business. Extended Fund arrangements, which are the multiyear programs, existed then. But there is a historical revisionism in that. There is always the threat of institutions expanding.
They are a talented group of people. I like to believe, as I whispered to Ed, what was the phrase—''magnificent bureaucracy.'' That is more a translation from the French problem. I don't think it comes across in English quite the way he meant it.
They are a talented group of people. Maybe it is my 4 1/2 or 5 years on Wall Street that give me a different view on the salary issue. I do think by U.S. Government standards it is a lot of money. No doubt about it. But these people have a market value. Indeed I was quite surprised that this year, three economists that I know at the Fund went to a single one of my competitors and each of them are drawing multiple salaries over what Camdessus is getting. But we have to understand in an international bureaucracy, which is what it is, many nationalities that are essentially dealing in finance and economics, you will have a hard time retaining them with U.S. Government pay scales.
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The Fed has raised staff directors' salary somewhat, but they lose staffers to the Fund all the time. But the salaries is an issue that the U.S. opposes. The U.S. opposes salary increases. I opposed them when I was there. I had to fight with my counterparts at the World Bank and regional banks. We are trying to compromise. The U.S. has to hold the line but the salary issue is—education allowance is different—but the salary one is marketed and related salaries will probably be appropriate.
Thank you.
Dr. FEULNER. Thank you.
Mr. Chairman, H.R. 3331 is a very good piece of legislation. I think it moves exactly in the right direction. It requires transparency; the recognition of moral hazard; it answers and looks at the subsidy question; and, most importantly, it exercises Congress' primary ability to affect this institution, which is the power of the purse. It cuts the money off until they answer these very fundamental questions about what their role is, about the mission creep that I have referred to earlier. I think it is exactly the right way.
Mr. NADER. I think that Congress has to realize that the IMF is beyond the effective range of congressional action except the power of the purse. That is in the nature of a global treaty, very difficult to change the structure unilaterally. The power of the purse, however, is a very significant power and it tends to have repercussive impacts on other countries that might not have the courage to go first the way the U.S. might.
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Second, I think it is important to have legislation such as that which you proposed in H.R. 3580 to set standards of expectation and to rally public opinion behind it, even though they are exhortations. It has more to do than that. One of the functions of Congress is to frame the background for public policy and you can't just say, well, because we can't make this mandatory, why even try? I think it is very important to keep at it, even though there are certain limits to its practical impact.
By the way, I might mention in response to Dr. Lindsey before he heads for the plane, if the managing director doesn't want to set a precedent by appearing before the U.S. Congress, maybe he doesn't want the $18 billion either.
Chairman BACHUS. Mr. Dawson.
Mr. DAWSON. I have to say I thank Ed for alerting me to 3331 when I was in Miami with a panel, and my view on this is that an awful lot of this transparency and accountability, either it is there or it can be there easily with additional legislation.
I mentioned Treasury's role and responsibility in particular. I don't want to declare victory in this regard but Congress, with the right follow-through and right issues, dealing in terms of forcing the Treasury to work, can get that information rather easily. I don't think in that sense of the word, fundamental reform is there, because that fundamental information is available. As I stated in my statement, all the documents of the IMF are available to Congress. Those are confidential to Congress and staff, and those who are cleared must keep it confidential. There are no particular secrets there. They are, as I say, wide availability.
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I must take mild objection to the statement that in a sense—I don't think it should be our role to try to make the Fund operations, as was said earlier, more like America.
Mr. NADER. Procedurally.
Mr. DAWSON. I think what is happening in the marketplace in the broad sense of the word is transparency, which are Anglo-Saxon concepts; they are working their way through but taking a front-door mandatory approach to that, which I think will not be as effective. That is why on the voting issue, I have tended to, even though I voted no a number of times, mostly on human rights, terrorism, and those sorts of issues, that that has limited effectiveness when you have 8 or 10 issues and 60 or 70 country programs.
If the Congress should write the prescriptions so tight you have to vote no, you would lose a lot of credibility. If I guess one dozen or two dozen were no votes, by all 24 directors, this is simply a cultural way of how they feel. The views of the United States are well-known and that is why voice or whatever phrase you want to use is the point, but the vote process is, in a sense I think, going in our way and I think there are cases where we need to do that.
I suspect a number of people read the profile of Chuck Engel in The Washington Post. He has some very interesting comments on internationalism and indeed the limits on how much we can make them more like us.
Mr. NADER. I have to really—that is the way I took it, which is unfortunate. If we belong to international autocratic systems of government that are unlike our own procedures which we fought for for 200 years, bit by bit our democracy will be dragged down. It will be adulterated and dragged down. When we have secret tribunals in which there is no public transcript, no conflict of interest applied to the three trade judges; and yet the sanctions on our country, losing such a decision, are quite significant. We are weakening our democracy. We are debilitating our democracy. Human rights and democratic processs we like to think transcend nations. That is the way the world goes forward.
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Mr. DAWSON. The Fund, however, is not the World Trade Organization and the multilateral agreement is not part of the IMF either.
Mr. NADER. But through its structural jobs and positions, has enormous impact; more than GATT has on ordinary poor people in Brazil, Venezuela, and Indonesia.
Mr. DAWSON. Here again, it is hard to prove the negative and Mr. Sanders' comments were in terms of concern for the poor and middle class, much as I do for people in foreign countries. But I strongly believe when you talk about Brazil, Brazil has not had an IMF program for 20 years. That is not a good example. If you talk about the countries in Asia and Argentina, I would not support the Fund if I did not believe the people are better off with the IMF than where they would have been otherwise.
In Indonesia, the Rapaiha was back up to 7800. It could be at 2000 if the Fund weren't there. Depends on where you start counting. Some support 5000. But the effect of the Fund can't be judged by what the situation was simply before it came in, because the Fund comes in when the slide has started and there is a log before the bottom has been hit.
Mr. NADER. Mr. Chairman, this exchange illustrates my criticism of Mr. Dawson's point. ''We are not going to see really stunning materials from the IMF if they are disclosed.'' It depends on how you interpret it. Obviously he doesn't interpret structural adjustment in terms the way I do. I think it is terrible to take an underdeveloped government, force it to convert to cash crops for hard currency, and replace it with vegetables and fruits and other products that are immediately necessary to raise the nutritional levels of millions of people, and he looks at a document like that and says no, this is more important to do it this way.
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The important thing is always watch out for anyone who says to you about a secretive organization that these materials, ''You know, I have seen them, I have talked to people who have seen them, they are not all that stunning.''
It all depends on the perspective you bring to it and which is the constituency you think is a priority constituency. So let the IMF start disclosing.
Chairman BACHUS. I will allow Mr. Sanders now, and I know you could go back and forth and this is somewhat helpful.
I will make two points. First, I think that what we have heard here is that the IMF is not responsive to a lot of policies that we hold very dear, and by putting our full faith and credit and our money behind the IMF we are allowing countries to be financially solvent and operate, which tends for them not to reform. If nothing else, I think we are causing those governments not to reform; whereas if we allowed them to collapse under their own weight, short term it could be very detrimental to the people but long term it may result in truer democracy.
The other thing I would like to say—and Mr. Sanders is waiting—the thing about Congress can see any of these documents it wants to see, it just can't tell anybody what is in them, that is of no value.
You can't discuss them. You can't get public opinion, you can't—there is no accountability there. You are expanding somewhat this secrecy to include Members of Congress, but that is not how we operate in a democracy. That is my view. If it were national security—but that is an abused term.
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Mr. DAWSON. If I could say, the three major Asian programs, every letter of intent was—you never heard any—you may have heard some.
Chairman BACHUS. If we are all agreeing this should be disclosed, fine. But if we were saying the Congressman or Congresswoman or Congressperson can see these documents, they can't discuss them, can't reveal them, can't debate them openly, it is not very effective for us being able to use the documents to argue for change. These are things the public——
Mr. DAWSON. They are given on the basis that the documents are not to be published, but there is no restriction on what you learn from them. I provided the Polish arguments to Mr. Obey's staff and they used them freely. As to whether Jeff Sachs——
Chairman BACHUS. Why not let them have them?
