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THE ADMINISTRATION'S FISCAL YEAR 2000 AUTHORIZATION REQUESTS FOR INTERNATIONAL FINANCIAL INSTITUTIONS

WEDNESDAY, APRIL 21, 1999
U.S. House of Representatives,
Subcommittee on Domestic and International Monetary Policy,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. Spencer Bachus, [chairman of the subcommittee], presiding.

    Present: Chairman Bachus; Representatives Ose, Paul Ryan of Wisconsin, Biggert, Waters, Frank, Schakowsky, and Moore.

    Also Present: Representatives Sherman, Inslee and LaFalce.

    Chairman BACHUS. I call to order the Subcommittee on Domestic and International Monetary Policy. Today we convene the subcommittee to assess the Treasury Department's Fiscal Year 2000 authorization requests for the international financial institutions. These requests are important because of the increased impact of the international markets on the economic health of our economy. American businesses have strong and profitable presence abroad, but as Chairman Greenspan and others have testified before our own committee, America's economic well-being could be jeopardized by adverse developments overseas.
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    Indeed the global economic crisis that began in 1997 has not been resolved. Many dangers still exist internationally that threaten our Nation's prosperity. For this reason it is imperative that our international financial institutions are a part of the solution, not part of the problem.

    The subcommittee takes seriously its legislative and oversight responsibilities for the IMF, the World Bank, and other multilateral financial institutions. These organizations have a dramatic effect on the course of the international economy, and we are here today to examine ways to improve their performance. Reform of these institutions is a necessary and continuing process.

    I am pleased that the Clinton Administration has sent the able Dr. Larry Summers, the Deputy Secretary of the Treasury, to present the Administration's budget requests for the multilateral financial organizations requiring authorization this year. Foremost of these requests is $2.4 billion for the International Development Agency, which is the concessional loan facility for the World Bank. Only the poorest of countries, those with a per capita GDP of $925 or less, may receive IDA loans. Currently almost half of these loans are in Africa.

    Also up for reauthorization are the African Development Bank and the African Development Fund. These institutions are an important part of Africa's hope for real and sustained development.

    I look forward to hearing from Dr. Summers and our experts on development assistance and the desperate need for sustainable development in Africa.
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    The request for about $120 million in debt relief is another important aspect of this year's authorization. Only the $50 million request for the Heavily Indebted Poor Countries Trust Fund is before this subcommittee.

    As you know, I have cosponsored with Ms. Waters and other Members of this subcommittee—in fact, I think Mr. Frank is lead cosponsor—a legislative proposal for debt relief, H.R. 1095. This country is blessed with an abundance of resources and is enjoying a period of extraordinary prosperity. I and others in this body think we have a moral obligation to help our fellow human beings help themselves to a better future. I look forward to a constructive discussion with Dr. Summers and the Treasury Department on this important issue over the next months.

    This subcommittee has two other very important authorization requests regarding debt relief that do not require any money expenditures. The first request is for an authorization to transfer up to $300 million of the IMF's Special Contingency Account to the HIPC Trust Fund. The second is for authorization to sell between 5 and 10 million ounces of IMF gold reserves. The proceeds, up to $2.5 billion, would also be made available for debt relief.

    Many of the gold producers and gold-producing States have expressed serious reservations about the possible adverse reaction in the gold market to a large-scale increase of gold sales. Let me say that I feel Congress must decide whether it is in our national interest to authorize the sale of gold. Though I am sensitive to the need to avoid unnecessarily or unduly affecting prices on the gold market, I look forward to hearing from the Treasury and hearing its arguments why it is in the best interest of the United States to sell gold to fund debt relief. At the same time, if this is in the best interest of the country, then so be it.
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    In addition to funding, HIPC funds from any gold sales could also be used to permanently fund the Enhanced Structural Adjustment Facility, or ESAF. ESAF is used by the IMF to provide concessional loans to developing countries on the condition that the debtor country undertakes a multiyear macro-economic structural adjustment program. The purpose of the structural adjustment loans is to promote budget and fiscal reform in the debtor countries.

    We will hear from a number of witnesses about their concerns about the effectiveness of ESAF as a debt relief mechanism. Indeed, we will hear from some who say ESAF actually injures the very poor countries it aims to help.

    Several Members have expressed to me their concern about permanently funding ESAF. Congress represents the people of the United States and has a responsibility to continually review the performance of ESAF in light of America's interest and humanitarian concerns. Since permanent funding might weaken our ability to perform such oversight, this proposal, quite frankly, in my opinion, faces an uphill battle. This and other issues are important matters for the subcommittee to consider and deliberate, and I look forward to hearing everyone's views. Thank you.

    With that, are there Members of the subcommittee who wish to make opening statements?

    Mr. Frank.

    Mr. FRANK. Thank you, Mr. Chairman. I was very pleased to hear your articulations of our moral obligation as a wealthy society to help with the distressing conditions in which so many people live. I think all goes well for our being able to cooperate to a great extent here. I also want to join in your skepticism about anything that would put ESAF on a permanently funded basis diminishing our ability to have an impact on the policies there. So I very much appreciate the tone of your statement.
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    I want to say that I think this is about as important an issue as we will deal with in this Congress. Alan Greenspan last week on Friday made a speech in Texas lamenting the growth of resistance in America to globalization and conceding, which I must say is an advance, because when this debate over globalization began, people on that side were reluctant to make the concession, but he conceded there are going to be both winners and losers. His point was overall our economy, as other economies, will be a big winner, but he did concede that there will be losers.

    We, as a country, and the world have to do a better job of dealing with the losers in this globalization process if people expect to maintain the political support for the process to go forward. It will not do to tell people who are losing their jobs, or seeing programs on which they depend in other countries, or who see their food prices going up and their jobs losing out, it will not do to preach to them the intellectual virtues of Schumpeter's concept of creative destruction. They are not going to sit by and support their own destruction, whether it is creative or non-creative. The adjective does not modify the noun in any significant way in this case.

    Mr. Greenspan made an elegant plea, but he left out something which is that there is going to have to be some tradeoffs and some compromise. It is important to acknowledge there are losers. It is even more important to acknowledge that we have the resources as a wealthy society, as the Chairman mentioned, to help the losers.

    Now, that is important both domestically and internationally. It means that internationally we have to take into account the adverse social consequences of some of the policies, and one of the things that the people who have been running ESAF will have to do is rebut charges that they have historically been socially insensitive. And I understand that they are well-intentioned, and I understand that they are pushing policies that they believe will benefit people in the long run, but more relevant than Schumpeter's concept of ''creative destruction'' is Keyne's insight that ''in the long run we shall all be dead,'' and when it comes to the political impact of these sorts of things, citizens understand that. They are not interested terribly in the long run if it means that that is a rationale for them sustaining social damage in the short run.
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    This is relevant, because I believe no issue is more important for the stability of the world, for humanitarian considerations. No issue is more important if you are going to gain support for globalization. The only way to refute the kind of sentiments that Alan Greenspan was deploring in his speech on Friday is to convince people who represent working people and poor people that we have a globalization policy that responds to their real needs. So this is very important.

    Getting international debt relief done well is important if you want to assemble the kind of coalition that Alan Greenspan is looking for, because there are people here, people sitting on this rostrum, who will not be supportive of a global integration policy economically unless we can be assured it will be more socially responsible, and a good responsible debt relief policy is a very critical piece of that. So I am looking forward to this hearing. Intellectually it is a very important one.

    The last point I want to make is this: We in this Congress will be besieged for the next few weeks with terrible decisions about Kosovo. I am essentially in support of the policy, because I do not think we can sit idly by and let innocent people be killed. But let us also note that more people will die of AIDS in Africa over the next couple of years than will die in Kosovo, and the deaths of people in Africa from AIDS are avoidable. We have medical treatment now which can substantially diminish the death rate for AIDS, but that might as well not exist for the average African where AIDS is at its worst.

    So we are dealing here with moral concerns as well as self-interest concerns that are great or greater than anywhere else. Yes, we ought to try to stop people from being butchered, but we also, if we have a moral obligation to go to the aid of people in need and to protect children from severe mistreatment, have an obligation to prevent poor children from being quietly, slowly, but irresistibly killed as well. And that will happen if we do not adopt international economic policies that are reflective of these goals.
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    Mr. Chairman, again I thank you, and I am heartened by the areas of agreement. I regard this as a mutual effort on which we are all engaged. I don't think there are bad guys here. There are some bad ideas. We are in an important intellectual arena that we have to debate, but I hope we will all recognize both the moral importance of it. And for those who are not moved by the moral impact, let me just close by reiterating, people like Chairman Greenspan and others who object to the lack of support for global integration that they see in America today must understand that getting policies such as this right are an indispensable piece of assembling the kind of coalition they want to turn things around.

    Chairman BACHUS. Thank you.

    Next, Mr. Ose, and then we will go to Ms. Waters, who is the Ranking Member.

    Mr. OSE. Thank you, Mr. Chairman. I am pleased to be here today. I am heartened by my friend from Massachusetts' reference to Mr. Schumpeter and Mr. Keyne. I am reminded of my dinner conversation last night about having a very high death rate and a very low mortality rate. When we talked about that, I said, ''We do have a very high death rate, it is 100 percent, and we have a mortality rate that hopefully is something less than that.''

    Mr. FRANK. Could I ask—I think the sound system is not working too well. I thought maybe it was my fault. Mr. Ose is having the same dictional problem. I wonder if someone can check the sound, because it is not working very well.

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    Chairman BACHUS. We are working on it.

    Mr. OSE. My point is while I share my colleagues' concern about the social side of the ledger, particularly on the Banking Committee hearing, I am concerned about the manner and the structure under which these loans are offered, particularly as it affects the taxpayers in this country in getting a relationship between making a loan and having a product at the end of the process that actually contributes to another country's well-being. That is one of the primaries since I am here today to look at the structural impediments between us making a loan and obtaining the end result that gives us the product contributing to the economy of our fellow countries.

    Thank you, Mr. Chairman. I yield back.

    Chairman BACHUS. The technicians are on the way, and they assure us they will be here in five minutes. We are going to take a recess until we get the sound system working, and then we will be back. We will recess for ten minutes.

    [Recess.]

    Chairman BACHUS. We now go to the Ranking Member of the subcommittee, Ms. Waters.

    Ms. WATERS. Thank you very much, Mr. Chairman. I would like to begin by expressing my appreciation to you for your interest in the needs of heavily indebted poor countries and your support for H.R. 1095, the Debt Relief for Poverty Reduction Act of 1999. This bill, which was introduced by Congressman Jim Leach, would provide substantial debt relief to heavily indebted poor countries and ensure that the savings from debt relief would be targeted to the poorest people in these countries, and I am proud to be a principal cosponsor of this bill.
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    Mr. Chairman, let me just say you and I are getting along so well on these issues, people are going to get suspicious of us.

    Debt relief is desperately needed by many poor countries, especially those in Africa. The governments of these heavily indebted countries are often forced to make drastic cuts in basic services in order to make payments on their debts. Many of the people in these countries already live in extreme poverty. Cuts in vital services such as health care, education, nutrition and poverty reduction programs make them more impoverished. Debt relief will give poor countries a fresh start and improve their ability to serve their people.

    I am deeply concerned about the policies of the International Monetary Fund—IMF—and the affiliated Enhanced Structural Adjustment Facility, known as ESAF, toward heavily indebted poor countries. Many poor countries do not even qualify for the existing IMF debt relief programs, although their debts are a tremendous burden on their impoverished populations. Those countries that do qualify are often required to adopt painful economic reform programs that cut health care, education, and other social services as a condition for receiving debt reduction. Furthermore, existing debt relief programs under the IMF do not provide sufficient debt reduction to give these countries a fresh start. Many poor countries have had their debts rescheduled or slightly reduced, but are still unable to pay the remaining debts without making further cuts in desperately needed social services.

    When I walked in, my colleague Barney Frank was talking about AIDS. I don't need to revisit that entire discussion. None of us are serious unless we understand that if we were to relieve the debt, so that, if nothing else, these countries can begin to deal with this problem of AIDS in Africa. We know that there are treatments now available that they don't have in Africa, and the incidence of HIV and AIDS is just spiraling out of control. We can't have a structural adjustment facility where people are forced to cut back on these basic services and at the same time talk about having debt relief. We have got to relieve Africa of this debt—and many of our other poor countries—so they can get on with the business of trying to tackle this problem of HIV and AIDS.
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    I am pleased that some of the witnesses who are scheduled to testify today have extensive knowledge of IMF policies toward poor countries and understand the tremendous need for debt relief. I am looking forward to hearing their views regarding the most effective ways to wipe away the crushing debt burden that causes so much unnecessary suffering for the impoverished people of Africa and the world.

    I was encouraged earlier this year by President Clinton's announcement of a new initiative to provide debt relief to some of the world's poorest countries. While the President's initiative is not as extensive as H.R. 1095, I am hopeful that it will be an important first step toward the development of a comprehensive program to eliminate the enormous burden of debt facing poor countries. I am anxious to hear the details of this proposal from Deputy Secretary of the Treasury Lawrence Summers who is here today.

    Nevertheless I do have concerns about certain aspects of the Treasury Department's plans for the coming fiscal year. I am especially concerned about the Treasury's plan to support the sale of some of IMF's gold reserves in order to make ESAF self-sustaining. I am not opposed to gold sales for the purpose of financing debt relief for poor countries that desperately need it. However, I strongly believe that ESAF should be subject to congressional oversight, and I am seriously concerned about the possibility that a self-sustaining ESAF would not be required to report to Congress on its policies and activities. So I hope that Deputy Secretary Summers will provide a complete explanation of the purpose and implications of this proposal during his testimony today.

    Thank you very much, Mr. Chairman.
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    Chairman BACHUS. Thank you.

    Mr. Ryan from Wisconsin, if you wish to make an opening statement.

    Mr. RYAN. I thank you very much for coming, Dr. Summers. It is nice to have you here.

    I would like to echo in some ways my colleague from California. I think she made very interesting and compelling points. If you look at any newspaper, the comments on global finance, you will see headlines like we saw in the Wall Street Journal on Monday. ''Capital Flight Remains a Draining Problem for Russia.'' In this particular article, we noticed that the IMF said that the extra $4.8 billion loan package under consideration will be just enough to finance just more than three months of capital flight at its present levels.

    Later on in the article, they quote Martin Gilman, the fund's chief representative in Moscow, who has said the IMF would be willing to support only a program that could persuade average Russians to keep their money in the country and in rubles. I wholeheartedly agree. If that is the case, and if that is the stated policy of the IMF with respect to Russia or other countries, in my opinion that would represent a massive or radical departure from current and past IMF policies. Hopefully the IMF will engage in a currency stability track.

    There are some things I hope in your testimony that you will talk about with respect to gold sales. In the Bretton Woods Act, and this is a CRS study that was fairly recent, under the Bretton Woods Agreement Act, only Congress can approve gold sales with the IMF. So we have been reading recently in newspapers it is not the U.S. Government's policy to approve these gold sales. That may be the Administration's preference in policy, but the U.S. Government does not have a policy or an answer on the sale of gold with respect to the IMF. I would hope you can address that in your testimony.
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    I think last year in the 1999 omnibus appropriations bill, reform to the IMF was passed. Interest rate reforms were passed to give us more transparent, more market-based interest rates, which are other avenues to fund HIPC and ESAF. I think there are other avenues.

    I am concerned that the sale of gold is a circumvention of congressional oversight and that the sale of gold must come to Congress before that is approved. I hope you will address that, because I think there is an impression out there in the world markets that it has already been approved, and that simply is not the case.

    . I hope that you can address these points in your testimony, and I hope that we can really get to the core of this issue, which is how do we achieve currency stability. I think in many cases the IMF has done more harm than good on this front. I think you will probably agree with that, and specifically with the gold sales I hope we can talk about what that will do to the gold markets, how that represents the departure from prior practices, and if, in your opinion, that represents a circumvention of congressional oversight. I look forward to hearing your testimony.

    I yield back my time.

    Chairman BACHUS. Thank you.

    Are there other Members who wish to make an opening statement?

    Mr. LaFalce, who is Ranking Member of the full committee.
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    Mr. LAFALCE. Mr. Chairman, I simply want to commend you for having this hearing. It is extremely important. The Chairman of the full committee will be working with me over the next several weeks. There will be a series of hearings on international, economic and financial topics, and I am delighted. I think this is one of the most important responsibilities of the Banking Committee. We can get bogged down over years and years of debates.