Mr. DAWSON. There is a fundamental problem. The Articles of Agreement state that countries can keep their information secret.
Chairman BACHUS. We can change that. I will allow Mr. Sanders to go on.
We are representatives of the people and if we can't share with the people we represent what we have found, then we are somewhat handicapped in representing them.
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Mr. SANDERS. Thank you, Mr. Chairman. First of all, let me thank all of you. I think the testimony, without exception, was really useful. I would agree with Mr. Nader and everyone else that this discussion, knowledge of the disagreements we have should be going to all the American people. They should be drawn into the debate. What I fear, Mr. Chairman, if we did a poll today, I would be surprised if as many as 50 percent even knew what the IMF was let alone understanding the important issues of how they affect them. I want to thank the Chairman for beginning this process and thank you all very much for coming forward.
Let me ask all of you—Mr. Nader touched on a point which I think was a good one, which is sometimes we have a value judgment when we determine whether something is successful or not successful. For example, the President and corporate America are telling us America is very, very successful, never been this great. Many of us are concerned about the shrinkage of the middle class, high rate of childhood poverty, the average wage, a hell of a lot less than what he made 25 or 30 years ago, and we don't see that as success.
But in terms of the global situation, I am concerned that many IMF structural adjustment programs never see poor people in very, very poor countries. In Africa we have seen cutbacks in health care and education; that the bailout of Mexico, which as I understand is thought by the Treasury Department to be a success because the money was paid back in full, left millions and millions of people in Mexico in dire circumstances; minimum wage is much lower, wages lower in general, and so forth. So let me ask you a simple question. Mr. Dawson touched on it and we may end up disagreeing on it.
The IMF policy in general that goes to a country, we will give you money if you do the following—A, B, and C, often cut back on basic services, open up your economy to foreign investment, and so forth—has it worked, when we know that in countries all over the world poverty has increased, health care has deteriorated, unemployment has gone up, wages have gone down in countries that have been subjected to IMF forced austerity programs? Would everyone please take a crack at that.
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Mr. DAWSON. I would just say, because I am sure you will get attacked from both sides here—and Ed and I are old friends, we have done this in one fashion or another for fifteen years, again working to proving the negative—what would it have been without the program? I have given you my feeling. Voluntarily or involuntarily doing it on their own and not following IMF programs. They give Hong Kong and Taiwan as great success stories, but if you look at them they are IMF-plus programs.
But look at countries that had chosen for themselves in recent years that they will do it on their own: Liberia, Iraq, Iran. I would argue the plight of the people between before and now has deteriorated far, far more and, in my mind, gives an indication of what happens to the country when it chooses not to go through the adjustment process.
The structural adjustment in the development literature has gotten a nasty name. What it amounts to is balancing your books. That is what it amounts to; your fiscal accounts, balancing your current account. That is what it is. It amounts to hopefully cutting defense spending, but I have looked at these programs in the countries that have IMF programs. They don't go in there and say, cut education by 30 percent. They take a budget and work with the government as to how it gets layered down.
Mr. SANDERS. You don't deny that that is often the case.
Mr. DAWSON. That may well be the case. If the country doesn't have the money to do it, the budget overall is going to be cut.
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Mr. SANDERS. And the poorest people will suffer.
Mr. DAWSON. What the Fund tries to do is target safety net assistance to the poor so that broad base subsidies don't continue; they are targeted to the poor, they cut nonproductive, they call it nonproductive expenditures, not defense spending.
Mr. SANDERS. But the United States, the Administration wants to sell military hardware to Latin America; planes.
Mr. DAWSON. I am not in the loop on that.
Dr. FEULNER. On page 9 of my statement. Loans between 1965 and 1995, 48 today are no better off economically than they were before the IMF. Of those 48, 32 are actually poorer than they were before receiving IMF loans.
My friend Tom Dawson and I have debated this, as he said, over the years; but one thing I would certainly maintain concerns Mexico. The effect of the last IMF bailout was basically to wipe out the Mexican middle class. It is gone. Savings were wiped out, education levels have gone down, wages have fallen. Individuals had been saving to go to higher education and now they can't afford it. I know this on a micro basis, I know this through personal friends down there, I know it from looking at the statistics.
Mr. SANDERS. That is a success story, isn't it?
Dr. FEULNER. That is what they say. So the first obligation is to repay the IMF, which is why the IMF is repaid ahead of schedule, so it is a success to the IMF.
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Mr. SANDERS. Poverty went up, and that is presumably a success story. We can never answer your question, Mr. Dawson; it is a chicken and egg in certain circumstances. But I would like to say that I think he makes the very, very important point. We can target the most vulnerable, in worst shape.
Mr. NADER. I think there is another scenario here. Most of these countries we are talking about are dictatorships or authoritarian regimes, political oligarchies connected with powers in the military and in the government. In the same countries there are democratic forces trying to get more justice, trying to get more clean elections, and so forth. What the IMF structural adjustment policies do is to give these dictators and oligarchs an external excuse, rationalized in nice-sounding language, instead of crude domestic greed to suppress the workers and consumers.
Getting rid of consumer subsidy is a life-and-death matter. The price of milk and bread is subsidized. Same for workers who try to form trade unions or uplift their stake in life, and the regimes say, ''This is the IMF, this is what we got to do, this is austerity programs,'' and so forth. And the indentured media plays it out.
So there are different ways to look at this issue. I think a devastating case can be made against structural adjustment impact, but we should see it in terms of the dynamics in the countries, in regard to the forces that are supposed to be what we represent in the world and what they are up against when the IMF and their policies connect with the ruling cliques to counteract these democratic forces.
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I saw this twenty years ago in Brazil, Mr. Dawson, and it wasn't pretty at all.
Mr. DAWSON. No IMF program. Sorry.
Mr. NADER. There was an IMF, AID——
Mr. DAWSON. There was no IMF program; that is my point.
Mr. NADER. We are talking about broader international forces like the IMF, the World Bank, AID in northeast Brazil. It represents many of the same interests. Let's face it.
Mr. SANDERS. But there was an IMF program in Zaire, was there not?
Mr. DAWSON. The last time the Fund—the Fund program in Zaire ceased in terms of lending money approximately fifteen years ago.
Mr. SANDERS. When Mr. Mobotu was ripping off funds.
Mr. DAWSON. Where we sailed into trouble is when the creditor nations, including the United States, pushed the Fund into lending money to a country. That is one of the three I had in mind.
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Mr. SANDERS. But he was pocketing IMF money.
Mr. DAWSON. He was pocketing something, but I am not sure it could be proven to be IMF money.
Mr. SANDERS. Lastly, Mr. Chairman, a point not touched on a lot: Democracy. What does it mean to a small country when the IMF comes in there and says, ''If you need further loans, this is what you are going to do.''?
You may have so-called free elections, but ultimately the most important decisions are going to be told to you by a large outside force of which the United States is the most important member.
Dr. Feulner.
Dr. FEULNER. I think it is a travesty in two regards, Mr. Sanders; first of all, because it is a extraterritorial body imposing its will on the people of that country. Second, the usual way to do that is to in fact impose the pain of the adjustment process, which means higher taxes. Democracy to me has, in effect, two kinds of votes. One is the vote everyone casts when they go to the voting booth and cast their ballot to vote; the other is the vote we cast in terms of how we spend our scarce resources, our dollars, won, or pesos, and by taking away those it is against democracy twice.
Mr. DAWSON. If I could answer Mr. Nader and others without making this a point/counterpoint, 1983 was the last program in which Brazil drew. That was during the previous debt crisis. They had a couple of arrangements they signed but never drew out on. 1983 is the last time the Fund was lending money to Brazil.
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Mr. SANDERS. Which at that point was under what government, military?
Mr. DAWSON. Military. It was after the 1982 debt crisis.
Mr. SANDERS. Lent to a military dictatorship.
Mr. DAWSON. Yes; but if you see what they are doing now, there are a number of dictators there; we have not had a wild outbreak of democracy in recent years.
Mr. SANDERS. First of all, I know that you and our current director worked for the Treasury Department. You should not be blamed for those actions. They come from an Administration you didn't work for.
Let me ask you this question; and I am curious, you correct me where I may be wrong here. Saddam Hussein has used poison gas against Iran; he got IMF money. Were you there at the time? Is that before you?
Mr. DAWSON. I was there, yes, during the Gulf War.
Mr. SANDERS. This was in the 1980's. Saddam Hussein received funding?
Mr. DAWSON. But IMF could not lend money to Iraq. They have never lent money to Iraq. The arrears resulted from SDRs, special drawing rights, the special money set up when the IMF articles were amended, and the international reserve. All members are allowed to basically draw on this and they pay interest on it. When they get the money they pay—let me say, it is an automatic right for every government in the world and most governments pay.
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At the moment, Iraq has about 40 million SDRs in arrears. I think that is the number. It did not come from IMF saying anything about the government of Iraq doing anything right or wrong. They had those arrears. Iraq may or may not want to pay back the arrears. They can't pay them back because of sanctions. The present status in the Fund is probably better than without the United States because if they withdraw from the Fund they would have the right to get their money back. They can't participate in the quota increase.
If the implication is somehow the Fund was coddling Iraq during the Gulf War, the Fund lent billions to countries affected by Saddam Hussein. They did that in response to U.S. leadership. So somehow having this association of funding soft on Iraq is really unfair. By the way, you are not the only one to make that accusation.
Mr. SANDERS. I just learned of this the other day. I appreciate your explanation. Please correct me if I am wrong. You are making the distinction between voting money and drawing money. That is an important distinction. You have an ugly guy who used poison gas for the first time in decades, who was able to draw money. And again this is not, really not, I am not trying to be partisan here; there was not an outburst from the Administration about saying this guy should not be drawing.
Mr. DAWSON. Your staff may have the record of when it was drawn.
Mr. SANDERS. 1986; is that what you say? Staff tells me 1986.
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Mr. DAWSON. Yes; and the SDR allocations, if they used that, then that is when they pay interest.
Mr. SANDERS. The question is what role the United States should play under those circumstances in changing those bylaws.
Mr. DAWSON. That is not a bylaw. That SDR provision was passed by the U.S. Congress. Their right to do that is in this letter.
Mr. SANDERS. We may want to look at that.
Mr. DAWSON. There is no option on that. The Fund observes U.S. sanctions. Iraq won't be participating in Fund activities, you know.
Mr. SANDERS. OK. Thank you very much.
Chairman BACHUS. I thank the gentleman. This will close out the second panel. I very much appreciate your testimony. I have enjoyed this debate.
Mr. NADER. Thank you very much.
Mr. DAWSON. Hopefully again, not five years from now, but before that.
Mr. NADER. In the last hearing on the IMF subject, it was four years.
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Mr. DAWSON. 1992 is the last one I can remember.
Mr. NADER. Six years.
Chairman BACHUS. I agree with our panelists there should be oversight, and there has been oversight of the IMF now.
Thank you.
Our next panel is comprised of Dr. Walden Bello, Focus on Global South, from Bangkok, Thailand—and Mr. Sanders' staff wanted me to note, and I am happy to note, that he was the author of a book several years ago predicting the Asian crisis in quite accurate terms, called ''Dragons in Distress''—and Mr. Ian Vásquez, Director of the Project on Global Economic Liberty, with The CATO Institute. Appreciate you being here. And our third panelist is Mr. John Cavanaugh, Director of the Institute of Policy Studies. We appreciate you gentlemen joining us.
Again as our custom is, we will go from our left to right. Starting with Dr. Bello. We welcome you to the subcommittee.
STATEMENT OF DR. WALDEN BELLO, FOCUS ON GLOBAL SOUTH, BANGKOK, THAILAND
Dr. BELLO. Thank you very much, Mr. Chairman. I would like to thank the Members of the House Banking Committee for inviting me to participate in these crucial hearings. I am also glad and grateful that a representative of the nongovernmental community in Asia is being encouraged to share his views on an issue of paramount importance before a vote of historic international significance.
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Let me also say that I am really very glad that the U.S. Congress is holding these hearings because in her previous incarnation, Ms. Karin Lissakers, before she became the Deputy, in her book ''Banks, Borrowers, and the Establishment'' said that on financial matters only the Congress has an institutional memory in the whole of Washington. I would also recommend that with respect to the issues you are raising here today, her previous book, which unfortunately might no longer be in print, is very significant.
Allow me to state at the outset that the IMF's record in the Asian region does not inspire confidence in the institution nor in the possibility that the appropriated funds will be used wisely. I urge you to vote against the Clinton Administration's proposal for quota increase for the following reasons: First the IMF, by promoting a policy of indiscriminate capital account liberalization among the East Asian economies, has been a central cause of the Asian financial crisis. This is pretty much a truth that is now accepted in the region.
Second, the International Monetary Fund exhibited a remarkable inability to anticipate and predict the financial crisis because it has been imprisoned by an economic paradigm that severely underestimates the destabilizing effects of unregulated global capital markets.
Third, the Fund is imposing stabilization and recovery programs that are worsening instead of alleviating the economic crisis in the region, raising the specter of a decade of stagnation, if not worse.
Fourth, as many have raised already, the IMF is not so much restoring our economies to health as bailing out the big international creditors. By not allowing the latter to face market penalties, the Fund is practicing what many of us in Asia sarcastically term ''socialism for the global financial elite.''
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Fifth, the Fund is being used brazenly by the Clinton Administration as an instrument to promote the bilateral trade and investment objectives of the United States, leading to the weakening of the legitimacy of the IMF as a multilateral institution and to a backlash that could hurt America's ties with the region.
Sixth, the IMF for its own bureaucratic self-interest is preventing the Asian countries from developing innovative responses to the Asian financial crisis that would not be dependent on U.S. taxpayers money.
Finally, replenishing the Fund would promote the Clinton Administration's objective of monopolizing foreign economic policymaking at the expense of Congress, a development that I—though not a U.S. citizen—disapprove of as a partisan of democracy since decentralized, dispersed power provides the best condition for the exercise of democracy.
Let me very briefly touch on a number of these issues. My written statement is here. But I would just like to say that in the last 2 weeks or in the last 2 months, we in Asia have come across news stories about the Fund talking now more about greater transparency, reform, opening itself up to consultation with various social sectors.
The International Herald Tribune just carried an article by Michel Camdessus, the Managing Director, saying that the Fund is now consulting or has now consulted nongovernmental organizations and workers and labor. This is something new and I think that this is mainly coming out of the Fund because of the threat that comes from congressional surveillance. This is something that we have never heard before. I can only correlate that to the pressure that you are exerting because of your threat to use the power of the purse. So I would say that it is in this context that we feel that these hearings are rather important not only for the United States but for those of us in Asia.
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Let me just then very briefly go through some of the reasons why we find continuing funding of the Fund quite problematic. First of all, the Fund was to a great extent responsible for the crisis because of its prescription of liberalizing the capital account of these countries, liberalizing the financial sectors through the inflow of tremendous infusions of foreign capital in the form of bank loans or in the form of portfolio investments that were not regulated before these countries were prepared for it. I think it is fairly clear that consistently over the last few years, Thailand and Indonesia were particularly raised as sort of models by the International Monetary Fund because of the way that they liberalized their financial sectors and they liberalized the capital account.
I think we, for instance, in Thailand—I am not from Thailand, I am from the Philippines—but I have been looking at Thailand fairly closely, there was a fairly highly regulated banking system before the early 1990's. The Fund came in and basically pushed through a series of fairly radical liberalization measures that would open up the country to inflows of foreign capital. There is no problem with this. The only problem, of course—I mean there is no problem with foreign capital. The only problem is of course can a country handle it? Does it have the proper regulatory structures? What happened in Thailand, which the IMF did not foresee, was that a liberalized capital account would, yes, be the conduit for huge capital inflows when there was confidence in the economy, but it could also be the wide highway through which the capital would flee at the slightest sign of trouble. This is what happened in 1997.