    On a scale of 1-to-1,000, these are very important issues we are discussing today; much closer to the 1,000 mark. As we discuss these issues, it is so easy to get lost in the world of numbers, budget crunching, economic terms, and so forth. Let's never lose sight of the fact that what we are dealing with are human beings and people, and all these policies we talk about can and do have profound impact on human beings, and our chief task is to devise domestic and international economic policies, structures, and mechanisms and approaches that help the human condition. That is one of the reasons I cosponsored this bill, and I am pleased that that, too, is an integral part of this morning's hearing. I thank you, Mr. Chairman.

    Chairman BACHUS. Thank you, Mr. LaFalce.

    If there are no other opening statements, the first panel is made up of Larry Summers, Deputy Secretary, Department of the Treasury. Mr. Summers, we welcome you to the hearing. We look forward to hearing your request of the Administration. Thank you.

STATEMENT OF HON. LAWRENCE H. SUMMERS, DEPUTY SECRETARY, DEPARTMENT OF THE TREASURY

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    Mr. SUMMERS. Thank you very much, Mr. Chairman, Representative Ms. Waters, Members of the subcommittee. I am very grateful for the opportunity to appear before you today, and I am very grateful on behalf of the whole Administration for the constructive spirit in which the subcommittee is engaging on these issues, and I particularly applaud, Mr. Chairman, your recognition in your opening statement of the transcendence of human importance of the financial issues we are going to discuss today.

    At the brink of the 21st century, a child born in Africa is less likely to learn to read than to be malnourished and is more likely to die before the age of 5 than to go to secondary school. That is wrong. Our country at this moment can make a difference, and I believe it is our obligation do so. I want to discuss on behalf of the Administration our proposals this year for authorization of the Multilateral Development Banks and for debt relief.

    My statement, the long version of which is submitted for the record, reviews a number of highlights of the past year's activities. What I would stress, especially at this juncture, is that the MDBs are a remarkably leveraged approach for providing American support. $1.2 billion contained in this year's budget request allows the United States to leverage some $57 billion in lending to less developed countries. That leverage arises from two sources: the fact that the United States is one of many contributors internationally, and the fact the institutions are able to go to capital markets, backed by their loans, in order to provide substantial support.

    I should say that working closely with this subcommittee and Members of Congress in recognition of budget priorities, we have succeeded over the last six years in getting more bang for less buck with our MDB appropriations.
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    The running cost of U.S. participation in these institutions in the early 1990's was $1.9 billion. That has been reduced to $1.2 billion over the last six years. At the same time we have made substantial progress working with this subcommittee and the entire Congress in the clearance of U.S. arrears to the MDBs.

    Let me just mention in passing one critical issue that risks casting a shadow over this year's request, and that is the proposal presently before the Congress to rescind appropriated United States callable capital. If enacted, the rescission of U.S. callable capital could be perceived as a major reduction in American support for these institutions and could lead to a serious market reassessment of the likely United States response to a call on MDB capital should one ever be necessary. Such a reassessment could increase borrowing costs for the MDBs and at the same time would be an additional source of uncertainty for global financial markets and emergingt market economies at a time that I think would be particularly unfortunate.

    Three crucial United States priorities in our interactions with all the international financial institutions have been, first, improved and enhanced focus on the basic economic and social priorities that are central to long-term economic growth, including in particular education and basic social services; second, modernization and renewal of the international financial institutions to make them more transparent, more accountable, and more responsive; and third, an increased emphasis on the private sector as a key to growth in the developing world in the years ahead.

    With this by way of backdrop, let me offer some highlights of our specific MDB authorization requests for Fiscal Year 2000. Continuing our record of trying to support more effective targeting of IDA's resources to the World Bank, we have successfully pressed in this replenishment for much greater emphasis on directing the resource investments; for graduation of China from IDA, and for earmarking 50 percent of this replenishment to Africa; and of particular importance, and I think this will support the kind of debate and dialogue I know the subcommittee is eager to have on development policy toward the poorest countries—for new specific linkages between new lending and governance indicators, anticorruption measures, and portfolio performance, and for a major increase in IDA transparency, and particularly for a breakthrough agreement for the publication of Country Assistance Strategies from June of this year.
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    In recent years, the African Development Bank has faced real problems of governance, accountability, and appropriate performance. We have seen a major effort to restore the credibility and effectiveness of this institution and put it firmly back on track.

    Our other MDB requests include measures that I think are particularly important at this time of financial strain in the developing world. Capital increases for MIGA and for the IIC would help catalyze private capital flows to would-be emerging economies.

    Let me now turn to the question of debt reduction, something that I think we can all agree on as important to do in a prudent and effective way. I emphasize a prudent and effective way, because we know that debt overhangs can stifle investment, can absorb resources that could otherwise go to key priorities like child survival. We also know the debt problems result from money borrowed and not used well, from flawed policies that do not create a basis for sustainable economic growth. As we work to reduce debt burdens, and as we work where appropriate to provide new finance, it is crucial that we do so in the context of overall frameworks that maximize the probability that our assistance will be effective in achieving its objectives. It is this balance that we have tried to strike in creating debt relief approaches that reward good policies through the reduction of the burden of bad debts.

    We recognize that there is a crucial component of these policies. We must act multilaterally because U.S. debt is so small, a fraction of the debt of many of the poorest countries, particularly in sub-Saharan Africa, that actions on our own could result only in enhanced payments to other creditors, rather than relief to debtors. A coordinated and concerted effort among virtually all creditors is needed to ensure real benefits.
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    We also recognize the difficult budget tradeoffs that are involved and believe that it is appropriate to design our debt relief so as to maximize its leverage in terms of maximizing and developing impact per dollar of U.S. budget expenses.

    The President's program, which could result in forgiving as much as $70 billion of debt, is laid out in some detail in my written testimony. Towards that end, the Fiscal Year 2000 request contains a number of new debt-related initiatives: a first-ever authorization request for the United States contribution to the World Bank HIPC Trust Fund of $50 million; a request of 450 million for the first year of implementation of debt-for-rainforest legislation, which passed Congress last year; a request for the second year of implementation of debt reduction under the Africa Initiative, as well as a request for the regular debt reduction activities of the Paris Club, including the Naples and HIPC programs; and finally, two authorization requests including authorization for the support of IMF gold sales and the use of resources in the IMF SCA2 reserve account.

    These requests amount to $120 million of budget authority, very small compared to even one component of the attainable debt reductions, $12 billion of debt to the international financial institutions.

    Let me just conclude, Mr. Chairman, by commenting on two concerns that ran through your comments and those other Members of the subcommittee. First on gold, we, of course, recognize the need for congressional authorization, and U.S. proposals in this area have been put forward subject to congressional authorization. It is important to understand that the gold proposals are for encashing a small portion of the IMF's gold reserve, and using a portion of the interest that results to fund these initiatives. The IMF's reserves would be maintained, and indeed some of the interest would be credited to reserves which would actually be increased by these proposals.
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    I should also emphasize that it is the judgment of our technical experts that by phasing any gold sales out over a number of years, recognizing the extent to which there are already anticipations in this regard, recognizing the size of the world gold market, and recognizing the experience in the 1970's when the amount of gold sold was many times the amount that is contemplated now, it is our confident judgment that any impact on the gold market would be likely very, very small.

    Let me conclude on this note, Mr. Chairman. Members of the subcommittee have raised what I think is a profoundly important and troubling question, and that is how we can best make our assistance programs—whether they are bilateral or through the international financial institutions—to the poorest countries in the world, as effective as we possibly can.

    I welcome the recognition that everyone in this debate is well-intentioned and looking for the best outcomes. I share the judgment that the best outcomes can only be achieved through approaches that focus on protecting people and protecting investments in these countries that go for the benefit of the most vulnerable.

    I caution, however, that experience—as one of the opening comments recognized, not just in Russia, but in many countries—points to the danger of capital flight, points to the danger of support that leaves behind a burden of debt and that is not well utilized. And therefore, in our support programs, I believe we need to design the best possible approaches that utilize resources well so that they achieve their true development impact.

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    No one has all or, I suspect, most of the answers to this question, and it will need to be a subject of continuing discussion. This is very much a dialogue that we are prepared to enter into, but it seems to me that it is a dialogue that needs to be based on comparison of alternative policies. One needs to be somewhat cautious about reaching the judgment that because the outcomes have been difficult, there are obvious policy alternatives that would have produced better results. And in this regard, we look forward to a continuing dialogue with this subcommittee regarding the future of the ESAF program.

    I would just suggest that it is, I think, important to recognize that there are tradeoffs to be found between continuing budgetary involvement and the scrutiny that it brings, on the one hand, and on the continuing budgetary involvement and the obligations that it brings, on the other hand. The United States has not been able for the last several years to make an ESAF contribution, and I think in that context it is appropriate to look for other ways of providing support to the lowest-income countries.

    That is what is embodied in the approaches we have described.

    Thank you very much for your patience, Mr. Chairman.

    Chairman BACHUS. Thank you.

    For some of the Members that may have missed one of the very first things you said, would you just repeat? Because I think it bears repeating, what you said about a child born in Africa today.

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    Mr. SUMMERS. I said that in substantial parts of Africa, a child born today is less likely to learn to read than to be malnourished, and more likely to die before the age of five than to attend secondary school.

    Chairman BACHUS. Thank you. My first question is—I think relates to that. You have proposed—in the IDA Replenishment Agreement—you have said that ''We are going to try to reform the World Bank's policies and their operations to better assist these developing nations so they can use this aid more effectively.''

    What policies would you hope to change at the World Bank?

    Mr. SUMMERS. Let me highlight three areas, if I could, Mr. Chairman.

    The first is a greater degree of transparency as manifested in publication of Country Assistance Strategies, so that the Bank's approach to these countries, the Bank's assessment of these countries, is open for all to see, inside the country and out, and for debate. I believe, ultimately that kind of transparency will lead to debate, because not the Bank, not the U.S. Treasury, dare I say it, not even the U.S. Congress, has a monopoly of wisdom in these areas, and I think by having transparency, we will have a much more satisfactory process.

    Second, an emphasis—this will be tracked year by year—on the composition of lending portfolios toward the priority social areas.

    Some time ago, Mr. Chairman, I was involved in some work when I was at the World Bank on the education of girls that made, I think, a powerful case that of all the investments that you can look at in the developing world, perhaps the highest return investment is investing in girls, because of the greater productivity and wages it brings, because of its impact on their health, on their children's health, on the size of their families, on the nature of societies.
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    You will see a much larger fraction of lending go to those kinds of priorities, education and health in particular, than you have in the past.

    The third——

    Chairman BACHUS. When you say you will see that, how do we assure that that happens?

    Mr. SUMMERS. It will be tracked year by year. The Bank will have to report to its board on the composition of the lending, and we, in turn, will provide that information in various reports to the Congress.

    This has been a priority for us for a number of years, and one has seen in the different development banks that there are many fewer public-enterprise loans to large state companies than there were five years ago. And there are more loans for health clinics and for schools than there were five years ago. Those trends should continue.

    The third area is one that requires a lot of discipline, and that is greater selectivity in lending, more for the good performers, for the governments that are doing their best and working and using money well, and less for the poor performers. In particular, a selection criteria in that area will be corruption, which President Wolfensohn at the Bank has, I think, appropriately tried to shine the spotlight on.

    Chairman BACHUS. When you say those that have been good performers, do you mean in repaying the money or in using the money for good policy?
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    Mr. SUMMERS. The Bank, as with any financial institution, doesn't lend to people who are not paying it back. But any emphasis in my comment was not on that. The emphasis was on the rather careful portfolio reviews that the Bank does of project implementation and effectiveness. And those that are implementing their projects effectively will see the size of their envelope grow, and those who are not even able to use the money that has been allocated to them because they haven't been able to put in place the conditions for drawing down the next stage—they are not building the clinics, so they don't have the receipts so they can't get the loan—those countries will be finding less and less support coming their way.

    So transparency, social emphasis, and selectivity are three key themes that we have pushed in all of the development banks, and, in particular, in the IDA request.

    Chairman BACHUS. Will those policies also include getting donor nations, more participation from other donor nations? We see in Kosovo a rather small participation by some of the other NATO nations.

    Mr. SUMMERS. I emphasized, Mr. Chairman, in my opening statement, that leverage is a central objective. The more we are able to get others to contribute, the more leverage we have. Indeed, if one looks at the different multilateral programs relative to what was the case five years ago, I think that in almost every instance, the fraction of the support that is coming from the United States has come down because we have been able to catalyze increased funding from others.

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    I think this is particularly important in debt relief for the Africa area, where the debt of the Sub-Saharan countries owed to the U.S. represents well under 10 percent of the total. So to be effective at all, we have to be catalytic with respect to a broader international effort toward this objective.

    Chairman BACHUS. I appreciate your responses. I thought they were well understood and well presented.

    Ms. Waters.

    Ms. WATERS. Thank you very much, Mr. Chairman.

    Let me first say to Mr. Summers, I am very much encouraged by what is happening in this subcommittee. My Chairman's interest, Mr. Leach's interest, the Administration's interest, I think we are going to get something done here on debt relief.

    I am concerned about the amount of debt relief, and I am concerned that we have the kind of transparency with the World Bank and that we really deal with the question of structural adjustment—that bothers us all so very much—so we can have the most comprehensive package this year when we do debt relief, and we do it as best as we possibly can.

    There are a lot of things that some of us do not understand about World Bank lending and the IMF. I don't understand what role politics play in the granting, the implementation and whether or not some countries bear the burden of not having their policies in place while others do not, because there are political alignments or reasons.
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    I need to understand that, because that will help us get to whether or not structural adjustment makes good sense in the way that it is done and what to do about it. So if you could help me in this discussion, Mr. Summers, let us take a look at Russia and Indonesia and whether or not the World Bank policies are such that they make the same kind of demands for them to have certain policies in place as they make on some of the other poorer countries. And what do we do about that; if that is true?

    Mr. SUMMERS. Let me try to answer your question as well as I can. It is an area where different people's perceptions would differ.

    Each country's situation is different, and there is a different set of problems, there is a different set of opportunities, there is a different set of ways in which money is used. So one can't, in a simple way, compare the conditionality in one country with the conditionality in another country.

    It is our policy, and it is the institution's policy, to provide support with that conditionality which is most effective in any particular case——

    Ms. WATERS. Let us take, for example, the example you gave us a moment ago. You are lending money to develop a clinic. They never get it off the ground, or they are slow in getting it off the ground. The money doesn't flow; they don't have the policies in place. What would be different about that, say, in Africa, as opposed to, say, Russia? How would that policy differ?

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    Mr. SUMMERS. It would be the same. Where the projects were not working, the size of the support would fall; and where the projects are not moving, there isn't lending.

    I think there is a somewhat different set of issues that are involved, much more actually with the activities of the IMF than the activities of the World Bank, in terms of the provision of fast disbursing assistance when you have a major financial gap that has to be filled. There is also conditionality, because there the danger is particularly great that the money will go in and will go right back out. But that conditionality is applied in a strong way in all cases to ensure—there is no ensuring—to minimize the possibility that the funds will go in and out and not serve their intended objective of maintaining confidence.

    But we believe that it is very important that these judgments be made in a grounded and technical way. And it seems to us that it is very unfortunate in any country if you get into a situation where loans are provided without appropriate conditions being in place, because then the debt is left behind and no wherewithal in terms of development to repay it has been created.

    So our policy tries to be—in what we support in the institutions—tries to be as even-handed and constant across all parts of the world as possible. That doesn't mean we get it right in every single case—or that the institutions get it right in every single case—but that is certainly the intention.

    Ms. WATERS. Thank you very much.

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    Chairman BACHUS. Thank you.

    Mr. Ryan.

    Mr. RYAN. Thank you, Mr. Summers, for coming. I just wanted to ask you a series of questions that probably require relatively brief answers. I think there is general consensus that the IMF has been notoriously intransigent to change and reform. How will you guarantee, if gold sales are used to create a self-financing permanent ESAF, this will not diminish the accountability of IMF to its member governments? Specifically, the Treasury doesn't have to come to Congress to get additional funding for ESAF, how will you guarantee that will diminish congressional accountability?