It has been pointed out that the Fund was rather late in anticipating this crisis or it did not anticipate it at all. Again this is not a question of information, because it is not that the Fund did not have the information. It had the information. It had the information that there was tremendous capital inflows into Thailand, but it was ideologically blindsided. Why? Because it was not government that was borrowing. As far as the Fund was concerned, if it was government that was borrowing in order to finance its deficits, that was a no-no. In this case, since it was the private sector that was borrowing, there was no problem because of the sense that somehow if it was the private sector, the market would correct anything that would happen that was wrong with this process. So that even though the country's debt skyrocketed from $21 billion in 1988 to $55 billion by 1994 to $89 billion by 1996, 80 percent of which was owned by the private sector, as far as the Fund was concerned, that was OK, there was no problem.
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What happened of course is that yes, there was a market correction but this market correction took the form of a crash and the dynamics of what happened when you leave the private sector completely unregulated, as happened in Thailand, we are now in fact paying for it. Again the Fund, as we say, was sort of blindsided by this, not because it had no information but because it was caught up with an economic paradigm that so long as it was the private sector that was borrowing, there was no problem that would emerge.
Third, I would just like to address the question of the cure at this point. I think many of you have heard from Jeffrey Sachs from Harvard that we have the wrong solution in Asia to what is essentially a private sector problem. What we have is the imposition of an IMF program that basically addresses the problem of the 1980's, which was public sector overborrowing. What we now have is private sector overborrowing and what we have is the same solution as what happened before. What we have is now a regime, uniformly pushed throughout the Asian region, of high interest rates and keeping interest rates quite high. Second is radical cutbacks in government expenditures, in fact pushing governments to run a surplus.
What we see here are several things. I will not go through the details right now. But what we see from Indonesia through Thailand to Korea is the engineering of a recession, and a quite deep one at that. In Thailand, for instance, we expect that the growth rate will be a negative 3.5 percent this year. Some Thai economists in fact say that it will be a 6.5 percent negative growth rate. This is, of course, a situation which people contrast with what the IMF and the United States are recommending toward Japan, which is exactly the opposite, which is more government spending, tax cuts in terms of tax increases, and keeping interest rates low, precisely in response to the same regionwide crisis.
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So that we are asking ourselves, why is the IMF recommending recessionary programs which will result in years of stagnation in the Southeast Asian region and in Korea at the same time that it is encouraging a Keynesian type stimulus, reflationary program in Japan when in fact we are talking about the same regionwide crisis? But the point that I would just like to stress here is that the solution that is being imposed on our countries is a recessionary program, engineered recession that will last quite long, which is why we cannot quite understand what Ms. Lissakers said this morning that they are trying to promote the prosperity of the region when in fact even the IMF does admit at this point that we will have the next few years of recession because, partly, of its programs.
The third point that I would just like to make is the question of the IMF being the credit community's enforcer, to use Ms. Lissakers' word in her book. I think I need not go through this question of moral hazard, but let me just say that to many of us in Asia there is something fundamentally wrong about a process that imposes full market penalties on our private sector while sparing international private financial institutions, indeed socializing the latter's losses. We are not asking the IMF to bail out our firms. We are simply asking for a sharing of the market's punishment for making the wrong decisions. As The Nation puts it, a Thai newspaper, ''The penalties imposed on foreign creditor banks which have lent to the Thai private sector must be precise and applied equally. Thailand and Thai companies may bear the brunt of the financial crisis but foreign banks must also share part of the cost because of some imprudent lending. It would be irresponsible to lay the blame entirely on Thailand.''
This is especially important, Mr. Chairman, because it wasn't just a case of Thai and East Asian banks going to the international creditor community during the period of the boom. In fact, we had a situation whereby the international banks were actively soliciting clients in the region, in fact pushing loans down on us. Let me just quote Asiamoney in 1995 where it puts it, and I quote, ''As a result of stiff competition, pricing levels in many cases are not premised entirely on the financial fundamentals of the borrower. Many banks are anxious to develop good relations with their Thai counterparts and are increasingly willing to lend to build relationships.''
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Again what Ms. Lissakers wrote back three years ago with respect to the 1980's debt crisis also holds now and I just would like to quote her: ''The willingness of the market to lend, not the borrower's ability to pay, became the accepted measure of creditworthiness.'' I think that is the same case in Asia at this point on this question of what is happening right now with respect to the social crisis.
Let me just say that I am glad, Mr. Chairman, and Congressman Sanders, that you have raised this issue of the social impacts, because these are hardly raised in the usual discussions of the IMF Fund and IMF financing. We are facing what is going to be tremendous social crisis in the region. It is now estimated that the economic free-fall in Indonesia has raised the number of people living under the poverty line to 118.5 million from 22.5 million just a few months ago. That is from 11.2 percent of the population to 60.6 percent. The ranks of the unemployed is expected to reach 13 million in the next few months, partly because of the recessionary impacts of the IMF program.
In Korea, we expect that the numbers of the unemployed will exceed 2 million by the end of 1998, or about 10 percent of the workforce. Of course women are likely to be the first to be laid off and women with children are the first to be laid off among women. This will require a great deal of psychological adjustment on the part of a workforce that is accustomed to a system of lifetime employment with no unemployment insurance. That the adjustment is extremely traumatic is underlined by the increasing number of what Koreans call IMF suicides of laid-off workers who also take with them their wife and children to the afterlife most likely because of their worry that no one will be left to provide for them in this life.
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Mr. Wolfensohn in Thailand has just admitted that about 800 workers have been thrown out of work by 1998. We are talking really about a social situation which is likely to lead to a situation of instability in Asia. I think that a number of people have written, including Mr. Kissinger, about the possibilities of this. But believe me, if you go to the East Asian region at this point, and to Southeast Asia in particular, I think you really ought to worry because of the way that IMF programs have been identified with the United States and the way that the IMF programs are going to promote a new round of anti-Americanism in the region precisely because of the way the Clinton Administration has been shown so hard in identifying itself with pushing programs in the region.
Let me just say that one of the biggest myths around these days is the indispensability of the Fund to a resolution of the Asian financial crisis. In fact, the Asian countries did attempt to set up an alternative institution and a process to stabilize the financial situation in the region in the fall of last year, one which would not have entailed additional dollar appropriations by the U.S. Congress. The alternative approach came in the form of the Japanese proposal to establish the so-called Asian Monetary Fund, the AMF, last August. I think it is important to note in this connection that, contrary to the Administration's claim that Japan is not doing anything to help its neighbor get out of the crisis, the Japanese government was willing to put up a considerable part of the resources for this alternative approach. The fund, with a possible capitalization of $100 billion, all of it drawn from Asian countries, was envisioned as a multi-purpose fund that would assist Asian economies in defending their currencies against speculators, provide emergency balance of payments financing and make available long-term funding for economic adjustment purposes. As outlined by the ministry of finance official Eisuke Sakakibara, the fund would be a quick disbursing mechanism that would be more flexible than the IMF by requiring a less uniform and less deflationary set of policy reforms as conditions for receiving help. The AMF had the backing of all the Asian countries, with Taiwan and China being on the same side for once.
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Not surprisingly, the IMF Managing Director Camdessus and his Deputy Stanley Fischer argued against the establishment of the AMF. The stated rationale was that the AMF would subvert the IMF's ability to secure tough economic reforms from Asian countries. The reality was that the AMF would threaten the IMF's monopoly on the making of policy for dealing with the financial crisis. The Clinton Administration without consulting Congress backed the IMF leadership and made considerable efforts to kill Tokyo's proposal. One of the key reasons is that with Congress increasing assertiveness in foreign economic policy, using its power of the purse, the Clinton Administration sees the IMF as an increasingly important instrument to push key initiatives without having to submit them to congressional oversight.
Faced with the Administration's opposition, the Japanese government withdrew the proposal and with that went the promise to commit substantial sums of money. With Japan retreating, the Taiwanese and the Chinese also withdrew their promise to commit their tremendous reserves to dealing with the crisis. So instead of these countries bearing the costs of the adjustment and recovery of their neighbors, the Clinton Administration is now asking you, the Congress, for this money in the form of the $18.5 billion IMF replenishment fund.