    Mr. SUMMERS. We would be happy to work with Congress on finding appropriate ways to maintain accountability. As far as accountability to IMF members, ESAF is periodically reviewed. There was recently an independent review by outside auditors of the ESAF program. We would envision reviews of that kind periodically. At the Interim Committee that meets every six months, the ESAF is a topic of discussion. So there is no sense in which IMF management is left on autopilot separate from the shareholders. The other part of your question was Congressional review. Here the balance that has to be struck is whether the Congress is prepared under any circumstances to provide support for ESAF, which it has not been in recent years. We would certainly be pleased to work with the subcommittee on reporting requirements, testimony requirements, other kinds of mechanisms to promote accountability.

    Our feeling is not that these are ways of avoiding accountability but that, given the crucial development impact in some of the very poorest countries in the world, it is appropriate for us to craft an overall package that assures that the financial wherewithal to provide support, not just now but in the future, will be in place. And we would be pleased to discuss ways of achieving appropriate kinds of accountability.
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    Mr. RYAN. Do you believe that the periodic funding of ESAF though is approximately the greatest leverage tool of accountability of the member governments and legislatures?

    Mr. SUMMERS. I think for the United States it has not been a tool of accountability, because there has not been funding for sufficiently long. And I think other member governments feel that the periodic reviews which provide for the renewal of the program, which provide for changes in its policies, offer very substantial opportunity for changing the policies of the ESAF where that is appropriate. And then I think the judgment of the countries who benefit from the ESAF is that the risks of not establishing funding, creating a situation where funding would be subject to periodic lapses without the development impact, might well exceed any extra accountability benefit that it would provide.

    But we are very much supportive of accountability and would be pleased to work to find appropriate mechanisms to promote accountability.

    Mr. RYAN. I suppose at the end of the day, the answer to this is whether or not you believe that what we have done in the past with ESAF has been to the detriment of countries or to the benefit of countries. I would add this brief comment. I wanted to move down that path toward the language the House passed last fall addressing IMF funding and interest rates. There are two ways, and there are more than two ways, to fund ESAF.

    What is your impression and opinion on the House language that was passed? Has it been complied with on getting at charging interest rates closer to the market rates?
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    As we know, ESAF funds—charges interest rates based on the most creditworthy nations of the finance ministries in the world. They are very below market interest rates. Do you believe an alternative way of financing ESAF would be to charge higher market rates or rates close to the market rates? Wouldn't that be another way of financing ESAF without having to go to gold sales?

    Mr. SUMMERS. Let me first say that the IMF and we have been in full compliance with the increased interest rate provisions that were embodied in the legislation last fall in the context of the ongoing discussions of the contingent credit line need for interest rates to reflect risks well above IMF borrowing costs. It is something fully embodied within it. It is certainly something that can be looked at.

    Under the current articles of the IMF, which require very elaborate procedures to change, any profits, if you like, from higher interest rates could not be used to support concessional funds for any purpose, including for ESAF. Under the current procedures of the IMF, the use of interest rate premiums would not be possible.

    Mr. RYAN. Do you think that should be changed?

    Mr. SUMMERS. I think it is something that could be looked at. The incidence of such profits depends upon the incidence of financial emergencies. If, as one hopes, we are successful in reducing the incidence of the financial emergencies which produce the high interest rate loans, that would not be available as a secure funding source for concessional activities. So it is certainly something that could be looked at, but I would be rather surprised if it would obviate the need for the FCA to have a modest amount of gold sales. I would add that through the modest amount of gold sales, the reserves of the IMF would be fully maintained, and indeed would grow, because a portion of the interest that would be retained would represent a sound funding source for this program. And I think we in no way would do damage to the financial standing of the IMF. Indeed had such policies been pursued several years ago, the IMF would be better reserved today than it in fact is.
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    Mr. RYAN. You mentioned briefly that you thought the gold sale will not impact the world gold market. Do you still believe that to be the case? If, in fact, Switzerland—and we have just read recently—will engage in a healthy amount of gold sales themselves? Do you still hold that to be the case?

    Mr. SUMMERS. Whether Switzerland does or does not engage in gold sales, I don't have any prediction to make. I am not able to forecast the price of gold. That is not the business we are in.

    Mr. RYAN. I thought you could do that.

    Mr. SUMMERS. That is not the business we are in. But the marginal impact, the delta between the gold price with and without an IMF program of modest gold sales, I am convinced would be negligible relative to the overall fluctuations in the world gold market. Again, we have an experience with gold sales in the 1970's five or more times the size that is contemplated at a time when the world market was actually significantly smaller—and it did not prove to be highly material for the world gold price.

    Mr. RYAN. Thank you. Unfortunately, I have run out of time. I would like to have the opportunity to submit some questions to Dr. Summers in writing.

    Mr. SUMMERS. I would be happy to answer them.

    Chairman BACHUS. Mr. Frank.
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    Mr. FRANK. Let me explain, Ms. Waters and I are Members of the Judiciary Committee which is voting on bankruptcy across the hall, which is why we will be sprinting out of here from time to time. I want to say with regard to gold sales, I think they are an excellent idea. I think the objections have to be divided.

    One, there is a question about whether or not we finance some of this with gold sales. Another is whether those proceeds automatically go to ESAF. I am against the second and for the first. But we ought to be clear they are divisible. Objections to the sale of gold based on some commitment to gold as a monetary standard or the hopes that gold will again be more of a standard don't impress me. I have to say indeed when the Swiss are ready to give it up, it seems to me it is not an act of radicalism to follow the Swiss in this particular area.

    So I think selling gold is the best way to do it. I would differ that raising interest rates on some of these loans—when we are dealing with countries already heavily indebted, raising interest rates on some of them would appear to me to be counter intuitive. But let us not put it on in the ESAF. The reason I don't want to automatically put it in ESAF comes up, and I should begin by saying on page 7 of your written testimony, I was delighted to see six bullet points about changes the Administration is considering. They all go in the right direction, getting some debt relief in earlier, complete forgiveness of bilateral concessions, and so forth. These are all in the right direction.

    The one issue that isn't addressed here is the question of the linkage to ESAF, implicit, explicit, whatever. Here is why some of us are worried about that.

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    You graciously called my attention to some Wall Street Journal stuff today, and, I should just note parenthetically, I will be working further. And I am glad to have the assurances of the Administration that you are going to try to protect the function of the inspection panels of the World Bank. And I should just say to the World Bank, they are obviously free to do what they wish with the inspection panels, but we are equally free to do as we wish with Congress' appropriations. While we cannot establish a formal connection, the ankle bone is indeed still connected to the shoulder bone. If the inspection panels go away, that might be a very expensive decision. If they lose impact, that could also cost a couple of nickels.

    Now, my problem though is another article today. Let me quote.

    Mr. SUMMERS. This is going to teach me not to show you the Wall Street Journal. Go ahead. I am sorry.

    Mr. FRANK. You are never too old to learn. The Wall Street Journal article I am looking at is ''U.S. Economic Outlook Upgraded by IMF.'' The quote in particular: ''Michael Mussa, the IMF economic counsel, said the U.S. economy 'really does need to slow down.' '' This is the IMF saying this now, and not Mr. Mussa personally: ''If growth doesn't moderate sufficiently, the Federal Reserve may well need to tighten monetary policy initially.''

    There they go again. Now, this is in my memory the third time in this recent set of economic decisions when the IMF has called for raising American interest rates, and the first two times they were clearly wrong. This is the problem that many of us have.

    No, we do not object, in principal, to an effort to improve economic conditions, but there is a high interest rate, slow growth bias that we worry about in the IMF. Now, I think they are wrong to do it now. By the way, if Mr. Greenspan—Mr. Greenspan has successfully resisted that. Let me say, I am glad the last two times the IMF told America to raise interest rates, the Federal Reserve didn't pay attention, because if it had, this resistance to free trade and globalization that Mr. Greenspan lamented would be stronger. Raising interest rates is one sure way to make sure that the victims continue to be victimized.
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    I just want to make it clear, this is a perfect example of why we are worried about these IMF prescriptions. It is not in concept that we are against them. And I would ask you to respond. How much confidence am I supposed to have in an IMF which continues to repeat the error, and it is not just an intellectual error. We are not talking purely about predictions. It is a question of values. Essentially, I believe the people that run the IMF continue to underestimate the pain that comes as a factor. I know they know it is there, but I think—you know, one of my problems is that you get a reputation for being responsible in the financial world by the ease with which you bear the pain of others. A willingness to accept difficulty for other people becomes a mark of your seriousness. I am afraid that hits the IMF.

    So until and unless I am persuaded that the IMF has a better sense of the economic mix, I will be opposed to linking this in any formal way to the ESAF. I would like your comments on that.

    Mr. RYAN. Would the gentleman yield for one second? I can tell we don't agree on the Swiss decision on gold. But I think the second half of your statement was right on target. I want to ask you, from listening to your statement, do you believe or do you have a concern that putting together a permanent funding mechanism for ESAF with gold sales will reduce our ability, as a Congress or a member government, to have proper amount of accountability?

    Mr. FRANK. Let me put it this way. Looking at it historically, I don't think it will reduce our control of the IMF, because zero is pretty hard to get below. But I do hold out the hopes that we will do better in the future. Therefore, I am for selling the gold, but against giving it to the ESAF. But now, if I could have an extra couple of minutes, I would ask if Mr. Summers would respond to my criticisms about the IMF and ESAF and the perceptions many of us have that they are simply insufficiently aware of the social dimension and intellectually wedded to a high interest rate. I know it is important for these people to attract capital and to raise their interest rates, but we don't have a problem of attracting capital in the U.S. They want me to raise interest rates here and throw more people out of work. I don't know that that is not falling over into their other prescriptions.
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    Mr. SUMMERS. Let me try to respond to that. I am not sure in the time I have got I can do justice to your question.

    I am going to resist the invitation to make a comment on the Fed with respect to U.S. policy. But let me address the concern that the IMF's policies are, in some sense, too austere in both the fiscal and the monetary prescription as a consistent matter, which I think is your main concern.

    Let me say first that I think it is not fair to say that those policies come from a lack of appropriate social concern. Rightly or wrongly—and I will say something about that in a minute—it comes from a judgment that you minimize the sum of unemployment, of human distress, of disruption by pursuing a policy that is more vigorous, up front, in maintaining fiscal and monetary balance. That may or may not be the right judgment.

    Mr. FRANK. I may be too harsh. I agree that is what motivates it. I do think, however, there is a tendency to underestimate the short-term pain. I think you correctly described the motivation, but I think that is influenced by an underestimation of the short-term problem.

    Mr. SUMMERS. As you know, battlefield medicine is never perfect, and certainly there have been cases where, in restrospect, the policies that were imposed were also too austere.

    I think if one looks at the number of countries in which the IMF is involved who, despite the IMF's involvement, found themselves with double and triple digit rates of inflation that were undermining their exchange rate, the well-off in many of these countries are not sitting there with cash seeing their cash erode. The people hurt by the high rates of inflation are the poorest people.
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    I think the question one has to ask is whether, if the policies had been different, one would have had relatively similar rates of inflation and more favorable output performance, or one would have had much higher inflation rates with the distributional consequences that they bring without any material improvement in output performance.

    That is a question that one can debate looking at the cross-country evidence. It seems to me that it is relatively difficult to find examples of countries that resisted the IMF advice, pursued far more expansionary policies than the IMF recommended, and had a good outcome. That could be because a climate was created where there wasn't any confidence in those policies.

    Mr. FRANK. I understand your unwillingness to comment about future interest-rate policy here. But let me ask you to look back over the last few years and suggest to you a country which has differed with the IMF's advice and been more expansionary than the IMF asked for and tell me how it worked out, the United States of America. The IMF twice in the past asked us to raise interest rates. I know it is the policy of Treasury never to talk about what the Fed might do. God forbid the elected officials should ever have anything to say about something like interest rates. But let us talk about the past.

    Is it your judgment that when the IMF a couple of times in the past urged us to slow down, they were correct? And since we did ignore that advice, were we successful despite ignoring their advice?

    Mr. SUMMERS. I certainly would say that.
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    Mr. FRANK. This is not a take home exam.

    Mr. SUMMERS. I am aware of that. Nor one that is being privately graded. I certainly think that we can all agree that macro-economic policy in the United States in recent years—I think, both in fiscal terms and in monetary terms—has been managed well, and that has got a great deal to do with our success. I think the IMF's repeated advice in the 1980's and into the early 1990's that this country would be well served by reducing its budget deficit in a substantial way was good advice, and we did the right thing by following that advice.

    I am not sure that those who prescribe different monetary policies than were followed in the mid-1990's, that that advice, in retrospect, I don't think would necessarily be judged to have been the best advice. But I think that one needs to look across the full spectrum of countries, and I would just caution that there are many instances. The experience of the policies that Indonesia pursued in the late fall of 1997, contrary to the advice of the IMF, would be one example, where a situation where there are not proper controls on the printing of money, not proper controls on budget deficits, leads to a situation where there is very substantial capital flight, and what is left behind is debt. So I would hope that we could all agree on the principle that a lender has to have appropriate conditions to be sure that his resources are well used. And we could all try to participate as well as we can in helping to devise appropriate strategies for those conditions, recognizing that excessive austerity is a real danger, but an economic environment in which capital goes right in and goes right out is also a very real danger, and a balance has to be found. I think that one could cite examples of the kind that you did, where advice that was more austere proved to be wrong. I think one can also cite instances—such as going back some years in our country to our own progress in bringing down the rate of inflation—where there were voices who were very concerned about such policies in ways that, if their advice had been heeded, might well have led to a continuing excess inflation with real problems.
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    So I think there can be errors in both directions, and one has to find the right kind of balance. But what I would very much caution against is the idea that supporting unconditional debt relief or providing——

    Mr. FRANK. That is a straw man. No one is for that.

    Mr. SUMMERS. If you say it is a straw man——

    Mr. FRANK. The question is what kind of conditions and who forms the conditions. We are not talking unconditional.

    Chairman BACHUS. Let me say this. Mr. Frank is now in his third five minutes.

    Mr. SUMMERS. I am sorry.

    Chairman BACHUS. But he has got——

    Mr. FRANK. I just want to say about Indonesia, I agree, and I would just note that months after the fall of 1997, many of us here were pushing to make the most important change in Indonesian policy, mainly getting rid of Suharto, while there was a great reluctance on the part of the Administration to go along with that.

    Mr. SUMMERS. I think I will take advantage of the fact we are in the third five minutes to not respond to that particular observation.
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    Chairman BACHUS. Thank you. What I do want to do at this time before the next speaker, I want to introduce for the record the two articles in the Wall Street Journal that were mentioned, one is on page A–2 of the Wall Street Journal, U.S. ''Economic Outlook Is Upgraded by IMF,'' where Michael Mussa, the IMF's economic counsel, noted that the U.S. economy really does need to slow down and gives some advice to the Federal Reserve. I would note that I am glad he is not on the Board of Governors of the Federal Reserve. But we would like to offer that for the record.

    Also the article on A–6 of the Wall Street Journal, ''World Bank Board Agrees to Weaken a Watchdog Panel,'' which is quite disturbing in light of what we have discussed today.

    So I would offer those, if there is no objection, for the record.

    Mr. SUMMERS.With your permission, Mr. Chairman, I would would like to insert into the record our World Bank U.S. Executive Director's Statement on the inspection panel question.

    Chairman BACHUS. OK. Certainly, in fairness.

    Mr. FRANK. I was encouraged by Mr. Summers' interpretation of what is happening. I look forward to working with the Administration to make the best of this.

    Chairman BACHUS. Thank you.
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    With that, Mr. Ose.

    Mr. OSE. Thank you, Mr. Chairman. I want to return to the more mundane things that you think were the body of the hearing today having to do with the Fiscal Year 2000 authorization request.

    If I understand correctly, the request is for additional hundreds of millions of dollars for various hard and soft loans targeted on the 45 or 46 poorest countries.

    Have you made, in your determination of eligibility, any connection between those to whom we would provide this additional assistance and the aggregate demand for American product that comes out of those countries?

    The reason I ask that question is that while I was much younger and far more foolish in the 1970's when these loans were made, we made them ostensibly to help the economy, to cure poverty, to help with disease and education, and a host of other things. Now we are on the verge of forgiving the loans to help the economy, cure poverty, help with education, cure disease and the like. As a business person, I have to tell you if there is not structural change to the manner in which the money is utilized, we are not getting anywhere. We are not making any progress.