In conclusion, I join many of you who recommend withholding the $18 billion from the Fund. The world will not come to an end without an IMF replenishment. In fact, I dare say that with the IMF resources reduced, the Asian countries will be forced to come up with innovative self-help, cooperative solutions, like some revived version of the Asian Monetary Fund, to deal with the financial crisis that would not be a drain on American taxpayers' money.
Incidentally, Mr. Chairman, it is estimated that Mr. Suharto and his cronies have an estimated $100 billion that are stashed away in various places. We in Asia are basically saying why does the IMF have to come in with funds. If Mr. Suharto really wants to save that country, he has the funds, part of it personal funds, to do it. Please do not believe the idea that Asia will collapse. Asians will find a way to deal with the issues. Mr. Suharto, if he wants to remain in power, will find a way to deal with it without IMF money coming in.
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Giving the Fund the replenishment at this time will only allow IMF bureaucrats to dig in their heels against the much needed reform of their structures of decisionmaking and accountability and the urgently needed review of their failed policies. Giving the replenishment at this time will only encourage persistence in economic programs that perpetuate dependence on the Fund and American taxpayers' money rather than promote financial independence. Giving the quota increase will only serve to strengthen the executive's drive to monopolize foreign economic policymaking at the expense of Congress.
Thank you very much.
[The prepared statement of Dr. Walden Bello can be found on page 189 in the appendix.]
Chairman BACHUS. Thank you very much.
Mr. Vásquez.
STATEMENT OF IAN VÁSQUEZ, DIRECTOR, PROJECT ON GLOBAL ECONOMIC LIBERTY, CATO INSTITUTE
Mr. VÁSQUEZ. Thank you very much. I would like to thank Chairman Bachus for inviting me to testify before the U.S. House of Representatives. In keeping with the truth in testimony requirements, let me note that the Cato Institute does not receive Government money of any kind.
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Usually the IMF takes a low profile except when there are riots in major cities of client countries, national currency crises or when the IMF is asking for more money. Unfortunately, all three factors explain the currently high profile of the IMF. The emergency atmosphere of the ongoing Asian financial crisis should not serve as an excuse to approve urgent requests for a massive increase in the IMF's resources.
The IMF has made matters worse in Asia by establishing moral hazard, hindering rapid and widespread reforms, undercutting superior, less expensive market solutions. These are serious charges that require public debate rather than the unquestioning financial support of U.S. taxpayers that the IMF has cavalierly come to expect.
I am encouraged that the Congress is interested in examining the IMF's performance and the ability of that organization to comply with congressional intent. Evaluations of the IMF, however, should not concentrate on reform efforts if those efforts do little or nothing to address the fundamental flaws of the IMF. For the most part, current proposals to reform the IMF and its relationship with the United States seem to fall under that category.
The IMF suffers from a set of internal tensions in its functions and operations that additional funding from the United States and other donor nations will not resolve and that will be difficult if not impossible to resolve even without new funding. Those strains include the IMF's demands that countries be more open versus its own resistance at efforts to increase its own transparency, the IMF's role as an international surveillance body versus its role as an agency that would actually prevent the outbreak of crises, the IMF's bailout function versus its claims to minimize or eliminate moral hazard, and the Fund's insistence on conditionality to recipient nations versus its reluctance to accept any conditions on its own performance when asking for more money from donor countries.
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Those are relatively new concerns that build on the criticisms that many free market economists have long had about the IMF. Indeed, Mexico style crises may have brought much attention to the Fund in recent years but the lending agency's record over the past fifty years has been dismal. The IMF does not appear to have helped countries either achieve self-sustaining growth or to promote market reforms. Keep in mind that in theory the IMF makes loans that are short-term in exchange for policy changes in recipient countries. This has not, however, helped countries move to the free market.
Instead, the Fund has created loan addicts, as a review of its lending reveals. Eleven nations have been relying on IMF aid for at least 30 years, 32 countries have been borrowers for between 20 and 29 years, and 41 countries have been using IMF credit for between 10 and 19 years. That is not evidence of the success of the Fund's so-called conditionality or of the temporary nature of the Fund's short-term loans. The IMF is now demanding transparency on the part of Asian governments whose concealment of financial data is largely responsible for the region's economic crisis. But even as the IMF insists on full and accurate information, it remains one of the world's most secretive bureaucracies. The agency's secrecy undermines its credibility and allows the Fund at the same time to dodge accountability. Openness would surely help to answer some of the most basic questions about the Fund's performance.
How successful has the IMF been in helping countries reform their economies and achieve self-sustaining growth? IMF officials, of course, claim that it has been very successful but they continue to keep many of the agencies' documents, economic evaluations and policy prescriptions confidential. The Fund, for example, has never publicly produced a thorough assessment of its own effectiveness, as has the World Bank. But what if countries did begin to provide the Fund with the data it demands? Could the IMF at least be expected to detect ominous financial developments and offer timely warnings? The Fund, says IMF head Michel Camdessus, should fill that role. But it is useful to recall that the agency was already charged with that mission and utterly failed to alert the world to problems in Thailand, South Korea, Indonesia or the Philippines, a task at which it had promised to perform much better after having failed in Mexico in 1994.
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Instead, the IMF praised all of those economies right up to the outbreak of crisis. Rather than acknowledge negligence or inattentiveness to the impending Asian financial crisis, the IMF has refused to accept responsibility. When asked if the Fund's performance in Asia and Mexico was not evidence of failure, Mr. Camdessus responded like this: ''This is a joke. It is true that Mexico revealed the importance of transparency, but the fact is that we are not suppliers or producers of statistics. These are produced by each individual country.''
One observer put it more aptly when he said that by calling for transparency, the IMF admits that it did not know what was going on. Not only has the Fund shifted blame for its obvious lack of vigilance, it is asking now for the $18 billion in U.S. funding and making the superficially appealing recommendation that the IMF strengthen its role as a watchdog agency that provides an early warning system in case of potential financial troubles.
Congress should of course deny support to any bureaucracy that responds to requests for transparency with smugness. Yet even if the IMF somehow transformed itself, it is unclear how a warning system would work. As one economist asked, who would be warned and when? As soon as the financial community receives a warning that a country is facing financial difficulty, a massive capital outflow is likely to occur, in which case crisis prevention would be out of the question. On the other hand, if the IMF goes into a country and perceives a serious financial difficulty there and does not disclose that information, then it undermines its credibility as a credit rating agency for countries. That appears to have been the case in Thailand where the IMF now claims it issued warnings about the economy before the crisis erupted but kept those concerns confidential.
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The Fund's credibility is further undercut by inherent conflicts of interest. In many cases it would be evaluating countries in which it had its own money at stake. Another problem which has been mentioned, and I won't dwell on, is the problem that IMF intervention establishes moral hazard. This is not something that anybody has figured out how to resolve as long as the IMF continues to lend.
IMF bailouts of Asian countries, I would like to add, are expensive, bureaucratic and fundamentally unjust solutions to currency crises. The Fund's approach helps explain why Fund conditionality lacks credibility and why reform efforts there are unlikely to improve its performance. In the first place, the financial aid that the Fund gives out cuts investors' losses rather than allowing them to bear full responsibility for their decisions. Just as profits should not be socialized when times are good, neither should losses be socialized during difficult times.
Unfortunately for ordinary Asian citizens who had nothing to do with creating the crisis, they will be forced to pay for the added debt burden imposed by IMF loans. IMF bailouts impose another burden on ordinary citizens because they don't work very well. The Fund's money goes to governments that have created the crisis to begin with and who have shown themselves to be unwilling or reluctant to introduce necessary reforms. Giving money to such governments does not tend to promote market reforms. It tends to delay them because it takes the pressure off of governments to change their policies.
Rather, the suspension of loans is far more effective at promoting market reforms and concentrating the minds of policymakers in troubled countries. The reason, after all, there is any talk today of market reforms in Asia is not because the IMF has shown up and suggested it is a good and necessary thing. That is fairly obvious. It is economic reality that is forcing the long needed changes. To the extent that the IMF steps in and provides moneys, those reforms will not be as forthcoming. Thus, the citizens of recipient Asian nations suffer the added burden of IMF intervention. Not only do they pay a greater debt but they also have to suffer prolonged economic agony that is produced by the IMF's bailouts.