    So I would appreciate any comments you would have on that.

    Secondarily, has there been any comparison between the aggregate demand from sub-Saharan countries that might receive the predominant share of this country and the needs of Caribbean, Latin American or South American countries that in the alternative might receive this money?
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    Mr. SUMMERS. Let me respond to your question in three ways, Congressman. First, the procedures under the IDA 12 Agreement call for greatly increased selectivity based on assessments of the incidence of corruption, the incidence of proper project management so that projects are well used, and much more transparency about those assessments, precisely so as to make it most likely that the resources are well used and make it least likely that the money goes to waste, as it has been too often in the past.

    Second, while you correctly note that we are talking about debt reduction for loans that were well-intentioned in the past, I think it is important for the Members of the subcommittee not to lose sight of the fact that with all of the problems, the worldwide development effort has been remarkably successful over the last 20 years.

    Look globally. Children who died during childbirth or in the first year of life 25 years ago were 1-in-6, and that number is still far too high, but it is well below 1-in-10 today.

    If you look at what has happened to life expectancy globally, it has increased by nearly nine years. That is an impact that would be equivalent to what would happen if you cured cancer three times over in the United States.

    If you look at the incidence of illiteracy——

    Mr. OSE. I am not arguing those points. Your points are well made. My question is moreso if we had been able to appropriately manage the use of the fund even better than we had, would we have had an 18-year increase in life expectancy, for instance? It is the structural thing.
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    Mr. SUMMERS. Congressman, I completely agree with you. We need always to improve the way these funds are used. I think that the emphasis on transparency, on selectivity and on better targeting to key social investments represents the best possible approach to improving the targeting. And as for the targeting across different regions, the approach is to concentrate the concessional resources of IDA on those countries which are least creditworthy and, at this point, have the least capacity to be able to borrow hard money. That is why, as you suggest, half of the money is going to sub-Saharan Africa, because a substantial fraction of such countries are in sub-Saharan Africa. But I think it is very important that we and the countries who are involved to the maximum extent possible view IDA as transitional toward the point where creditworthiness can be established and where loans can be provided on hard terms.

    I share the impulse behind your question, which I think is that these are laudable objectives, but that can't excuse any lack of hard-headedness in ensuring that the money is well used and that it is not going into places where, no matter how well-intentioned, nothing good is going to come of it.

    Any financial institution has its failures. There certainly have been failures in this development effort, and I certainly can't tell you that there will not be failures again. But we are trying to be as—and push the institutions to be—as strong and tough minded as we possibly can.

    Mr. OSE. Mr. Chairman, two observations, if I might. In the legislation that Chairman Leach has introduced, there is a Human Development Fund, into which debtor countries would pay over time in lieu of paying on forgiven debt. It seems a stretch to me that setting up this fund into which debtor countries would pay and leaving control of that money in the hands of the debtor countries who couldn't pay their debt in the first place is a stretch.
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    My second observation is that the liquidation of gold holdings from the reserve balances in the long run leads to a reduction in our ability to provide additional financial support. I haven't worked out the dichotomy in my own mind, and with your permission I would like to submit a few questions for the record and yield back the rest of my expired time.

    Mr. SUMMERS. Can I very briefly respond to the second concern, because it is obviously one we have given a great deal of thought to.

    Investing the reserves in an asset that yields income——

    Mr. OSE. If you invest it, that is right.

    Mr. SUMMERS. Which is what is envisioned, and in fact because we want to be very careful about these things, the procedures would involve a portion of the interest each year being allocated to finance the debt relief, with a portion of the interest being maintained.

    I think that is crucial. I think this only makes sense if it is done in a way that provides for a growing reserve at the IMF rather than a shrinking reserve. We would not support the use of principal or even the use of the entirety of the income from investment for these purposes for precisely the reason that you described, Congressman.

    Mr. OSE. We have come full circle back to my structural question: How do we control an appropriate and efficient use of the capital?
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    Mr. SUMMERS. That is something we can perhaps have some subsequent dialogue on, because that is obviously a critical question.

    Chairman BACHUS. All right. At this time I am just going to recognize Congresswoman Biggert to say one thing, and then Congresswoman Schakowsky is going to have her five minutes.

    Mrs. BIGGERT. Thank you, Mr. Chairman. I have some questions that were submitted by some constituents of mine. I would just like to ask permission to have those submitted for the record.

    Thank you.

    Chairman BACHUS. Without objection.

    All right, Congresswoman Schakowsky.

    Ms. SCHAKOWSKY. Thank you, Mr. Chairman. I just have a very brief comment, and then I would like to yield the balance of my time to the Ranking Member of this subcommittee, whose leadership I so appreciate and whose knowledge of this subject I respect so much.

    I just wanted to say that in this time when we are watching in horror as we see life in the refugee camps and the souls of Americans so moved by compassion, I think it is important to recognize that the kind of circumstances that we are seeing in these refugee camps in some ways are reflective of daily life for many people, particularly in sub-Sahara Africa. Though you cited some fairly optimistic interpretations of progress, I think it is important to note that in sub-Saharan Africa, in fact, one out of five children will die before his or her fifth birthday, and one-third, as you point out, do suffer from malnutrition, and one out of twenty mothers die in childbirth.
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    So while there may be examples of progress, we have so far to go, and I am concerned about some of the ESAF conditions that I think do prevent us from addressing effectively those issues.

    But as I say, I would like to yield the balance of my time now to Ms. Waters.

    Chairman BACHUS. Congresswoman Waters, her question I would also join in asking with her.

    Ms. WATERS. Thank you very much, Mr. Chairman. Thank you very much, Ms. Schakowsky. I have something I would like to develop—working with my Chairman, working with the Administration, something that I think that has been missed in all of the policy development—and that is this: I believe there is room for technical assistance and support for economic development in many of the countries that are far too dependent on the loans. I believe that we should be providing the kind of technical assistance that will help put together plans to identify resources that can be developed over a period of time so that countries can indeed become more independent.

    I don't see that kind of discussion anywhere, but it does not make good sense to me that there are countries with gold, diamonds, oil, what have you, much of it undeveloped, much of it exploited, and we do nothing to provide technical assistance and the development of plans working with many of these countries to do this kind of development.

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    I am hopeful that I can get support from everybody who is interested in debt relief. This is long-range, but it has to start sometime. I would like to know if you are interested, if the Administration, if Treasury, is interested or has taken a look at that or wants to do something about that?

    Mr. SUMMERS. Congresswoman Waters, I share very much what you said. Some years ago the Treasury set up a technical assistance program for a number of the countries in eastern Europe to provide advice on questions with important financial aspects where Treasury and people affiliated with the Treasury could make a contribution.

    We, in the last several years, have worked to expand that program to a number of other situations, and I know, for example, that several people from that program have provided advice in South Africa, and I believe it is very appropriate to have those kinds of efforts, because I agree with you completely.

    We have also strongly encouraged at the World Bank and the other development banks exactly this kind of initiative. We have found that the area of natural resources that you mentioned is a particularly strong example—often just a problem of communication back and forth between countries and the private sector. Frankly, it is difficult for the governments of countries to find someone who has both technical expertise and who is on their side and whom they can trust, and at the same time, the private sector often has difficulties in conveying its concerns to countries where it is working.

    That is an area where the World Bank and the IFC, in particular, have tried to take a much more active role, because they can provide, on the one hand, the sureties to the country they are working for development and on the other can facilitate communication. That is something that we have very strongly encouraged. But I think it is a very powerful idea, because if you look at the development problems of these countries and you look at the size of the money that is potentially available, the only way the problems are going to get solved in the long run is by attracting private investment. We need to find ways to do everything we can do to facilitate that. At the risk of being predictable, I would caution that that is one of the things that influences the question of appropriate policy in the short run, because there is a need to maintain confidence, to create an environment where you can attract private capital and eliminate the overhang of debt, which is one very important thing in that regard. But there are other steps that are necessary as well.
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    Chairman BACHUS. Mr. Summers, you have represented the Administration well today. I think you have been very candid in your answers and very responsive to our questions. I want to commend you for that.

    I want to also remind you that my opening statement, and I am going to read it again, the next-to-last paragraph, I said, ''Several Members have expressed to me their concern about permanently funding ESAF. Congress represents the people of the United States and has responsibility to continually review the performance of ESAF in light of Americans' interests in humanitarian concerns. Since permanent funding would weaken your ability to perform such oversight, this proposal, quite frankly, faces an uphill battle.''

    I think you have seen that today from what some of the other Members have said.

    But, that being said, we are going to recess the hearing. We appreciate your testimony. We are going to recess for one hour to allow people to have a chance to get something to eat. And also so that when the second panel convenes, we will take time with that panel, and we won't be rushing to adjourn.

    Thank you very much. The hearing is adjourned for one hour. We will just say 1 o'clock.

    Mr. SUMMERS. Thank you very much for this opportunity, Mr. Chairman.
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    Chairman BACHUS. Thank you.

    [Recess.]

    Chairman BACHUS. I call to order the hearing.

    Our second panel is made up of Dr. Nancy Birdsall, who is with the Carnegie Endowment for International Peace; Njoki Njehu, coordinator of the 50 Years Is Enough Network; Lydia Williams, Advocate Coordinator for Oxfam America. Glad to have you. And what is Oxfam America?

    Ms. WILLIAMS. We are an international non-profit humanitarian aid organization, and we work in 30 countries in the south.

    Chairman BACHUS. I heard the name, but I just wasn't familiar.

    Also, George Milling-Stanley, Manager of Gold Market Analysis, World Gold Council. Glad to have you. And Jo Marie Griesgraber. Dr. Griesgraber is Director of the Rethinking Bretton Woods Group, also Director of Research at the Center of Concern. So we welcome all of you; and for simplicity, I think we will start with Ms. Birdsall, or is it Dr. Birdsall?

    Ms. BIRDSALL. It is Doctor, but I go by Ms., so as not to confuse people thinking I am a medical doctor.

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    Chairman BACHUS. Dr. Ms. Nancy Birdsall will lead off the testimony.

STATEMENT OF DR. NANCY BIRDSALL, SENIOR ASSOCIATE, CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE

    Ms. BIRDSALL. Thank you, Mr. Chairman. It is a pleasure to be here. This is the first time I have had the privilege of testifying or being a witness at a congressional hearing.

    Chairman BACHUS. My staff just reminded me to remind all of you that all your testimony should be limited to ten minutes. But now as you all witnessed from earlier today, if you are ten minutes and you still have a minute or two to go, that is not a problem.

    Ms. BIRDSALL. Thank you, Mr. Chairman. I hope I will take less than ten minutes.

    Chairman BACHUS. Start the time back over again.

    Ms. BIRDSALL. Very good.

    As you may know I spent many years in the international financial institutions before moving to the Carnegie Endowment, and I am now doing research preparing a book on inequality in a globalizing world. So I enjoyed very much the discussion this morning and was quite heartened to see the level of engagement on the part of the subcommittee in these issues of development.
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    I would like, in general, to support the Administration's request for support to the international institutions. My remarks will be confined primarily to the issue of the IDA replenishment and to development assistance in general, but I would be happy to engage later in discussions of the broader issues that are before you.

    I have three questions that I will pose and answer briefly. The first is: Has development worked? The second: Has development assistance worked? And the third: Does the IDA 12 Agreement reflect what we have learned about the answers to the first two questions?

    So first, has development worked? Well, we heard this morning from Larry Summers, from Mr. Summers and others, the bottom line, which is that, yes, development has been a success story. There are still millions of people living in poverty; but conditions are better, certainly better than they were 40 years ago for common people in terms of infant mortality, enrollment in school, and so on. The larger point I would make is that today the stage is set for a new round of progress in development efforts which could reap much higher gains in the next decade than we have seen in the last three or four decades for two reasons.

    First, throughout the developing world, we have seen more and more countries turning to the market. What do I mean by that? Subject, increasingly, to the healthy pressures of real competition, they are taking steps to be open and to be competitive. That means they are reducing the role of the state, strengthening property rights and the rule of law, modernizing tax administration, opening their markets, introducing transparency into government affairs, efforts to reduce corruption, delegating more responsibility to local governments, creating the frameworks within which civil society organizations can work. In a way, you could say that most of the developing world is starting to look or trying to look more like what the United States looks like. And that creates a setting where there is great likelihood of more rapid success on the fundamental development indicators that we are concerned about, reducing poverty in particular.
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    The second reason why the stage is set for dramatic gains is that we have learned a lot about what works in development assistance. So let me turn to the second question I raised. Has development assistance worked? And the answer to that question, of course, is not simple.

    In many respects development assistance has worked in that it has pushed along much of the progress that I referred to. On the other hand, a tremendous amount of aid resources have been wasted in the last 30 or 40 years. There have been in the last four or five years a set of systematic studies of what works and what doesn't work in development assistance, including studies done at the World Bank. I refer in my written testimony to a very frank, refreshingly frank assessment done at the World Bank. There are straightforward lessons from these studies and from experience, and I would summarize the central lesson as follows: Development assistance only works when economic policies are sensible and public institutions function reasonably well in the recipient countries. Another way of saying this more simply is that development assistance works when good government is in place. Only when good government is in place does development assistance crowd in the private investment by local citizens and by foreign investors that is the real engine of growth.

    There are a lot of other lessons from the experience and the studies of the last few years, one of which is that countries have to own the conditionality that has been so much discussed. Conditionality can complement internalization of these reform steps, but it cannot substitute for countries having their own internal drive to take on the tough reforms.

    Let me go to the third question. Does the IDA 12 Agreement reinforce or reflect, at least, these lessons? I would say, yes, definitely. It not only reflects these lessons about development assistance, it reinforces these lessons. And it also reflects critical changes that are under way in all of the multilateral development banks.
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    I would say that the approval and financing of the IDA 12 Agreement will lead, in fact, to the consolidation and the more consistent application of the particular lessons. Let me mention two features of the IDA Agreement that are noteworthy and that address the points I have made about what has been wrong with development assistance and what can be done better.

    The first feature is the emphasis in the IDA Agreement on country performance criteria and thus on more differentiation among countries—on which ones get the big money. This is what Mr. Summers referred to as selectivity. A lot of additional work has to be done to improve the rating system that the World Bank and the other multilateral banks would use to set, to define, or to measure performance and to make this process of developing and using performance criteria as transparent and public as possible. But the fact is that the IDA 12 Agreement can be a very effective vehicle for creating the momentum to get those performance criteria tied down in a way that is realistic and, indeed, could lead to a process of creating at the international level for the other multilateral banks performance criteria that are systematic and consistent across the banks.

    The second feature of the IDA Agreement worth mentioning is that, for the first time, very explicitly included in the performance criteria are two issues. One is that countries should clearly demonstrate pro-poor policy which can be measured, for example, by public expenditures. How are they allocating public expenditures? And the second is the inclusion explicitly of issues of governance in the performance criteria which would include, of course, efforts, for example, by recipient countries to deal with problems of corruption and, equally important, to ensure that their public institutions are accountable to their citizens.

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    For them to be accountable to their citizens, in turn, requires active citizen participation in things like public hearings, in civil society groups. So these kinds of issues, which traditionally have not been measured and have not been so explicitly on the agenda of the World Bank and the other international institutions, now will be because they will be included in the performance criteria that, in turn, will generate decisions about which potential IDA recipient countries get more resources and which get fewer resources.

    I think what is important to know is that in the process of producing this IDA 12 Agreement, the United States leadership brought along many of the other donors, other members of the donor community, so that there is a general enthusiasm across the donor community for these principles of accountability, of participation, of emphasis on governance, emphasis on pro-poor policy, and emphasis in the IDA 12 allocation on selectivity.

    There are many other issues I can raise. I know that many of you are aware that the IDA 12 Agreement is much stronger on disclosure on environmental issues and so on.

    Let me, instead of going on, close by saying that the financial crisis at the global level over the last couple of years has certainly reminded us of how interdependent the world is. It is clear that these international institutions can play a key role in coping with these issues of interdependence. It is also clear, and here I would think back to my own experience inside those institutions, that the U.S. has had a critical leadership role in pushing the institutions in directions that have made those institutions more effective, more focused on poverty, on the environment, and so on. So I hope that that U.S. leadership role can continue to be effective. Certainly support for the IDA 12 Agreement, and for the other proposals for support to these institutions, provides an excellent vehicle to ensure that kind of leadership and leverage. Thank you, Mr. Chairman.
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    Chairman BACHUS. Thank you.

    Next speaker, please.

STATEMENT OF NJOKI NJOROGE NJEHU, COORDINATOR, 50 YEARS IS ENOUGH NETWORK

    Ms. NJEHU. Thank you, Mr. Chairman, and Members of this subcommittee for the invitation to testify today. As an African woman, the opportunity to address you as you decide whether to agree to new financing for the IMF's Enhanced Structural Adjustment Facility, ESAF, is momentous. It is not often that those of us who are from or who live in countries under the IMF economic tutelage are asked to speak about our experiences. Again, I thank you.

    Mr. Chairman, your letter of invitation asked me to, ''Assess the needs of African countries and effectiveness of ESAF as a debt relief mechanism.'' In brief, what African countries need is immediate cancellation of the debts which continue to cause massive and unnecessary suffering to millions of people. That debt cancellation must be delinked from structural adjustment programs such as those designed under ESAF.

    Furthermore, I want to mention that ESAF is not a debt relief mechanism. In fact, it leads to increased debt burdens, and I will be citing the IMF's own reports in the external and internal review of ESAF. The mechanisms being considered for financing ESAF, selling part of the IMF's gold stocks and returning a $300 million reimbursement due the U.S. from an IMF account, are new and signal a reluctance to simply ask for fresh funds, the usual way of financing ESAF.
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    That reluctance should raise your antenna. ESAF has become a controversial program. For millions of people in Africa and other impoverished regions of the world, how ESAF is funded is immaterial. The question is whether it will be funded and for how long and whether any outside body will maintain any oversight.

    ESAF is far from broke. Recent calculations suggest that if IMF used the ESAF capital base, it could continue lending operations until 2015. What the IMF seeks with these unorthodox funding mechanisms is a self-sustaining ESAF, a program which would be able to live off repayments and never again have to come to the U.S. Congress for an appropriation. Approval of the use of gold sale proceeds for ESAF would most likely mean the end of any accountability to outside sources for a program which could extend into perpetuity.

    For people in the indebted countries, this is a monumental decision, and your role is vital, because the U.S. Congress is the only open elected body in the world with the power to affect how the IMF conducts itself. Is ESAF working? Is it, as the IMF claims, a suitable vehicle for debt relief? According to the IMF's own reports, ESAF is not achieving the economic goals the IMF proclaims for it, namely ''high and sustainable growth and external payments viability.'' An internal IMF review of ESAF conducted in 1997 in 36 borrowing countries found that annual real per capita GDP growth for those countries averaged 0 percent, 0. Developing countries not under ESAF programs average 1 percent real per capita GDP growth. In sub-Saharan African countries with ESAF programs, real per capita incomes declined over the period of IMF adjustment from 1991 to 1995. In terms of ''external payments viability consider that debt as a share of GNP for ESAF countries increased from 71 percent to 88 percent between 1985 and 1995.'' Again, this from the IMF's own study.
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    I was glad this morning to see Mr. Frank disagrees with the IMF on how much short-term pain is appropriate, but the other question that I have is that we need to pay attention that there has been no long-term gain which was a promise. Short-term pain for long-term gain. There has been no long-term gain.

    If ESAF is a failure in economic terms, it is a tragedy in social terms. Per capita spending in education in African countries implementing ESAF actually declined between 1986 and 1996 by an average of 0.7 percent. Zambia is spending $4 per person on debt payments and $1 per person on health. The number of births attended by trained health personnel has decreased dramatically in most African countries.

    The ratio of people to doctors in my home country of Kenya has more than doubled since the early 1980's to 22,000 people per doctor. This is not any way for a region to recover.

    In 1997, I visited my aunt at Kenyatta National Hospital in Nairobi, formally the pride of East and Central Africa. I found her sharing a bed with another patient, sleeping head to toe. Most wards had no beds because of lack of resources and all the beds had two people in them. I remember when guards used to check visitors to prevent them from bringing in food. Now the guards are gone and if you don't bring any food, your relatives simply won't eat.

    My aunt was lucky that the dollars I brought with me could buy the medications she was prescribed and which we had to go buy and bring back for the nurse to administer. Remember that Kenya is far from being one of the poorest African countries.
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    About a year ago, I learned that a friend in Uganda was desperately trying to raise money to take her father to Kenya for medical treatment, probably to Kenyatta National Hospital. No hospital in Uganda would treat him any further and for the surgery that he did receive there, his family had to provide clean water for the doctors to scrub with. This is in Uganda, the country most often cited by the World Bank and IMF as a success story of structural adjustment.

    Because of the experiences of millions of people, because of the well documented impacts of structural adjustment policies in Africa and elsewhere, I am here today to ask you to deny any authorization of funds for ESAF, including the approval of gold sales whose proceeds would go to ESAF.

    Mr. Chairman, I would also like to submit for the record a letter to Members of Congress signed by over 40 national local and international organizations which have joined in this call.

    Chairman BACHUS. Without objection.

    Ms. NJEHU. Thank you.

    The IMF claims that it does not force policies on any countries, that it has no such power. It is true that it has no legal power, but it has something far more powerful. It has money. The severely indebted, impoverished countries of Africa, Latin America, Asia, and the Caribbean find they cannot get credit from any other source. The IMF will lend desperate governments money, but only in exchange for their commitment to the standard recipes of ESAF's structural adjustment policies. And if a country does not maintain its policies to the satisfaction of the IMF, IMF's reports will effectively prohibit it from getting credit from any other source.
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    The adjustments recommended under ESAF are nearly identical, emphasize export production over food security; lay off public sector employees; slash public spending, such as health and education; raise taxes; raise interest rates; end subsidies on food, fuel and other basic necessities; and end support for local industry. After the standard three-year ESAF program, the net result is lower standards of living, increased debt burdens, higher poverty rates, and governments less and less able to provide for people or set a course for self-sufficiency.

    That is why so many countries have signed up for multiple ESAF programs. The goals haven't been achieved. The external debt has grown, and the IMF remains the only source of capital, so the cycle starts all over.

    In 1996 after resisting any participation in the World Bank-designed Heavily Indebted Poor Country debt initiative—HIPC—the IMF compromised. It would participate on the condition that ESAF was first fully funded. That condition quite plainly held debt relief hostage to ESAF funding, but in the face of the IMF's stubborness and the fact that multilateral debt cannot be addressed without the IMF, the condition was accepted.

    As it turns out, the HIPC initiative has proven to be a failure. The Associated Press reported on Friday that an internal assessment discussed by both the IMF and World Bank boards found that the HIPC initiative may ''not reduce amounts these nations already pay to keep up the accounts.'' And that, in fact, Guinea-Bissau and Mali will probably be expected to pay more as a result of participating in HIPC.

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    Although neither ESAF or HIPC provides real debt relief, IMF gold should be sold. The proceeds from those sales should not go to ESAF or HIPC, but directly to immediate debt relief that is not linked to IMF structural adjustment conditions. Let us think and act outside the IMF designed box around debt relief.

    ESAF's statistics sometimes make me wonder about the economic competence of the IMF. In the economic courses that I took, the one idea I grasped was the law of supply and demand. Have the IMF and World Bank decided to ignore it? On one of the central and changing strategies of ESAF programs is an orientation to export production so our young people work in skilled jobs for low wages in assembly factories and our best land is used not to grow food but cash crops like cotton, coffee, tobacco and cut flowers. We end up buying food that we used to grow. And when we go to sell our goods at the world market, we find that for commodity after commodity, prices are at all-time lows. And no wonder, the IMF gives the same advice to countries throughout Africa, Latin America, Asia, and the Caribbean. Everyone is producing the same goods.

    You have the power we in Africa don't—to make the officials of the international financial institutions and of the Treasury Department, which has been central in designing these programs, explain why they insist on doing this to Africa. Indeed, in the face of all the evidence of ESAF's tragic failure, why is the IMF so committed to it, so committed that it will condition its cooperation in other areas on having it fully funded? It can't be because of the amounts of debt payment since they are not that like themselves.

    So why not cancel the debt and end the cycling of reschedulings and new programs? What is being gained with all of this? And is it worth the continued buildup of debt, the growing poverty levels, the increased burdens on African women, the millions of children who die each year, the cuts in wages for those lucky enough not to get laid off, and the suffering that continues to afflict people in impoverished countries? Posing these questions will advance not only the cause of equitable and sustainable development in Africa and other impoverished regions but also call for a sound assessment of the likely and examined policies guiding the global economy.
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    Mr. Chairman, in conclusion let me just say that we are also very concerned about some of the conditions contained in H.R. 1095 and also similar conditions that are contained in the President's Debt Relief Proposal, and we share the concerns expressed by some of the Members this morning about the link to structural adjustment programs on our debt relief mechanism. Thank you.

    Chairman BACHUS. Thank you very much.

    Ms. Williams.

STATEMENT OF LYDIA WILLIAMS, POLICY ADVISOR, OXFAM AMERICA

    Ms. WILLIAMS. Thank you. Thank you, Mr. Chairman, for the opportunity to testify today. I have been asked to speak on the debt relief programs as they relate to the Fiscal Year 2000 authorization.

    Oxfam America is a private, non-profit humanitarian organization. We provide basic support to grass-roots groups engaged in self-help development in 30 countries. And based on this experience, we also speak out on policies that affect the low-income communities we work with, and the debt crisis is one of those issues.

    For Oxfam and I am sure for you as well, debt relief is not an end in itself. It is a means for mobilizing resources for poverty reduction. The bottom line for us is that debt relief must be delivered in a way that fosters accountability on the part of the creditors and the debtors and benefits the poor.
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    Before getting into the specifics of the existing debt relief program, I just want to repeat a couple of things we heard this morning about the link between debt and poverty. Mr. Summers delivered some, what I thought were stunning statistics.

    Let us take a look at Africa, the most heavily indebted region. As Mr. Summers said this morning, a child in Africa is less likely to learn to read than to be malnourished and more likely to die before the age of five than to go to secondary school. But despite this grim picture, African governments today transfer to creditors four times as much as they spend on primary health and primary education combined.

    In 1996, the World Bank, the IMF, and other creditors, including the United States, launched the Heavily Indebted Poor Country Initiative. And this was billed as a once-and-for-all exit from the debt trap. But nearly three years into the program, it is clear to us that HIPC has failed to deliver. It has provided too little debt relief to too few countries with too many delays and too many onerous conditions attached.

    As we have heard, countries must go through six years of an IMF program before receiving relief. Because these conditions are too onerous, only two countries, Uganda and Bolivia, have been able to meet the conditions and are now receiving relief. But once countries get relief they are receiving very little in real benefits. I am glad to hear Njoki quote from a recent World Bank IMF report which I have here—and you probably don't have yet, because it is still a confidential document, but the report found that for the first seven countries that have gone through the program, actual debt service will not be dramatically different from what they were paying before. And as Njoki said, Burkina Faso and Mali are actually going to be probably paying more in debt service than they are paying now.
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    So in reality, HIPC is a cruel hoax in that only that part of the debt that wasn't being serviced is now being forgiven. But, thanks to growing citizen pressure, including the Jubilee 2000 movement which is growing around the world, reform of the HIPC initiatives is on the agenda at next week's World Bank IMF spring meetings and later this summer at the Group of Seven summit. In the run up to the summit, President Clinton, as we heard this morning, and other leaders have put forward proposals in favor of earlier and deeper debt relief. But while all these proposals talk a good game about the need to link debt relief to poverty reduction, none offers the concrete mechanism for doing this. Nor do any of these proposals challenge the gatekeeping role of the IMF.

    And this brings me to the Debt Relief for Poverty Reduction Act of 1999. H.R. 1095, as we know, is a bipartisan bill which was introduced last month by Banking Committee Chairman James Leach. And I would like to commend you, Mr. Chairman, as well as Mr. Frank and other Members of the subcommittee for cosponsoring this important legislation.

    The bill offers a blueprint for fixing HIPC and it builds substantially on the current program for which the Administration is seeking authorization from the subcommittee. The goal of the bill is simple, to provide faster and deeper debt relief to more countries provided that they are committed to translating debt into sustainable development.

    And a summary of the bill is attached to my written testimony so I will just summarize a couple of the key points to the bill. First, the bill would introduce a fiscal cap into the HIPC initiative which reflects the human cost of debt. Governments that meet the eligibility criteria would see their debt reduced to a level such that annual debt service would not exceed 10 percent of government revenue. The bill recognizes that countries receiving relief should be committed to economic and social reforms, but rather than allowing the IMF to dictate these reforms and, therefore, which countries gain entry into HIPC, the bill calls for a more open process where the public indebtor countries plays a role in determining the conditions for debt relief. This, we think, is essential.
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    Finally, the bill offers what no other proposal out there does, a concrete mechanism to ensure that free resources benefit the poor. In exchange for deeper and faster relief, recipient countries under the bill would be required to set up a Human Development Fund and deposit the resources freed from debt relief into it. Decisions on how the funds are used would be made through a public process, and independent monitoring would be required. I should note this approach is being carried out today in Uganda which was the first country to go through the HIPC initiative, and by all accounts it seems to be working fairly well.

    Early action on H.R. 1095 preferably before the G–7 summit would be a strong sign of congressional leadership on this important issue.

    Let me just close by saying that in an increasingly interdependent world, the dangers of stability imposed by the deepening poverty associated with debt, the prospect of increased conflict, refugee flows, and environmental degradation must not be underestimated, nor can we in the United States allow the most vulnerable of this generation to be left paying for the mistakes of creditors and debtors of the last. Thank you.

    Chairman BACHUS. Thank you very much.

    Mr. Milling-Stanley.

STATEMENT OF GEORGE MILLING-STANLEY, MANAGER, GOLD MARKET ANALYSIS, WORLD GOLD COUNCIL

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    Mr. MILLING-STANLEY. Mr. Chairman, Members of the subcommittee, thank you very much for inviting me to testify here today. It is an honor, and I am proud to be here.

    Gold sales from the International Monetary Fund would not help the economies of the HIPCs. They would harm them. Gold mining is a viable and productive sector in the economies of more than half of the 41 countries included in the HIPC coverage. In ten of those countries, it accounts for between 5 and 40 percent of export earnings. It is consequently crucial to national economic well-being and employment not to mention their ability to honor debt-service payments.

    The sale of gold, even a small quantity, as Mr. Summers pointed out, from the IMF's reserves would bring further weakness in the gold price. I think it would be a bitter irony if the assistance being offered to the poorest countries in the world did further damage to their already troubled economies. As an illustration of this, I would just like to say I don't share Treasury's confidence that the IMF could minimize the impact of any sale on the gold price. As an illustration, in the two trading days immediately following President Clinton's recent announcement of renewed U.S. support for IMF gold sales, the price fell $10. That is 3 percent.

    The IMF has not sold an ounce since the late 1970's, but simply the revival of serious discussion about the issue has already done damage to the HIPCs and to other gold producers and economies dependent upon gold around the world.

    It is not just the producing countries among the HIPCs that would suffer from IMF gold sales. In many of the HIPCs that don't currently produce a significant quantity, there are advanced plans for major gold mining projects. These plans will only happen and do some good to the economies of these beleaguered countries provided nothing happens to stem the inflow of foreign capital investment and technology. The sort of thing that could do that would be any further deterioration in the gold price, the primary determinant of the economic environment against which such investment decisions are taken. Again, it would be wrong if the form of assistance chosen actually deters investment in gold mining which is potentially of enormous benefit to all of these economies.
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    As an earlier speaker, Ms. Birdsall, pointed out investment is the engine of growth, and I think gold mining investment is a very good example of precisely that and of what Congresswoman Waters was talking about this morning about inward investment being very important for these countries.

    Apart from the very real damage that IMF gold sales would do to many of the HIPC countries, there is also the question of the potential impact on several other countries not covered by the initiative but whose economies are also facing difficulties. Gold exports currently account for 5 percent or more of the value of goods exports from, for example, Fiji, the Kyrgyz Republic, Papua New Guinea, Peru, Uzbekistan, and Zimbabwe, while South Africa is heavily dependent on gold exports as the word's leading producer. Any reduction in income from gold mining in all of these countries does real harm not just to the governments and not just to those people directly involved in gold mining, but also to the economic fabric of whole communities that are dependent on that income for their own livelihoods.