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But what about the Fund's strong conditionality? Don't the strict conditions of IMF lending ensure that the important policy changes will be made? Again, the record of long-term dependency suggests that this conditionality has not worked well in the past. But besides the Fund's poor record, there is good reason why the IMF has little credibility in imposing its conditions.
As we have seen with Russia over the past several years, a country, especially a highly visible country, that does not stick to IMF conditions risks having its loans suspended. When loans are cut off, recipient governments tend to become more serious about reform. Note that the IMF encourages misbehaving governments to introduce reforms by cutting loans off. It is the cutoff of credit that induces policy change. Unfortunately, when the policy changes are forthcoming, the IMF resumes lending.
Indeed, the IMF has a bureaucratic incentive to lend. It simply cannot afford to watch countries reform on their own because it would risk making the IMF appear irrelevant. The resumption of financial aid starts the process over again and prolongs the period of reform.
The Fund's pressure to lend money in order to keep borrowers current on previous loans and to be able to ask for more money is well documented. The IMF's bureaucratic incentive to lend is also well-known by both recipient governments and the IMF itself, making the Fund's conditionality that much less credible.
Let me just note that IMF bailouts also undermine superior, less expensive market solutions. No amount of IMF reform in that area short of an end to its bailout function can change that reality. In the absence of an IMF, creditors and debtors would do what creditors and debtors always do in cases of illiquidity or insolvency. They renegotiate debt or enter into bankruptcy procedures. In a world without the IMF, both parties would have an incentive to do so because the alternative, to do nothing, would mean a complete loss.
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Because the IMF suffers from an array of inherent tensions in the way that it operates, that it causes more harm than good once a crisis erupts and undermines superior market solutions, we should not allow superficial reform proposals to serve as a distraction from the Fund's fundamental flaws and to lead us into believing that its severe shortcomings will somehow be overcome.
If Congress wishes to continue supporting the IMF, the most important reform it can pursue, but one which may only make a marginal difference in the Fund's effectiveness, is that of increased transparency at the lending agency. The U.S. Government and the U.S. public are entitled to know what advice the IMF is giving countries, when it is giving that advice, under what financial and policy conditions is the Fund providing support and what exact criteria the IMF will use to measure whether a country is successfully reforming or merely delaying comprehensive market reforms.
The Fund should also publicly identify those institutions, public and private, in recipient nations that are receiving its subsidized finance. In practice, that means that IMF documents, including economic evaluations, policy prescriptions, letters of intent and other memoranda, be made public. The Fund should also allow outside auditors to assess the quality of IMF loans and to conduct full evaluations of the IMF's lending record.
At the very least, more transparency would provide for a more informed public debate and in theory would make the IMF more accountable. There is, however, no reason to believe that the IMF would noticeably improve its performance or significantly change its behavior even if much damning evidence came to light under such reforms.
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After all, Washington's other multilateral lending agency, the World Bank, already conforms with many of the stipulations some are suggesting for the IMF. The World Bank's operations and evaluations department and other internal reviews have for years consistently turned up self-admitted dismal performance. These have resulted in reforms and promises of reforms, but no noticeable improvement in performance.
Congress should expect the same experience from the IMF bureaucracy if it attaches demands for transparency in exchange for continued or increased financial support. Congress, moreover, may ask the U.S. Treasury Department to report whether the IMF is complying with congressional stipulations, but Congress should not rely on the Treasury Department to provide adequate assessments. Because the Treasury Department, through the U.S. Executive Director at the IMF, has influence over the use of IMF funds, it is in its bureaucratic interest to maintain and even increase those resources under its influence. The Treasury department has long supported the prerogatives of the IMF regardless of whether U.S. administrations have been conservative or liberal. Treasury's recent and disingenuous claims that funding the IMF does not cost U.S. taxpayers a dime is only the most recent example of its virtually uncritical endorsement of IMF lending activities.
Finally, it is worth noting that the global financial system could improve in a number of ways. Countries do need to increase the transparency of their financial institutions and disclose economic data. I think that financial deregulation and openness to foreign investment in the financial sector and other sectors would reduce instability and promote prosperity in developing countries. Establishing bankruptcy rules and the rule of law would also help. In general, economic liberalization will help promote prosperity and stability in the global economy. But all of those reforms can be unilaterally introduced by developing nations. Such policy change does not require IMF intervention. Reforms at the IMF which promise little are thus a distraction to the important task developing countries are more likely to undertake without IMF money and advice. The conditionality that Congress attaches to increased funding of the IMF is, in any event, likely to be about as effective as IMF conditionality itself.
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Thank you.
[The prepared statement of Ian Vásquez can be found on page 198 in the appendix.]
Chairman BACHUS. Thank you.
Mr. Cavanagh, I appreciate your attendance. You are from the Institute for Policy Studies.
STATEMENT OF JOHN CAVANAGH, DIRECTOR, INSTITUTE FOR POLICY STUDIES
Mr. CAVANAGH. Thank you very much, Mr. Chairman. I will be mercifully brief. I remember from education experts that the average attention span of a human being is about 20 minutes. Therefore, nothing of what I am about to say is likely to be remembered by anyone in this room 24 hours from now. But it will be in the record.
My institute has been studying the IMF for some 20 years, a lot in collaboration with organizations like Dr. Bello's. In 1985, I coauthored a book entitled ''From Debt to Development.'' I am struck, in looking back at it, on how unfortunate it is that a statement we made thirteen years ago still seems true. This was the statement:
''The IMF approaches its patient in much the same fashion as the medieval doctor. Regardless of the disorder, leeches are applied and the patient is bled. At best, the remedy supplants the original disorder with a new agony, often more lethal than the original.''
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This critique of the IMF, as you have just heard from Walden Bello and from others, is now widely shared throughout the developing world, most recently in the countries that no one thought could be afflicted by this kind of crisis, the so-called tigers of Southeast Asia and East Asia.
For years now, it has been as long as I have been here, so for fifteen years, organizations of environmentalists, trade unions and other citizens groups from around the world and here in the U.S. have attempted to reform the IMF. I would note that this current debate you are having is but one of four major debates in the past decade. I would like in my few minutes to share just a couple of lessons, I think, from those debates, because I think there is some very clear evidence about what works and what doesn't.
What works, I think, is to pull something right out of the IMF's bag of tricks. Over this past century, I think they have become very effective at imposing their version of development on client nations. They do it because they give money in what they call a French term, I guess originally, in tranches. They give a country a portion of the loan, they wait to see if there are desired results and only then do they release the next portion of the money.
I would note in your reform efforts, you have only tried this once in the past ten years. By the way, a terrific history of this, and I won't go into it in any detail, is in the statement provided by Marijke Torfs of Friends of the Earth, who is really our historian in Washington of the IMF. What she points out is that in 1994, citizens groups and a number of Members of Congress were particularly concerned around the issue of secrecy and transparency. Hence, as part of the 1994 appropriations bill, Congress actually reduced its contribution to one IMF facility and made it clear that the remainder of the contribution would be forthcoming only when the IMF showed progress on the secrecy front. This is the one recent instance where the IMF actually took the U.S. Congress' concerns to heart and actually took real steps in disclosure of information.
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I was struck this morning, Mr. Geithner was trying to emphasize the steps they have taken around transparency and secrecy. What he did not mention was they did it when money was threatened. By contrast, and these have been referred to several times this morning and this afternoon, there are three major recent instances where the U.S. Congress passed language asking the U.S. Executive Directors of the Fund to use their voice and vote to advance social and environmental ends, first in 1989 on the environment, in 1992 on poverty and in 1994, thanks to Congressmen Sanders and Frank, around worker rights issues. As several have detailed here, as Ms. Torfs' statement also details, none of these three reform efforts resulted in any change of behavior at the IMF. I think there is no reason to believe, unfortunately, that any similar voice and vote effort in 1998 will meet any more successful end.
I should say I think it is important to share this history broadly in the Congress because I think there is an illusion that voice and vote will work and I think there is not adequate understanding that the one time you actually used money to threaten change, there was change.