    To address one of the points made in the testimony of Deputy Secretary Summers this morning, the current situation in the gold market differs significantly from the late 1970's when the IMF last sold some of its gold reserves for a very similar purpose to what is proposed now. At that time in the late 1970's, global gold production was dominated by South Africa and the Soviet Union. Output from the developing world was insignificant. In addition, at the time the gold price was on a strong upward trend creating a much more auspicious climate for the IMF sales. Since then, gold mining has become much more important to developing countries, and that has happened particularly over the last decade.

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    I would like to say I think the development of a viable gold mining industry is an attractive proposition for any HIPC, or indeed for any developing country. Gold mining can have significant benefits in addition to boosting export earnings. It attracts inward investment. It creates jobs. In some cases the existence of a significant gold mine can cause previously remote areas of the country to be opened up, encouraging the development of transportation links and other infrastructure and enabling the whole region to move away from a purely subsistence economy. The benefits of foreign investment to a developing country are well documented. This is exactly as I said the kind of investment leading to economic independence that Congresswoman Waters was talking about this morning. The sale by the IMF of part of its gold holdings would jeopardize all of these highly desirable developments.

    There are several alternatives that the fund could usefully consider. I am going to offer you several of them. My list is intended to be illustrative of some of the avenues the fund should be encouraged to explore rather than implying any specific recommendation about one alternative or another.

    First, the fund could borrow from the private sector. Under Article VII of its constitution, the fund is able to do this, but in practice it has never taken advantage of that.

    Second, the fund could institute the necessary changes to its somewhat arcane rules to allow it to pledge some of the gold against a loan of foreign currency.

    Third, the IMF could use its undoubted creditworthiness in the markets to underpin a bond issue with the proceeds earmarked specifically for debt relief. Four, the fund could end its policy of deeply subsidized interest rates including its current standard loan interest rate of 3.5 percent. That one is perhaps more contentious than some of the others, but I stress these are not recommendations, just suggestions that the IMF should explore.
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    Finally and perhaps most importantly, I think the fund could work with the economies of the developed world to encourage the reduction or elimination of trade barriers to exports from these countries.

    IMF gold sales would also have a significant adverse impact on the lives of individuals who hold gold all around the world rather than just people who mine it. For millions of people throughout Asia, the Middle East, and the Indian subcontinent, for example, gold is a primary form of savings. In cultures where women's rights to own property of any kind are restricted by custom or by law, gold is often the only asset they are allowed to possess.

    There are even potential adverse implications in this issue for the United States. Apart from people directly involved in the gold mining industry in this country, the second largest in the world incidentally, there is also considerable public concern over the issue. A survey of public opinion carried out earlier this month found that 59 percent of respondents disapproved of the proposal that the IMF should sell some of its gold reserves and 32 percent expressed strong disapproval.

    I would like to close with a quotation. ''There are a whole host of proposals out there that, on the surface, seem sensible and have great political appeal, but which, when carefully analyzed, are deeply flawed. It is easy to make dramatic statements. It takes a lot of hard work to produce sensible proposals.'' Those are the words of Treasury Secretary Rubin speaking in March about some suggested remedies to fix other problems within the global financial system. Secretary Rubin should be encouraged to subject his proposal that the IMF sell a part of its gold holdings to the same rigorous standard. If he refuses, I urge the Congress to do it for him.
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    The proposal is deeply flawed. It would hurt the very countries that most need help and it would have a number of other unintended adverse consequences. This Congress has a veto over the possibility of IMF gold sales. I would urge you to exercise that veto. Thank you very much.

    Chairman BACHUS. Thank you.

    Dr. Griesgraber

STATEMENT OF JO MARIE GRIESGRABER, Ph.D., DIRECTOR, RETHINKING BRETTON WOODS PROJECT, CENTER OF CONCERN

    Ms. GRIESGRABER. Thank you.

    I would like to thank the Chairman for the invitation to speak today. I work at the Center of Concern which is a Jesuit-related Catholic social justice research center. One of our international colleagues is present in the room today. He is the president of CIDSE, which is the umbrella organization of all the Catholic development agencies in the world and has brought their statement on debt, and I wonder if I might submit that with my testimony?

    Chairman BACHUS. You might recognize him if he would like to stand. I think I just saw him leave.

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    Ms. GRIESGRABER. When he gets back.

    Mr. FRANK. He can wonder why we are staring at him when he comes back.

    Ms. GRIESGRABER. We will point to him. Thank you. We will give this to you. We will even give you a clean copy.

    Ms. GRIESGRABER. I was asked to address issues of ESAF and to speak as an ESAF expert. I would like to note that I happen to be Chair of Jubilee 2000 U.S.A. And I am a strong partisan on debt reduction for the poorest countries.

    I would like to associate myself with Mr. Frank's comments on ESAF.

    When dealing with ESAF and its utility as a debt reduction instrument, we are grappling with issues of linking macro-economic policy with their microimpact. This is an institutional weakness at the IMF. The staff are all macro-economists and very good at it, but they are technicians. And as was observed this morning, they don't feel any of the pain of their policies.

    So I would really like to keep that in mind as we look at the effectiveness of ESAF in its own terms. As did Ms. Njehu, I will refer to a couple of the studies done internally by the IMF on ESAF, that is the Enhanced Structural Adjustment Facility, which relies on grants and some loans as its resources. It is not the core funding of the IMF. The program, the policy portion, lasts for three years. The repayment period is ten years. There is a 5 1/2-year grace period. The interest rate is 1/2 percent. I would like that new rate for my house mortgage. Only countries that qualify for IDA are eligible, and that was explained earlier today.
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    The problem with ESAF is not the amount of money and not the qualifications nor the interest rates. The problem with ESAF is the package of policies that accompany it. They are very strict, short-term stabilization policies. Now, that may be appropriate in an emergency situation to staunch the flow of hyperinflation or a balance of payments catastrophe. The problem with ESAF is that it requires the same policies be followed for three years and then, in the case of HIPC, an additional three years. That is like asking a patient to retain a tourniquet on his arm for six years. It is inappropriate over the long haul. It may be appropriate in the short term, maybe.

    The Fund has given two tasks to ESAF. Through macro-economic discipline, it is supposed to accomplish, first, growth, and second, external viability. Now, these have been very nagging questions for the Fund, in large part because the Fund itself is set up for short-term balance of payments crises. However, through ESAF, it is involved in long-term development issues, which are inappropriate to the IMF as an institution. The Fund is aware of this uncomfortable combination so they have done two reviews of ESAF, one internal and the other external.

    I would differ strongly with Mr. Summers' position that these are periodic reviews. Every five years perhaps, but I don't think that is a regular periodic review. The first of these reviews was an internal review, which to the Fund's credit, was made public. Now, both this internal review and the second external review that I will refer to, do not attempt the counterfactual, that is, what would have happened if the Fund hadn't been there? And then we get into some mythology. What they looked at were countries that followed the ESAF programs. Did countries that follow the program have sustained growth and external viability? The clear answer is no, they did not.
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    Now, regarding the internal report, and a second axe to grind, namely, the quality of IMF evaluation itself. This is an internal report, but the parameters it gave itself were extremely restricted. They do not ask the relationship between ESAF policies and the consequences. Rather, they simply ask: ''Did the countries follow the policies they were supposed to?'' Not: ''Were the policies appropriate? Did they do more harm than good?'' They only ask: ''Did the countries carry out the designed programs or not?''

    Even in its very sanguine summary, the internal report finds that the programs fell short of the most important objective of what is needed for countries to reach real growth. Their success in moving toward external viability has also been uneven. In a closer review of the report, you will find that real per capita growth rose virtually none. And again, as Ms. Njehu indicated, any growth that was probably due more to external factors than to the internal ESAF policies. Second, since 1981, average per capita income in ESAF countries has fallen behind comparable developing countries, not the rich ones. External viability has been disappointing in terms of balance of payments or their trade situation. And the debt of these countries has doubled. Between 1985 and 1995, countries on ESAF programs had their debt double.

    Let us turn now to the second evaluation. This was a first ever independent external evaluation that the Fund board requested. Again to their credit, the evaluation was made public in January of 1998. Three questions were asked of the external evaluators. The first touched on the development of the country's external position. In other words, how well they did on the balance of payments and on their debt payments capabilities. The second examined the social policies, and the third explored determinants and influence of differing degrees of national ownership.
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    The external viability was summarized in terms of the debt payments. The researcher proposed some elaborate techniques for assessing which debt indicator is better and which is more flexible and capable of showing changes over time. I don't think you want to get into that now. Professors Paul Collier and Jan Willem Gunning were the two external evaluators focused on social policies. They found that no research was done before policies were put into place to assess which sectors of society would be impacted negatively. Prior analysis could help ensure appropriate social programs. It could also make sure that the quantity and costing of budget line items is more appropriate to the needs. They found the sequencing of policies was inappropriate. The internal report also had noted there was inappropriate sequencing. Again, the staff suffer nothing if they propose policies that have negative consequences. Their salaries are not deducted. They don't have to live in Zimbabwe for three years if they mess up on the policy recommendations for that country. There are no consequences. And for the United States, we have the luxury of turning a deaf ear to the IMF. Poor countries so dependent on IMF policy requirements. This is the bottleneck issue: the Fund's approval is required for all other bilateral, multilateral loans, especially fast-disbursing money.

    And most significantly is the failure of the Fund to distinguish between short-term costs and long-term costs. Regarding local ownership, there is a strong recommendation by the external evaluators for greater flexibility, greater decentralization, wider involvement of more ministries of government, as well as a role for the public in the decisionmaking. Frequently, we are told, and this by members of government themselves, only the finance ministers are involved in the policy decisions. Even the full cabinet doesn't know what is going on. I would just like to note that Dr. Botchwey, who is now at Harvard and is a former Finance Minister of Ghana, talked about the problems with local ownership with regard to all the donors, not just the IMF.
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    In a study in Tanzania, donors were asked about ownership. A number of donor representatives said they saw ownership as the acceptance by the recipient country of what the donor wants. Some of the more forthright responses included, ''Ownership exists when they do what we want to do, but they do it voluntarily. We want them to take ownership. Of course they must do what we want. If not, they should get their money elsewhere.'' There is no option for elsewhere.

    Now, if this is the critique from the IMF itself, what was the response of the Board and the staff? The Board and the staff responded to both evaluations. They agreed with the external evaluators when the staff report coincided. When the external evaluators ventured very far afield, the Fund said this was inappropriate and the evaluators did not really understand the Fund. In this context, it seems unlikely that we can change ESAF so that it becomes a viable instrument for debt reduction. We do not see changes or an openness to change. We see inflexibility on the part of the staff. We see a closed attutude on the part of the Board to recommendations from their own external evaluators.

    Where do we go from this? H.R. 1095, which has been referred to here carries some very useful suggestions requiring local transparency and participation. Research throughout the academic community and throughout the World Bank and the IMF demonstrate these are the only conditions to loans that are implemented. If you want local ownership, you have to have a transparent and participatory process.

    Therefore, this is not an idealistic approach. Fundamentally crass pragmatism requires opening up the process. The Human Development Fund in the Leach bill has this component. Proposals like the Human Development Fund have been implemented in Uganda, Mozambique. There is an openness to this approach in Tanzania, Zimbabwe, and many other countries. It is frankly modeled after the Enterprise for the Americas Initiative which was a Republican initiative, thence is precedent in U.S. legislation. It has been very useful.
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    The economic and social reforms the Leach bill calls for require poverty reduction. The ESAF policies that are in place do not accomplish poverty reduction. So under the current situation, ESAF is not a viable mechanism for reducing debt. Thank you.

    Chairman BACHUS. Thank you very much.

    Let me ask Ms. Birdsall a question.

    Dr. Birdsall, you said that you felt like these—I may be mischaracterizing—but these development loans worked only where good government was in place.

    Ms. BIRDSALL. That is right. Very well put.

    Chairman BACHUS. Is good government in place in many of these African countries?

    Ms. BIRDSALL. I think that is an important question. I can't answer it very specifically, because I haven't followed in the last couple of years all the events in Africa.

    But I think your question reflects a fundamental problem with a lot of what we are talking about today, namely that it is too simple to hold responsible bad government in Africa, the IMF, or the World Bank, or other international institutions. It is hard to know when things go bad who to blame. Is it the IMF and the ESAF program that is at the heart of all the difficulties in Africa? I know Latin America better, and I can assure you, Mr. Chairman, and other Members of the subcommittee that IMF and other international programs which have emphasized sound economic policy, have emphasized fiscal rectitude, have emphasized getting the state out of the business of private enterprises, have worked in Latin America and that most countries in Latin America did take ownership of programs which were encouraged and supported by the IMF and the World Bank.
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    So we have to ask the question: ''Why doesn't it work in Africa?'' I think that is the real deep question for development experts to ponder. The answer to that question is very central to the question before this subcommittee which is: ''Is it possible in the future that these institutions can limit their support to countries that are prepared to deal with the difficult tasks before them? I would say that, as in my written testimony, the new emphasis on good governance, the rule of law, anticorruption, the emphasis on pro-poor policies which you know in more plain language means ''do not support governments through ESAF or HIPC or other mechanisms of the international institutions that are finding ways to continue to subsidize the rich, that are finding ways to continue to line the pockets of those in government.''

    Support needs to be directed to countries that have sound leadership and are prepared to take the politically difficult steps associated with development. Why is it that some countries grow and others don't? Some countries in Africa are growing and others are not. So I think the emphasis on good government is something important for the future and we have to think about what it means in interpreting past failures as well as past successes.

    Ms. GRIESGRABER. Mr. Chairman, I would like to just recognize Justin Kilcullen from the CIDSE organization.

    Chairman BACHUS. Thank you. If you'll just introduce them individually.

    Ms. GRIESGRABER. Yes, Justin is the head of TROCAIRE which is the Irish Catholic Development Agency, and he also chairs CIDSE, which is the umbrella organization of all the Catholic development funders in the developed world.
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    Chairman BACHUS. We are very glad to have you here today. Thank you. What is the number of our bill Debt Relief for Poverty Reduction?

    Ms. WILLIAMS. H.R. 1095.

    Chairman BACHUS. Are you familiar with Bill 1095? I know some of the other panel are supportive of it.

    Ms. BIRDSALL. This is a bill that has been introduced by Congressman Leach and colleagues.

    Chairman BACHUS. Yes.

    Ms. BIRDSALL. I am familiar with the idea, but I am not familiar with the details. And I have before me the testimony, I think, of Lydia Williams, about the bill.

    Chairman BACHUS. Have you got any impressions?

    Ms. BIRDSALL. I think it is going in the right direction. Yes, I think it deserves support. You know, it is difficult to be in the middle of these arguments, which is where I find myself. On the one hand——

    Mr. FRANK. Surely you don't expect to get sympathy from us about being put in the middle of an argument.
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    Ms. BIRDSALL. You are right. You are more in the middle even I suppose as a group. On the one hand, I think that much of the criticism directed by my fellow witnesses today on the programs, particularly the IMF ESAF programs in Africa is warranted. There has not been sufficient attention to the pain. There is a problem of the IMF being in there for a long time on issues which are better dealt with, I believe, by the World Bank and the African Development Bank.

    On the other hand, I do believe that it is necessary to avoid subsidizing bad behavior on the part of governments. It is necessary to design programs which support those governments prepared to take the difficult steps and prepared to deal aggressively with poverty, with environmental problems and so on. And so the challenge is to design programs, and I think the challenge before Congress is to create mechanisms for monitoring how the institutions behave so that they can find this difficult middle ground between on the one hand, avoiding moral hazard associated with simply giving away the money, since that would create possibly another round of difficulty, and, on the other, avoiding imposing on countries and their peoples the kind of pain that isn't necessary.

    Chairman BACHUS. Leach-LaFalce doesn't really give money away.

    Ms. BIRDSALL. Not at all. Leach-LaFalce has the advantage, for example, creating this mechanism of the Human Development Fund which you know—I don't know the details of how it would work, but the concept is excellent, because what it does is it, in effect, ties debt relief to a kind of insurance that the resources would be used through a participative mechanism to deal with human development problems. So I think the issue is how it will work, but the concept is excellent.
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    Chairman BACHUS. Dr. Griesgraber, she mentioned that there are a lot of economists at the IMF, the macro-economists and that that they—I think Ms. Williams also made that statement—that they have been successful maybe in looking at economic policy but not in seeing its effect and the idea that they have not—that they really have no mechanism to manage their policies or to see the effect of them. Is that fair?

    Ms. BIRDSALL. I think a simple way to think of it that the economists at the IMF work hard on the programs in the countries that they are supporting, but they never leave the capital city. Indeed, they often never leave the offices of the central bank. It is a little bit unfair since many, of course, do travel, but their professional interest and engagement is on macro-economic issues and it is human nature that you see the pain more if you are working more directly on issues that bring you to the field and show you whether children are in school or not, whether they are being fed or not, what the health clinic looks like and so on.

    Chairman BACHUS. I will yield to Mr. Frank. Really I would say this. All your statements have given us a lot of food for thought. I think what I intend to do is just read these statements and follow up with some written questions.

    Mr. FRANK. Thank you. Just one question.

    You say, on page 3: ''gold sales would do damage to many of the HIPC countries.'' You mentioned six countries. Which of them are HIPC countries? Are they all Fiji, Kyrgyz Republic, Papua New Guinea, Peru, Uzbekistan, Zimbabwe?
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    Mr. MILLING-STANLEY. No, sir. If I may correct you, the paragraph to which you are referring specifically states these are non-HIPC countries whose economies are troubled. I actually haven't named any of the HIPC countries at all.

    Mr. FRANK. Are any of the HIPC countries in this 5 percent or more category?

    Mr. MILLING-STANLEY. Yes, sir. You will find that in 10 of the HIPC countries, I couldn't name them all I am afraid, but in ten of the HIPC countries gold exports——

    Mr. FRANK. If you would give me the list, I would appreciate it.

    Mr. MILLING-STANLEY. It has been submitted, sir, in the written testimony. I can tell you, for example, in the case of Ghana, gold accounts for 37 percent of the value of its exports.

    Mr. FRANK. I didn't see it with your testimony. If you can submit a separate—I will try to find it. I appreciate that.

    Mr. MILLING-STANLEY. There is another piece of supporting documentation I submitted, sir.

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    Mr. FRANK. Not a problem. I will take that. Not only turning to the others, there is this—I have a couple of questions. I am pretty well persuaded that the ESAF mechanism doesn't work well, but I have two questions. Do we need a substitute, and if so, what is it? We have in the bill that I am pleased to cosponsor, the Human Development Fund, but we don't monitor that. People call it a fund and they say this. I guess—there is this broader question. It has to do in part with what the Chairman asked Ms. Birdsall. Do we agree that we should deny these funds to badly governed countries?

    Part of the problem is a lot of people live in badly governed countries, and it is not their fault that they are badly governed. This is troublesome. Obviously we don't want to throw money away, but people who live in a badly governed country may already be suffering because of that. And particularly if we are talking about oppressive countries, it is not the fault of the people. So that is my first question.

    When I ask do we need a substitute for the ESAF, that is, are we saying that there are some countries that are very poor and very deeply in debt, but they are so badly governed that we won't give them debt relief because it wouldn't be used well? My own sense is and this is the dilemma, even the badly governed countries probably some of it is going to get through, but let me ask you that first. Are we saying that there are some countries that are so badly governed that no matter how poor they are and how burdensome their debt, it just doesn't make sense to try to help them?

    Let me start with Ms. Griesgraber.

    Ms. GRIESGRABER. Thank you, Mr. Frank. There are countries that are very badly governed, but let me just say if you look at ESAF and how——
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    Mr. FRANK. Excuse me, please. No, I am sorry. I am not—I don't want you to look at ESAF. I want answers to hard questions.

    Ms. GRIESGRABER. I am going to answer your hard question. The hard question——

    Mr. FRANK. Excuse me. I have to tell you, I got a little frustrated. Most of you did what I don't think really is useful: ''Somebody else said it so I am going to repeat it.'' Please don't repeat these. Let us get to the hard questions. There is a lot of agreement. You all have managed to say—a lot of you have repeated what everybody else said. Don't do that. Do we—are there some countries that are so badly governed that we shouldn't give them any money?

    Ms. GRIESGRABER. The Human Development Fund will serve as an enticement for governments to shape up.

    Mr. FRANK. Ms. Griesgraber, I am sorry. They are tough questions. You are going to have to answer them. Why don't you?

    Ms. GRIESGRABER. Are there countries that are so bad, you should not give debt relief to, yes.

    Mr. FRANK. We have got to decide that. Some of us are in agreement with this. And then the question is, OK, who decides, and how do we decide what are the criteria? I want to get beyond the rhetoric.
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    Ms. GRIESGRABER. The criterion is your openness question. The criterion is will they, in any way, allow their people a voice. If they do, then they set up this fund.

    Mr. FRANK. Your answer would be——

    Ms. GRIESGRABER. It is a political answer.

    Mr. FRANK. Right, it is a procedural—that is fine, but that is what we need, because we have got to write a bill and we have got to answer these tough questions. So you would say no matter what the substantive outcome, as long as there is genuine participation in this process, then you would go forward and include that?

    Ms. GRIESGRABER. Yes.

    Mr. FRANK. Ms. Williams.

    Ms. WILLIAMS. I think you are right. That is a very tough question, and I think the way the bill is written, it attempts to look at——

    Mr. FRANK. Excuse me. I didn't ask you how the bill is written. I know it is a tough question.

    Ms. WILLIAMS. I will give you a couple. Sudan, Somalia, countries that I don't think——
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    Mr. FRANK. I have got to be honest with you. I don't need you for the easy answers. I need you for the tough answers. We have got to write a bill. We have a lot of agreement. I want to get to what we have to do to write a bill. That is what I need you to tell me.

    Ms. WILLIAMS. Those are the kinds of countries where——

    Mr. FRANK. There are some you would write off?

    Ms. WILLIAMS. Absolutely where you don't have reasonable assurance that the country is going to do the right thing and commit the resources.

    Mr. FRANK. But again, I think out of both of these I am getting—and I want to hear from the others as well, the answer is, yes, but it is not that you have to be a good government to get the money, but you can be bad enough so that you don't get it. That is, we do have a cutoff, but it is a cutoff fairly low, because we recognize even in what we might consider generally poorly governed countries, still some of that money will get to the people who most need it.

    Ms. Njehu.

    Ms. NJEHU. Yes, I think probably what I would do is throw back a question at you, because what I—from the perspective that I am coming from, what we are talking about, debt cancellation, is really going to benefit people, not necessarily the government. The ordinary people are the ones who are suffering.
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    Mr. FRANK. So you would say no matter how badly governed, go ahead with it?

    Ms. NJEHU. I wouldn't say that, but I would be hard pressed to name any specific governments or any specific countries and say that they are the ones who—that these countries should not receive any debt cancellation, and one of the concerns that I have on this question is that for many years, and I may be repeating what other people have said——

    Mr. FRANK. Please don't. I am serious. It is not helpful. Rhetoric is easy. I am telling you, I am being tough because I want to get this bill through and reconfirming each other and all the good feelings we have doesn't buy anybody anything.

    I think we are reaching a consensus. Ms. Waters said it. You heard the Chairman say a Republican speaking about the humane impulse. We are getting there, but we need to get the tough questions answered. And if you said to me, ''Well, theoretically there are some countries that are so bad,'' but you can't think of any, then the answer is no. That is a reasonable position. It is a reasonable position to say it is bad enough if you live in country X or Y that is run by a repressive government, why should we add starvation to it? I understand that, but not answering those questions is the only indefensible position.

    Ms. NJEHU. When I said I will repeat what someone has said, I was going to repeat what the Financial Times said in reference to Mobutu, because for a long time, the institutions, the IMF and World Bank were willing to give money to governments and to heads of states where they knew that the money was not being used for the purposes. That is why, you know, you have countries that receive billions of dollars, and when you look around, you can't see how that money was used.
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    Mr. FRANK. I know that. I am against it. The question is what do we do now?

    Ms. NJEHU. What we do now is we hold both the lenders, the World Bank and the IMF and bilateral donors, accountable as well as we hold the borrowing governments, because I think the tendency is to say that we are going to hold those countries——

    Mr. FRANK. I am sorry. You disappoint me. I work hard at trying to hold the IMF and World Bank accountable. But answering easy questions doesn't help me answer hard ones. It is perfectly reasonable to say in the case—by the way, there is a reason why thugs like Mobutu and Marcos and Suharto were funded. It had to do with the Cold War.

    All you have to do is say you are an anticommunist and hold out your bucket. The demise of communism has, frankly, given us an opportunity to hold these people to a better standard. They don't get any points anymore by threatening they are going to make a deal with the communists. I would just remind you, I don't want the IMF to have control of this money.

    My second question is, who makes these decisions? I don't want the ESAF. I don't want the IMF, but there is a threshold question. Do you say some governments shouldn't get it?

    Ms. NJEHU. Yes, I would say that some governments shouldn't get it. But do let me finish, because I do think that the question of who is held accountable today.
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    Mr. FRANK. I agree with that. I am sorry, you can think Mobutu if you want to, but I agree with that. I am not going to have you lecture me, as I won't lecture you on the things that we agree with. I want to cut the IMF out of it. I want to make them not accountable.

    But let me ask you, suppose we are successful and do that, who then decides whether or not the Human Development Fund, for instance, is a legitimate operation in a country and not a sham? I can see Marcos or Mobutu setting up a Human Development Fund, because they and their families are human, and they developed pretty good with those funds. So what do we do now, assuming that we cut the IMF out and we take this Human Development Fund mechanism, who monitors whether or not it is being appropriately used? Let me start with Ms. Birdsall on that question.

    Ms. BIRDSALL. HIPC should not support governments that are not behaving well. It is just a waste of money.

    There are other instruments, of course, besides the HIPC and the ESAF that can be used, with small amounts of money, in the case of the World Bank, that is small amounts of money to nurture along the good guys in each setting.

    Mr. FRANK. Who decides what is the mechanism for deciding who is a good government and a bad government? That includes, by the way, what happens if you start and a good government gets bad. There is a monitoring capacity built into it.

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    Ms. BIRDSALL. That is right. I think this Congress could ask Treasury to do that. First of all, the proposals now that Treasury is bringing to the redesign of the HIPC program would reduce the time period of monitoring before a final legal agreement to do the debt relief from six to three years.

    Mr. FRANK. I am for that. That is an easy question. Of course, you should not have to wait six years when you are dying. I do not want you to wait six years before you get a quarter, I want you to start getting the money right away. All the more important to have the monitoring, because you don't wait until you get the package done.

    Ms. BIRDSALL. There should be a way to have, even with a three-year wait, resources flowing to those countries.

    Mr. FRANK. Please.

    Ms. BIRDSALL. That can be built into the HIPC.

    Mr. FRANK. I understand that.

    Ms. BIRDSALL. What is your question now?

    Mr. FRANK. Who decides, and by what criteria, whether the countries ought to get the debt relief right away, and how should we monitor it?

    Ms. BIRDSALL. I would endorse the general approach that now exists, with some more monitoring by Treasury, monitored in turn by Congress. Namely, the boards of the IMF and the World Bank would decide as they do now on eligibility. They could decide on the Human Development Fund every year. The periodicity is not clear.
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    Mr. FRANK. Your objection is not so much that the IMF board objects, but you can separate out the ESAF. You can say to them do the IMF, but do not use the ESAF mechanism, or would you keep the ESAF mechanism?

    Ms. BIRDSALL. I would keep the ESAF mechanism for the three years. A country to be eligible would have to be in the ESAF program. If I were Congress, I would ask Treasury to do the kind of monitoring of how are they making that judgment. What is in those programs.

    Mr. FRANK. My question really was for the people who wanted to abandon the ESAF structure, what they would put in its place.

    Ms. Griesgraber.

    Ms. GRIESGRABER. I would have a two-part structure. One would be domestic, which would include representatives of civil society and a chair for the government.

    Mr. FRANK. Domestic in the recipient countries?

    Ms. GRIESGRABER. Yes. And the other would be the international donor community. There would be three members from each side and it would be chaired by a U.N. agency.

    Mr. FRANK. There would be one from each country?
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    Ms. GRIESGRABER. I would put three from the countries so that you have civil society and a parliament, and if you have a separate executive branch, great or just a third leg. And then three from the donor community, one multilateral and maybe two bilaterals, and somebody from the Secretary General's office or from UNDP.

    Mr. FRANK. I ask everybody to think about that. This is obviously not the finite answers today. This is a take-home exam, unlike Larry Summers, because as I look at our bill, I like the Human Development Fund, but it seems to me we need a piece. It is not a self-executing fund.

    If I can let the other two answer this, Mr. Chairman.

    Ms. Williams.

    Ms. WILLIAMS. I think Jo Marie sounds like she is on the right track with her proposal. I agree that the United Nations ought to be brought in. It is an independent body, it is not a creditor, it is not a debtor.

    Mr. FRANK. So United Nations development program?

    Ms. WILLIAMS. And civil society participation is essential. In Uganda, they set up a steering committee which is made up of official donors as well as local private groups.

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    Mr. FRANK. That sounds like what Ms. Birdsall is talking about, you are developing the capacity. If you require them to come up with a civil society representative that in fact passes scrutiny, that may give them the incentive to do it the right way.

    Ms. Njehu, how would you monitor it?

    Ms. NJEHU. I would agree with what has been said. But one of the proposals that is out there is the question of an independent debt cancellation arbitration panel or body. When individuals or countries go bankrupt, there is a mechanism where there is a neutral party that comes to address that question.

    Mr. FRANK. Be careful, about a hundred feet away that is being dismantled in the Judiciary Committee, so don't count on that.

    Ms. NJEHU. I think it would do us well to look into the question of having a debt arbitration panel that is independent, neither debtor nor creditor.

    Mr. FRANK. I guess the U.N.—there might be a role here because somebody has to pick something and the U.N. might be an interesting—I thank you. I appreciate your answers.

    I think for me and many of my colleagues on this subcommittee, there is a lot of agreement on the general outlook on breaking out of the ESAF, cutting down the six years, and having some criteria. Nothing is going to pass here unless it has both some criteria and some monitoring. My advice would be to focus on that.
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    And if you can help us develop criteria for which governments qualify and monitoring for judging those criteria, and I think the Human Development Fund has a lot of agreement as the vehicle, then I think you can get a bill. I think there is enough general perception of the need, so right now, although there would be a lot of resistance to getting rid of ESAF, come up with a substitute for the ESAF mechanism for those judgments, and I think you will help us get a bill through.

    Thank you for your indulgence, Spencer.

    Chairman BACHUS. I would just close by saying this. I would invite you—what I think we are going to have to do to put together a mechanism, and the bill that we have all filed I think is a framework, is get a lot of input.

    We have—I would invite you to work with our staff on our subcommittee, work with Members' staff on reviewing this bill. I will say this. The concept that intrigues me about this is we are involving civic society. We are, in a sense, going around the government, and I guess that is maybe not a fair statement, but we are—there are a lot of agencies who are doing good work. They have experience in doing it, and in some of these countries where the governments are not up to par, we obviously involve the people from the country on it.

    You have to have people from the donor country, but I think you also have to build into that some people from the relief organizations with experience. But I think the key is going to be how well it is administered, and I would submit that a bad track record in the past where we have not had accountability and where we have not had a mechanism in place should not exclude a country from participating simply because we didn't build accountability in, sort of a fresh start.
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    It is sort of like with our children. If we turn them lose with a lot of money and no curfew and don't check on them and don't monitor and don't help them and they make bad grades, whose fault is that?

    So we would invite your continued input and resources. And as Mr. Frank said, if we can—as Representative Frank said, if we can get legislation together that will work or that has a promise of what is intended, then I believe it can be passed. And we want to have sound legislation that people cannot shoot holes in.

    We very much appreciate your participation today, but more importantly, we invite your participation as this goes forward.

    With that, Mr. Ryan, did you have any questions?

    Mr. FRANK. We have just given unanimous consent to gold sales, Paul, while you were gone.

    Chairman BACHUS. As far as gold sales, this is the bad news, the United States also owns gold. There is a potential for the sale of that gold, too.

    Mr. MILLING-STANLEY. If I may respond to that, I think that is part of the problem with the IMF selling. The IMF can't sell without the approval of the U.S. Congress. What would be the message that is sent to the markets by the world's largest single holder of gold reserves allowing the world's third largest to sell some of its gold? I think that would be very bad for HIPC countries and developing countries all over the world.
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    Chairman BACHUS. One thing that we have to look at, is gold a good stored value or is there a better return for our investment? What is in the national interest? Not so much—our concern is for the national interest as opposed to the price for gold.