The other brief point I wanted to make, it is an extension of the comments that Congressman Sanders made this morning, is that while workers in Asia, as Walden Bello has pointed out, are suffering desperately and as workers here, it has been projected conservatively by the Economic Policy Institute that 700,000 U.S. jobs are at stake because of the mishandling of the Asian crisis, there is one group of people who are making out like bandits and those are the CEOs of the banks that lend in Asia. As we have already pointed out, several people have, the IMF in essence has bailed out banks that made very bad decisions there.
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My institute has just carefully studied the six big U.S. banks with the largest outstanding loans to Asia. These are the institutions that jointly have $19 billion in loan exposure to the four countries that have gotten IMF agreements since last June. The banks are doing great. We have just gotten this month the proxies of the CEOs of these six banks. The reward system has been passed down to those CEOs. The top executives at each of these six banks did very well in 1997. In terms of salary and bonus alone, these banking executives enjoyed an average increase of 18 percent in their salary and bonus over 1996. The IMF bails out the bank, the banks bail out their CEOs, working people suffer everywhere.
Let me conclude with just a couple of thoughts on what should be done. I would join Ralph Nader and those who earlier have called for a continuation of this debate in other fora here. As you do it, I would encourage you, I know the issue before you right now is IMF money. But I think you have a terrific opportunity to address some of the broader issues that would get at the roots of this crisis, as Dr. Bello has spelled it out.
We need serious hearings on international measures to address the explosion of short-term capital flows and currency speculation, and there are good solutions out there. We need careful thinking about local, State and national measures that can be taken to address short-term flows and currency speculation. We have not talked here today about countries like Chile which have controls and which are weathering the storm much better.
Finally, on the IMF, I would simply say that the IMF has become a prisoner of an outmoded view of economic medicine, and the fallacy I must say that what works for one nation works for all. It should be opened up to a fundamental review. The only way you will get a fundamental review is by withholding some funds.
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Also, by the way, this stealth proposal to amend the IMF Articles of Agreement to give the Fund even more power over private capital flows should of course be rejected out of hand. We must use this moment of crisis as an opportunity for fundamental reform.
Thank you.
[The prepared statement of John Cavanagh can be found on page 189 in the appendix.]
Chairman BACHUS. Thank you. I want to compliment each of you. I have learned quite a lot just by listening. It is so much to absorb, I am not sure I have any questions. But it was excellent testimony. My only regret is that we did not devote a morning to this panel and focus on it. You have really put things together well for me.
Mr. Sanders, do you have any questions?
Mr. SANDERS. I concur. We thank all of you for your thoughts. I also have learned a great deal. Let me just ask a few questions.
Let me start off by giving you a provocative quote and see what you would like to say about it because I think it says a lot and maybe touches on something that all of you have talked about and Dr. Bello went into at some length. According to a January 15, 1998 International Herald Tribune article, ''Speaking to the Confederation of British Industry in London recently, Mickey Kantor, the former U.S. Trade Representative, said the troubles of the tiger economies should be seized as golden opportunities for the West to reassert its commercial interests.''
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The article continues, ''Such comments heighten the suspicion that the rich countries are using the IMF rescue packages to their own advantages.''
Comment. Now, if you are sitting in Asia and you have suddenly been unemployed or you are now going hungry and you read Mickey Kantor's statement that this crisis should be seized as golden opportunities for the West to reassert its commercial interests, what does that say?
Dr. Bello.
Dr. BELLO. Let me just say, Congressman Sanders, that this view now is widespread, that the Fund is being used by the United States to push through bilateral investment and trade objectives which it has been trying to push through for over a decade, since 1983, around what it calls opening up the Asian economies. What has happened is that people have been watching not only what Mr. Kantor has said, but what the United States Trade Representative Charlene Barshefsky has openly stated before Congress and what Mr. Rubin and others have stated before various audiences about the way that they see the IMF programs as providing the opportunity in fact to transform Asian economies along what they call a more Americanized direction. Indeed, the Financial Times had a reference to this recently about the so-called Americanization of the Asian economies.
So what is happening here is, and I would like to call attention to something I did not quite say during my talk because it was in the prepared statement, is that this is the sort of very manipulative view of the Fund that I think is going to provoke another round of anti-Americanism in the region, that somehow the sense that what the United States could not get through GATT, could not get through APEC and could not get through bilateral trade measures, it is now using through the Fund.
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So I think there are two dangers happening here. One is the Clinton Administration's use of the Fund threatens the stability of United States relations with the Asian region. Second is that the image of the Fund that now comes across is as an instrument of the U.S. Treasury Department and of the U.S. Trade Representative so that its ability to be a really multilateral institution is diminished.
The third thing that I would just like to say here, and I believe this goes right to the heart of this debate, is that I think that Congress through disapproval of Fast Track, through more and more surveillance of different economic and trade initiatives, has been reasserting itself in terms of foreign economic policymaking. The reason that I sort of, as somebody who has looked at this issue, the reason that the Fund is extremely important to the Clinton Administration is that it is a multilateral instrument that it can use that does not have the sort of congressional oversight over policies, because what we see is a very close correlation between the U.S. Treasury Department and what the Fund wants.
Sometimes we sort of laugh when the Treasury Department begins to retreat behind the fact that this is really an institution that we can't tamper with because it is owned by 182 countries. But, indeed, I think if you look at this situation fairly closely, the United States does exercise tremendous power here, not Congress, but the Executive. This is why I think that this is part of the reason why they are fighting so hard the power of the purse of Congress, particularly over this replenishment.
Mr. SANDERS. What I would like to do is ask Mr. Vásquez a question and then Mr. Cavanagh a quick question if I might. I noted with interest, Mr. Vásquez, that you referred to a number of countries now who are IMF recipients as ''loan addicts.'' I think the evidence is fairly clear that from 1982 through 1990, debtor countries in the south paid their creditors in the north $6.5 billion of interest and another $6 billion in principal payments every month. The irony is that by 1990, the debtor country debts were 60 percent greater than in 1982. What am I missing here? If you are in debt, you come to me, right? I am going to lend you money. If at the end of the period you are more deeply in debt, does that not suggest that this program is not working terribly well in trying to make you an independent country?
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Mr. VÁSQUEZ. I mentioned the record of aid dependency that the IMF has created. If you look at almost any African country, you see that some of them have been relying on IMF for decades and you have seen little in the way of policy reform or any other types of reforms there. In fact, that is one region in the world where the debt has increased to such an extent that the latest evidence of IMF failure is efforts at the IMF and the World Bank to establish a debt reduction facility, which is an implicit admission of the failure of past loans without actually saying, ''Here, we lent these countries massive amounts of loans over the past several decades and they haven't worked.''
Mr. SANDERS. In other words, despite having received all of these loans, they are now more deeply in debt than before the process began?
Mr. VÁSQUEZ. That is right. So that is the latest evidence of the failure of IMF lending. I would also add that there is a bit of financial shenanigans going on with that particular initiative. Because instead of simply forgiving the debt and not lending additional money in the way that it tends to do, the IMF and the World Bank are creating a separate lending facility to lend money to those countries so that those countries pay back their arrears and make it seem as though there was never any debt forgiveness, and in that way make it appear that the IMF and the World Bank actually had financially sound loans. This is a shell game.
Mr. SANDERS. Thank you. Let me ask you, Mr. Cavanagh, because you have touched on, I think, a very important point. We have been talking about the IMF and the United States Congress all day long. Yet I note that it was interesting, there was a national article, at least reprinted in one of the Vermont papers, which talked about how big business is exerting all of their enormous pressure on Congress to get this $18 billion replenishment passed, AT&T and all of those guys. They think it is just terribly important that this IMF replenishment—the article was actually in The New York Times. ''Business Groups Press for $18 Billion for IMF. They Seek More Money for Asian Bailout.''
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Let me ask you a very tough question. Why is it, do you think, that our friends at the multinational corporations whose salaries are 200 times higher than their workers, who are enjoying huge profits, think that the taxpayers of this country should come up with another $18 billion?