    Ms. BIRDSALL. Mr. Chairman, could I make a comment on the other witness' comments. Is that kosher?

    Chairman BACHUS. Yes.

    Ms. BIRDSALL. I think that, although there could be some marginal effect for some HIPC countries of a reduction, marginal in the price of gold, and it is an export for them, we have to keep in mind two things.

    First, most of these countries have been subject to much greater swings in prices because of changing prices of oil, cocoa, coffee, such that any effect at the margin on the price of gold, to associate it with harm to the HIPC countries independent of all of the other things going on in the world, strikes me as making a mountain out of a molehill.

    The second thing I would like to say on this issue as a development economist is that we cannot place our hopes for real development in Africa or the other poorest countries of the world on extraction of minerals. It is a curse for poor countries to rely on gold, oil, and so on. The countries that have really made progress in terms of reducing poverty, generating jobs, improving people's lives, are the countries that have not been able to rely on natural resource extraction, who have had to rely on educating their people and putting them in good jobs. Those are the countries, Costa Rica, Taiwan, Korea, where there has been an explosion in per capita income.
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    So I think this is just to put in perspective the issue of gold sales as it might affect the HIPC countries. There may be other larger issues of concern with the IMF selling gold, but I think it is very misleading to put on the agenda that somehow it should not be done, because it would add to the difficulties of the poorest countries.

    Chairman BACHUS. Well, I know Mr. Milling-Stanley is going to have to respond, and I regret ever mentioning the subject. I would say this. If I were Mr. Milling-Stanley, one thing I would point out is that commodity prices across the board are low, and this is killing those countries. If the price of oil was up, and if the price of some other commodities were up and only the price of gold was down, it would not be as bad.

    The other thing, obviously is—coming from a coal mining district as I do, the extraction of minerals in the United States has brought us a lot of good paying jobs and allowed a lot of people to be employed, but then we are getting into writing books now. And at times, it maybe doesn't have the promise it should. But it has even in the United States made a good living for a good number of people.

    Mr. Ryan, you are the gold expert and you have a degree in international monetary policy. I am going to go talk to a school, because I had a commitment for 2:45, but Mr. Ryan—they are not there yet, so I can stay.

    I am still going to let Mr. Ryan take the Chair as a subcommittee Chairman.

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    Mr. RYAN. [Presiding]. I will be very brief, but I do want to give——

    Chairman BACHUS. We do not want to end the record here. We also have Members' staffers who are going back to report to the Members. I appreciate the candid answers of the panel. I think this has been very helpful. You say what is on your mind even when you disagree with each other. That helps us.

    Mr. RYAN. Thank you, Mr. Chairman. I will be brief, because I know that everyone has been here for awhile.

    I do want to give Mr. Milling-Stanley a chance to respond only out of fairness, not because I appreciate what he is about to say. Just kidding.

    But I do think that selling gold in and of itself is a marginal issue, but the price of gold has great consequences on many, many other things. So you cannot look at it in an isolated way. You have to look at gold sales as a leading indicator toward other things. I would like to give you a second, and then I want to ask each panelist one real quick question, and then we will adjourn.

    Mr. MILLING-STANLEY. Thank you. I appreciate an opportunity to respond.

    Mr. Frank had not seen the document that we have prepared on the HIPCs and the impact of gold production to their economies. There is also an executive summary. I would like your permission that these are included in the record.
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    Mr. RYAN. Without objection.

    Mr. MILLING-STANLEY. As far as the impact of gold sales being marginal is concerned, if we simply take not the result of any sales of gold, but if we take the $10 fall that followed President Clinton's embrace of the notion that some of the IMF's gold should be sold to help the HIPCs, that alone, sir, cost the gold producers among the HIPCs $50 million in two days alone.

    Not an ounce has been sold. I do not regard a 3 percent fall in the commodity before anybody even sells anything as being marginal. I have been in the market for almost 30 years, and I have no way of assessing what an actual sale by the IMF would cause, but just the discussion was very, very damaging indeed.

    Mr. RYAN. Going on that point, and I don't know the answer to that question and I am not sure whether it is extremely relevant or not, but do you believe—and if you listen to Dr. Summers' testimony, I asked him the question about the impact on the worldwide price of gold with this sale, which obviously is very small relevant to the current existing portfolio, this combined with other statements on gold with Swiss delinkage, with Swiss sales on the horizon, with this albeit small amount of gold sales.

    Do you believe that that may, in fact, trigger a larger consequence, a larger decline in the price of gold which very well might serve as a detriment to not just these economies but to other economies?

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    Mr. MILLING-STANLEY. If I may answer a broader question than you asked, I think it is precisely at this time with talk of Switzerland perhaps selling some of its gold in a couple of years time, with oil prices, other metal prices so heavily depressed, I think it is precisely because of that that we should not add to the burdens of the HIPCs at this particular point when there are clear alternatives which I have outlined in my testimony.

    The other thing, it seemed to me that Ms. Birdsall was suggesting that perhaps gold mining was not a particularly helpful industry for emerging countries to be in. I know what classic economic theory has to say about being involved only in the extractive industries, and I agree except when there are very, very few alternatives. Manufacturing is not growing very fast in the HIPCs. I know of the existence of one gold mining company in North America which is planning to invest something like $300 million in a venture in Tanzania. I am not aware that Bill Gates of Microsoft has any similar plans for investment in semiconductor technology in Tanzania.

    Mr. RYAN. I think the relevant questions that have been posed as to whether or not this money will make it into the HIPC, will it go to ESAF and non-debt relief functions. That is a valid question.

    Do you have concerns that we will circumvent oversight role if we go to a permanent funding mechanism? I don't know if you answered this question before, and I apologize, because I had to go to a meeting. One, are we circumventing oversight on ESAF and HIPCs?

    Two, will this money go toward debt relief?

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    Three, do you have concerns about the moral hazard issue with the debt relief? I would like to see if you can quickly address those points, and then we will adjourn.

    Nancy.

    Ms. BIRDSALL. I think it is a legitimate question, the question of oversight. However, I think it is a mistake in the long run to rely on new appropriations and new authorizations as the sole vehicle for oversight, because beyond the issue of the HIPC and the ESAF and the IMF, the fact is that the World Bank is not going to have much call, if ever, for new capital replenishments.

    The Inter-American Development Bank will probably never need a new capital replenishment. So eventually Congress and the U.S. will face this issue anyway. So I think it is appropriate to start thinking about other vehicles for the kind of accountability and oversight which is a legitimate concern despite the fact that the U.S. has, as do all members of these clubs have, board members. I think it is true that the additional discipline from the legislatures makes a difference.

    Will the money go for debt relief? That can be built into the design of the program, the HIPC, which is under discussion again.

    Mr. RYAN. But it has yet to be built into the design, correct?

    Ms. BIRDSALL. I don't know the details of the discussions at the moment, but there is no question that it is possible to ensure that there is the link that you are looking for.
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    On moral hazard, I think I probably took the strongest position on the panel of caution to avoid the problem of moral hazard that does arise if there is debt relief across the board independent of government policies, independent of criteria in recipient countries. Indeed, in answer to Representative Frank's question, I think all of us eventually said, ''Hmmm, true. No debt relief in countries that are behaving poorly.''

    Ms. NJEHU. The question regarding moral hazard, countries for decades have suffered under the debt crisis. And the question is are we willing to say that they continue to suffer because of the debt?

    In the last eighteen months we saw with the Asian crisis where all those kinds of considerations were put aside as bailout packages were pulled together. And this was a bailout of banks and investors. Here we are talking about debt relief that would benefit the most vulnerable impoverished people, and I think we should be willing to go to bat for ordinary and poor people in the same way that money was put forward to bail out investors in the Asian economic crisis.

    On the question of the loss of oversight, I think it is a very, very serious consideration. For people in indebted countries, the only hope they have and way of questioning and calling to question the record of these institutions is when hearings like this one happens. If, indeed, these institutions are not going to be coming before the U.S. Congress, if indeed they are not going to be questioned by any elected body, then this is a serious consideration that leaves a lot of people at the mercy of policymakers who are not accountable and processes in which they do not participate.
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    And the question of debt relief, ESAF and debt relief, I think this morning we heard, and this afternoon, we heard plenty about ESAF and its programs and what that means for poor countries. So using that—the ESAF facility to administer debt relief is, I think, a bad idea. ESAF is about requiring countries to adhere to IMF policies, and it has very little to do with debt relief. And the kinds of conditions that I would be thinking about and willing to agree to are conditions where civil society is involved, where there is transparency and accountability and participation.

    Thank you.

    Mr. RYAN. Sure.

    Ms. WILLIAMS. On the first question, am I concerned about Congress losing the ability to have oversight over ESAF? Yes, I am. And I think Congress should look carefully at making sure that does not happen.

    On the second question, my understanding is that I think the split in the gold sales proceeds would be about 60/40. Sixty would go toward ESAF, and 40 percent would go toward HIPC. I get that figure from Treasury. We would like to see more resources go toward HIPC. And we are very concerned given what we have heard today, and we think Congress should look very carefully before approving that.

    And on moral hazard, yes, that ought to be a concern and the Debt Relief for Poverty Reduction Act, that bill seeks to address that by requiring recipient governments to set up a fund into which the proceeds of debt relief would be deposited. So for a government that might take off with the money, that is not going to happen.
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    Chairman BACHUS. Mr. Ryan, if I may, moral hazard, we have been very concerned about moral hazard and it has been a concern as it relates to the international lending community where they will lend to foreign countries at high interest rates as opposed to domestically, or lower interest rates with the expectation——

    Ms. BIRDSALL. That they will be bailed out.

    Chairman BACHUS.——That they will be bailed out.

    Now, I am not sure—what we are talking about with this debt relief bill is an altogether different thing, because we are not bailing—we are not creating expectation for those lenders. Certainly the people that we are seeking to assist are poor people who had no expectation, who didn't borrow the money. There is a moral hazard, but I think it is a different set of circumstances, although obviously any time you do something for someone, it creates a moral hazard in that it maybe creates an expectation. I think it is more remote in this situation.

    Ms. BIRDSALL. If I may, it is a peculiar term of art in economics which I think confuses more than it clarifies.

    But I would say that the application of the concern about moral hazard in the case of the HIPC would not be that the people on the ground who might ultimately benefit from debt reduction would somehow, you know, expect more. My concern would be with the governments which went through one round of borrowing, did not spend the money well, have the debt of their country written off.
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    Chairman BACHUS. But see, it is not written off.

    Ms. BIRDSALL. I think here your point, Mr. Chairman, is the right one. Namely that it is not reasonable to punish current and future people for errors of former governments. At the same time, I think it would be unreasonable to reward current governments that are not taking appropriate steps. That would create the moral hazard. Well, just get into debt and somebody will come along later and take care of you.

    Chairman BACHUS. Debt forgiveness could have created, but this is really—we are taking this money and putting it into a fund. They will be paying it back, it is just that it will not be to us, they will be investing it into their infrastructure of their own country or in humanitarian relief at home and education.

    Mr. RYAN. Part of the moral hazard question ought to be dissected not only on government and institutional lending, but a lot of these debts have a private component to it. A lot of these loans combine government institutional lending such as the IMF with private lenders, with private banks. And the question that I think is a very important one is how does it affect the relationship between these debtor nations and the private lenders? How does that moral hazard work? Do we incentivize risky creditors to be riskier creditors?

    Those are things that everyone should take a look and think about as we go down that road, and that is something that ought to be addressed in any future actions, whether it be through HIPC, ESAF or what we do in Congress. That is a big part of the portfolio that are facing these countries.
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    Ms. BIRDSALL. If I can comment on that quickly, the fact is that the HIPC program is directed to countries which—the HIPC program would not really affect current private or commercial debt. It would be relief for public debt, multilateral debt. But more important, and I think more telling is that these are countries that don't have much commercial debt, because they have never had the capacity to enter into private markets. The great benefit of HIPC would, of course, be that it might make them more capable of going to the private markets, since potential lenders currently look at a country and say, 60 percent or 50 percent of tax revenues for the next fifteen years have to go to pay these onerous debts, so it is not a very auspicious place to lend your money.

    Mr. RYAN. The road that we are traveling down right now essentially says at the end of the day, we have to have sound money. We have to have stable investment horizons predicated on a policy of price stability. If you don't have that, you don't have much else, and I think that is where we are ultimately going down on the conclusion.

    Chairman BACHUS. I think we do make these countries more creditworthy by raising their standards of education and improving the poverty.

    Ms. BIRDSALL. Absolutely.

    Chairman BACHUS. Addressing those issues ultimately will on a permanent basis——

    Ms. BIRDSALL. Absolutely. This is why the Human Development Fund concept is very important.
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    Mr. RYAN. Mr. Milling-Stanley.

    Mr. MILLING-STANLEY. I don't want to get into moral hazard questions. Those are not my area of expertise. I would like to talk about simply how you finance that debt relief and so forth.

    If I could just extend my response to what Ms. Birdsall said about making mountains out of molehills, I focused very much on the potential impact on HIPC gold producers, potential HIPC gold producers and seriously economically troubled nations that are not yet HIPC recipients but might well need this kind of aid if the price of their primary export commodity were further depressed. But it is probably appropriate, especially since I am not a United States citizen, as you can probably gather from my accent and perhaps the name, it is probably appropriate to say that there are serious unintended adverse consequences for the fourteen Western States in this country that go to make the United States the world's second largest gold producer.

    Mr. RYAN. There are other alternatives to raise money for HIPC and ESAF. Charging interest rates on IMF loans closer to market rates, fixing the institutional problems that Dr. Summers mentioned about using those funds to supplement HIPC and ESAF. Are those solutions that you think that the subcommittee here should take a look at and the Treasury department should look at?

    Mr. MILLING-STANLEY. In both my written and spoken testimony, I list six alternatives which I believe the fund should explore. I didn't list them in any order. I certainly didn't recommend any one over any other, but there are a number of things that could be done, many of which are already in the statutes of the IMF and they should be encouraged to explore those.
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    Mr. RYAN. Ms. Griesgraber.

    Ms. GRIESGRABER. Just to pick up where Mr. Milling-Stanley left off, I would like to suggest a seventh source of funding for debt relief within the IMF, namely a targeted SDR allocation based on need. It is an option that was explored by this subcommittee in the mid-1980's. It is difficult, but it is certainly possible to do. It would be creating fresh SDR money. That is another issue to look into.

    In terms of circumventing oversight, yes. Making ESAF self-replenishing would definitely circumvent congressional oversight. As Dr. Birdsall indicated, that is not a route available for the other IFIs, the World Bank core funding market rate lending, and it is the future. So Congress has to explore how you will make sure that the Executive Branch hears what you say. And that does not happen with yearly reports. It does not happen with hearings, as you know. I think that is a challenge to you institutionally. At the moment it is the power of the purse that really carries the message.

    With regard to, can the money be put in a pocket other than ESAF? Yes. You can create facilities at the fund. There is a separate HIPC trust at the IMF. It does not have to be linked with ESAF policies, and that is the crux of the problem. With regard to moral hazard, under the current arrangement, the moral hazard is not in the economic sense, but in the moral sense of that phrase. The moral hazard has been with the creditors. They have set the rules.

    The debtors have had no voice. It is true that in certain circumstances even in Africa the private sector commercial banks made loans to governments. Particularly in Cote d'Ivoire and Nigeria there have been large commercial bank loans. The government has ended up guaranteeing those and they have become part of the national debt. This is similar to what happened earlier in Latin America.
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    The situation we have now is the result of a variety of reasons. This debt ''crisis'' has been going on for eighteen years. This is not something that countries have gotten into expecting to get rescued next week. They have been struggling with it for nearly two decades. Countries don't like to be in debt. They want to attract private investment. They cannot do that; they are too poor. If you put your money in such countries you are into very high risk investment.

    So I would say that the moral dimension of this, the hazard, is that we not act quickly enough, because it shows that the international community is ill-equipped to deal with systemic problems of this nature, and we need a systemic response, some kind of an arbitration panel that could be set up on an ''as-needed'' basis, so you do not have an unaccountable institution such as the IMF, which is itself a creditor, determining all of the questions on debt reduction.

    Mr. RYAN. Thank you very much. This is very interesting testimony. I appreciate everybody spending so much time up here, and this hearing is adjourned.

    [Whereupon, at 3:10 p.m., the hearing was adjourned.]