Mr. CAVANAGH. That is a very tough question. We are releasing, by the way, on Thursday a report that shows it is now 326 times, the average CEO pay over the average worker's pay. I think it gets back actually to the quote you started with with Dr. Bello. I think it is a crucial point. I think maybe perhaps, if I could be critical of one approach of the opponents of IMF money, all of the emphasis has been on moral hazard with banks. Clearly banks are one of the sets of institutions that are being let off scott free. The corporate interest in these IMF bailouts are beautifully summed up by that Mickey Kantor quote. Big U.S. corporations have been dying to get into Asia. The Asian countries have been the most restrictive of foreign investment, countries like Malaysia, South Korea and others. This crisis offers the opportunity to bash down those barriers and get U.S. companies in there and take over Asian assets.
What is disturbing here is how much the U.S. Treasury Department is making its policy with those interests and banking interests in mind.
Let me end this by just noting a forthcoming article that I have just seen a draft of in Foreign Affairs. It has a beautiful analysis of this by Jagdish Baghwati, who is one of our great foes in the Fast Track lane. He is a pure free trader. He is now horrified at the explosion of private financial funds around the world. He thinks that there needs to be a stop to this, and he refers in this article, it is quite stunning, in Foreign Affairs, the magazine of the Council on Foreign Relations, as ''the U.S. Treasury clique.'' The fact that so much of the U.S. Treasury Department is dominated by Wall Streeters, and I think that is where policymaking has gotten out of hand and it is where you have an extra responsibility here in the U.S. Congress to represent the interests of ordinary people.
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Mr. SANDERS. Mr. Chairman, I want to thank all three of our guests for their excellent testimony.
Chairman BACHUS. I do have something that I read earlier and I was thinking how it is consistent with what we are talking about, and it is from The Heritage Foundation and I think it shows that there is some agreement here from the conservative, from the liberal, from the middle of the road that we are all seeing more of the same thing, that IMF bailouts and loans are extended at highly subsidized rates and are the equivalent of a massive transfer of wealth from taxpayers of the United States and other countries. For example, the IMF extended most of its loans to Indonesia, South Korea and Thailand at subsidized rates at 4.5 and 4.7 percent. By contrast, these same countries were required to offer approximately 14.5 percent on comparable government bonds to access credit in the private sector.
And then it quotes a Wall Street Journal article by David Sachs and Peter Thiel which said in over three years South Korea, Indonesia and Thailand will have received a direct wealth transfer of at least $35 billion, mostly from the United States and Western European taxpayers.
You know, that is only part of the picture, though. That is the money going over, but then as Dr. Bello said, it is not going to governments who are in distress, it is actually going to private investors who have invested in those countries. The money continues to turn around and come out of those countries, leaving really the middle class here and the middle class there impoverished, and the investors and the institutions who have charged large interest rates, they are the only ones that have basically not paid the penalty, and it was they who made those investment decisions, participated in them, made money off them and yet they are made wholly at the expense of the people in both countries who did not profit from these investments, did not participate in these investments, and it has been described as a ponzi scheme, but the last one holding the bag are the people who did not participate in any way.
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Mr. CAVANAGH. Very well put, and if I can add just one final piece to that very sad story, the ultimate beneficiaries being the CEOs of the banks and the companies who made the loans. They now have a loophole.
You all tried a few years back to cap the deductibility of CEO pay. They figured out a loophole that said they could continue to pay exorbitant salaries to CEOs if it was performance based. They now define anything as performance based, so the taxpayer gets stuck one final time as the CEOs of these big banks and corporations reap record salaries.
Chairman BACHUS. I always wondered why people who believed in the free market suddenly believe in this approach, and it is getting clearer and clearer. It is because they profit from this approach.
Let me ask you one final question, Mr. Cavanagh and Dr. Bello. We have been talking about environmental issues. Quite apart from these hearings the Congress and the people of the United States are more and more concerned about the rain forest and the destruction of the rain forest.
I note that the two largest rain forests are in Southeast Asia in Indonesia and Thailand, and in the case of Indonesia and Thailand, to a certain extent those are the rain forests that have had the greatest percentage of loss over the last ten years.
In fact we have directed and I'm going to introduce at this time something that Mr. Sanders requested, and it is a report dated April 15, 1998. We can introduce it later, called ''The IMF Voice and Vote Amendments,'' a compilation which you referred to, Mr. Cavanagh, in your testimony.
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[The information referred to can be found on page 89 in the appendix.]
Chairman BACHUS. In here on several occasions we direct the IMF to look for environmental concerns to enforce environmental policies which are in the best interest of the people of the United States, one of which clearly would be preservation of the rain forest. I have a question about the loans in these two countries which have the largest rain forest in Southeast Asia; and I give you a step further, the two South America countries which people say may come to the IMF next, they happen to have the largest rain forest in the Americas; and Zaire, which we at one time had a relationship with. Was any of our voice and vote heard in any attempts whatsoever in these agreements to preserve the rain forest?
Mr. CAVANAGH. The only thing that we have seen a change in is the rhetoric of IMF officials. They now know how to speak the term ''sustainable development,'' but so long as the core of their agreements remain export more and spend less, and in most of these countries exports mean the plunder of natural resources, and in the case of Indonesia, Thailand, Brazil and Mexico, that means the plunder of the world's last remaining rain forests, as long as that is the core of their agreement, they will be the principal architects of the destruction of those forests.
Chairman BACHUS. Go ahead.
Dr. BELLO. Yes, Mr. Chairman, when it comes to the case of Thailand and Indonesia, for instance, when we are talking about recessionary programs that are engineered because of the emphasis on high interest rates and cutbacks in government expenditures and a bigger push for what they call exporting your way out of the crisis, what this means is tremendous pressure on the rain forests because what it means is that the unemployment in the cities is going to drive workers out to put more and more forested land under cultivation or exploitation or illegal logging.
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So the crisis in the cities is going to translate itself into tremendous pressure on the rain forest, and if you are going to have as a component of your program an emphasis on more and more exports and your manufactured exports are not increasing that much, what it means is you are putting more and more pressure on this country to cut down their forests. So that it is not surprising that the Philippines has been under an IMF program for about 35 years. It has also been during this time that we have practically lost all of our rain forests.
Just last week the Philippine administration lifted a 10-year-old ban on the export of timber or logs, which had been put there because we lost so much of their forest. When they were asked why they did this, they could not explain it except to say that they needed more export earnings. And this is an emphasis on what we call a new IMF program, a precautionary program with the IMF, which has pushed the Philippine government to increase its export earnings as its way of dealing with the financial crisis.
So I would agree with Mr. Cavanagh that they now are speaking the language of sustainable development, but the whole macro impacts of their programs are so devastating in terms of the environment, and I think Mr. Geithner and Ms. Lissakers did a very great disservice today when they said that the IMF has already been consulting nongovernmental organizations, people's organizations and workers' organizations when they were designing these programs. In no case have these organizations been consulted in the three large programs of Korea, Indonesia and Thailand.
We asked to be consulted. We weren't consulted, both in Thailand and in the Philippines. So I would just like to say that the rhetoric being pushed here and the reality of consultation is not happening. It is very different.
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Chairman BACHUS. I wonder if environmental groups have been consulted because we have made the decision to make the investor whole, and to do that you are going to have austerity measures. You are going to have to increase your imports. As you say, the natural resources of the countries are going to be depleted as opposed to processes of bankruptcy and people who took the risk assuming the loss.
Mr. CAVANAGH. Environmental groups have not been consulted, and one last obscenity of the Indonesia program which ought to be a scandal is that program actually encourages the spread of palm oil plantations as part of its export drive and it is the palm oil plantations, again big corporations, which have been the biggest source of forest fires in Indonesia, which is destroying record amounts of rain forests.
Chairman BACHUS. Actually some of these loans are going to prop up those investors?
Mr. CAVANAGH. To prop up those investors, exactly.
Chairman BACHUS. I would think that the environmentalists——
Mr. CAVANAGH. They are up in arms, but they are not being heard officially by the IMF.
Chairman BACHUS. I would think that the American taxpayer, that obviously their best interests are not in a policy that would destroy these natural resources. We are actually promoting with our money something that is very much against our own self-interest.
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Thank you very much.
Mr. SANDERS. Thank you all very much.
[Whereupon, at 3:05 p.m., the hearing was adjourned.]
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